Earnings Call Transcript - SB Q2 2020

Operator, Operator

Thank you for being here today, and welcome to the Safe Bulkers conference call to discuss our Second Quarter 2020 Financial Results. With us are Mr. Polys Hajioannou, Chairman and Chief Executive Officer; Dr. Loukas Barmparis, President; Mr. Konstantinos Adamopoulos, Chief Financial Officer; and Ioannis Foteinos, Chief Operating Officer. If you need any additional information after this call, please reach out to Capital Link at (212) 661-7566. I want to remind everyone that this conference is being recorded. Before we start, please be aware that this presentation includes forward-looking statements as defined in relevant sections of the Securities Act and the Securities Exchange Act. These statements pertain to future events, the company's growth strategy, and plans to execute that strategy, including anticipated vessel acquisitions and new time charters. Terms like expects, intends, plans, believes, anticipates, hopes, estimates, and similar expressions signal forward-looking statements. While we consider these expectations reasonable, we cannot guarantee their accuracy. These statements carry known and unknown risks and are based on numerous assumptions that involve significant uncertainties, many of which are beyond our control. Actual results may differ significantly from those indicated. Factors that may cause actual results to differ include changes in demand for drybulk vessels, competitive market conditions, operational risks outside the United States, and other factors outlined in our SEC filings. We do not commit to updating or revising any forward-looking statements to reflect changes in our expectations or circumstances. I will now hand the floor over to Dr. Barmparis. Please continue.

Loukas Barmparis, President

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 2020. I would like to start by thanking our seafarers for their commitment and dedication throughout this critical period. The difficulties for crew changes continue. And I would like to say that in many places, the situation is very unfair for people who have stayed on board for extended periods, supporting the operation of the supply chain. Our results for the second quarter were negatively impacted by the reduction in charter rates due to the COVID-19 outbreak. A number of charter contracts that had expired in the previous period have been replaced by contracts with lower charter hires. Despite that, there is a small increase in our aggregate revenue due to scrubber benefits and due to the addition of the new vessel. However, further expenses that are deducted from the revenue, in order to calculate the TCE increased substantially due to vessel repositioning, higher costs of bulkers, and consumption costs for scrubbers. Our decision in this uncertain environment is to maintain strong liquidity, which was $111.3 million as of July 31, 2020. This can be a push on this situation if the coronavirus develops negatively or a strong cushion that will allow us to make opportunistic moves for when the situation improves. Moving to Slide 3, we were able to develop six five-year charter contracts and two contracts of average duration of nine and twelve months, which represents a substantial change in our chartering policy. Together with the 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 $115.7 million, and the important detail is that liquidity is provided upfront. The second point is that the charters we have concluded in July have higher charter hires, $15,800, compared to those in May at $11,750. Let's move to analyzing the market conditions; in Slide 5, we are presenting a comparison of the Capes in terms of monthly chartering rate as published by the Baltic Exchange between 2020 and 2019. The COVID-19 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 Kamsarmaxes and $34,000 for Capes. Presently, Kamsarmaxes are trading in the region of $12,000, and Capes in the region of $12,205. The main reason for the recovery of the market is the resumption of economic activity after the lockdown, 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 while COVID-19 remains a threat. Turning to Slide 6, 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 resumption of economic activity and fiscal measures to stimulate the 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 the Chinese National Bureau of Statistics, data show that the industrial output grew by 4.8% year-on-year in June after sliding to about minus 15% during the lockdown. The fixed asset investment 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 has led to increased volumes of Chinese imports for drybulk commodities. As presented in Slide 7 on the graph, within June 2020, there were increased imports on the major drybulk commodities. June 2020 iron ore imports increased by 16.8% month-on-month and 35.3% year-on-year. For the previous January to June 2020, iron ore increased by 9.3% as compared to the same period in 2019. Forecasts of Brazilian major miners leading player in the Cape market remain unchanged, implying a substantial increase in their second half 2020 volumes. As estimated by shipping analysts, shipments would need to rise in the second half of the year by 31% versus the first half for Cape Brazilian miners to hit their lower target for shipments. The middle graph presents the increase in Chinese imports in thermal coal and lignite. The 2020 imports increased by 14.6% month-on-month and by 23.1% year-on-year. While for the period from January to June 2020, imports increased by 34.5% as compared to the same year of 2019. The lower graph presents the increase in Chinese import of soybeans. The June 2020 soybean imports increased by 19% month-on-month, and by 71.4% year-on-year, while for the period from January to June, imports increased by 17.7% as compared to the same period of 2019. As the rest of the importing countries deal with COVID-19, it is possible to assume a shorting in demand, formulating a bottleneck of imports over the end of the year. Furthermore, according to market information, increased exports of grains from the U.S. Gulf are already scheduled as part of the implementation of Phase I trade deal. On the supply side in Slide 8, order bookings have remained unchanged with literally no new normal orders. As of today, the order 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. Slippage or cancellations due to COVID-19 have created extensive delays. We believe that aging of the fleet, low freight rates, and increased CapEx for compliance with environmental regulations may enhance our scrapping activity. When demolition countries, India and Bangladesh, see a recovery from COVID-19, the scrapping activity is expected to increase. Lastly, the ongoing environmental discussions for emission decarbonization will not favor new orders. Turning to the next slide, number 9, we make a brief presentation on the status of the fuels market. Global lockdowns and mobility restrictions have reduced the demand for certain distillate products. As global lockdowns ease, oil demand will continue to improve. The future market indicates that market prices will recover in 2021 and in 2022. The spread differential between 0.5% very low set of fuel oil due to the compliance fuel, and 3.5% high set of fuel oil, the so-called Hi5, has narrowed massively. The futures chart indicates that Hi5 will be recovering in excess of $80 in 2021 and 2022. Eventually, the recovery of global economies, the full operation of mobility restrictions, and subsequent increase in crude oil prices will possibly push the Hi5 differential toward pre-COVID-19 levels. Turning to Slide 10, in the context of our environmental social responsibility policies, we undertake significant environmental investments by retrofitting scrubbers and ballast water treatment systems on our fleet. We have already invested $68.2 million as of July 30, 2020, and have retrofitted 19 scrubbers out of 20 scheduled in total and 36 ballast water treatment systems. By the end of the third quarter of 2025, more ballast water treatment systems and the last scrubber will have been installed. On the bottom table, we made the expected downtime in days for Q3 and Q4 2019 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 from 2020 onwards. The ongoing decarbonization discussions do not favor new orders. Slippage, aging of the fleet, low freight rates, and increased environmental CapEx may enhance scrapping activity. Global lockdown adversely affects demand for oil and distillate fuels. We have a slow oil demand rebounding in the second quarter of 2020 as global lockdown eases. Eventually, the Brent price recovery may lead to a wider Hi5 spread differential. For closing, in Slide 12, let's summarize Safe Bulkers key takeaways. The key note is our liquidity exceeding $810 million, which gives us flexibility in the presently unstable and uncertain market environment. We have entered, in total, into eight long-term period charters during the second quarter, evidence of excellent relations we have with charterers. Our ability to complete our environmental investments is evidence of our technical expertise. Our smoothed debt profile for the next two years is evidence of lenders' trust and support. Now I will pass the floor to our Chief Financial Officer, Konstantinos Adamopoulos, who will present the quarterly financial results.

Konstantinos Adamopoulos, Chief Financial Officer

Thank you. Good morning everyone. Let me continue with our liquidity on Slide 14, which, as of the end of July 2020, totaled $111.3 million, consisting of $89.9 million in cash and bank time deposits and $19.4 million in restricted cash and $2 million available under an unsecured revolving credit facility. We have refinanced a large portion of our debt. And in Slide 15, we present our repayment schedule as of June 30, 2020. In close cooperation with our lenders, we'll push back loan payments to 2022 and 2023, which were originally scheduled for this year and 2021, expanding the operating 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 operating expenses, which stood at $4,729, with our quarterly daily general and administrative expenses standing at $1,374. The aggregate number for both operating and general and administrative expenses for the second quarter of 2020 was $6,103, demonstrating our focus on lean operations. We believe that this figure for both operating and general and administrative expenses, when comparing apples-to-apples, is one of the industry's lowest. Given the fact that we include in our operating expenses all our drydocking expenses and in our general and administrative expenses are Directors' compensation and all expenses related to our administration. We move on to Slide 17. We present our quarterly TCE, which stood at $8,094, clearly affected by COVID-19, versus our quarterly operating expenses, which stood at $4,709. Let’s move to Slide 18 with our quarterly financial highlights for the second quarter of 2020 compared to the same period of 2019. Net revenues increased by 5% to $49.3 million from $45.5 million, despite the relatively weak charter market due to COVID-19 restrictions, mainly due to the additional revenues from our scrubber and feeder vessels and the additional vessel which was delivered in April of this year. During the second quarter of 2020, we operated in a weaker charter market environment compared to the same period in 2019. This was evidenced by the reduced TCE of $8,094 compared to $11,970 during the same period in 2019. A number of charter contracts entered into in the previous period expired and were replaced by contracts with lower charter rate hires. However, net revenues were supported by the benefit from scrubber-fitted vessels despite the reduced price differential with heavy fuel and compliant fuel, which was due to this oil price war and by revenue contributed by our new build delivered. Mortgage expenses substantially increased due to the increased repositioning expenses, higher loss from bunker sales due to the oil price war and consumption costs for the scrubber-fitted vessel. Daily vessel operating expenses increased by 2% to $4,729 compared to $4,653 for the same period of last year, whereas daily vessel operating expenses excluding drydocking and pre-delivery expenses decreased by 2% to $4,207 for the second quarter of 2020 compared to $4,283 for the same period in 2019. Our adjusted EBITDA for the second quarter of 2020 decreased to $6.3 million compared to $21 million in the same period in 2019. Our adjusted loss per share for the second quarter of 2020 was $0.16, calculated on a weighted average number of 102.8 million shares compared to an adjusted loss per share of $0.01 during the same period in 2019, calculated on a weighted average number of 101.3 million 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 in early 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 19 scrubbers with just one remaining. We have a strong balance sheet, with comfortable leverage, a smooth debt profile for the next two years, and liquidity of $111.3 million. Lastly, we took measures to protect our seafarers' and 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 operating results. And now we're ready to take your questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. We will take our first question from Chris Wetherbee of Citi. Please go ahead. Your line is now open.

James Monigan, Analyst

Hi. This is James on for Chris. Thank you for taking my question. So just starting off on the rate side, it does seem like, as you guys have mentioned, that there's kind of a recent increase in some of the shorter-term rates that you guys have been able to obtain in the spot market. So I'm just wondering how sustainable you think the increase is? And if you have any sense of what positive and negative factors will be there that are going to impact rates for later 2020 and 2021?

Loukas Barmparis, President

Yes. Hello. Good morning. Yes, the rates, as we speak, in the last months 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 quickly. So we are in a very good position to enjoy this improvement in the market, which, as we said in previous calls, we were expecting it to start after China announced a big stimulus plan, and it is happening now with very strong grain exports in South America over the last three months and now with very strong grain exports from the U.S. Gulf and from the U.S. West Coast.

James Monigan, Analyst

Got it. And do you think that this increase in rates will kind of lead to a stable increase in vessel values? I know that they've also recovered a bit recently, but obviously, that remained at fairly low levels.

Loukas Barmparis, President

Yes. We think that vessel values are always 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 projects. It's more technical problems that they are involved with regarding 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 vessels. This is the only negative thing. Otherwise, I think that as the freight market is improving, prices will start to improve very soon.

James Monigan, Analyst

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

Loukas Barmparis, President

Look, voyage expenses have increased in the past for three reasons, mainly. First of all was the valuation of the fuel that we have on board, which price was pushed dramatically; it was quite lower in the previous months due to the fuel oil war. The second reason was the repositioning of vessels, as we said. The third reason was that right now, the fuel that is used for scrubbers is included in the voyage expenses—it is recorded in the voyage expenses part. So that's why we will maintain somehow higher voyage expenses in the future. The one part, which is due to the prices of the oil, I believe that it will not go up so much in the future. The second part, which is basically the repositioning, will be certainly lower. The last part, which is due to the recognition of fuel scrubbers in the voyage expenses, will remain.

James Monigan, Analyst

Got it. Thank you. And just finally, I know you guys have $100 million 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 payments.

Loukas Barmparis, President

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

James Monigan, Analyst

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

Konstantinos Adamopoulos, Chief Financial Officer

These are not mature. These are scheduled installments. We don't have any debt maturing this year or next year.

Loukas Barmparis, President

But there are repayments in 2022 and 2023.

Konstantinos Adamopoulos, Chief Financial Officer

Yes. The first maturity, I believe, is in 2023.

James Monigan, Analyst

All right, well thank you for the clarification. I appreciate you answered all my questions.

Operator, Operator

Your next question comes from the line Randy Giveans of Jefferies. Please go ahead and ask your questions loud and clearly.

Randy Giveans, Analyst

Hello, gentlemen. It’s Randy Giveans from Jefferies. How are you?

Konstantinos Adamopoulos, Chief Financial Officer

Hi.

Loukas Barmparis, President

Hi.

Randy Giveans, Analyst

You booked these six long-term charters in the second quarter. So is that more of the same? Are you going to look to lock in additional longer-term charters? Or now that the spot market has improved, focusing more on the short-term charters in the spot moving forward? And what was the rationale for these five-year charters in the last couple of months?

Loukas Barmparis, President

Look, the rationale for the five-year charter was that we got a good premium in the first two years above the current spot market at the time we did the fixtures. So this is a very good cash flow injection during an uncertain time until we get over this pandemic of COVID-19. The policy now that the market is improving is to look into some more period charters when we get the opportunity. Of course, they cannot all be five-year charters or the same structure; they could be one- or two-year charters. As we approach or exceed breakeven levels, it makes sense to charter at the shorter levels. It wouldn't have made sense a year ago or six months ago to charter one or two years at $8,000, $9,000, or $10,000 a day. Now that we can secure numbers around $13,000 a day, it makes sense for the company to try and with appropriate charterers to secure some period charters. So we have many ships in the spot market, and we can take a more balanced approach.

Randy Giveans, Analyst

Okay. And then following the swaps, which were very attractive 3 to 5 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?

Loukas Barmparis, President

The average of the swaps that we've done so far is a little bit below 0.5%. So we fixed around 35% of our loan book.

Randy Giveans, Analyst

Yes. And then the margin?

Konstantinos Adamopoulos, Chief Financial Officer

We don't disclose the specific number.

Loukas Barmparis, President

We'll give you the number.

Konstantinos Adamopoulos, Chief Financial Officer

We'll give you the number, yes.

Loukas Barmparis, President

But it's not in the report. But it's about 2%, a little bit higher than 2%, about 2.10%, the average.

Randy Giveans, Analyst

All right. Okay. So all in interest expense, sounds like it's below 3%.

Konstantinos Adamopoulos, Chief Financial Officer

Yes.

Loukas Barmparis, President

Yes, yes. It's a very comfortable level, which we can use for our forward planning.

Randy Giveans, Analyst

Yes, absolutely. All right, and then a final question. Now that you have kind of the revised swaps and what have you, what's your kind of first use of cash? Are you looking at about preferred purchases? Those are yielding 11%, 12%, what have you now. So is that an option? Do you have some authorization there? What is your appetite for the preferred purchases?

Loukas Barmparis, President

Look, the most important thing, I think, is to keep a strong cash position in the balance sheet because there's a lot of uncertainty as yet. We are optimistic about the market and the stimulus pack, but there are no guarantees. We already entered the second phase of this coronavirus disease, but we don't know how it will develop in the winter months—if there are more lockdowns or partial lockdowns or other issues. So we intend to keep a strong cash position. And if possible, use part of it to deleverage and prepay earlier some installments of the loans. We want to focus right now on handling the situation with COVID-19 with the least possible damage to the company's operations. Right now, we face a very big challenge that all companies are facing. I think this may also help the freight market. We are facing a lot of delays in various parts of the world with crew changes, with changes of crew, and with testing of the crew, with delays in ports to bear before they test the crew. Also, with the limitation of the ports around the world where we can make crew changes because of strict regulations and the non-availability of international flights. I'm very disappointed to say that owners are not receiving support from charterers when it comes down to social responsibility and the well-being of seafarers. We have to face all the costs ourselves, which I mean, it's a lease. But here we have a lack of cooperation from many charterers, including major ones, when there is a need to make a small deviation from the intensive route in order to disembark our crew and put on board a fresh crew. Even big names, big charterers, that they should support such small deviations are not willing to collaborate and assist. They need their cargo faster at the destination, which creates a lot of hassle and problems for owners to make such small deviations, which are primarily due to compassionate 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’s happening right now. And it's not good for major charterers only to put it in their reports and mention the social responsibility that they have and how well they feel about the well-being of the crew and all the people associated in the chain of sea transportation. And these principles that they stated in their processes and in their code of ethics—they don't pass it on to their chartering departments who resist whenever an owner is asking to make such a small deviation for crew changes. I think there is a lot of hypocrisy in the market. We all need to sit down together and cooperate to save this time bomb that is going to hit the transportation chain. I have seen only two or three charterers really understanding the problem and cooperating. The good names like Cargill or Bunge are doing their best to assist. But there are some other names that we are really disappointed with. And I consider this the biggest problem of the shipping industry for the next six to twelve months. People need to make an effort to assist owners in order for the crews that are there on board for more than 12 or 14 months to get relief and 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 want to say these things that we all have 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.

Randy Giveans, Analyst

Got it. Okay. And how much is outstanding on these preferreds right now? Is it still $137 million?

Loukas Barmparis, President

Look, the preferred 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, the preferred dividends are quite competitive. I think that they need right now is liquidity, as Mr. Hajioannou said before. There are two points here. One is liquidity mix in this low part of the market, which can be used as a cushion if the market sees a second wave, or as an asset tool if there is an improvement in the market. The second point is deleveraging. Because as we always say, we intend in the next three to five years to bring the net debt of the company close to the scrap value. So basically, we have a specific guide 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 preferred, which is equity, perpetual equity, and can be replaced at any time in the future when freight rates really outperform the current situation. So I think this time will be in the next few years; we will get the opportunity as world trade increases and as the world freight fleet is not increasing, to start reducing that preferred. But for the time being, there is no plan to reduce the preferred.

Konstantinos Adamopoulos, Chief Financial Officer

It is $137 million.

Randy Giveans, Analyst

Got it. That links it. Well, that’s it from me. Thanks again, guys.

Konstantinos Adamopoulos, Chief Financial Officer

Thank you.

Operator, Operator

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

Loukas Barmparis, President

Thank you very much for attending this call during the summer months of August. And stay safe for all of you. And we hope that—and we believe that we will see better markets in the second half of 2020. Thank you to all.

Operator, Operator

That does conclude our conference call. Thank you all for participation, and you may now all disconnect.