Safe Bulkers, Inc. Q2 FY2021 Earnings Call

Thank you for standing by, ladies and gentlemen. And welcome to the Safe Bulkers Conference Call to discuss the Second 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. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. Following this conference call, if you need any further information on the conference call or on the presentation, please contact us. I must advise you this conference is being recorded today. Forward-looking statements. 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'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the second quarter of 2021. We are happy to present the financial results for the second quarter of 2021. In a synopsis, is profitability, fleet at the edge of technology and we are leveraging targeting to create shortly a company where its net debt is comparable to steel by your vessels, creating value for our shareholders. The above are presented in Slide 4, we reached $81.6 million in net revenues, $50.2 million of EBITDA and $0.31 of adjusted earnings per share. We ordered eight vessels GHG -EEDI Phase 3 NOx-Tier III compliant, Japanese newbuilds with early deliveries, two in 2022, four in 2023 and two in Q1 2024 at very competitive prices ahead of our competition. At the same time, we have sold six vessels, three of which are yet to be delivered with $47.6 million outstanding sales process and acquired two second-hand Panamax. We believe that by 2024, we will be able to renew about one fourth of the fleet to Phase 2 compliant newbuilds while substituting at the same time some older vessels with younger second hand vessels. In terms of deleveraging, we have a $125.5 million decrease in debt from $607.7 million of 2020 year-end to $482.2 million as of July 23, 2021. At the same time, we maintain our financial flexibility by preserving a strong cash position, $115.6 million in our ongoing borrowing capacity available under revolving debt facilities to $67 million. All these actions we believe will position the company to a whole new level of competitiveness, well ahead of the competition. We are here for the long run. In Slide 5, we show balance sheet analysis. The assets are presented of course in their book value, noting that presently we believe that asset value substantially exceeds the book value. Let's turn to Slide 7 to have a quick look at the present charter market position. As shown in the top graph, the capes market year-to-date is outperforming 2020. Presently, capes are trading at about $32,000. The year-to-date average is about $24,800 as compared to the 2020 average for the same period, which was $9,600 per tonne. Similarly, for Kamsarmaxes, the market remains strong throughout this year. Presently trades at a region of $32,000 with a year-to-date average of $23,900 as compared to $7,900 for the same period in 2020. Current market prospects with strong demand and balanced order book are reflected in the FHA guess, which is marked in healthy and sustainable levels. Turning to the next slide number 8. We present the development on pricing of certain commodities, which are either indicators for the shipping. The continuous increase in prices during the last period is signifying the underlying demand. The strong demand from China continues and the control of COVID-19 will lead to the opening normalization of other importing countries, for example, India. Several more leading countries such as the United States and China have been preparing for post-pandemic plans to boost their economies. These sparks are expecting to enhance drybulk growth and altogether to boost the demand for drybulk cargo scrubber. On to Slide 9, we present the status of the market in terms of values and expected supply. On the top graph, we present the values of five-year-old capes and Panamaxes as assessed by the Baltic exchange. During the last month, it is evidenced a significant increase in vessel value. For capes in particular, values have surged more than 40% in the same year in 2020 and have gained about $31 million per vessel as seen the lows in 2016. Similarly, for five-year-old Panamaxes, the values have gained about 45% compared to the same period in 2020 and have gained about $80 million per vessel seen at 2016 lows. The above assessment is indicative for the average Baltic-type vessel. Japanese big vessels with high specifications have increased demand and can achieve even higher value. Our fleet consists mostly of Japanese big vessels with high specifications, and many commercial and operational upgrades. Looking at the other graph on the bottom, we note that the growth of the fleet for both capes and Panamaxes is minimal and does not exceed 3% each year. Taking into account the expected scrapping, we may conclude that the expected demand for drybulk vessels for the next years to come will be significantly higher than the actual supply of vessels. Under current market conditions, at CPS both in Japan and China, we do not expect that the order book may increase significantly for the next couple of years given orders from other sectors such as containers and tankers. There is no space for additional dry bulk orders. Furthermore, only a few shipyards have developed new environmentally efficient designs, which together with ongoing environmental discussions regarding emissions are expected to discourage new orders. Turning to Slide 10, we touched upon the current status of fuels and day pricing. Our company has invested in exhaust gas cleaning technology, which allows our ships fitted with scrubbers to comply with IMO 2020 regulations for sulfur emissions by burning high sulfur fuel oil instead of IMO compliant fuel, which is a very low sulfur fuel oil. The differential in the price between very low sulfur fuel oil and the high sulfur fuel oil, so-called high five, is calculated to have a useful scrubber-fitted vessels. Presently, the high five differential in Singapore, for example, is set at about $125 per metric tonne. According to future markets, as shown in the graph on the bottom, these prices are sustainable through 2023. The scrubbers fitted post-Panamax, there are about 7,500 gallons per year, and this being scrubber gained to about 900,000 per year or about 2,500 per day. The recovery of global economies, the restoration of mobility, and the recovery of crude oil prices may lead to an even wider high five differential. As shown in the top graph presently, the Brent price is upgrading to pre-pandemic levels at the size of the last five years. Let's summarize all the key takeaways in Slide number 11. The order book is at its lowest level since 2002 as decarbonization discussions do not favor new orders. Most shipyards are preoccupied with containers and tanker orders until 2024. Only a few shipyards have developed new environmentally efficient designs. We have experienced an exceptionally strong start to 2021 with robust volumes of iron ore coal and grain. Demand for commodities has been exceptionally strong during the first quarter. We have seen increased government spending on post-pandemic stimulus programs and the continuing growth of the global economy. We have experienced Brent prices recovery, which may lead to even wider high five spreads than that of today, about $120 per tonne. Lastly, gauging of the fleet and the increased environmental restrictions regarding emissions may enhance the scrapping activity. This gives us support for our thought process in relation to the market positions that will prevail in the following quarters. Now let me pass the floor to our CFO for our financial overview.

Thank you, Loukas and good morning to everyone. Let's get started with our top selling performance in Slide 13, where we present our quarterly PCE, which stood at $21,098 versus our quarterly OpEx, which stood at $4,874. Moving on to Slide 14, we present our quarterly daily OpEx, which stood at $4,874 and the quarterly G&A, daily G&A, which stood at $1,448. The average figure over those two numbers is $6,322, which demonstrates our focus on lean operations. We believe that this number is one of the industry's lowest - if not the lowest, given that we include in our OpEx all our drydocking and pre-delivery expenses. In our G&A, our management fees, directors, and officer compensation, and all expenses related to our administration. Moving on to our debt profile, as seen in Slide 16. We present our repayment schedule as of the end of June this year. As of June 30, we have - turning now to liquidity. As of June 30, we have $127.4 million in cash, cash equivalents for time deposits and restricted cash. We have another $67 million in undrawn borrowing capacity available under revolving reduced credit facilities, and $54.7 million available in secured commitments for loan and sale and leaseback agreements in relation to two newbuild vessels and the financing of existing vessels. Furthermore, excluding the vessels committed for sale, which cannot be delivered yet, we have additional polling capacity in relation to one unencumbered existing vessel and three newbuilds upon their delivery. Slide 16 represents our debt amortization schedule versus the scrap value of our fleet. We have a smooth debt payment profile for the next few years, gradually delivering a company following considerable debt repayments we have made this quarter. If you will now move to Slide 17, with our quarterly financial highlights for the second quarter of 2021, compared to the same period of last year. As a general note, during the second quarter of 2021, we're operating in an improved charter market environment compared to the second quarter. With lower interest expenses while our net revenues of $81.6 million, compared to $48.3 million for the same period in 2020. We're further increased by the earnings from scrubber fitted vessels and our reduced voyage expenses. During the second quarter of 2021, we have a time charter equivalent rate of $21,098 compared to $8,094 for the same period in 2020. The income from the second quarter of this year reached $32.4 million compared to a net loss of $13.9 million during the second quarter of 2020. Net revenues increased by 69% with the $1.6 million for the second quarter of 21 compared to $48.3 million for the same period in 2020, mainly due to the increases seen in our fleet as a result of the improved market, assisted by the additional revenues from our scrubber-fitted vessels. Daily vessel OpEx increased by 3% to $4,874, compared to $4,729. This increase was a result of the combined effect of reduced drydocking and provisions of regular services. But increased crude saturation expenses due to the COVID-19 pandemic. Daily vessel OpEx excluding drydocking and pre-delivery expenses increased by 9% to $4,568 for the second quarter of 2021, compared to $4,270 for the same period in 2020. Our adjusted EBITDA for the second quarter of 2021 increased to $54.1 million, compared to $6.3 million for the same period last year. Our adjusted earnings per share for the second quarter of 2021 was $0.31, calculated based on a weighted average number of 109 million shares, compared to a loss per share of $0.16 during the same period in 2020, calculated on a weighted average number of 102.7 million shares. Closing our presentation on Slide 18, we present our quarterly fleet data, average daily indicators compared to the same period last year. We would like to emphasize that the company is maintaining a strong cash position of $115.6 million as of July 23, that provides us with flexibility to follow our plan, aiming to gradually renew our fleet with a view of forthcoming environmental changes and regulations, and further deleverage our balance sheet targeting to create value for our shareholders. Once again, we'd like to thank our seafarers for their commitment and dedication throughout this tough period. Our press release represents in more detail our financial and operational results. And we are now ready to take your questions.

Thank you. Your first question comes from the line of Ben Nolan from Stifel. Please go ahead. Your line is open.

Thank you. So I have a couple, well, good morning or afternoon I guess first. My first question relates to the new building activity. Obviously, you guys have been sort of at the forefront of the innovations and design and have always had high quality equipment from primarily Japan. But there is still conventionally fuel or use oil relative to some of the other designs that we see a lot now to be that maybe LNG or ammonia. Can you maybe talk through the idea of how you decided on your propulsion systems versus some of the other would seem to be increasingly popular alternatives?

I don't think that I mean, if you are assessing the actual situation, there are no presenting other alternatives. Ammonia or hydrogen or some of the fuels will be under assessment. And I strongly believe that this will be the case. And we have let's say - this shift towards the new fuels after about at least 10 years from now or even 15. So we have followed a pragmatic approach. To tell you the truth the LNG, as you mentioned, is not actually a real solution. It could be an intermediate solution. But LNG has a steep path of methane, which is, I think about 100 times more greenhouse gas effective compared to CO2. So it's not clear that if you order LNG, this LNG will be compatible with the new regulations after five or six or seven years. The second point is that the other fuels basically do not exist, they are under discussion. And we know that because we are part of the CPS, which is actually developing these new designs, and are probably the first to have this information. On the other hand, we have followed a pragmatic approach. And when we say Phase 3, I want to make it clear that Phase 3 is applicable after 2025. It's not about vessels that are produced today. Because today, we have Phase 2, not Phase 3 vessels, which represents a 20% reduction of emissions compared to those in 2008 and 30%, which is the Phase 3. So a Phase 3 vessel that we ordered is a vessel that when we start its production between 2025 and 2030, before vessels - before the ship of new technologies, like ammonia or hydrogen, whatever it prevails, which will come towards the mid of 2030. So I don't believe that there's a question, whether you want to invest or not. This is an investment, which is clear abundance to us. We believe we have the best vessels compared to the market. We can compete easily with the existing fleet with extremely low emissions compared to everybody else, while others will wait to see what technology will come after 10 years from 2025.

Yeah, I appreciate that. Although we do sometimes see people that order ships that may be fueled by whatever is the alternative, but have the ability to be converted relatively easily. Is there any ability of the newbuilders that you have to convert to alternative fuels relatively easily?

If you can give me one name and one ship that has designed, and we can discuss. So let's not say about white, let’s say about the reality. So, I don't believe presently - in principle everything can be converted. So LNG for example, can be converted, but it has shit comes conventional, of course you need to have a different systems for storage etc. So we don’t want to play this game of advertisement. We just want to follow what is the best available technology after 2025 to 2030. Between 2025 and 2030 we may order over the technology that will be available for the next decade. But if you give me a design, I can tell you whether what you say is correct, or if we don't believe that the designs are creatable right now or even exist.

Gotcha. Okay, that's helpful. And then lastly for me. You guys have been pretty active, very active under that ATM program that you have. Can you maybe talk through the thinking behind that? I mean, obviously you are ordering new ships, but you're also selling older ships and making a lot of money on the existing fleet. It doesn't look like you really need the money at the moment. What's the thinking behind the activity on the ATM program?

Look, the idea is very simple. We have a design tech company that wants to create value for its shareholders. And I tell you that the majority of shareholders are families that own our management and have young family. So a design, we have described how we look at companies. And we will be able to be very profitable in the future and also, at the same time pay dividends to the shareholders. We don't want the company which is over-levered. So this is the one point. We want a company with low leverage about say, 30% to 35% of the assets. Second, we don't want a company which has an old fleet that after 2023 and the following years, we will not be able to compete. Especially when you have Chinese vessels, we will not be able to compete in the market and have to pay an environmental levy in either Europe or the United States or have to withdraw your fleet if it's in category E or do additional investments within three years, if it's in category D. We have substantial programs for all such vessels. We want a company that has basically its backbone consisting of Phase 3 vessels and also about 10-11 Echo-ships, which were both in the previous after 2015. So this is the second point. So if you have a company with low interest, low leverage, low interest expense, a younger fleet, Japanese fleet, and a durable company, solid company, low emissions, this company will be able to generate the best profits after one year from now. Then we will be able to pay also dividends at a certain point in time. We don't want to create a company that is over-levered and pay dividends now to do so. In this respect, we are doing two things. The first is selling older vessels which you see we are executing this replacement strategy. So we have sold a few vessels, and the price at which we sell them is very good. The second point is that we have also the ATM, which, in the back of our minds, may include companies accessing public markets one way or the other. So it's essential for us to have some equity in our balance sheet, which basically is not dilutive. Because as you can see, we are always picking up profits because the market is very good. With new technology shifts, we will continue to do that. So basically, this is an investment for the future of the company. If we do this job the right way as we have designed, then we can continue to work with our shareholders in the future.

Okay, that's helpful. And since you brought it up, you talked about wanting to pay dividends. How close are you to that at this point? I mean, you're making money and again, the balance sheet is stronger. Is that something that you think is a 12 months or less kind of an event?

I cannot say how close or how far we are. Because a year before we were very far. But now we could be closer. The issue is that as you can see, we have the leverage – yes, Poly?

If I may add here. The good market has started only six months ago, around February. We are still six months into a good market. It's most important for the company to deleverage and renew its fleet first and then to consider the dividends. Because now we have work to do and this is what we're doing. We prove it quarter after quarter with the deleveraging policy and then fleet renewal policy. There will come a time when a dividend will come for the benefit of all shareholders.

Thank you for that.

Yes, thank you.

Thank you. Your next question comes from the line of Randy Giveans from Jefferies. Please go ahead. Your line is open.

Gentlemen, how's it going?

Thank you. Fine.

I guess two questions for me here. Looking at your chartering strategy. You clearly have a lot of your days already booked for the back half of the year. Has your charting strategy changed at all, given the kind of current market strength? And then also, what are your quarter-to-date spot rates achieved thus far? It seems like the vast majority of your third quarter is already booked. So just trying to compare 3Q'21 versus the $21,000 a day you earned in 2Q'21?

Yes. Look, first of all, regarding the period of charters. As I said in previous calls, the period of charter is for the time still controlled by the major charterers, the so-called FFAs, the Forward Trade Agreements. And which for the four years are not satisfactory levels for '23 or '24. So you cannot really utilize three or four or five-year charters that lie within our own container business. The company prefers to work in the spot market or short period or up to one year. Because you can get the maximum benefit during those periods. I expect as the spot market improves in the following quarters, that charters will come out and meet the higher freight rates for two or three year periods. At the moment we only see sensible numbers, one year of up to 12 months period. Beyond that, if you start talking for two-year periods, the charterers have asked for heavy discounts. So I don't see what is the point for the company to invest in two years, when you're doing the year one at the high-20s and the year two at the low-teens. That does not make sense. The year two will yield low-teens and make an average of $21,000- $22,000 a day. Because you can get it done in the first year and then keep shooting for the spot market. So we don't believe there will be an order book in '22 or '23 to spoil the party from that point of view. And we still believe the supply will be strong. Because we see Handysize rates are $30,000 a day, we'll see Supramax rate of $30,000 a day. We see Kamsarmax are the same and Capesize are also performing well. We cannot recall ever seeing Handysize earning $30,000 a day even in the good times of 2010-2011 when we had a strong market. The Handysize was earning $16,000 or $17,000. So it means now the minor bulk is moving and is moving with the bulk carriers and open containers. This is boosting a lot the base and strength of the market. So I believe that the two or three years' charters will have to wait a little bit longer before going down. As for the other question you asked about the third quarter. The numbers are increasing. This is true, but the market levels have increased from Q1. So it's normal to expect that the numbers will be higher in the third quarter as it looks now. We are only through the first month of the third quarter. But it’s higher than what it was in the second quarter until now.

Got it. I was just saying, I know with your recent chartering activity, almost 100% of the third quarter already booked. But looking at your balance sheet, you have obviously a robust cash balance $115 million, plus all the cash available from the asset sales? Are you looking at kind of current fleet in terms of renewal looking at further acquisitions, more divestitures with the older vessels? What are your plans on that in the coming months?

Yes, we have new buildings. We have sold six older vessels. So these are coming in as a replacement for the older vessels. I don't expect we can find reasonably priced new buildings from now on. It will be very difficult to acquire the type of ships we want from Japan. So we'll mostly concentrate on modern second hand acquisitions. We are prepared to sell a vessel built in '04 or '05. We will try to replace it with a 10-year younger vessel built in 2012-2013-2014, that sort of period. So from now on, we tend to concentrate on second hand acquisitions. We have a couple of war deals under negotiation that we are going to conclude in the next few weeks. I think it's a proven strategy to continue in that way. Also, we see that shipyard costs have gone up, their steel prices are also increasing. For us, the deliveries of these vessels two and a half years from now is looking a bit far away. So we have to wait for new ships and also for some time for new technologies to evolve, this may be in hydrogen vessels or ammonia vessels for other things or LNG, I don't know. No one knows what fuel or technology will prevail. So we're happy with the eight vessels we are acquiring to replace ships we've already sold. The priority for us is to keep renewing the fleet and deleverage the company. We are doing that very quickly as we have demonstrated in our last two quarter earnings. We have promising profits looking good. Let's make the company as attractive as possible for investors to join and enjoy the good retention in the next quarters that are coming.

Yeah. Well, that's it for me. Thanks again.

Thank you.

Thank you. Those are the questions at this time. I will hand the call back to you.

Thank you very much for attending this conference call where we presented our quarterly results. We're looking forward to discussing again with you in the next quarter. Thank you very much again and have a nice day.

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