Safe Bulkers - Earnings Call - Q2 2020

Transcript

Speaker 0

ladies and gentlemen, and welcome to the Safe Bulkers conference call to discuss second quarter twenty twenty financial results. Today, we have with us from Safe Bulkers Chairman and Chief

Speaker 1

Call.

Speaker 0

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 27 a Securities Act of 1933 as amended, and section 21 b, the Securities Exchange Act 1934 as amended. Concerning future events, the company's growth strategy measures to implement such strategy, including expected vessel acquisitions acquisitions and entering into further time charters. Words such as expect, intend, plan, believe, anticipate, hope, estimate, and variations of the 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 such expectations would prove to have been correct.

These statements involve known unknown risks and are based on a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the company.

Speaker 2

I need to discuss here.

Speaker 0

Actual results may differ materially from those expressed or implied by such forward looking statements. Factors that could cause actual results to differ materially due to, but are not limited, changes in the demand to dry bulk

Speaker 1

vessels in

Speaker 0

the market in which the company operates. The company expressly disclaims any obligation to undertake any 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 fixed. And I now pass the floor to doctor Barbares. Please go ahead, sir.

Speaker 2

Good morning. I'm Lucas Pavarit, President of SafeBarges. Welcome to our conference call and webcast to discuss the financial results for the 2020. I would like to start by thanking our seafarers for their commitment and dedication throughout this difficult period. The difficulties for crew changes continue and I would like to say that in many places the situation is very unfair to people who have stayed on board for extended periods supporting the smooth operation of supply chains.

Our results for the second quarter were negatively impacted by the reduction in charter rates due to COVID-nineteen outbreak. A number of charters charter contracts that had expired in the previous period has been replaced by CONEX with lower charter hires. Despite that, there is a small increase in our aggregate revenue due to scrubber benefit and due to addition of the new vessels. However, voyage expenses that are deducted from the revenue in order to calculate the TCE were substantially increased due to better repositioning, higher cost of baskets and consumption cost of scrubbers. Our decision in this uncertain environment is to maintain strong liquidity which was 111,300,000 as of 07/31/2020.

This can be a cushion if situation with coronavirus is developed negatively or a strong tool that will allow us to do opportunistic move when the situation improves. Moving to Slide three, we were able to develop six five year charter contracts and two contracts of other expiration nine and twelve months, which represent a substantial change in our chartering policy. Together with three Capes, we will have fixed about one fourth of our fleet in medium to long period time charters. The anticipated total revenue on the basis of FFA is about $115,700,000 and the important feature is that liquidity is provided upfront. The second point is that the charters that we have concluded in July, they have higher charters higher 13,008 compared to those in May at 11,700.

Let's move into analyzing the market conditions. In Slide five, we are presenting a comparison of the Capes and Camps Americas chartering rates as published by the Baltic Exchange between 2020 and 2019. The COVID-nineteen effect in terms of seasonality coincided with the lower quarter of the shipping market. Therefore, following a low first half of the year, the market started improving after May and picked up in July at about $14,000 for Tamsar markets and $34,000 for Capes. Presently, Tamsar markets are trading in the region of $12,000 and Capes in the region of 20,500 Main reasons for the recovery of the market is the resumption of economic activity after the lockdown and especially the resumption of China providing for increased volumes of iron ore, coal and grain trade.

Looking forward, the implementation of The U. S.-China trade deal is an important factor for the shipping market with the COVID-nineteen remains a threat. Turning to Slide six, we provide more input in relation to the Chinese economic recovery. During the lockdown period in Q1, China's economy contracted by almost 7%. The assumption of economic activity and fiscal measures to stimulate Chinese economy have led to a V shaped recovery with a GDP growth in Q2 of about 3.2%.

Moreover, as shown in the bottom graph China's industrial indicators show continued recovery. According to Chinese National Bureau statistics data show that the industrial output grew by 4.8% year on year in June, but it's likely to about minus 15% during lockdown. The fixed asset investment in infrastructure is down by 1.2% as compared with a decrease of about minus 30% during Q1. The fixed asset investment in manufacturing is down by 11.7% as compared with a decrease of about minus 30% during Q1. The actual effect of this recovery is reflected in the increased volumes of Chinese imports for drybulk commodities.

As presented in Slide seven on the graph within June 2020, there were increased imports on the major drybulk commodities. June 2020 iron ore imports increased by 60.8% month on month and 35.3% year on year. For the period January 2020, iron ore increased by 9.3% compared to the same period in 2019. Forecast of Brazilian major miner leading lower in the Cape market remain unchanged implying a substantial increase in their second half twenty twenty volumes. As is estimated by the shipping analyst of Arrowsmith it progresses shipments would need to rise in the second half of the year by 31% versus the first half of the Brazilian miner, which we see its lower target for shipments.

The middle graph presents the increase on Chinese imports in thermal coal and lignite. The June 20 imports increased by 14.6 month on month and by 23.1% year on year. While for the period from January to June 20 imports increased by 34.5% as compared to the same period of 2019. The lower graph presents the increase on Chinese imports of Soybean. The June 20 Soybean imports by 19% month on month and by 71.4% year on year.

While for the period from January to June increased by 17.7% as compared to the same period of 2019. As the rest of the important countries will be dealing with COVID-nineteen, it is possible to assume a solemn in demand formulating a bottleneck of imports towards the end of the year. Furthermore, according to market information, increased exports of grains from U. S. Gulf are already scheduled as part of the implementation of Phase one trade deal.

On the supply side, in Slide number eight and the order book, things have been remained unchanged with literally no new orders. As of today, the order book for Capes stands at around 8% of the total fleet and 6% for Panamaxes. In both cases, it is evenly spread between 2020 and 2021. Slipping slippage or cancellations due to COVID-nineteen are still creating extensive delays. We believe that aging of fleet, low freight rates and increased CapEx for complying with environmental regulations may enhance our scrapping activity.

When demolition countries in the Bangladesh beat in recovering from COVID-nineteen, the scrapping activity is expected to increase. To access ongoing environmental discussions for emission decarbonization will not favor new orders. Turning to the next Slide nine, we make a brief presentation on the status of the fuels market. Global lockdowns and mobility restrictions have reduced the demand for fuels and distillates products. As global lockdowns ease, oil demand will continue to improve.

The future market indicates that bunker prices will recover in 2021 and in 2022. The spread differential between 0.5% very low set of fuel oil due to the compliant fuel and 3.5% high set of fuel oil, the so called high 5% has narrowed massively. The futures chart indicated high 5% will be recovering in excess of $80 in 2021 and 2022. Eventually, the recovery of global economies, the full restoration of mobility restrictions and subsequent increase of crude oil prices will possibly push the high five differential towards pre COVID-nineteen levels. Turning to Slide 10, in the context of our environmental state social responsibility policies, we undertake significant environmental investments by retrofitting scrubbers and ballast water treatment systems on our fleet.

We have already invested $68,200,000 as of 06/30/2020 and have retrofitted 19 scrubbers out of 20 scheduled in total and 36 ballast water with new systems. By the end of the 2020, five more ballast water with new systems and the last scrubber will have been installed. On the bottom table, we estimate the expected downtime in days from Q3 and Q4 twenty twenty in order to assist analysts with their projections. In Slide 11, let's summarize the key market takeaways. The Chinese fiscal stimulus package may signal a V shaped market recovery.

We have a declining order book 2020 onwards. The ongoing decarbonization discussions do not favor new orders. Seabatch aging of fleet, low freight rates and increased environmental CapEx may enhance scrapping activity. Global lockdown adversely affects demand for oil and diesel fuel. We may have a may have a slow oil demand rebounding edge in the 2020 as global lockdown is.

Eventually, the bear prices recovery may lead to a wider high price spread differential. Conclusion on Slide 12, let's summarize the value key takeaways. She knows this our liquidity exceeding $110,000,000 which gives us flexibility in the present and stable in uncertain market environment. We have entered in total into eight long term period charters during the second quarter evidence of excellent relations without charters. Our ability to complete our environmental investments is an evidence of our technical expertise.

Our smoothened debt profile for the next two years is an evidence of latest trust and support. Now I will pass the floor to our Chief Financial Officer, Josefios Adamopoulos, who will present the quarterly financial results. Thank you, Lucas, and good morning, everyone. Let me continue with our liquidity on Slide 14, which as of the July 2020 stood at $111,300,000 consisting of $89,900,000 in cash and bank bank deposits and $19,400,000 in restricted cash and $2,000,000 available under unsecured revolving credit facility. We have refinanced a large portion of our debt.

In Slide 15, we present our repayment schedule as of 06/30/2020. In close cooperation with our lenders, we pushed back loan payments to 2022 and 2023, which were originally scheduled for this year in 2021, expanding the average tenure creating a smoother repayment schedule for 2020 and 2021 and maintaining the same covenants of our debt while increasing our flexibility during this difficult period. Moving on to Slide 16, we present our quarterly daily OpEx, which stood at $4,729 Flexstar quarterly daily G and A, which stood at $13.74 dollars The aggregate number for both OpEx and G and A for 2020 was $6,103 demonstrating our focus on clean operations. We believe that this figure for both OpEx and G and A when comparing apples to apples is one of the industry's growers. Given the fact that we conclude that we include in our OpEx all our dry docking expenses and in our G and A our directors' compensation and all expenses related to our administration.

Moving on to Slide 17, we present our quarterly TCE which stood at $8,094 clearly affected by COVID-nineteen versus our quarterly OpEx which stood at $4,799 Let's move to Slide 18 with our quarterly financial highlights for the 2020 compared to the same period of 2019. Net revenues increased by 5% to 49,300,000 from $45,500,000 despite a relatively weak charter market due to COVID-nineteen restrictions, mainly due to the additional revenues and by our scrubber fitted vessels and the additional vessels which were delivered in April. During the 2020, we operated in a weaker charter market environment compared to the same period in 2019. This was evident from the reduced TCE of $8,094 compared to $11,970 during the same period in 2019. A number of charter contracts entered in previous periods expired and we will replace by contract with lower charter rates higher.

However, net revenues were supported by the benefit from scrubber fitted vessels despite the reduced price differential between heavy fuel oil and compliant fuel, which was due to the oil price war and by revenue contributed by our new build delivery. Mortgage expenses substantially increased due to increased pressure repositioning expenses, higher loss on bunker sales due to the oil price war and consumption cost for the scrubber fitted vessels. Daily vessel OpEx increased by 2% to $4,729 compared to $4,650 for the same period last year, whereas daily vessel operating expenses excluding dry docking and pre delivery expenses decreased by 2% to $4,207 for the 2020 compared to $4,283 for the same period in 2019. Our adjusted EBITDA for the 2020 decreased to $6,300,000 compared to $21,000,000 for the same period in 2019. Our adjusted loss per share for the 2020 was $0.16 calculated in a weighted average number of 102,800,000.0 shares compared to adjusted loss per share of $01 during the same period of 2019 calculated on a weighted average number of 101,300,000.0 shares.

Closing our presentation on Slide 19, we present our quarterly fleet data and average daily indicators compared to the same period of 2019. We would like to emphasize that in this period, we have worked extensively despite the tough market conditions and we have contracted a total of eight long term period line charters including six five year charters adding front loaded cash flows. We refinanced the last part of our debt early in 2020 providing us with additional liquidity And we took a step further to push back to 2022 and 2023 loan payments scheduled for this year and next year. We have installed twenty nineteen scrubbers with just one remaining. We have a strong balance sheet.

We've covered up leverage, a smooth debt profile for the next year with a liquidity of $111,300,000 And lastly, we took measures to protect our shippers shore employees' health and well-being and kept all our vessels sailing continuously servicing our charters. Once again concluding, we would like to thank our seafarers for their commitment, dedication and efforts throughout this tough period. Our press release presents in more detail our financial and operating results. And now we are ready to take your questions.

Speaker 0

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your automated message advising your line is open. Please state your first and last name before asking your question. If you wish to come to your request, please press star too.

We will take our first question from the line of Chris Wetherbee of Citi. This

Speaker 1

is Liam on for Chris. So just starting off on the rate side, it does seem like, as

Speaker 2

you guys have mentioned, that there's been

Speaker 1

a recent increase in some of the shorter term rates you guys have been able to obtain in the spot market. So I'm just wondering how sustainable you think this increase is and if you have any sense of, like, what positive and negative factors will be that are gonna impact rates for the remainder of 2020 and 2021.

Speaker 2

Yes. Hello. Good morning. Yes. The rates as we speak in the last month have been increasing sizably.

And right now, the spot market is performing at around $12,500 a day. Since we have the majority of our ships in the spot market, we are able to capture this increase very, very quickly. So we are in a very good position to enjoy this improvement of the market, which as we said in previous calls, we were expecting it to start after China announced a big stimulus plan. And it's happening now with a very strong grain export in South America the last three months and now with a very strong grain export from US Gulf and from US West Coast.

Speaker 1

Okay. And do you think that this this increase in rates will kind of lead to a, yeah, stable increase in vessel values? I know that they've also recovered

Speaker 2

a little bit recently, but, obviously, that remained at a fairly low level. Yes. We we think that vessel value always are affected by increased freight rates, And we think that this will be the case again. I think that there is good support from banks over the last year or so. And they are there to finance the projects.

It's more technical problems that technicalities that they are involved with the acquisition of vessels at the moment. You know the difficulty to contact inspections on behalf of the owners, pre purchase inspections because of restrictions on boarding vessels. This is the only negative thing. Otherwise, I thought I think that as the freight market is improving, I think that prices will start very soon to improve as well.

Speaker 1

All right. And one other question that I have was I know you guys have discussed an increase in voyage expenses that is recently in place, but they also did step up from the first quarter and second quarter as well. I know a lot of that is due to leasing expenses and also fuel related costs. But I'm just wondering if you can provide some sense of where you expect that expense line to go in the remainder of the year. Should we expect it to kind of be at the first half average around $17,000,000 Or should it be something down?

Speaker 2

Look, volume expenses have increased in the past for three reasons mainly. First of all, was the valuation of the the fuel that we have on board, which whose price was dramatically it was quite lower in the previous months due to the fuel oil war. The second was repositioning of vessels as we said. And the third was the that right now the fuel that is used for scrubbers is included in this voyage expenses is reported in the voyage expenses part. And so that's why we will maintain somehow higher budget expenses in the future.

The one part which is due to the prices, the oil prices, I believe that it will not be affected so much in the future. The second part which is basically the repositioning will be lower, which should be lower. The last part which is due to the recognition of fuel of scrubbers in the volume expenses will remain.

Speaker 1

Got it. Thank you. Just finally, I know you guys have a $101,000,000 of debt maturing in the remainder of 2020 and through 2021. I was just wondering if you could touch on how you plan to refinance these out here.

Speaker 2

Could you please repeat the question a little bit slower because you have a some noise?

Speaker 1

Apologies about that. So I'm just referring to Slide 15, where it shows your debt repayment profile. And it it looks like you guys have a 100,000,000 of maturing in the remainder of 2020 and 2021. And I was just wondering what your plans are to refinance these payments.

Speaker 2

This is not these are not mature. These are these are scheduled installment. We don't have any debt maturing Post three. After post three. Okay.

In this year or next year. But they are in 2020 in 2023? No. The first maturity, I believe, is in 2023.

Speaker 1

Alright. Well, thank you. Sorry about the rest of the confusion, but I appreciate you answering all my questions.

Speaker 0

Your next question comes from the line of Randy Giveans of Jefferies.

Speaker 1

Hi. Hi. Hey. So, yeah, you, you know, you booked these six long term charters in the second quarter. So is that more of

Speaker 2

the same, or are you gonna look

Speaker 1

to lock in additional longer term charters? And now that stock market has improved, focusing more on the the short term charters and and stocks going forward. And what was the rationale for the five year charters in the last couple of months?

Speaker 2

Look, the rationale of the five year charter was that we get a good premium in the first two years above the the current spot market at the time we did the the fixtures. So this is a very good cash flow injection during an uncertain time with until we get over this pandemic of COVID nineteen or COVID-twenty or whatever that will be. The policy now that the market is improving is to log in into some more period charters when we get the opportunity. Of course, they cannot all be five year charters or the same structure. Could be one or two year charters as we as we approach or or exceed breakeven levels.

It makes sense to charter at this sort sort of levels. It would it it it wouldn't make sense a year ago or six months ago to charter one or two years period at $8.09, or $10,000 a day. Now that we are we can secure numbers around $13,000 a day, it makes sense for the company to try and with with appropriate charters to secure some period charters. So we have many ships in the spot market, and we can we can play a more balanced take a more balanced approach. K.

Speaker 1

And then following the the swaps, which were very attractive here for three to five years, what is your weighted average interest rate in terms of the premium or the margin as well as what you're swapping it at?

Speaker 2

The average of the swaps that we've done so far is a little bit below half half percent. So we fixed around 35% of our of our loan book.

Speaker 1

Yep. And then the margin?

Speaker 2

We don't disclose Stop.

Speaker 1

I'm fine.

Speaker 2

We'll give you the number. Give you the number. Yes. But it's not in the report, but it's a it's about it's about 2%. A little bit higher of 2%, about two ten, the average.

Okay.

Speaker 1

So all in all in interest expense sounds like it's below 3%.

Speaker 2

Yeah. Yes. Yes. It's a very it's a very comfortable level based which we can make our full planning. Yeah.

No.

Speaker 1

Absolutely. Alright. And then just final question. Now that you have kind of the the refi done and swaps and what have you, you know, what is your kind of first use of cash? Are you looking at our preferred repurchases?

You know, those are yielding 11%, 12%, what have you now. So is that is that an option? Do you have some authorization there? What is your appetite for the preferred repurchases?

Speaker 2

The most important thing, I think, is the to keep a strong cash position in balance sheet because there's a lot of uncertainty ahead. We are optimistic about the market and the stimulus back, but there's no guarantees. We have already second threat from this coronavirus disease that we don't know what how it will be developed in the winter months if there are more lockdowns or partial lockdowns or other things. So we intend to keep a strong cash position. And if possible, use part of it to deleverage to deleverage and prepay earlier some installments of the loans.

We we we want to focus right now on handling the situation with the with the with the COVID nineteen and COVID twenty with the least possible damage to company's operations. Right now, we face a very big challenge all companies are facing. And I think this also may help the freight market. We're facing a lot of delays in various parts of the world with crewing matters, with changes of crew, with the testing of the crew, with delays in ports to berth before they test the crew. Also with limitation of the ports around the world where we can make crew changes because of strict regulations and the nonavailability of flights, international flights.

We also are very disappointed disappointed to say that the owners are not having the support of charterers when it comes down to social responsibility to the well-being of seafarers. We have to face all the cost ourselves, which I mean is the least. But here we have lack of cooperation by many charterers including major ones. When there is a need to make a small deviation from the intended route in order to disembark our crew and put on board fresh crew, even even big names, big charterers that they should have supported such small deviations. Of course, at all this cost, they are not willing to to collaborate and to assist because they need their cargo faster in the destination.

And they are creating a lot of hassle and a lot of problems to the owners to make such small deviations, which are primarily due to compassionate reasons and humanitarian reasons for our crew. I think this is a time bomb for the shipping industry. It will explode one day and it will hit all of us. It may kill all of us one day what is happening right now. And it's not good for the major chapters only to put it in their reports in their reports and and mention the social responsibility that they have and the how how well they feel about the the well-being of the crew and all the people associated in the in the in the chain of of sea transportation.

And this and this this principles that they state in their in their brochures and in their in in their court of ethics, they don't pass it on to their chartering departments who are existing whenever owner is asking to make a small deviation for crude changes. I think there is a lot of hypocrisy in the market. We all need to sit down together and cooperate in order to save a time bomb that is gonna hit the world tap transportation chain. So I have seen only two or three charters really understanding the problem and the operating. The good names like Cargill or Banky, they are doing their best to assist.

But there are some other names that they are really we are really disappointed, and I consider this as the biggest problem of the shipping industry for the next six to twelve months. People have had the for for for people, they have to make an effort to assist owners in order the the crews that they are on board more than twelve or fourteen months to get on to get relief and to go back to their homes and the new crew to be able to join the vessels. Otherwise, things will explode, I'm afraid. And I I want to say these things that, you know, we all have to to face our social responsibilities, not only the owner himself, but he can't do it. We need the cooperation of all the parties, the cargo owners, the charterers, everyone.

Speaker 1

Got it. Okay. And how much is outstanding on the preferreds right now?

Speaker 2

Is it still the $1.37? Look. The preferred is a part is a part of our capital structure, and we will continue to maintain it for the foreseeable future simply because we feel that having one of the best operating expenses in the market, one a very comfortable management fee and also and the preferred dividends were quite competitive. I think the need right now is liquidity. And as Mr.

Gajiano said just before, there are two points here. The one is liquidity needs in this low part of the market, which can be used as a cushion if the market if the second wave hits or as a tool if there is an improvement in the market. And the second point is deleveraging because as we always say that we intend in the next three to five years to bring the net debt of the company close to the steel value. So basically, we have a specific target of our deleveraging policy and we also maintain our liquidity. I think this is a recipe for a good company for the following years.

It is more important to bring the debt down to the scrap value of the vessel than to repay early the prepared, which is equity, perpetual equity and can be repaid at any time in the future when freight rates really over perform the current situation. So I think this time will be in the next few years, we will get the opportunity as the world trade increases and as the world fleet is not increasing, we'll get the opportunity of better markets to start reducing that prepared. But for the time being, there's no plan to reduce the prepared.

Speaker 1

I'm just asking the outstanding amount on the preferred.

Speaker 2

It is $137,000,000. Got it. Okay. Just making sure. Well, that's it

Speaker 1

for me. Thanks again, fellas.

Speaker 2

Thank you. Thank you.

Speaker 0

There are no further questions at this time, so I will hand back to the speakers for closing. I now hand back to the speakers to close off the call. Do you have any closing remarks?

Speaker 2

Thank you very much for attending this call during the summer month of August. And and stay safe all of you. And we hope that and we believe that we'll see better markets in the 2020. Thank you to all.

Speaker 0

That does conclude our conference for today. Thank you all for participating, and you may now all disconnect.