Safe Bulkers, Inc. Q1 FY2021 Earnings Call

Thank you for standing by, ladies and gentlemen. Welcome to the Safe Bulkers Conference Call to discuss the First Quarter 2021 Financial Results. Today, we have with us from Safe Bulkers Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; Chief Financial Officer, Mr. Konstantinos Adamopoulos. 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 this conference is being recorded today, May 6, 2021. 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 that 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 release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company’s expectations with respect thereto or any change in events, conditions or circumstances on which any statement is based. And now, I pass the floor to Dr. Barmparis. Please go ahead, sir.

Good morning. I am Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the first quarter of 2021. Let me start our presentation by expressing our gratitude to all our seafarers. We are committed to their safety and well-being. Moving on to Slide 3, we present some key points about Safe Bulkers. We are a true drybulk player. Without predictions, we have a history of over 60 years of uninterrupted presence in the drybulk market. Our management team has more than 30 years of experience in the drybulk industry. We are here for the long run. We preserve our liquidity, which provides financial flexibility, security in turbulence and opportunistic asset acquisitions. Our spot market exposure allows expansion of profits in favorable charter market conditions. We have half of our fleet in the spot market at about one-third of BDI charters index-linked, enjoying the credit market position. About 75% of our fleet is Japanese-built, providing us with a lower environmental footprint, lean operations and cost advantages from scrubber-fitted vessels based on increased fuel spread differential. We have actively centered environmental preservation in the heart of our competitive strategy by investing more than $67 million in 2019 and 2020 retrofitting 50% of our fleet with exhaust gas cleaning devices, also known as scrubbers, which provide us with extra income capability in a rising oil price environment. The management team has seen gains that offer full alignment with shareholders. We have demonstrated our twofold fleet renewal strategy. On the one hand, looking towards 2030 with ordering greenhouse gas EEDI Phase 3 and NOx-Tier 3 Japanese newbuilds and on the other hand, capturing the present market by opportunistic second-hand acquisition, replacing older vessels at a modest price differential. At the same time, we continue the gradual de-levering of the company. I will continue with Slide 4. We focus on our spot market exposure. I would like to point out that 75% of our fleet is Japanese versus 46% of the world fleet, providing us with a lower environmental footprint, lean operations and cost-building advantage. As shown on the left side, the Cape and Kamsarmax spot market during the first quarter of 2021 has significantly improved. As a result of our exposure in the spot market, with half of our fleet and the fact that about one-third of our period charters are index-linked, you can observe on the right-hand side figures, the impact on our PC and net revenues of this quarter versus the same period of 2020. We continue the presentation of 70 points on Slide 5. We demonstrate our lean operations and low breakeven points with stable operating expenses yet again during this quarter. As a result, on Slide 6, we have increased our profitability to earnings per share of $0.18 and $0.14 on an adjusted basis as compared to an adjusted loss of $0.13 for the same quarter last year. Our liquidity has also increased in Slide 7 to over $190 million as of quarter-end and over $209 million as of April 23, which increases our flexibility to execute on our fleet renewal strategy and de-leveraging. At the same time, we have a strong balance sheet, as analyzed on Slide 8, with a healthy total liabilities to total assets ratio of about 57%. Now, let’s see an overview of the first quarter as presented in Slide #9. We have increased our profitability, and with our exposure with half of our fleet in the spot market and about one-third of our period charters enjoying index-linked rates. As an example, our recently early delivered Capesize has been subsequently fixed for 1 year at a gross daily charter rate linked to the 5TC bulk exchange Capesize index multiplied by 119%. The current BCI rate stands at 44,000. At the same time, we have increased our liquidity and strengthened our balance sheet. We will continue our efforts to gradually renew our fleet with selective sales of older vessels and new acquisitions of modern designed vessels that adhere to new environmental regulations. We remain focused on our environmental performance and continue to invest to improve our operations in this area as we believe that our environmental investments will contribute to sustainable operational and financial advantages. Let’s move now to Slide 11 and the industry update. Most countries have accelerated COVID-19 vaccination and have resumed their economic activity, in most cases at a faster pace than the pre-COVID period. This year started with a very strong charter market. The average charter hire is about $20,500 year-to-date compared to $5,400 for the same period in 2020. Presently, Capes are trading at about $45,000 per day. Similarly, for Kamsarmax, the average charter hire is $19,300 year-to-date as compared to $7,100 for the same period in 2020. Presently, Kamsarmax are trading at about $25,000 per day. This represents a substantial increase in vessel revenues, which has been sustained through the first 5 months of 2021. Looking at vertical Capes, which have been extremely relevant to the market trend, the forecast is for the market to remain strong. According to the present trading rate for Capesizes, June is expected to trade at $47,000, Q3 and Q4 at $36,000 and $39,000 respectively. Similarly for Kamsarmax, June is expected to trade at $28,000 per day, while Q3 and Q4 are at $25,500 and $22,000 per day, respectively. The expected sustainability of the market for Capesize is a result of the increase in underlying demand, which is also reflected in commodity prices, which we will review in a moment, and the lack of other supplies. In Slide 12, we present the current status of major relevant commodity prices. As observed, there has been a significant price surge in all commodities relevant to shipping. The main reason for this has been the strong demand from China and other countries, along with government spending on post-pandemic recovery programs and greening projects of the global economy. Indicatively, iron ore, which is the main curve, is trading at about $190 per ton, comparable to 2009 levels. Similarly, steel rebar, which is a direct product of iron ore and reflects the subsequent metal production, is currently trading at the highest levels in 5 years. Soybeans, a primary target for Kamsarmax, have hit an 8-year high, reflecting a similar pattern in supply across all grain products such as wheat, corn, etc. Additionally, we also present the price development of copper, which has reached $10,000 for the first time since 2011. The surge in demand for commodities has been further enhanced by government stimulus plans. President Biden has proposed two additional stimulus plans on top of the one he has already passed. Furthermore, it is important to note that the demand is not only driven by China, as was the case earlier; the rest of the world is now contributing significantly to the demand side. Turning to Slide 13, we present the status of the fleet for Capes and Panamaxes. On the top left graph, we present the price of a 5-year-old Capes and Panamaxes since 2010 as assessed by both exchanges. The prices of the 5-year-old Capes have increased by about 30% since the last 6 months and about 90% since the 2016 lows, and they are presently valued at about $40 million. Similarly, Panamaxes have surged by about 35% during the last 6 months and about 105% since the 2016 lows. It is important to note that the above figures reflect other vessels in terms of country and their shipyard build specifications and maintenance divisions. Safe Bulkers has mostly built by top-class shipyards in Japan with advanced specifications. Moreover, 75% of the fleet is equipped with pilot water treatment systems and have retrofitted scrubbers. All these features provide significant additional market value for each of our vessels. In the second and third graphs, we present the status of the order. Until the end of the year, the new build orders accounted for about 2.5% of Capes and about 3.7% for Panamax. From 2022 onwards, the new orders are less than 2%. It is important to note that there are several limitations for anticipating asset new build orders. There is a scarce building capacity at most shipyards as they are preoccupied with building assets in other sectors such as containers and tankers. In addition, only a few shipyards have developed new environmentally efficient designs. These reasons, taking into account the aging of the fleet and the eventual scrapping, will limit the growth of the drybulk fleet. On the next Slide #14, we will present the status of bunker prices, and specifically, the difference between the price of very low sulfur fuel oil and the high sulfur fuel oil, known as Hi5, which is of interest for our scrubber operations. Also, in the top graph, the Brent prices collapsed during the pandemic period, especially in the beginning of 2020. As anticipated, this affected bunker prices, particularly the different products, with the very low sulfur fuel oil being significantly impacted. Currently, Brent rates are close to pre-pandemic levels, in a healthy range of about $70 per barrel. Hi5 is currently around $110 per metric ton, and according to the future market in Singapore, it is expected to trade in the region of $120 for the remainder of 2021 and around $130 in 2022 and 2023. Safe Bulkers has installed scrubbers on half of its fleet. For reference, scrubbers for post-Panamax vessels with consumption of about 7,500 metric tons per year enjoy the benefit of about $120 difference between very low sulfur fuel oil and heavy sulfur fuel oil, resulting in a financial gain of approximately $900,000 per year or about $2,500 per day. The recovery of global economies, increased mobility, and the rebound in crude oil prices may push the Hi5 differential even higher to pre-COVID-19 levels. Let me summarize the key market takeaways in Slide 15. The order book is minimal, at its lowest level since 2002 due to decarbonization discussions not favoring new orders. Most shipyards are preoccupied with orders for containers and tankers until 2024, and only a few have developed new environmental efficiency designs. We experienced an exceptionally strong start to 2021 with robust volumes of iron ore, coal, and grain in trade. Demand for commodities has been exceptionally strong during the first quarter. We have seen increased government spending on post-pandemic stimulus programs and the continued greening of the global economy. We have witnessed the recovery of Brent prices, which may even acquire the Hi5 spread differential that is currently around $120 per ton. Lastly, the aging of the fleet and increasing environmental restrictions for emissions enhance the scrubbing activity. Now, let me pass the floor to our CFO, Konstantinos Adamopoulos, for our financial overview.

Thank you, Loukas, and good morning to everyone. Let me start in Slide 17. We are chartering performance, where we present our quarterly time charter equivalent rate. For the first quarter, we stood at $15,567 per vessel. Our revenues for the first quarter were supported by quarterly running expenses, which stood at $4,702. Moving on to Slide 18, which represents our quarterly daily OpEx and our quarterly daily G&A, which stood at $1,440. The added figure for both OpEx and G&A for Q1 2021 was $6,142, demonstrating our focus on lean operations. We believe that this number, when comparing apples-to-apples, is one of the industry’s lowest if not the lowest, given the fact that we include in our OpEx all dry docking and free delivery expenses, as well as management fees, directors' and officers' compensation, and all expenses related to the administration of our company. Moving on to our debt profile, as seen in Slide 19, we present a repayment schedule as of March 31, 2021. As of that time, our liquidity stood at $191.4 million, consisting of cash and bank time deposits, restricted cash, contracted undrawn borrowing capacity under revolving credit facilities, and secured commitments including sale and leaseback financing. Slide 20 focuses on our liquidity versus our CapEx. As of April 23, 2021, we had liquidity of $209.6 million, which comprised cash and cash equivalents, time deposits, restricted cash, and funds available under sale and leaseback agreements, new term loan agreements, and the revolving credit facility. Our aggregate remaining CapEx for the acquisition of our 2 new builds and the merger was $52 million, of which $600,000 is payable this year and $51.4 million is due in 2022. In addition, the committed CapEx for the scrubber installation and several ballast water treatment systems amounted to $3.2 million, of which $2.3 million is due this year and $900,000 next year. Slide 21 presents our debt amortization schedule versus the scrap value of our fleet. We have a smooth debt repayment profile for the next 2 years, helping us gradually de-leverage our company. Next, Slide #22 presents our quarterly financial highlights for the first quarter of 2021 compared to the same period of 2020. As a general note, during the first quarter of 2021, we operated in an improved charter market environment, experiencing higher charter rates compared to the fourth quarter of 2020, with lower interest expenses while our revenues were supported by earnings from scrubber-fitted vessels and reduced expenses. During the first quarter of 2021, we had a time charter equivalent of $16,567 compared to a TCE of $9,089 in the same period in 2020. Net income for the first quarter of 2021 reached $21.3 million compared to a net loss of $9.9 million during the same period in 2020. Net revenues increased by 37% to $62.5 million in the first quarter of 2021, compared to $45.7 million in the same period of 2020, mainly due to increased TCE, which was a result of the improved market, assisted also by the additional revenues from our scrubber-fitted vessels. Daily vessel OpEx decreased by 1% to $4,702 compared to $4,771 for the same period in 2020. This decrease is associated with reduced dry dockings and the provision of technical services, which was impacted by increased crew repatriation expenses due to COVID-related issues. Daily vessel OpEx, excluding dry docking and pre-delivery expenses, increased by 2% to $4,358 for the first quarter of 2021 compared to $4,258 for the same period in 2020. Our adjusted EBITDA for the first quarter of 2021 increased to $34.6 million compared to $9.4 million for the same period in 2020. Our adjusted EPS for the first quarter of 2021 was $0.14, calculated on a weighted average number of shares of 103.3 million, compared to a loss per share of $0.13 during the same period in 2020, calculated on a weighted average number of 103.4 million shares. Slide 23 provides an estimation of the expected downtime in days for this year to assist our analysts with their projections. Closing our presentation in Slide 24, we present our quarterly slide data and average daily indicators compared to the same period last year. We would like to emphasize that the company maintains a strong liquidity position with $209.6 million as of April 23, 2021. This solid liquidity provides us with the flexibility to follow our plan, targeting to gradually renew our fleet while adhering to forthcoming environmental changes and sensibly de-leveraging our balance sheet, aiming to create value for our shareholders. Once again, I would like to thank our seafarers for their commitment and dedication throughout this tough period. Our press release presents in more detail our results, and we are now open to take questions.

Thank you. We will now take the first question. Please go ahead, your line is open.

Hi, this is Liam on for Chris Wetherbee. Thank you for taking my question. So I just wanted to first ask about your fleet and the chartering strategy. So I know that half of your fleet is in the spot market environment.

Can you please speak closer to the microphone because you cannot – you don’t have good reception or...

Yes, sorry about that. So I know that half of your fleet is on the spot market currently. So I just wanted to ask about your chartering strategy. So what are your thoughts about the portion of your vessels that will continue to trade in the spot market? And what would it take for you to kind of look to lock in some of your vessels on longer term charters?

Yes. Right now, half of the vessels are in the spot market, and the other half on short-term period market up to 1 year. Out of this period, one-third of them, as we saw, is index-linked because we were feeling that the market would improve in 2021. And we decided those fixtures on part of the clear pictures would be done on an index-linked basis. So we will continue for the rest of the quarter and up to the third quarter this policy to keep ships in the spot market. Possibly, in the third quarter or fourth quarter, we will try to lock in longer periods as the charterers will be more keen to secure longer period charters.

Got it. That’s very helpful. Thank you. And so kind of there is a little bit of a follow-up to that and some of the things you discussed earlier. I know that more recently, given the fact that spot rates have surged, that’s really benefited your liquidity. But I’m also just kind of wondering how are you kind of planning to leverage that increased liquidity? Are you going to look to be more aggressive in pursuing your fleet renewal program and maybe acquire more vessels in the secondhand market?

Yes. I think that now our aim is to leverage our fleet renewal. We are interested in newer technology vessels, which means we have to concentrate on acquisitions of ships younger than 5 years old. At the same time, we have some ships approaching 18 years old, which we need to sell. So there will be some sales and some acquisitions and selective ordering at a very limited pace. Because right now, we see that the shipyards are not ready to propose new designs with new technology, and there are not so many options available. This, of course, is giving us more optimism for the freight market. We don’t expect to see many drybulk newbuilding orders for 2023. We believe that the yards are getting filled up with big container ships and tanker orders, while drybulk orders from owners will wait for new designs to appear. But we don’t see many shipyards keen at the moment to develop these new designs.

Alright. Thank you very much for taking my questions.

Thank you. And we will now take our next question. Please go ahead. Your line is open.

Great. Thanks. This is Ben Nolan from Stifel. Actually, just wanted to follow-up on that last response you were talking about. Well, obviously, you guys ordered some ships last year, but now we’re sort of looking for things with new designs. I’m curious if you could maybe flesh that out a little bit. Are you most interested in things that might use ammonia or is there something specific that you have in mind that isn’t being developed that would be of interest?

Yes. Look, when we speak about newbuildings for the future, and we said that we have bought two ships, we referred to EEDI Phase 3. I wanted to clarify that EEDI Phase 3 comes in the regulations after 2025. So basically, what the company has done is that we ordered not the present generation that we can easily do, which is Phase 2 until 2025. But we ordered the Phase 3 vessels, which are much closer to 2030, and they are more advanced. Now the company has chosen this route because we believe it’s a pragmatic group for existing technologies. We are aware that despite the fact that there are several discussions and researches about new fuels, we are not optimistic that new fuels like hydrogen or ammonia will come into play in the next decade. By having the most advanced ships of 2025 onwards earlier, that would be a competitive advantage. A second point that we want to stress is that our company has the vast majority of its fleet built in Japan, which is generally lighter and more energy-efficient, giving us a better footprint. We expect that when the new regulations on greenhouse gases come into effect on January 1, 2023, our vessels will be well-positioned to maintain operational advantages that we have had in the past.

Yes. I appreciate that. If I can switch gears for a second, my next question, obviously, we’ve seen spot rates go up and you talked about that. And there is strong underlying demand. You guys did do some time charters. But still most things, both for you and elsewhere in the market, tend to be pretty short duration, 6 to maybe 18 months on the long end. But as the market tightens, are you guys beginning to see any lengthening duration in terms of what customers are looking for to hedge out the risk of a spike or something like that? And really, I asked because I know in the past you guys have done some longer duration deals. So is that something that’s materializing at all? And is it something that you would be interested in doing?

You are talking about longer period charters, correct?

Yes. 3 years or 4, I think longer than a year, yes.

Yes. For this to happen, we have to be a little bit patient because we had a decent two months, February and April. In between, we have the correction of the market in March. So all we have seen until now were just two good months of the freight market, February and April. We continue now in May as the third month of a good freight market. The charters will need to see the spillover of enthusiasm before they begin to fix long-term deals. Many of them usually monitor this FFA market, which is not necessarily every ship owner's piece of cake or guidance for long-term business, but the charters primarily monitor these indicators. We know that the forward part of those scales is very depressed from the point of view that there is not enough volume to push it up to the proper levels, similar to those of 2022 when we know 2022 is supply restrictive, and that applies to 2023 as well. As we enter into Q3 and Q4, I believe charterers will have this feeling, but the commodity prices today and the value of the dollar coupled with global stimulus plans will keep the market higher for a longer period of time. We will see the FFA for the years start moving to higher levels. Then charters will begin asking for ships for 3, 4, or 5 years. So we have to be patient and keep the ships in the spot market until we reach that point.

And if that does materialize, that is an area that you guys would need to be active in.

If it doesn’t materialize, we have to enjoy the $20,000 a day.

Right now, but I think if it does – if it happens?

If it does, a certain part of the fleet has to go there, yes, definitely.

Yes. Okay, perfect. Appreciate it. Thank you.

Thank you. And we will now take the next question. Please go ahead. Your line is now open.

Gentleman, it’s Randy Giveans with Jefferies. How is it going?

Yes. Hi, good morning.

Good morning. Two questions from me. First, clearly, your TCE rates increased pretty meaningfully from $12,000 a day in the fourth quarter of 2020 to about $16,000 in 1Q '21. How big of an increase are you expecting in 2Q '21?

Look, I mean the spot market has moved to leverage $22,000, $23,000 a day. On the Capes, it has moved on to $40,000 level. So you should expect that the second quarter TCE rate should see a similar increase. We are already 50% into the second quarter, and the fixtures being done now will cover the rest of the second quarter. So I mean the assumptions are easy to be made. I do not want to predict the numbers now, but you are 50% in the spot market and one-third of the period ships on index-linked; you can run the calculations easily.

Okay. And then it looks like you used half of your $23.5 million ATM program, raising I think it was $12.7 million in recent months. Average price is under $2.80 million. So with the ongoing rally now pushing your shares around $4, will you use the remainder of that ATM here in the near-term and what will the primary use of the proceeds be?

Look, a small part of ATM remains, but we don’t know exactly when we will activate this last portion. We have always activated when the company, as before, has indicated that the company thinks it’s the right time for pricing. And so we cannot comment any further on that.

Alright. Well, thanks so much. That’s it for me.

Thank you. There were no further questions coming through, so I’ll now hand back to the speakers.

So thank you for attending this Q1 conference call and the webcast to discuss our financial results, and we are looking forward to having the same discussion in about 3 months from now. Thank you to all and have a nice day.

Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.