Safe Bulkers, Inc. (NYSE:SB) Q2 2019 Results Earnings Conference Call September 4, 2019 8:30 AM ET
Polys Hajioannou - Chairman and CEO
Loukas Barmparis - President
Konstantinos Adamopoulos - CFO
Conference Call Participants
Ben Nolan - Stifel
James Monigan - Citi
Randy Giveans - Jefferies
Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the Second Quarter 2019 Financial Results.
Today, we have with us from Safe Bulkers, Chairman and Chief Executive, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Mr. Konstantinos Adamopoulos. [Operator Instructions]
Following this conference call, if you need any further information on the conference call or on the presentation, please contact Capital Link at (212) 661-7566. I must advise you that this conference is being recorded today.
Before we begin, please note that this presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning future events, the company's growth strategy and measures to implement such strategy, including expected vessel acquisitions and entering into further time charters. Words such as expects, intends, plans, believe, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct.
These statements involve known and unknown risks and are based upon a number of assumptions and estimates, which are in inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the company. Actual results may differ materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are not limited to changes in the demand for drybulk vessels, competitive factors in the market in which the company operates, risks associated with operations outside the United States and other factors listed from time to time in the company's filings with the Securities and Exchange Commission.
The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company's expectations with respect thereto or any change in events, conditions or circumstances on which any statement is based.
And now I pass the floor to Dr. Barmparis. Please go ahead, sir.
Good morning. I'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the second quarter of 2019.
The charter market was weak during the first half of 2019 and this explains substantially out marginal losses last quarter. The average BDI during the first half of 2019 was 895 points. Since then, the charter market has improved and the average BDI for the large part of the third quarter was 1,904 more than doubled.
Presently, we are entering in new charters at improved rates. As we see in Slide 4, despite the concerns of the trade war both Capes and Panamax are performing at the highest levels in six years. Capes are trading to-date above 38,000 per day compared to 20 in the same period in 2018 and Panamax at about 18,000 per day compared to 12 for the same period in 2018.
On the top left graph in Slide 5, we presented Chinese iron ore import stocks. There is a developing shortage in ports stocks which are well below the three year average. At the same time as presented in the top right graph the price of the iron ore have dropped significantly. After the resumption of exports from Brazil, the supply of iron ore in the market is ample. The combination of low stocks and low iron ore prices is expected to encourage increased iron ore imports.
In the coal market as shown in the bottom left chart, Chinese imports of thermal coal have been fairly supported during summer months explaining partially the positive outlook of Panamax. Furthermore, in the bottom right graph the global seaborne grain trade looks stable and is forecasted to slightly increase in 2020. However, we are monitoring closely the developments in this sector mainly due to trade war concerns. Presently Panamax market is mainly driven by the strong demand for grains, transportation ex East Coast South America.
Let's move on to supply dynamics and fleet outlook in Slide 6. For Panamax to Post-Panamax Class the order book which is to be delivered until 2020/2021 comes around 10% of the existing fleet. The order book has been fairly stable for the past 18 months. Trade war concerns and expenditure in environmental investments have caused easing in the new fleeting orders. This 10% order book should be compared to 17% of the fleet which is over 17 years of age.
Older vessels lagging technologically and intention of fuel efficiency having to pass their special surveys for example the fourth special survey for vessels of age below 20 years we expect it will result in picking up scrubbing. Ballast water treatment systems and IMO 2020 regulations require substantial investments and advanced technical and operational capabilities.
Until the end of second quarter, we have invested 20.5 million. As of today as shown in Slide 7, we have completed installation of ballast water treatment system in 15 of our vessels and another 8 vessels the ballast water treatment system will be installed by the end of 2019. We have also completed the installation and commissioning of scrubbers in five vessels expecting to reach a figure of about 10 vessels by the end of the third quarter and 19 vessels by the end of the year.
Not only installation but according to equipment, we install Alpha Laval, technical design, selection of materials, commissioning and training, which are paramount importance in order to achieve the long-term performance of the scrubbers and the financial returns.
In addition, we gradually completed the chemical cleaning of tanks and vessels as we do not install scrubbers so that we will be able to use compliant fuels from now. Our end efficient vessels are the cases for most of our ships that we do not install scrubbers, we have an advantage over heavier consuming older vessels next year onboard not only due to the consumed quantity of fuel but also due to the price differential between higher sale of fuel oil and the compliance fuels. In the next two slides, we presented a few market data about installation of scrubbers and price differential of fuels.
In Slide 8 on the top graph according to data from Clarksons on drybulk about 10% of the total fleet will be scrubber period by the end of 2019 and about 14% will be scrubber fitted by the end of 2020. Regarding the total oceangoing fleet about 11% of the fleet and 15% of the fleet will be scrubber fitted by the end of 2019 and 2020 respectively.
As shown on the bottom graph, scrubber retrofitting activity as per data provided by brokers based on ICE systems after May 2019 in the Cape size class they are constantly about 6 million to 10 million deadweight tons spread in CPS installing scrubbers and/or undergoing schedule drydocking. As said before, this may interpret the reduced supply of tonnage of Capes by about 2% to 3% witnessed after May 2019 creating tightness to the demand supply balance.
Turning into Slide 9, approaching January 2020 the market is entering into a more dynamic phase in preparing for the compliance with IMO 2020 regulations. Demand for compliant fuel has started to pickup despite the fact that the maturity of ship owners have not yet moved to physical purchases of compliant fuel. The spread differential between heavy sulfur fuel oil and IMO 2020 compliant fuel in Rotterdam stands at about US$160 per metric ton presently.
Looking on the future pricing, the spread financial for the full 2020 starts at about US$220 per metric ton. As we approach the end of the year, we expect the dynamics of the market will be reflected to the spread differential.
Summarizing in Slide 10, the main key takeaways are, market is an uptrend trading at six years high and the resumption of iron ore trade from Brazil and strong grain demand from East Coast South America are driving the chartering market. The existing order book is relatively low compared to the number of older vessels that may face the market challenges, scrubbing is expected to increase.
New environmental legislation, ballast water treatment systems, and scrubbers involves substantial investments and create tightness in the supply market diverting use of funds from new orders. The vast majority of vessels in the Panamax to Post-Panamax Class will not be equipped with scrubbers and as a result slow steaming may be introduced to compensate for the potentially increased fuel costs. Older vessels towards their fourth special survey may be scrapped.
And finally Safe Bulkers is fully prepared for the new environment of IMO 2020 that will start in the 1st January 2020.
Now our Chief Financial Officer will present our quarterly financial results.
Thank you, Loukas, and good morning everyone.
In Slide 12, we present our quarterly time charter equivalent, which stood at $11,970 per day, and we focus on our expenses both OpEx as well as G&A. The aggregate figure for second quarter of 2019 was $5,981. This was a result of decreased maintenance, general store and spares and increased management fees charged by our managers.
Moving to Slide 13, we present some financial data on the quarterly basis. Our quarterly revenues, our adjusted EBITDA and our operating cash flow have been improving our overall financial strength.
Slide 14, will present our daily free cash flow waterfall for the second quarter of 2019. We went about $20,000 and went less than $10,400 per day per vessel for all of our daily outflows, including operating, G&A, interest, preferred dividend and principal repayments leaving about $1,600 per day per vessel as daily free cash flow.
Slide 15, shows our quarterly financial highlights for the second quarter of 2019 in comparison to the same period of 2018. Net revenues decreased by 3% or $45.5 million from $47 million mainly due to a decrease in charter rates. Our time charter equivalent rate per vessel decreased by 9% to $11,970 per day from $13,225 during the same period in 2018.
Daily vessel OpEx increased by 4% to $4,615 compared to $4,809 for the same period in 2018, where daily vessel OpEx excluding drydocking and predelivery expenses decreased by 2% to $4,283 for the second quarter of 2019 compared to $4,392 for the same period in 2018.
Our adjusted EBITDA for the second quarter of 2019 decreased by 9% to $21 million compared to $23.1 million for the same period in 2018. Our adjusted loss per share for the second quarter of 2019 was $0.01 calculated in the weighted average number of 101.3 million shares compared to adjusted earnings per share of $0.02 during the same period last year, activated on a weighted average number of 101.5 million shares.
Closing our presentation in Slide 16 we present our quarterly fleet data and average daily indicators in comparison to the same period of last year. We would like to emphasize that in this period we have worked extensively in implementing environmental investments in scrubbers and ballast water treatment systems. Our press release presents in more detail our financial and operational results.
And we are now ready to take your questions. Hello, hello.
[Operator Instructions] We will now take our first question. Please go ahead, your line is now open.
This is Ben Nolan from Stifel. Can you hear me?
Yes, hi yes.
So there was – I have a handful of questions. The first one is, if you said something, I missed it, and I didn't see it in the press release. You have any update on where you stand on the buyback program? It didn’t look like the share count moved much but I know that there was something that you talked about here?
Loukas, Loukas can update.
The buyback program is ongoing, but a minor action, minor shares have been bought back until now.
And so it's still, well I think it was a 5 million share allocation. Still pretty close to that is what?
Yes, you know it is – exactly but it’s a very small amount as the market went quite.
And then I was going to ask the G&A expenses were a little bit higher than what I thought and I know that – if there was a footnote in there that the manager, the daily rate for the manager has gone up a little bit. Just curious, you maybe walk me through that and how to think about the G&A going forward and the fees there?
G&A expenses are also – the expense for the inflation are related also to the euro. And as a result, sometimes we may see based on the euro exchange, certain differences which are not related to the actual amount, but they're related to the translation in U.S. dollars.
Also there has been substantial increase on the there are no insurances from various lawsuits on other companies which is affecting all shipping companies, irrespective if you have a clean record or not.
Okay. So given that insurance inflation, the G&A sort of where it is, is it fair to assume that's probably where it'll be close to that going forward?
Yes, it’s correct, yes.
And that well the other thing, I was curious on, if this is pretty late, is really late in the reporting cycle. And I look last year, you guys reported at the end of July, was there anything specific that caused the need to be September 4th rather than kind of the normal reporting period?
Look, we were expecting a better market than we’ll report the results, just after the holidays, just after the holidays, because it is pointless to report it on 10th of August, nobody would pay attention. Even now with the Labor Day holiday, it's a bit quiet market in the public markets, while trade market is very quiet. It’s quietly opposite in the public markets. So in the stock market, in the shipping stock market, so we decided to do it right now instead of middle of August.
Thank you. We will now take our next question. Please go ahead, your line is now open.
James Monigan on for Chris. Just a higher level question, you seem to highlighted a rebound in the BDI in the quarter, is that really come through in the P&L or the TCE rates. I wanted to get a better understanding of basically why and in that it may be a rebound was bit more isolated. And it might come down in the future?
Can you repeat because I didn't get – what you say about the charter rates, why they were lower than the previous quarter?
Something along those lines as well as you seem to, you highlighted a strong rebound in the BDI, you have an understanding of why that didn't come through in the P&L?
Yes because the TCE was lower because – the Q2 results were affected by very terrible first quarter, which was the spot market, you remember was $5,000 a day in the first quarter or $6,000 so that sort of rate. So, all those numbers filter – in the results of Q2 which we are reporting now. And as in our press release, we mentioned that BDI is more than double in the third quarter than what it was in the first half of the year.
So I mean, when you have BDI below 900 as an average in the first half, you understand that this is a very weak BDI to work on in the market during the first six months of the year. But right now we are more than doubled this number, so the results were affected by this – but I think we reported just $0.01 loss which is by far one of the best results in the market for this quarter.
And so you had also mentioned – highlighted essentially the Chinese iron ore market picking up stimulating demand. Actually want to understand if you had actually seen some of the demand coming through or if that was something that might happen later in the year and possibly in 2020 or if there is something that's going on now?
No, we are seeing more movement of iron ore from Brazil, you remember we had the big Brazilian accident in January which affected terribly the Capesize market in the first half of the year. Brazil now is back on track, and there is tremendous shortage of Cape size vessels. In the Atlantic, we're seeing high hours on trunk call rates of $60,000, $70,000 a day for Capesize bulk carriers from the Atlantic to the Pacific.
And this is filtering through in the Pacific rates where our ships across Panamaxes were doing – around right now at $19,000, $20,000, $21,000 a day on around more use of spaces, these ships were doing $8,000 in the spot market in the first half. So you can see little bit of this is affecting positively and will be shown in the next quarter results our numbers and we are very optimistic because we are entering a face of the change of the fuel oil in January until now not even 20% of the vessels that fuel scrubbers have done it. So there is plenty of work still to be done in 2020 on ships converting scrubber fitted.
This will keep a lot of supply of the market. There are more delays in the shipyard. We are seeing ships that are spending other yards 60 or 65 days to fit the scrubbers because of the workload in yards. We are achieving at the Cosco shipyards roughly around 50 days on our ships. So we are optimistic that all this traction will keep rates at very healthy levels for the next five or six quarters not only for the next quarter.
Yes, then one more quick one. You mentioned the chemical cleaning in the tanks just wanted to understand if there is any drydocking attached to that or there is something that actually be done during the course of operation?
No Loukas will answer it, it’s in the course of operation but Loukas he knows a bit.
Look I mean we have a specific schedule for all the vessels that we are not fitting scrubbers. So we are using a chemical treatment during bargaining and for a few times and we monitor the sludge that is accumulated there. So basically we believe that we are quite ready to expect - we don’t expect to have a downtime for that.
We have started the process of the chemical cleaning from early 2019 so these have already worked through the tanks and the results are vary costs.
[Operator Instructions] We will now take our next question. Please go head. Your line is open.
It’s Randy Giveans from Jefferies. How are you?
So a couple from me just looking at your fleet you have five Panamaxes over 15 years of age what appear to be earning a discount to kind of modern Panamaxes in terms of the short-term rates. So would you look to sell of those assets I mean renew fleet with modern second hand and if so which assets class would you like to grow in?
Yes look those ships are earnings less because of the ships we fix when the market was low. We decided to fix those ships for a period instead of earnings $3,000 or $4,000 a day in the first quarter we decided on our tanks fix a day $9,000, $10,000 for something like eight to 10 months period was to some better rate. So they are still running off from those numbers its winding out of the charters that we did - earlier in the year.
So we kept that biggest ships available work the sport market and to be able to capitalize on the expected increase, I was always talking about various strong second half of the year on the Capes side. So we left off and all the big ships on the spot market and we had chartered of course some of the smaller ones in the first half because you can understand you cannot leave the whole fleet to the spot market when its dull we’re in $5,000 or $6,000 a day.
So the charters are all coming off by the end of the year and we are expecting to be rechartered by much healthier rate. For example we have a ship that yesterday one of our charters fixed almost $20,000 a day for a South America cargo to the barge. So these ships can't compete in the market, it’s a matter of timing when they will open for employment.
And then just looking at pre-renewal from maybe selling those buying some more second hand and if so what asset class?
Yes, Safe Bulkers will do a small fleet renewal as the market improves. We’re going to more than shape less than five years old or resales we don’t want to add to the order book. We already bought one resale and which is for delivery next year. And we want to slow fleet renewal that is not the right time right now to do the full fleet renewal because we have deleveraging as well. We have the investment in the scrubbers we want to collect money from all the subdue actions and then to go into a bigger scale fleet renewal.
And in terms of the asset classes across the board growing your Cape?
Look our big expertise is Panamax to Post-Panamaxes. We will stay there with a bit of flavor on the Cape size as well but Cape size will refer to go for then when we have long period charters. We are not speculators in the Cape size market because we know we don’t have a big enough fleet there to compete - one should have a very big fleet on our Panamax, Kamsarmaxes and Post-Panamaxes. So it’s our specialization and connections and the market is in the Kamsarmaxes to Post-Panamax market it’s where we tend to concentrate it.
And then looking at your balance sheet as your cash continues to increase, I know it’s a higher currently than it was at the end of June scrubber CapEx will be winding down in the next few months. So our addition of share repurchases the number one use of cash after that or maybe look at buying back some of your preferred?
Yes, if the - share price does not reflect the current improved freight rate environment, I think the best option would be the share repurchase and then all the others. But we’ll see how the market will respond in October or November as we are covering pace and we are getting closer to the IMO deadline. You remember we are one off the only companies’ that will be 100% finished with the scrubbers before the end of the year.
Very few companies in the world will be able to achieve these results to be ready on 1st of January. Already the calendar 2020 the spread between H4 and compliant fuel is $220 in Singapore. So and we are still in September so we expect this number to be increasing as we go nearer to January. And we are in a good position to capitalize on this investment which we did early.
Our scrubbers technically they are performing excellently. We are producing emissions of much less than 0.1% so we can trade with the scrubbers in all conditions in areas everywhere with a very comfortable margins. So we are ready to take the much, much knowledge of the new regulation.
And then kind of lastly touch on the scrubbers, referred of reports of delays two, three, four weeks apparently you are not seeing that if you are still pretty confident that ICE scrubbers will be installed in the next 3.5 months?
Yes, I think only 40% of the ships that they will take scrubbers will be ready by December. And in comparison with Safe Bulkers which will be 100%. So I mean we are in the very good position because we moved early and we have a very good thing setup in the shipyards. We did all the work in the same shipyard and we achieve very good result.
Already we have five ships running. Five more will be done in this month in September so by the end of December we will have 19 out of 20 ships working who have their scrubbers operationally. And the last one but we don’t have its one of our long period Cape size which the investment is being done by the charters so this will be early next year.
So we are in a very good position. I think there are many companies that they will not be even at 30% or 40% of their work by the end of the year and some of them they will be going soon in the - during 2020 and very even going to the last quarter of 2020 to finish off their program. So we are at very good position we believe.
But for sure - we will pay more attention not only in the installation but also in the commissioning which is very important in the operation, because you know everybody will install the equation is how you will operate it. When it will be able to commission it finally and how successful this equipment will work in your ship.
So this is very important comparatively to just installing an equipment because this is not a – let’s say a washing machine, it’s a very big equipment that we need to be very careful. We need to have trained people, you need to have let’s say to do the right commissioning, you need to spend time and there will be a challenge for the market – and I think that it’s there where we’re more prepared compared to the others.
I would now like to hand the conference back to Dr. Barmparis.
So thank you very much for participating in this conference call. And we will be in touch and we’re looking forward for the next quarter where we will present the third quarter financial results. Thank you to all.
That does conclude our conference for today. Thank you for participating. You may all disconnect.
Okay, thank you, bye-bye.