Safe Bulkers, Inc. Q1 FY2023 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call to discuss the First Quarter 2023 Financial Results. Today, we have with us Mr. Polys Hajioannou, Chairman and Chief Executive Officer; Dr. Loukas Barmparis, President; and Mr. Konstantinos Adamopoulos, Chief Financial Officer of the company. 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 call, if you need any further information on the conference call or on the presentation, please contact 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 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'll 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 first quarter of 2023. During the first quarter of 2023, we operated in a relatively weak market compared to the previous year. Having comfortable liquidity and leverage, we terminated the ATM program, which has stopped since September 2021. We have continued our buyback program targeting 10 million shares for repurchase, and declared a dividend of $0.05 per share of common stock. Our balance sheet is strong, with significant cash and developed capacity. Our capital requirements are substantially covered by our contracted future revenues, and our capital structure is conservative. Now, let's start with the market update on slide three. If you turn on the graph, the current profits of the market. Sales have recovered from the recent lows, and drybulk freight markets overall will recover with China's easing as COVID policy and the active supply in the market. Total consumption has declined with lower import demand and easing of supply chain issues. The PANAMAX with the commodities market is likely to provide support to the current market growth in the second half of this year. It is worth noting that all our rates are pre-adjusted at an average value rate of $24,000. Moving on to slide four, we present the development of our CRB Commodity Index, reflecting the basic commodity features of future prices, for example, energy, agriculture, precious metals, and industrial metals. Although the index currency stands at high levels, commodity prices declined sharply over the past six months following the record high levels of last year resulting in June 2022. After rising by 45% in 2022, commodity prices are projected to fall by 21% in 2023. We continue to witness a rise in several bank interest rates as service maintenance aimed to fight inflation, which is expected to affect the global outlook. The forecast of iron ore set the expected growth of global GDP to 2.8% for 2023 as global inflation projection for 2023 is 7%, during the war-induced broadening price pressures, improved energy prices, and the leading supply/demand imbalances. In this environment, the forecasted global dry bulk demand growth is expected to increase only by 2% in 2023, with a forecasted drop in iron ore by 1% as the construction activity remains muted and an expected drop in coal import demand as a result of higher domestic production in China. Grains and soybean outlook remain positive as growth effectively and major harvests in exporting countries like the USA and Argentina take place. In China, the IMF April projection for growth in 2023 totaled 5.2% with major global and drybulk steel orders. GDP growth recorded 4.5% year-on-year in Q1 2023 from 2.9% in Q4 2022. This was service growth recovery, with services contributing to 3.1% growth, whereas the interest contribution accounted for around 20%. In March, the non-manufacturing PMI rose to 58.2, the highest level in the past period, and the impact PMI was at 51.9%. Metal prices fell by 3% in the recent months, with the intent to recover in China. India’s margins and expectations reflected again in the IMF April projection at 5.9%, increasing local investments in renewable electricity capacity. The global economy short-term remains on the course affected by the war in Ukraine and the possibility of other pandemic-related supply side disruptions, for example, in China. The World Bank commodity price index declined by 30% as the World Bank April 2023 projection compromised a 21% price drop in commodities for 2023. On the supply side, on slide 5, the total drybulk order book is in single digits. For this reason, we remain cautious about medium prospects of the freight market. We are cautious about the medium term of the freight market because more than 25% of the medium size fleet is older than 15 years, and scrapping is expected to accelerate as the combined effect of the environmental regulations kicking in from January 1, 2023. With the gross margins at stake, ships have more efficient designs and contracts in needs. 80% of our fleet is represented by 40% of the global fleet, which means that our group considers a more efficient basis compared to the market average and can compete better in the new environment. Furthermore, we are one of the very few drybulk companies to set an extensive order book after previous years. Our intention remains focused on production and annual performance. As seen in slide six, I talk to global business out of sales; only about 30% of drybulk fleet is expected to comply with EEXI without requiring modifications or upgrades. Safe Bulkers owns today 12 eco vessels built by 2014 and has an extensive order book of 12 Tier III newbuilds that will have been upgraded by the end of 2023 and, at the same time, we have a major ongoing environmental upgrade program, increasing tenancy, and our group completing upgrades by the end of 2023. Furthermore, we are monitoring the development of alternative fuels. Concluding our market view on slide seven, there has been increased industry price volatility driven by geographical disruptions and tight monetary policies. Environmental regulations and sales become increasingly important in dry bulk, and as a result, demand for technological efficiency creates opportunities for those looking to import actual assets. Second, environmental fleets may affect company valuations, and we are monitoring the market with a differential in capacity of such vessels. Moreover, the combined effect of the aging fleet, the low order book, and the regulations favoring newer and compliant vessels will limit the vessel supply, impacting the market even further. In this market of increased environmentally-based competition, let me turn to slide 8; our company is differentiated from our peers. Our strong alignment of interest with positive contributions comes from our participation, the low level of 33% for comfortable liquidity, and contracted revenues. Our track record includes the creation of valuable expansion programs and environmental upgrading of our existing fleet, including the installation of new scrubbers. Our focus is now on systems and all of our goods will have scrubbers by the beginning of 2024, with 20 vessels environmentally upgraded by the end of this year. We are taking delivery of three Phase I vessels that are already in process. We have the best performing vessels in the dry bulk market globally. We intend to compete based on lower fuel consumption and environmental performance with all of our vessels. Let's now focus on our liquidity, our cash flows, as presented in slide nine. While maintaining a comparable leverage of 43%, our debt of $430.2 million is comparable to our fleet's scrap value, which currently sits at $389.4 million. Our weighted average interest rate stands at 4.63% for our consolidated debt, with approximately $100 million fixed at a 2.95% coupon in a secured five-year bond. We have paid $72.8 million towards our capital expense guidance in relation to our order book, with the remaining capital expenses of $244.5 million projected negatively. Our liquidity and capital resources total $355.9 million, along with contracted revenue of $282.9 million, providing strong management and capital allocation insights. Furthermore, we have additional borrowing capacity through sales of vessels and five new builds upon their delivery. Moving to our dividend policy on slide 10, we declared a dividend of $0.05 per share over the last six consecutive quarters regarding our share purchase. At the same time, we have an active common share buyback program under which we have already repurchased 8.3 million shares as of May 2023, out of a total of 10 million shares strategy authorized under the repurchase program. Furthermore, we have suspended our program under which the last sale occurred in September 2021. In this uncertainty of the capital markets and the world economy, we continue to direct a portion of our free cash flow to commence investment in our new build program that will provide us with competitive advantages in terms of fuel consumption and environmental performance, while maintaining low average operating activity levels. Now, let me summarize the investment rationale of Safe Bulkers in slide 11. We believe that Safe Bulkers' fundamentals offer financial flexibility to adapt to market balances and opportunities. Safe Bulkers, with its order book, is among those capable of navigating the environmental challenges of the net transition, dealing with the aging dry bulk fleet, and tackling global uncertainties by utilizing the efficiency of its large-scale environmental upgrading program. In parallel, the company's expansion opens meaningful opportunities. We believe we are positioned for the long run with an environmentally responsible balance, a strong balance sheet and liquidity, and leverage comparable to our fleet's scrap value, securing cash flows from reliable counterparties. We will see focused fleet expansion with the full Phase III using cutting-edge environmental regulations. Our company’s experienced management team is well positioned against market challenges to seize advantageous market opportunities. Now, let me pass the floor to our CFO, Konstantinos Adamopoulos, for our financial overview.

Thank you, Loukas, and good morning to everyone. In this quarter, we found ourselves in a slowly declining charter market compared to the same time last year. Our revenues dropped due to lower highs, but we saw increased earnings from chartered vessels, along with higher operating and interest expenses driven by rising interest rates. In slide 12, we highlight a robust start and performance as a testament to our management's strategy. We recorded a time-charter equivalent of $21,300, consistent with the same period last year. Our net income for the first quarter of 2023 was $19.3 million, down from $36.4 million in the same period of 2022. Daily expense earnings were $5,550 compared to $5,722 last year, and when excluding dry bulk and pre-delivery expenses, daily expense earnings were $5,132 against $4,923 for Q1 of 2022. Our rolling operating expenses and general administrative costs for Q1 2023, which we consider competitive with our peers, are noted, including all dry bulk delivery expenses and operational costs. Moving on to slide 13, we have positive financial highlights for the first quarter of 2023 compared to the same period of 2022. Our adjusted EBITDA for the first quarter of 2023 stood at $23.1 million compared to $26.1 million for the same period in 2022. Our adjusted earnings per share for the first quarter of 2023 was $0.10, calculated on a weighted average number of 118.4 million shares, compared to $0.24 during the same period in 2022 calculated on a weighted average number of 121.6 million shares. If we turn to slide 14, our quarterly operational highlights for the first quarter of 2023 compared to the same period of 2022. We operated an average of 43.83 vessels and achieved an average time-charter equivalent of $15,760, compared to 39.54 vessels earning an average time-charter equivalent of $21,354 in the same period in 2022. On slide 15, we present our low breakeven point for Q1 2023, which we believe is one of the lowest in the industry. The global economy is experiencing multiple challenges. Inflation is higher than seen in several decades, tightening financial conditions in more regions, and the continued war in Ukraine all have weighed heavily on the market outlook. As our main focus remains on lean operations in this inflationary environment, based on satisfactory financial performance, the company’s Board of Directors declared the dividend for common shares. It is important to note that the company is maintaining a strong cash position of about $90.7 million as of May 2023, alongside another $119 million in revolving credit facilities and an additional $128.2 million in borrowing capacity. The combined liquidity and capital resources total approximately $351 million, thereby providing us with significant strategic power. Furthermore, we have contracted revenue from charter tenders in excess of $205 million, which excludes commissions and additional revenue from certain vessels, as well as extra borrowing capacity concerning various additional and unencumbered existing vessels and five new builds upon their delivery. We believe that the strong liquidity and relatively low leverage will enable us to maintain flexibility with our capital structure, expand our fleet, reward our shareholders, and take advantage of opportunities that may arise. Thank you, and we are now ready for the Q&A session.

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. And our first question is from the line of Chris Wetherbee of Citigroup. Please proceed with your questions.

Hey, thanks. Good afternoon, everyone. Maybe I could start on the fleet. I'm curious how you guys think about fleet opportunities from here. Obviously, a pretty tight order book relative to what we've seen over the past. I'm curious how you guys think about approaching it. Are there going to be new building opportunities for you that you'd like to execute on at this point? Does the secondhand market make more sense? Or, given where vessel values are, does it make sense just to stay on the sidelines and see how things develop over time? Just kind of curious how you're thinking about that right now.

Hi Chris. Regarding new builds, the current market is a bit confusing because we see prices rising due to demand created from other sectors. We do not have a clear path for the next fuel innovations available for new builds, and since we still have 9 vessels to be delivered from our existing building program, which focuses on low fuel consumption yielding designs. We are not currently pursuing investments in new vessels because we lack clarity in the situation. Many others in the dry bulk sector are likely facing similar confusion. I believe container ships have more options, but in dry bulk, it's less clear. Thus, we see a very small order book for 2025, which is close to full. Anyone looking to consider new designs has to wait until 2026 or 2027, which is quite far out. With upcoming delivery transitions, we have to account for high interest costs associated with delivery installments. Right now, I don’t see the market generating many new business opportunities; I think there will be a wait for clearer designs.

Okay. That's helpful. I appreciate that insight. And then I guess, as you think about scrubbers in particular, I know you've highlighted some of the hurdles and opportunities, as well, in terms of emissions and how much the fleet meets future emission standards. As you think about your approach to that market and scrubbers in particular, is that still an investment worth pursuing? Is there a desire to implement more scrubbers on existing vessels? And regarding the vessels that you have with scrubbers, do you feel they're earning a reasonable return given that most of these investments were underwritten by your customers? Just want to gather your thoughts on scrubbers generally.

If the scrubber spread is below 150, the option to invest in scrubbers becomes less attractive because, at the same time, we are also making environmental investments which reduce vessel consumption by around 10%. If we see the scrubber spread going above 150 in the future, we may see more scrubbers being installed. But for now, the current spread is heading towards 120, making new investments less appealing. Our current scrubber installations will allow our vessels to operate more efficiently by the end of the year. We expect these vessels to consume around 35 to 40 tons a day. However, for smaller ships, investing in scrubbers is less viable. The payback time for scrubbers has become significantly longer than it used to be.

Okay. That's a fair point. Great. Well, thanks very much for the time. I appreciate it.

Thank you. The next question is from Omar Nokta with Jefferies.

Thank you. Hi, everyone. Good afternoon. I wanted to touch a little bit on capital allocation. Your strategy there has been fairly balanced with the dividend and an active buyback program recently. You have acquisitions in the works with the new buildings, focusing on the balance sheet, and ensuring debt is being paid down. How are you thinking about the fleet moving forward? You outlined in the report that you have 44 vessels, of which 12 were eco-designed, built after 2014, and you have three very modern ones in the Phase 3. You've also got nine newbuilds coming on. How should we think about those new builds as they deliver and what plans do you have for the existing fleet, especially those vessels that are older and do not fit into the eco-category?

First, I will address our capital allocation. Early on, we decided on a meaningful dividend policy and to allocate a reasonable portion of our free cash flow toward investments in new builds. This approach maintains our leverage and keeps the loan-to-value at comfortable levels in the following years. Additionally, we have substantial contracted revenue, which provides visibility in getting our dividend. We also maintain liquidity in order to act on any opportunities that may arise. Regarding our fleet, you may see that by the end of 2025, half of the fleet will consist of either eco-designed vessels, which I believe is a very impressive figure. The other half will include about 25 vessels, 20 of which will undergo upgrades within 2023, increasing efficiency. Our ships built in Japan are inherently more efficient than others. However, about 50% of our fleet consists of older Chinese-built vessels, which are less efficient. Overall, I believe the company will comfortably compete based on fuel performance, with about half the fleet composed of new builds and the other half being upgraded vessels.

That's a very good overview. I appreciate that. I think earlier in the discussion, regarding new builds, you highlighted that you would have to look to 2026 or 2027 for new deliveries. Earlier this year, you added to your capacity with a new MAX vessel, I believe, to be delivered in the first half of 2025. If you place an order now, is that still achievable for first-half delivery or have those windows closed?

In Japan, it's very hard to find new builds for 2025. It's more like 2026 onwards. If you look closely, you'll see that opportunities for order placements are very limited. We currently have to wait until late 2026 or early 2027, and even then, we lack viable designs as shipyards are at a very early stage. I believe many ship owners are skeptical regarding which paths to take. Since we have an ongoing program with nine ships to be delivered, we don’t have real insight to make additional moves. We want to renew our fleet, especially acquiring ownership at favorable prices. Thus, we may wait another 6 to 12 months before taking action. Of course, if we discover the right opportunity sooner and have clear indicators of what will be developed, we will consider adding more ships. But at the moment, we see limited opportunities for 2027, which is still too far away. We will continue being discerning regarding our ships, focusing on those aged over 15 years. With our upcoming delivery replacements, we’ll see how the market evolves. Despite the trade markets having underperformed in the first few months this year, we see raw material prices increasing, such as silver. Home prices are also rising, which suggests that the market must react positively; either freight rates will need to improve or freight rates will decline.

Thank you. That's very clear. I'll wrap up my questions for now.

Thank you. At this time, there are no additional questions. I'll turn the floor back to management for closing remarks.

Thank you very much for joining us on this conference call discussing our first-quarter financial results. We look forward to our next discussion next quarter. Thank you to all.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.