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Edited Transcript of SB earnings conference call or presentation 19-Feb-19 2:00pm GMT

Q4 2018 Safe Bulkers Inc Earnings Call

Feb 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Safe Bulkers Inc earnings conference call or presentation Tuesday, February 19, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Konstantinos Adamopoulos

Safe Bulkers, Inc. - CFO & Director

* Loukas Barmparis

Safe Bulkers, Inc. - President, Secretary & Director

* Polys Hajioannou

Safe Bulkers, Inc. - Chairman & CEO

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Conference Call Participants

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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the fourth quarter 2018 financial results. Today, we have with us from Safe Bulkers, Chairman and Chief Executive Officer Polys Hajioannou; President Dr. Loukas Barmparis; and Chief Financial Officer 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, believes, 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 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 obligations or undertaking to publicly release 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.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [2]

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Good morning. I'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the fourth quarter of 2018. We will start our industry update in Slide 4, where we present the quarterly charter hire average for both Panamax and Capes. As seen in both graphs, the weakness, a seasonal weakness, in the beginning of this year followed by strengthening of the market during the second half. In addition, the uncertainties related to U.S.-China trade and the iron ore trade disruptions in Brazil have enhanced this seasonal weakness.

In Slide 5, we discuss the demand side. Noting the successful disruption in iron ore trade from Brazil, which affect directly the Cape market, but also indirectly the overall drybulk trade.

The top left, we'll present the monthly imports from -- of coal in China. According to Clarksons, for the first 11 months year-on-year, the imports of coal rose by about 9%. The restrictions related to the seasonal conditions have slowed down imports within Q1, though similar pattern is evidenced in all previous years.

On the top right graph, we present the outlook of Indian coal imports, which, in 2018, had sharp increase. And according to Clarksons' focus, this trend is expected to continue in 2019.

Presently, India has a positive sign and plenty of volume in coal imports.

On the bottom graph, we present the Chinese imports of soybean. The effect of trade war is evident in 2018. Hopes of U.S. and China reaching a trade agreement may restore the growth pattern.

Let's move onto Slide -- to supply dynamics and fleet outlook in Slide 6, where we present the deliveries, the aging and the order book of Panamax to post-Panamax fleet. As shown with the green line on the right, 16% or about 400 vessels of Panamax fleet are older than 17 years old. We expect that enforcement of new regulations for SOx and ballast water treatment systems and the latest substantial CapEx requirements create commercial disadvantages for older vessels. This is expected to enhance scrapping. The order book for the next 3 years, green bars on the left, of 254 vessels or 11% of Panamax to post-Panamax fleet, although sizable, should be compared with the older 400 vessels facing the market challenges. The larger the price differential between heavy fuel oil and compliant fuels towards the end of the year, the stronger the scrapping will be.

In Slide 7, we present a graph with current number of vessels with scrubbers by segment at year-end. According to DNV GL data as presented by DNB Markets by the end of 2019, about 2,440 vessels will be scrubber-fitted. This is relatively small now, but in comparison to the global fleet of about 60,000 oceangoing vessels. As shown in the graph, the vast majority of retrofittings is made to be in the region of 1,600. It will take place during 2019 and especially towards the second half of the year. This may create bottlenecks in the dry-docking shipyards and eventually tightness in supply of vessels.

Turning to Slide 8, we'll drill down to data specifically for the drybulk. For Panamax to post-Panamax, which is the main category that Safe Bulkers competes, according to Clarksons, only 157 out of the total 2,415 vessels will be retrofitted with scrubbers. Safe Bulkers will comply fully with IMO 2020 regulation by installing scrubbers in about 50% of its Panamax to post-Panamax fleet, namely relatively heavier fuel-consuming vessels, and in the remaining, by using compliant fuels. Please note that we presently have 11 eco ships, which shall be enjoying a competitive advantage after 2020 when the price of the new compliant fuel are expected to increase.

In Slide 9, we present what the outlook of futures market on fuels and the new compliant fuel. On the table on the top right, according to data from Platts, as presented in Thomson Reuters, we see that on February 15, the futures price for December 2019 of the new 0.5 compliant fuel in Singapore was $575 per ton. As shown on the bottom right figure, the spread of the compliant fuel versus the currently used high sulfur fuel oil is traded at $241 per ton for the same period. This spread is in line with the forecast and expectations of market analysts, which is presented on the graph on the left. Scrubber returns on investments may be reduced over time if fuel priced differential declines or scrubber penetration increases.

Now let's move to Slide 10, where we present an update on IMO 2020 regulation. There is an ongoing debate in relation to the use of open-loop scrubbers and whether the effluents affect the marine environment. A recent study conducted in Japan, which will be presented to the International Maritime Organization, according to Lloyds list, supports the open-loop scrubbers and their use in Japanese waters. According to the study, open-loop scrubbers should not be prohibited because there are no unacceptable effects on the marine organisms and the quality of the sea from their use. By using the computational fluid dynamics in relation model and conducting toxicity tests on aquatic organisms, the study concluded that open-loop scrubbers cannot have short- or long-term effects on marine organisms.

Study found that the technology to comply with the 2020 sulfur cap should not be prohibited.

The study focused on projected scrubber use in 2025 in 3 key areas: Tokyo Bay, Seto Sea and the Ise Sea and on the chasing the considerations of specific samples and chemical components compared with 2015. The results show that after 10 years, there was no material change found to the accumulated concentration of components, such as pH, nitrate and chemical oxygen demand, even in the scenario in which all vessels in those regions use scrubbers.

In addition, the study found that the amount of heavy metals in the sea emanating from open-loop scrubber use is about 100x less than the limit of heavy metal concentration permitted from land discharges in Japan.

On Slide 11, we'll present the key takeaways of the market outlook. We experienced weak charter market since the beginning of 2019, attributed mainly to seasonality, iron ore trade disruption and the trade war concerns.

Existing order book is relatively low compared to the number of older vessels that may face market challenges.

New environmental legislation, ballast water treatment systems and scrubbers involves substantial investments and may create tightness in supply due to the down time. The vast majority of vessels in the Panamax to post-Panamax Class have not ordered scrubbers as -- 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. As a result, environmental investments may act in a corrective manner in low market.

Now let us brief you on our quarterly actions in Slide 12. This quarter, we have refinanced our debt targeting gradual deleverage and smooth debt profile for 5 years maintaining a relatively low cash breakeven point. We have a 56% consolidated leverage as of year-end, representing total consolidated liabilities divided by our total consolidated market adjusted assets. [And tied to] more with an unaffiliated sale up to acquire a Japanese post-Panamax Class resale newbuild with first half of 2020 delivery, with an option to finance up to 60% of the vessel provisions of common stock to the seller. And we have continued implementing environmental investments, including scrubbers and ballast water treatment systems.

In Slide 13, we presented a detailed program of our dry-docking ballast water treatment and scrubber installation program, which has been included in our press release. At this point, let me remind you that we are one of the first drybulk companies to deliver detailed engineering studies for scrubber installation for approval to the classification society, and we remain confident that our company is well positioned ahead of uncertainties and opportunities that the present environment will offer.

Now our Chief Financial Officer will present our quarterly financials.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [3]

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Thank you, Loukas, and good morning to all.

In Slide 15, we present some financial data on a quarterly basis. Our quarterly revenues, our adjusted EBITDA and our operating cash flow have been constantly increasing, thus improving our overall financial strength. This fact is also determined in Slide 16, where we present our adjusted EBITDA on a per vessel and per quarter basis.

As our OpEx numbers include all items like dry-docking and predelivery expenses, in Slide 17, we present the breakdown of daily OpEx and daily OpEx, excluding dry-docking and predelivery expenses. Daily vessel OpEx increased by 11% to 4,355 -- $4,353 for the fourth quarter of 2018 compared to $3,914 for the same period in 2017. Daily vessel operating expenses, excluding dry-docking and predelivery expenses, increased by 6% to $4,109 for the fourth quarter of 2018 compared to $3,887 for the same period in 2017.

We present this Slide 18, our daily free cash flow waterfall for the full year of 2018. During 2018, we continue to be profitable, maintaining one of the most competitive breakeven points in the industry. We have earned about $13,000 per day on time charter equivalent basis and built less than $8,800 per day per vessel for all our daily outflows, including operating, G&A, preferred dividend, interest and principal repayments. Our daily free cash flow stood at about $4,300 per vessel per day.

In Slide 19, we present our quarterly TCE, which stood at $13,875, and we focus on our expenses both OpEx and G&A. The audited figure for this, for Q4 2018, was $5,737, as a result of: an 8% increase in average number of vessels to 41 vessels; of an expense of $900,000 related to 3 dry-dockings fully completed and 1 dry-docking partially completed in Q4 2018 compared to none for the same period in 2017; of increased maintenance, general stores and spare expenses; and lastly, of increased management fees charged by our managers.

Let's move to Slide 20, with our quarterly financial highlights for the fourth quarter of 2018 compared to the same period of 2017. Net revenues increased by 24% to $15.6 million (sic) [$52.6 million] from $42.4 million, mainly due to an increase in charter rates. Our time charter equivalent rate per vessel increased by 16% to $13,875 per day from $11,944 during the same period last year.

Daily vessel operating expenses increased by 11% to $4,353 compared to $3,914 for the same period in 2017. Whereas daily vessel operating expenses excluding dry-docking and predelivery expenses, increased by 6% to $4,109 for the fourth quarter of 2018 compared to $3,887 for the same period in 2017.

Our adjusted EBITDA for the fourth quarter of 2018 increased by 22% to $29.1 million compared to $23.9 million for the same period in 2017.

Our adjusted earnings per share for the fourth quarter of 2018 was $0.07, calculated on a weighted average number of 102.1 million shares, an increase as compared to $0.02 during the same period in 2017, calculated on a weighted average number of 101.5 million shares.

Closing our presentation, in Slide 21, we present our quarterly and 12-month fleet data and average daily indicators compared to the same period of 2017. We would like to emphasize that this year we have worked extensively in the financing and large part of our debt, aiming to smoothen our profile for the following 5 years and 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.

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Questions and Answers

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Operator [1]

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Our question comes from the line of Ben Nolan from Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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This is Ben Nolan. Can you guys hear me?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [3]

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Yes, yes.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Okay, good. Yes. So my first question relates to maybe how you're thinking about the time charter strategy in combination with your scrubbers. Obviously, that is, having scrubbers on your ships as they come and are delivered is a bit of a competitive advantage. But given the state of the market as it is at the moment with somewhat depressed by trade in Brazil and everything else that you guys walked through, is it maybe -- are you thinking about possibly not going as long in terms of tenure or duration on those contracts as maybe you otherwise would be for the vessels with scrubbers?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [5]

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Yes. Look, the charting policy will be decided in due course. It's very early days because nobody is sure what will be the exact differential of compliant fuel with HFO. Currently, the futures market in Singapore estimate that the differential is $240 for the end of the year. We want to see what the market will be evaluating by the end of the year or by the September, October. And at that time, we'll start deciding of how we plan the chartering of those ships. It is quite possible, but a number of those ships will work on the spot market to try and capture the biggest upside because we have 100% 2019 scrubber outfitting in our fleet.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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Yes. Well that's interesting, and certainly having vessels in the spot market is a little bit of a departure from what you currently do, but I can appreciate maybe the competitive advantage that having the scrubbers might provide there. The -- my second question is, thinking through sort of the capital strategy and, obviously, you guys can issue more shares if you want to buy that -- the vessel that's on order or not, I guess, but at the same time, you have been buying back shares. Currently, the market is weak. How are you weighing your options between preserving cash, buying back shares or using shares? What's your current strategy with respect to sort of what to do with the cash that you do have?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [7]

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Obviously, when we buy shares, it has be lower than when we issue shares. So we keep this principle and we'll evaluate in the future. But it's not in our -- it's not our priority to buy back stock at this point. We bought some stock at the end of the year. It was lower than the levels we issued the stock to the seller, so we did that part. In the future, we have this option to pay for the ship with part shares. We may exercise depending on the share price.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [8]

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Okay. All right. No, that's helpful. And then lastly from me, obviously, I appreciate the -- you laid out what the dry-docking days are associated with the scrubber and ballast water installations. I might have missed it, but could you maybe sort of say what the CapEx schedule may look like associated with the scrubbers, in particular?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [9]

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There is a detailed schedule in our press release about the installation of the scrubbers. And you can find, it's spread out through the 3 quarters, say, Q2, Q3 and Q4 of 2019.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [10]

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Yes, the CapEx is about $2 million, $2 million, $2.1 million, and this is the order of CapEx per vessel and for scrubbers, and may be in the order of $0.5 million for ballast water treatment plant. So basically, I mean, if you understand that on our medium-size vessels, it's cheaper than on the bigger ones.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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Okay. Now that's helpful. And just out of curiosity, lastly from me. Have you guys sorted out how to -- or the time period over which you will depreciate that -- the scrubber CapEx?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [12]

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Until the 10th of July.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [13]

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This is added on the book value recipient, you depreciated...

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [14]

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And also, the values of the ships will be adjusted because, clearly, it's an investment on the ship. So the value of the ship will be adjusted upwards when this equipments are fitted.

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Operator [15]

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Your next question comes from the line of Jon Chappell.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [16]

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It's Jon Chappell from Evercore ISI. Just one follow-up question from me on Ben's, I think, second question regarding uses of capital. So the spend on the CapEx is -- on the scrubbers is pretty light, $38 million, only one ship left to buy. You smoothed out the debt repayment by refinancing. So it would seem that there is some excess liquidity. So I guess the way to ask it is twofold. One, how to do you think ships versus shares? And the part two to that is, Polys, your comments about issuing -- or buying back the stock lower than where you issued it, it makes a ton of sense. But you also said, you're not into buying it right now, but you bought at the end of the year, and the stock is significantly lower than it was at the end of the year. So why not today if you're buying it back in December?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [17]

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First of all, the market -- the weak market of Q1 slightly made us to reconsider these options because we want to preserve liquidity. Second, we have quite a big expenditure in 2019 with the ballast water treatment and the scrubbers. So it's 19 vessels, roughly $40 million for the scrubbers alone and another maybe $10 million for the ballast water treatment plant. So it's a liquidity that we are investing in this year, whilst the start of the year is not so bright. So we'll wait to see how all things develop, the trade wars and the market, which is slowly creeping up now. But we have about 5 weeks of the start of the year. So we have to be more careful. Of course, the levels we bought the stock back is more or less within $0.10 or $0.15 of the levels that the stock is trading today. So it's not a big deal. There, we still consider it very cheap. If you consider only -- not only our 3 Capesizes, the values of their charters, as the market has been dropping after the Vale accident. The value of our 3k charters is increasing because it's average $30,000 per day on these 3 ships alone. So we will do the investments on this technology. We will wait to see how things develop with the chartering of the ships in the second half of the year. And then we decide how much liquidity we have and what we do with it. The easiest thing is to decide what you do with the liquidity. The most important is to make sure you have that liquidity there.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [18]

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Yes, that makes sense. So just to be clear then, even though you think kind of the weakness so far this year is seasonal and temporary, you've shifted to a little bit more defensive mode just to make sure if in case things stay worse than they are -- or worse than you expected for longer than you expected, that you can just kind of keep the buffer?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [19]

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No, I don't think anybody expected the drop from $14,000 a day in the beginning of January to $4,000 in the spot market at the end of January. We fix a ship at $14,000 at [$3,950] at -- on the 1st of January of this year. Then we had the seasonality -- the flat season at Queensland, the delay of core cargoes from Australia, the big collapse of the dam in Brazil with all the cancellations and the force majeure, plus the trade war, plus delivery of new buildings every January. All these things, coupled together, I mean, one thing can deteriorate the market, let alone all these together. So when the market -- the spot market reach $4,000, $5,000 a day, you have to consider certain things. Now it's creeping up slowly back to $8,000 or $9,000 in the Pacific. So I mean, there is volatility there. And you have to -- so long as you are below your breakeven levels on the spot market, you have to be a little bit defensive. You cannot go out as if you're fixing the small ships at $14,000 a day. So we have to be a little bit more careful, and this is what we're doing here.

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Operator [20]

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We will now take our next question.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [21]

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This is Max Yaras from Morgan Stanley. I have a couple of questions for you guys, kind of, general market questions. You laid out, kind of, a demand picture and highlighted India coal imports as maybe a driver. Just wondering what are -- what kind of main catalysts do you see coming up for maybe a demand turnaround? Or what kind of key drivers do you see?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [22]

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Look, we are more optimistic this year on the grains and the coal, especially we're seeing healthy numbers on that front. I think the Indian coal will -- remains strong. The Chinese coal, where we have the question marks there, what will happen with the ports, they close every winter and how they will, after the winter ban is over, how they will start buying coal. And the big question mark, what happen with this 40 million tons of iron ore lost from the Brazilian trade and how it will be replaced, from which area and how the ton-miles will be affected. So generally, it looks like the first half of 2019 will be not bright or as bright as it was in 2018. And overall, we never know how if the trade war is resolved, how this will affect trade and how positive and how fast this will be shown in the flows of cargo. And overall, I think it looks the first half will be lower, and there should be healthy recovery in the second half of the year. The second half of the year, also, you have to remember, there is a big number of ships going into the shipyards for retrofitting scrubbers. This will affect a lot also the older ships that they to take dry-dockings because every year, 1/4 of the fleet is going through their periodical dry-dockings. So these ships will find that most of the yard spaces is used by the large Capesize and the big tankers and other big ships retrofitting scrubbers. This will consequently raise the cost of dry-dockings for secondhand ships for the normal maintenance and things like that. The older ships, which are 17 years old, that they have to face new regulations and they have to pay the extra 40%, 50% higher cost to dry-dock their vessels. I think the owners, if the market is not at breakeven levels or near to breakeven levels, they will seriously considering other options when that dry-docking will be coming due. So I think it will be a quick recovery of the market once older ships start getting away. I mean, the lower the market is and the more ships are doing these jobs of retrofitting scrubbers, the higher the cost will be in normal dry-dockings for all owners in the world. So the older ships will find it a struggle.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [23]

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Right. And then to stay on that last topic, just kind of wondering if you have an estimate for scrapping in 2019 and 2020, especially if rates stay kind of weak in the near term? And then if you think the new -- there is a new kind of normalized fleet supply growth, what that has to be longer term?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [24]

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The fleet supply for the next few years is not huge, it's not huge. And it could be on par with the demand growth. So we're not worrying too much about the fleet supply. What could be positive for us will be the -- could be the scrubbing rate, which last year, I think, was very weak, and one of the lowest scrapping rates in the last 9, 10 years. This year, we could be surprised by the number of scrapping that we will see. So it all depends. If this low-freight market persists for 2, 3 months or 4 months, many people with older ships will consider all option. Last year, if you remember, the scrapping was just under 5 -- on drybulk was just under 5 million deadweight, which was minimal. One of the lowest years scrapping. So this year, we could see 15 million or 20 million if the freight market does not perform and also the cost of dry-docking keeps going high. So I mean the market will be -- is very finely balanced. And small changes either on demand or supply can influence the market a lot. In 2017, I think, the scrapping was 15 million or more. Last year, it was only 5 million. So if this year we don't have a good market, we'd see scrapping going 15 million to 20 million deadweight.

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Operator [25]

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We will now take our next question.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [26]

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It's Randy Giveans with Jefferies. Question, for the scrubber strategy, obviously, you're putting among the Kamsars, the post-Panamaxes, not the Panamaxes. Is that mainly due to just economics and the numbers of days at sea? Or is there maybe questions of HSFO fuel availability?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [27]

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Yes. Look, the scrubbers we wished to go for the relatively higher consumption vessel, which were the post-Panamaxes, large one Cape that we have in the spot market. So we fitted on all those -- the scrubbers. Then we selected -- out of our Kamsarmaxes, we selected Chinese-built Kamsarmaxes, which they have higher consumption than the Japanese ones. On the Panamaxes, we didn't see any reason to put scrubbers from those, because half of our Panamaxes are eco-engine with a -- built after 2014 and the other half is built in 2003 to 2006, which is a bit old to consider the investment on those vessels. So in the end, we came out with this 50% scrubber and 50% non-scrubber. We are not worried at all about availability of HFO. We are very confident because the places we supply bunkers to our ships -- where our charters supply bunkers to our ships is mostly in Singapore and Fujairah. This is where the bunkering of the vessels take place on the Panamax fleet -- in the post-Panamax fleet. We believe that we will find sufficient quantities of HFO in Singapore because these are the places where also the big tankers are passing and the big containers are passing. So it's a major hub. And on the other ships will compete with compliant fuel available in the market, which, again, we are sure that the refineries have done their work and they will be there and offering healthy prices on compliant fuel.

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Konstantinos Adamopoulos, Safe Bulkers, Inc. - CFO & Director [28]

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Also, I would like to say that when we speak about HFO, which is thin fuel oil. The thin fuel oil, as we know, is a residual of the distillation. It's residual, which means it's leftover. So it is left there in any case. 7% to 8% of the crude oil consists of heavy molecules, which is a residual fuel oil. Now if you want to -- this to make -- to crack it and use it as the MGO as a distillate, if you want to do the cracking from the heavy fuel oil and coal to distillates, this has some cost. So it's impossible not to have the residual, the heavy fuel oil. It is possible to have the same cost when you trade -- you compare the price of heavy fuel oil and the distillate prices, which, of course, are, let's say, more -- they have been refined and they should be more expensive because of the cost of the refining, at least.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [29]

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Okay. And then you mentioned the scrapping. What is your view of maybe increased scrapping and the use of all this recycled steel by China? That puts some downward pressure on iron ore imports needed because they were using more of recycled steel. Do you see that kind of continuing in 2019, 2020 even?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [30]

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I don't know what they do with the scrap steel they're buying, but I guess, they are using it for softer industries. And like in the past, they will keep using it. So I don't see any threat from there. I mean, we are not expecting a year, that we will suddenly see $100 million deadweight of ships being scrapped to start worrying that this will be affecting the steel industry and the production of steel in China. We'll talk about the normalized 15 million to 20 million tons of scrapping that we had back in 2017. So I'm not an expert to reply to or give an opinion on how the Chinese are using this scrap steel.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [31]

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No problem. And I guess, last quick question from me. You averaged about $13,875 a day per time charter equivalent in 4Q '18. Can you give some guidance for 1Q '19 in terms of your average TCE and percentage of the quarter that's already been booked?

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Polys Hajioannou, Safe Bulkers, Inc. - Chairman & CEO [32]

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Look, I mean the spot ships of January, as I told you very tremendously, the first fixture we did in the start of the year was almost $14,000 a day on the 3rd of January. On the 29th of January -- the second fixture in the spot market we did was on the 29th of January, which was equivalent something like $4,500 a day for a 30-day split. I mean, January and part of February, it was a very, very depressed month. It reminded us a bit of the tanker business. On one day, we'll see this is earning $50,000 a day and the next week maybe they're earning $5,000 a day. So it was -- this is not the norm for drybulk. I mean, you can have fluctuations of $2,000, $3,000 a day in a month, but you don't have $10,000. So slowly, slowly now the market start creeping back. We're adding fixtures in the spot market, $8,000, $9,000 a day. So I mean, it's not healthy, but it's not terrible. So I mean, every company has to go back to the basics, redraw the board, control your expenses. We've done this before. We'll do it again. And we will be on top of things. I think that market, with the grain season starting in March, will slowly start to appreciate. But of course, a lot depends on so many external factors. And let's see what happens with this twist and turns of the trade war, how this will affect sentiment, will there be a resolution, who is the winner, who will be the loser, how the market will perceive it. I mean, stock markets perceive right now, but there will be a solution and the resolution of the trade war. On the other hand, there will be questions who won that war and who lost it. I mean, we just follow what the rest of the world is monitoring at the time. So -- but I'm more optimistic in general for the market for the second half of the year because of all the retrofits. For shipowners, we have a very big change at the end of 2019, with moving up the cost of bunkers by $250 or $200 a ton. This will create slow steaming. The older ships, the heavier-consuming ships will find life very tough. This could lead to, as I told you before, the increased dry-docking cost because of all yards being very busy with big projects. This will -- all increasing to more pressure on the ships that are over 17 years old. That's why we included in our graph that 16% of the Panamax fleet is over 17 years old. If the ships that cannot make a breakeven or close to their breakeven, they will consider options like scrapping at an earlier stage instead of fitting out $0.5 million of ballast water treatment or doing other regulations or not finding proper employment because of their heavier consumption on compliant fuel will not make them attractive to the charters. So second half of the year, we are positive for second half of this year. But I mean, we need all parameters to start getting normalized. We have very abnormal market conditions and external factors this first couple of months of this year.

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Operator [33]

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We have no further questions at this time. Please continue.

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Loukas Barmparis, Safe Bulkers, Inc. - President, Secretary & Director [34]

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So thank you very much for attending this conference call, and we are looking forward to discuss again with you in our next call next quarter. Thank you. Have a nice day.

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Operator [35]

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That concludes the conference for today. Thank you for participating. You may all disconnect.