Safe Bulkers, Inc. Q4 FY2021 Earnings Call

Thank you for standing by, ladies and gentlemen. And welcome to the Safe Bulkers Conference Call to discuss the Fourth Quarter and Full Year 2021 Financial Results. Today, we have with us from Safe Bulkers, Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Mr. Konstantinos Adamopoulos. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Following this conference call, if you need any further information on the conference call or on the presentation, please contact. 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 these 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 changes 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 fourth quarter and the full year of 2021. We will start our presentation in slide three. We are deeply concerned about the Russian and Ukraine conflict, which against international laws has broken out and we hope that it will end soon avoiding further clashes in Ukraine. We do not have any Ukrainian or Russian crews on both our vessels and we don’t have any vessels currently sailing in the Black Sea. We intend to comply with the sanctions in bulk and we will continue to monitor closely the situation to assess the impact of the war on the global economy and on the drybulk fleet. As we can see from the slide, major commodity trades will be affected. In slide number four, we present the synopsis of our quarterly results. 2021 was a very good year for our company. We were able to renew our fleet with environmentally advanced vessels, enter into several favorable time charters, substantially deleverage and improve our liquidity. As a result of our strong performance, the company is declaring a $0.05 dividend per share. In terms of profitability, we reached $92.4 million in net revenues, $65.2 million of net income, $82.4 million of EBITDA and $0.39 of adjusted earnings per share. In terms of performance, we reached a time charter equivalent rate of $26,180, aggregate daily OpEx and G&A of $6,183. In terms of liquidity and capital resources, we have about $388 million as of March 4, 2022, of which $194 million is in cash, $94 million is in RCFs, reserve and credit facilities and secured commitments. Furthermore, we have additional borrowing capacity in relation to four unencumbered vessels and seven new builds upon their deliveries. Most recently in February, we successfully issued a €100 million five-year unsecured non-amortizing bond at a coupon of 2.95% per annum. Our secured debt stood at $329.4 million as of March 4, 2022 and we paid $125.3 million for the five second-hand vessels with 8.8 years average age and we collected $109.8 million for the seven vessels we sold with 14.3 years average age, effectively renewing our fleet with younger and more efficient vessels. Finally, we declared a dividend of $0.05 per share, noting at the same time, we’re renewing our fleet with second-hand and new builds ahead of the competition. Let me guide you through the company’s key investment highlights as presented in slide five. Safe Bulkers is a top 10 pure dry bulk vessel owner in the Panamax segment with a carryover of 60-plus years of track record experience in management led by Polys Hajioannou. With strong company balance sheet fundamentals, ample liquidity, low leverage, secured cash flows from reliable counterparties, we have secured nine Phase 3 Tier III new builds and replacement of five second-hand vessels for us that expansion in Europe ahead of peer competition and ahead of the expected impact of the environmental regulations from 2023 onwards. We have an additional yearly revenue capacity of about $20 million plus from also the new scrubber fitted vessels due to the inflated fuel price differential. Our 40 vessels today are 80% comprised of Japanese vessels with superior specifications and commercial and operational upgrades, with both substantial premium booked in chartering and resale value. The order book remains at a 20-year low and market fundamentals are positive for 2022. We believe the company is well positioned for the long run with environmental advantages. Moving to slide seven, we present the development of the CRB Commodity Index which currently stands at a five-year high with further upside potential. As I indicated basic commodity futures prices, for example, energy, agriculture, trade, precious metals and industrial metals will represent leading indicators for shipping. We have seen strong demand for commodities across the board during 2021 and there are certain prices further amplified during 2022 as a result of the ongoing Ukrainian conflict. The general forecast of the IMF before the Ukrainian conflict set the global GDP expected growth at 4.4% for 2022 and 3.8% for 2023. The forecasted global dry bulk tonne-mile demand is expected to increase by 2.2% in 2022, supported by recovery-related industrial materials like iron ore, coal and agriculture, while the expected dry bulk fleet growth stands at 2% for 2022, which means that a squeeze in supply vessels will be a realistic scenario. Furthermore, the USA has allocated about $1 trillion in stimulus programs for infrastructure spending for bridges, roads, while China spends yearly about $120 billion on similar infrastructure projects assuming 8.1% GDP growth in 2021, the best growth pace in a decade. The IMF forecasts 4.8% GDP growth for 2022 and 5.2% for 2023. Lastly, the EU overall recovery package of €2.4 billion for the period of 2021 to 2027 is a further boost for global demand. Let’s turn to slide eight to have a quick look at the present charter market conditions. As shown on the top graph, the Capes market for the year-to-date continues to be healthy. Capes recently have been volatile driven by commodity dynamics which we will analyze. The forward freight agreements curve presented in red color is about $30,000 to $35,000 for 2022. Similarly, for Panamaxes, as shown in the bottom graph, the FFA curve is about $30,000 to $35,000 for 2022. The prevailing commodities market coupled with strong supply fundamentals are likely to support the freight markets throughout 2022. In slide nine, we present our status orderbook deliveries. In this position the expected charter market environment, we have two deliveries in 2022, five in 2023 and during the first quarter of 2024. Our first new build delivery is in May. In the same slide in the bottom graph, we also present the record low order book for the forward years for Capes and Panamax vessels. Turning to slide 10, we touch upon the target market valuation about certain acquisitions and about the order book. During the business cycle, as part of our fleet renewal strategy, we have invested in nine new build vessels of the newest design compliant with the recent IMO regulations on NOX emissions. So we have acquired two Panamax and two second hand vessels, the model and design built in Japanese shipyards. The average acquisition price of about nine new builds was about $32.5 million, as compared with the current average market value, which is about $41.6 million. For the five second-hand average prices was $25.1 million, as compared with the current average market value of $28.2 million. This time, three new investments have created a pleasant and inflated value to our shareholders of close to $7 million. Certain recovery has previously invested in scrubber technology to 17 of these vessels. The certain prices of about six months is more evident in today’s market has pushed the very low all vessels are the full differential at high levels, which translated to increased revenues for the scrubber fitted vessels. Presently is high in Singapore centered about $280 per tonne and that continues in the future markets the balance for 2022 expansion about $190 per tonne. The scrubber fitted vessel generates about 7,500 mega tonnes per year gaining return of about $25 million per annum in aggregate for our carbon 17 scrubber fitted vessels. All in all, our new builds and scrubbers represent a significant increase of the intrinsic value of our company of about $120 million. Now let me pass the floor to our CFO, Konstantinos Adamopoulos, for our financial overview.

Thank you, Loukas, and good morning to everyone. As we start with our quarterly financial highlights, so I am on slide 12. During the fourth quarter of 2021 we operated in a significantly improved charter market compared to the same period of 2020, with lower interest expenses, reduced market expenses and increased revenues, also included earnings from scrubber fitted vessels. Our quarterly net revenues stood at $92.4 million versus $52.2 million last year. Net revenues increased by 77% compared to the same period in 2020, mainly due to the increased time charter that we want to trade as a result of the improved market assisted by the additional revenues earned by our scrubber fitted vessels. We had TCE of $26,180 compared to a TCE of $12,390 during the same period in 2020. The net income for the fourth quarter of 2021 reached $65.2 million, compared to net income of $7.6 million during the same period in 2020. Our daily time charter revenues stood at $26,180 versus $15,319 same quarter last year. Our daily OpEx stood at $5,149 versus $3,978 and our daily OpEx excluding dry docking and pre-delivery expenses stood at $4,666 versus $3,855 for the last quarter of 2020. Vessel operating expenses increased, mainly affected by increased dry docking expenses, increased spare parts, stores and provisions, related works performed during dry-dockings, increased provision of technical services and increased crew repatriation expenses due to COVID-19. The aggregate figure for both OpEx and G&A for the last quarter of 2021 was $6,183 demonstrating our focus on lean operations. We believe this number for both OpEx and G&A is one of the industry's lowest as we include in OpEx all dry dockings and pre-delivery expenses and in our G&A, our management fees, directors and officers compensation, as well as all expenses related to the administration of our company. Our adjusted EBITDA for the fourth quarter of 2021 increased to $67.6 million, compared to $26.3 million for the same period in 2020. Our adjusted earnings per share for the fourth quarter of 2021 was $0.39 calculated on a weighted average number of 121.6 million shares, compared to $0.04 during the same period in 2020 calculated on a weighted average number of 102.2 million shares. Let’s conclude our presentation on slide 13 with our quarterly operational highlights for the fourth quarter of 2021 in comparison to the same period of 2020. As a general note, 2021 was a very good year for our company. We were able to place orders, renew our fleet with environmentally advanced vessels, enter into several favorable time charters, substantial deliveries and improve liquidity. As a result of our performance, the company’s Board of Directors had decided to declare a $0.05 dividend to common shares. In addition, in February of last month, we have successfully issued a five-year unsecured bond in the amount of €100 million granted by Safe Bulkers with a coupon of 2.95% due semi-annually. We would like to emphasize that the company is maintaining a healthy liquidity position of about $194 million as of March 4 and another $194 million of RCF and secured commitments, resulting in a combined liquidity of about $388 million that provides us with significant strength. Our press release presents a more detail of financial and operational results. And now we’re ready to take your questions.

Thank you. We will now take your first question from Chris Wetherbee of Citi. Please go ahead.

Hey. Thanks, guys. This is Eli Winski on for Chris Wetherbee. Just wanted to start with rates here and the perception around the volatility. So, last couple quarters we had line of sight to them continuing to escalate, but with what’s happening right now in the broader environment, do you guys see any more possibility for higher fluctuations or do we think they’re going to continue to remain elevated particularly in spot contracts?

You mean volatility in the charter market?

Yeah. Yeah. Exactly. Is there more now than there has been, you think with some of the geopolitical issues or do we still expect demand is high in terms of the read through to your customers?

Yes. We expect that there would be a fair amount of volatility because of what is happening right now, because of big changes in the prices of commodities and the price of oil, especially. And a lot depends on how long the war will take and how long this conflict will keep going, and of course, we expect sanctions will be there for quite a long time, which is not necessarily bad for shipping; it could be good for volumes and tonne miles. But the freight rates will fluctuate a lot because of these changes in bulker prices. I mean, we saw this week changes of $20 to $30 on the price of Brent from one side to the other. So all this is affecting the trend. But overall, the trend is strong, because volumes are expensive and the order book is very low. So we expect volatility indeed for the next few months.

Sure. What are your customers saying about this in terms of the duration of contracts? I think you said that the average contract duration right now is 1.2 years, is I believe that’s what it said in the release. So do you see more and more trying to shift to longer term in terms of their preferences?

No. I think the trend in dry bulk is the charter rates and the offered contracts up to one year on our size of vessel, and the bigger ones in the Capesizes, you may find a little bit longer, but on the Panamaxes, it's generally six months to 12-month charters.

Got it. Thanks. And then one more for me, you guys declared a $0.05 dividend, stronger liquidity position, what does the long-term capital allocation look like for Safe Bulkers?

Long-term capital allocation?

CapEx.

Yes. Look, we started the dividend this quarter in Q4 of last year, which was the first year of a good market after six years or seven years of a low market. We started with a comfortable dividend in line with also the other actions the company is taking to deleverage, to take delivery of the new building vessels with the least possible debt on them. So all depends on the freight market. We believe we have a strong freight market for this year and possibly next year. There are good signs that next year will be good as well.

Thank you, guys.

Thanks.

But our remaining CapEx for the next couple of years is $250 million, $207 million.

Thank you. We will now take your next question. This comes from Ben Nolan of Stifel. Please go ahead. Your line is now open.

Hey, this is Ben Nolan at Stifel. I have a couple of questions. You mentioned your chartering strategy, and I noticed that one of your competitors just secured a longer duration contract on a new vessel. You have some very high specification new builds, which you’ve frequently utilized in the past. I am wondering if there is significant demand in that market and if you would consider pursuing similar contracts for some of those new vessels?

Look, it’s much easier to do it on larger ships, long-term charter, because there’s more horizon on there also on the freight market. So charters can be guided by Capesize in the freight market. In the smaller sizes like Panamaxes, both Panamaxes, the curve is very steep for the top here. So it doesn’t make a lot of sense when the market is so much under supplied with new tonnes; there’s not a lot of new tonnes entering the market in the next three years. It doesn’t make sense for an owner to go and look for three-year or five-year charters on the Panamaxes or on the Kamsarmaxes.

Okay. And then switching gears a little bit, obviously, you guys have a lot of scrubbers on your vessels. I assume that that is working very much to your benefit at the moment; any thoughts about going out and finishing out the fleet with scrubbers maybe as they come up for dry dock or effectively adding to your scrubber exposure?

Yeah. It doesn’t make a lot of sense to put the vessels for right now with finishing scrubbers, because what we see now the spike in the spreads is temporary because of what is happening in Ukraine. This should last for two or three months. I don’t think it will last for the whole year. And so putting ships into dry dock for an extra period of 15 days, 20 days when the market is $35,000 a day, it doesn’t make sense. We did it in 2019, when the market was $5,000 or $6,000 or $7,000; we put the ships in dry dock to do this extra bit of time there to fit the scrubbers in anticipation that the spread would be decent. So right now, I don’t see us doing anything more. We have a Capesize vessel, which we’re doing right now to plan since a year ago to do it, but we don’t have plans. We’re more focused on environmental improvements that we can do on our fleets of how we can upgrade our ships and reduce their CII and their energy efficiency indexes because I think this, when all this story of the war settles down, this will come back in focus and we have to be prepared for the next day.

Okay, that’s helpful. And the last for me, I believe I saw in the release that you guys had not been active under the ATM program, which is the first time in a while. Is that an indication that you sort of, you are where you are and you like where you are and you don’t need more capital to do anything else or as you just trying to?

It’s clear that we consider the stock price still not at the level that is worth considering and we don’t plan to use it. So…

Okay.

For the time being it’s at the level that we don’t really need any more liquidity. So that’s why since September we didn’t touch that scheme.

Okay.

On the other hand, as you have seen, we have increased our liquidity. We have extra liquidity through the vote. We’re waiting for the right opportunity to invest in new technologies and in fleet renewal, replacing the older ships with a bit younger ones, apart from the new builds we have. And for us the most important is to prepare for the next day on the new environmental changes that, as I tell you now, we will forget about them for three months, but thereafter I’m in the climate change is there, it won’t go away because of the war. I mean, we’re not focused to it now. Of course, we have to see how especially Europe will deal with the shortage of gas and the shortage of energy. But in three months' time, I believe that the focus will be back on the climate and we don’t want to derail from our initial planning of making environmental investments, but we will come the next two years, three years very fast.

Understood. All right. I appreciate it. Thank you, guys.

Thank you. And we take our next question. This comes from the line of Randy Giveans of Jeffries. Please go ahead. Your line is open.

Hey, gentleman. Randy Giveans from Jeffries. How’s it going?

Yeah. Fine.

Fine.

Hey. I guess looking at the first quarter, a lot of your peers kind of giving some quarter-to-date rate guidance. Can you provide us with the same on the spot side of the market?

The spot market has shown significant improvement over the last two to three weeks, as we've observed, and the first two months of the quarter have concluded. While the first two months of the year are indeed lower than Q4, there is an expectation of recovery in the third month of the quarter. Therefore, while we won’t provide specific guidance on future performance, we anticipate that the numbers for the first two months will be considerably lower than the previous month, though they won’t exceed it. The overall balance will slightly tip towards the lower end compared to the last quarter. If the last quarter's figure was 26, then that provides some context.

26.

And then this quarter may be a little bit less. That’s the…

Okay.

So that would be huge later.

Okay. And then on the dividend, great to see a dividend announcement from you guys, how did you decide on this amount? How should we think about going forward? Is there a policy in place or is this a flexible dividend based on kind of market conditions?

No. It’s more like a sustainable dividend, because we are one of the few companies that has made timely renewals of our fleet. We need to take delivery of all the ships, starting with the first one in two months, and then every couple of months we'll have a new build at the end of 2023 and the beginning of 2024. We expect these ships to enter the market in a favorable freight rate environment. The new ships will certainly be very appealing to charters, allowing us to secure longer contracts, possibly two or three years, when the market conditions are right. We decided to initiate this dividend now because we are very confident about the next two years and believe it’s the right time. At the same time, we want to maintain sufficient liquidity for new builds and environmental investments. We review our dividend policy every quarter, and while there’s no guarantee we will continue paying it, the dividend is designed to be meaningful for the upcoming period.

Got it. That makes sense. All right. And in terms of the unsecured, very impressive terms in terms of the rates there, use of proceeds, I know you had a few options; kind of are you leaning towards one or the other, is that market can it be tapped again, right, to another €50 million Euro or it ever maybe kind of on the upside of that?

No. We don’t plan to use this market again. We used it once; it was a good one, because it was the first dry bulk company to do the bond in the Athens Stock Exchange. We consider the price favorable. Of course, conditions have changed the last month with interest rates and it’s not something you tap every other quarter. You go in, you do it once, you go for five years, and then you see what happens after five years, if there is appetite for refinancing it in an appropriate manner or if you just repay the investors. So this gives ample liquidity to the company to make investments either on new ships or modern ships or environmental investments, which will help us to operate the fleet with an advantage over the competition. Because as I told you, I mean, in six months' time, the focus will be back on the climate issues; we shouldn’t forget that.

Got it. Well, thank you, again.

Thank you.

Thank you.

Thank you. We have one more question on the line. We will now take our next question from Magnus Fyhr of H.C. Wainwright. Please go ahead; your line is now open.

Good afternoon, gentlemen. This is Magnus Fyhr, H.C. Wainwright.

Okay.

Just a follow-up question on the current cash position; you mentioned you have $250 million of CapEx going forward. Can you break that out between the three years? I guess most of it is in 2023, and how much you plan to use for installment versus debt. Should we assume, like, 60%,

The majority of our capital expenditures will occur in 2023 due to deliveries happening this year, with most payments due at the time of delivery, around 60% to 70%. Therefore, we can confidently state that most of this capital expenditure will take place in 2023. Our strategy is to minimize debt on the new ships, focusing on maintaining it close to the scrub value of the fleet to maximize profits for our shareholders. It is crucial to recognize that shipping is a significant industry with ample investment opportunities arising in the next two to three years. While we must remain cautious, the market is expected to last for a decade, and we need to ensure we have the capital to invest throughout the cycle, especially given any uncertainties that may arise in the coming years. The capital expenditures for our company are projected to be $55 million in 2022, $143 million in 2023, and $47 million at the beginning of 2024. Our last delivery will take place very early in 2024, around January or February. Over the next 20 months, we will be expanding our fleet with a new vessel approximately every two months, resulting in a growth of about 25%. We are positioned to generate liquidity that will allow us to reward our investors and shareholders while also making necessary environmental investments to maintain our competitive edge.

All right. Thank you for that color. And just on the prefs, do you have an amount in mind there given that with all the cash on the balance sheet to retire some of those prefs?

The preferreds you mean? Yes.

We are considering allocating a portion of our resources over the next few quarters towards retiring some of the preferred shares. We have communicated this intention to the Board, but the final decision on the percentage allocated will be made collectively by the company and the Board. Given the current state of the ship market, where prices are elevated, we do not intend to invest in costly vessels at this time. We will wait for the right opportunity, as we are already planning to expand our fleet. Recently, we have observed that sellers are currently asking about $5 million more for dry bulk vessels, and we do not plan to engage at those prices. We can afford to be patient, whereas other buyers with cash who have not yet invested in ships might rush into high-priced acquisitions, but we prefer to wait for better options.

Very good. That’s it for me. Thank you.

Thank you.

Thank you.

Thank you. It appears there are no further questions at this time.

Okay. So thank you very much to all the participants, and we’re looking forward to discussing again with you in our next quarter results, which would come about in about three months from now. Thank you.

Thank you all for participating. This does conclude our conference for today.