Safe Bulkers, Inc. Q4 FY2023 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call on the Fourth Quarter ended December 31, 2023, Financial Results. 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 conference call, if you need any further information on the conference call or on the presentation, please contact us. I must advise you that this conference is being recorded today February 13, 2024. The archive webcast of the conference call will soon be made available on the Safe Bulkers website, www.safebulkers.com. Many of the remarks today contain forward-looking statements based on current expectations. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that can cause the actual results to differ materially from those in the forward-looking statements is contained in the fourth quarter ended December 31st, 2023 earnings release, which is available on the Safe Bulkers website, again, www.safebulkers.com. I would now like to turn the conference call to one of your speakers today, President Loukas 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 of 2023. During the last quarter of the year, we operated in an improved charter market environment compared to the previous quarter. The company continues to maintain a strong capital structure while implementing its strategy of gradual rate renewal that leads to decreasing fleet average age. Our ongoing efforts to upgrade our existing vessels coupled with our fleet renewal will enable us to remain competitive while reducing our carbon footprint. Yesterday, just before the issuance of our earnings press release, we announced the sale of our oldest vessel, MBE Maritime. This gives me the opportunity to focus on our investment strategy, which takes into account our existing policy and prepares our company for the new, more stringent regulatory environment in relation to carbon emissions. In slide 3, we present the environmental regulations timeline. We have been trying to be ahead of the market, for example, by placing Phase 3 orders when only Phase 2 regulations kicked in, and sell older vessels, and more recently by placing orders for dual fuel vessels. You see in slide four the challenge that the dry bulk shipping industry faces as we move with steady steps towards 2030. Advanced Phase 3 energy efficiency vessels are few, creating operational and commercial advantages for early movers. We moved early, and in slide 5, given our recent deliveries, we have maintained a very competitive average age, and we intend to do the same in the years to come with the remaining order book. All our actions should be built up in green fleet advantage, as presented in the top right graph of slide 6. Our fleet is comprised of eco-vessels built after 2014, conventional vessels which have been environmentally upgraded, and Phase 3 new builds which now account for 20% of our fleet. Only six of our 46 vessels in our fleet are scheduled to be upgraded. On the bottom graph, a series of our fleet renewal is presented with 12% sold in the last few years, having an average age of 15 years old, and 16 vessels acquired, nine of which are new builds and seven second-hand with a lower average age of nine years old. Let's now focus on the market. In slide 7, there has been significant volatility in the gate market. It's worth noting that all eight of our gates are period chartered with an average remaining charter duration of about two years, at an average daily rate of about $23.6 thousand, with a market currency at about $20.5 thousand. On the Panama side, the charter market remains stable. Expectations as defined by the paper market are optimistic. The interesting point here in slide eight is that the supply side is relatively weak, creating upside potential after the Chinese New Year holidays. The total dry bulk order book spans up to single digits. We remain cautiously optimistic about the medium-term prospects for the freight market in the coming years due to this healthy order book. About 25% of the medium-sized fleet is older than 15 years, thus the effect of fleet aging and environmental regulations are expected to accelerate scrapping. Japanese built vessels have more efficient designs, and please note that 82% of our fleet is Japanese built, compared to 40% of the global fleet. This means that our fleet can compete better in the post-carbon environmental-based charter market. We are one of the very few dry bulk companies with a Phase 3 order book, ahead of our peers, timely placed but lower than the present market values, signifying our intention to compete on the basis of operational and environmental performance. Moving to slide 9, we present the development of the CRB commodity index, representing the basic commodity futures prices, which represent the leading indicators for shipping, including energy, agriculture, and industrial metals. We continue to witness the rise of intensification of geopolitical tensions, notably in the Middle East region, the Red Sea, and Ukraine. We observe greater-than-expected resilience in the US and several larger emerging markets and developing economies, as well as significant fiscal support in China. Inflation is falling faster than experienced in most regions, amid unwinding supply-side issues and restructuring monetary policies. The general forecast of the IMF raised projections for global GDP growth for 2024 to 3.1%, as the global inflation projection for 2024 stands at 5.8%, lower than the previous forecast. According to BIMCO, the forecasted global dry bulk demand growth stands at a 1% increase for 2024. Yet the battle against inflation is not clearly won, with inflation expectations well anchored in major economies. In China, the IMF's general projection of GDP growth for 2024 stands at 4.6%. China's recovery seems stable, even after accounting for fiscal support, and even though the Chinese economy is near zero due to existing domestic difficulties, such as elevated debt, weakness in the property sector, and structural factors like aging that weigh on growth. On the other hand, India's growth is set to remain resilient, despite global challenges underpinned by Europe's domestic demand, strong public infrastructure investments, and a strengthening financial sector, as indicated by the IMF's January projection for a 6.5% increase in GDP for 2024. Concluding our market view in Slide 10, there has been an increase in industry-wide volatility, driven by tight monetary policies and rising geoeconomic fragmentation. There are signs of persistent inflation and forecasts of stable growth for the next few years. Demand for technological efficiency creates opportunities for those willing to invest, as Safe Bulkers has done. It is evident that ESG adherence becomes increasingly important for the years to come. Environmentally efficient fleets may lead to a two-tier market with differential earnings capability. We believe that the combined effect of the aging fleet, the low order book, slower selling speeds, and the new regulations and GHG targets will favor fleets comprising of efficient vessels, tightening the market. I will conclude with Slide 11, where we will present certain key characteristics that differentiate us from our peers. The key fundamentals are our strong alignment of interests with a significant percentage of management ownership, comfortable leverage, ample liquidity, and contracted revenues, our track record, and, of course, the quality and competitiveness of our fleet. Our operating model is positioned to capitalize on the most recent environmental regulations with assets focused on environmental competitiveness and ESG strategy. At the same time, we are committed to rewarding shareholders with meaningful dividends while actively building our future fleet competitiveness with substantial fleet expansion. Our Chief Financial Officer, Konstantinos Adamopoulos, will continue the presentation. Mr. Adamopoulos, the floor is yours.

Thank you, Loukas, and good morning to all. As a general note, during the fourth quarter of 2023, we operated in a weaker charter market environment compared to the same period in 2022 with decreased revenues due to lower charter hires, decreased earnings from scrubber-fitted vessels, decreased operating expenses, and higher interest expenses due to higher interest rates. Let's focus now on our liquidity, cash flows, and capital structure, which is presented in Slide 12. We are maintaining a comfortable leverage of around 37%. Our debt of $516 million remains comparable to our fleet's scrap value of $341 million, although our fleet is only 10 years old. Our weighted average interest rates stood at 6.31% for our consolidated debt. This is inclusive of the applicable loan margin, with a portion of €100 million being fixed at a coupon of 2.95% for an unsecured five-year bond. We have paid $85 million for our capital expenditure requirements in relation to our existing order book. The remaining CapEx was $223 million. Our liquidity and capital resources stand out strong at approximately $312 million, which together with the contracted revenue of about $270 million provides flexibility to our management in capital allocation. Furthermore, we have additional borrowing capacity in relation to eight existing unencumbered vessels and six or seven new builds upon their delivery. Moving on to Slide 13 for our quarterly financial highlights for the fourth quarter of 2023 compared to the same period of 2022. Our adjusted EBITDA for the fourth quarter of 2023 stood at $50.7 million, compared to $56 million for the same period in 2022. Our adjusted earnings per share for the fourth quarter of 2023 were $0.25, calculated on a weighted average number of 111.6 million shares, compared to $0.29 during the same period in 2022, which was calculated on a weighted average number of 118.9 million shares. We present Slide 14, our quarterly operational highlights for the fourth quarter of 2023 compared to the same period of 2022. During the fourth quarter of 2023, we operated on average 45.93 vessels, earning an average time charter equivalent of $18,321, compared to 44 vessels and an average TCE of $21,078 during the same period in 2022. Our net income for the fourth quarter of '23 was $27.6 million compared to a net income of $34.9 million during the same period in 2022. In conclusion, on Slide 16, we present our recent newbuild deliveries. Based on our financial performance, the company's Board of Directors declared a $0.05 dividend per common share. We would like to emphasize that the company is maintaining a healthy cash position, revolving credit facilities, and undrawn borrowing capacity. Altogether, combined liquidity and capital resources are north of $300 million. Furthermore, we have contracted revenue from our non-cash sourced and period time charter contracts of more than $240 million. This is net of commissions and before any scrap revenue and additional borrowing capacity in relation to eight unencumbered existing ships and seven new builds upon their delivery. We believe our strong liquidity and comfortable leverage will enable us to expand the fleet while still rewarding our shareholders. Thank you. I'm now ready to accept questions.

Our first question comes from Omar Nokta with Jefferies. Please go ahead with your question.

Thank you. Hey, guys, good afternoon. Just had a couple of questions, maybe just on the last point you made right before the Q&A session. Just wanted to ask about the uses of free cash in this market environment. Clearly, 4Q was a stronger period than we anticipated or at least a lot of us anticipated; 1Q is off to a solid start. There's a lot of disruption globally. And so just in general, as you think about things, how are you considering the uses of cash at this point? Or at least say the main use of cash? Is it to lower debt at this point? Or do you still see opportunities for further expansion beyond the current scope?

Yes, hello good morning to you. And look, the situation depends on how the market develops. At the moment, we see the market turning quite positive for the next year or so, and even more, in 2025, as we see the American economy doing very well. So the use of cash will be split for new buildings with fleet renewal; we don't exclude the sale of older ships to be replaced by more modern ships. So it's not only the new builds that are coming. There will be modern ships added to the fleet, and there will be some share buyback — I know we didn't do it in the last quarter. But we didn't have enough evidence of how the market would perform. Right now, we have evidence that the market is performing. And we will reduce our leverage; we don't want to increase our leverage from the current percentages as the new ships come in. So we want to keep it around the current levels, about 37% to 38%. So we will use cash for all these things. Of course, everything depends on how the market performs. At the moment, the signs are positive. And you know all the geopolitical situations and Panama Canal is reduced drought and no camps are much. Of course, Panamax vessels are passing now through the canal, coupled with the problems in the Red Sea. I also want to say that Safe Bulkers was one of the first companies that declared to its charterers after the initial hits on merchant vessels in early December, that we will stop going through the Red Sea, simply because we believe that our seamen, who everybody recognizes as key workers, should not be used for transporting through military areas. Just like we haven't traded in the Black Sea for the last two years, we have decided not to trade in the Red Sea for the foreseeable future. I want to emphasize that this decision has been very well received by all the crew members on our ships. We control the spot ships we have in the spot markets; it is our decision. But I am pleased to say that the majority of our charters accepted this condition immediately. It's very important for this company to do business with A-rated charters who share the responsibility toward seamen to avoid these military areas for at least the next two to three months until things clear out. Then let's see; it's not good to participate in conferences where we tout that seamen are key workers, and yet no one would accept our seamen to disembark in places like Singapore or China or any other country in the world. We had to divert ships to Manila to disembark our seamen. Charters were not paying the deviation costs or calling costs, which are very expensive; thus we had to take the ships to Manila. The only country in the world that provided safe corridors for seamen disembarking at that time in the first half of 2020 was Cyprus. It is a small country, but the government is pro-business and can make fair decisions quickly. The same applies now for the Red Sea until the situation is sorted out. Charters should not pressure ship owners to send seamen through hazardous areas, which — seamen must not be there to assess if drones are flying over the ship or to toggle the lights of vessels passing through the area. Let's sort it out with the navies as soon as possible.

Thank you, Polys. Very, very good context on everything as you related things a bit towards the COVID situation with crew changes. I guess in this market, there have been two ways where — I mean, you're obviously much closer to it than we are, but there's clearly a spot contract and then there's the vessels on time charter. Is there a deviation in terms of how charters are assessing transiting to the Red Sea, at least from your perspective and your ships? Are you still having vessels that are in your control operationally that are on contract or that are on time charter, being forced to go through the Red Sea by your customers?

Yes. On all our time charter ships, I'm proud to say that our charters are big names. They all cooperated despite there were some costs involved. We let them know early that we will not accept going through a military area or a war zone and we even had a charter on a route from the Continental to Paris that turned the ship around halfway through the Mediterranean and went via Cape Town. I'm proud to say that all these parties have cooperated; we reward them with more business and more ships when we time charter. For 1-year charters, we state from the start: we will not transit through the Red Sea. The charters are happy to accept and they appreciate the optional rules. We must show respect to those who do the job, as they have families and are seamen — not military personnel. Even with armed guards on board our ships, they are effective against pirates, but not against drones or rockets which can do significant harm. This is a very important matter, and I believe it won't take long to resolve. I anticipate it won't be a matter of one year, but more like two or three months. The world's navies are in the area and are managing the situation, and when the corridor is considered safe, we will start passing through again, hopefully in two or three months.

Yes, definitely. Okay. That makes sense. And then maybe just a final one for me, and it's just more of a follow-up to ensure I understood correctly. Regarding the share buyback that you haven't yet initiated, clearly, it was a time of transition and uncertainty. But given the current market conditions, you believe now is the time to buy stock.

Look, yes, we believe that at this time because now we have clear signs that the market is pushing up.

Our next question comes from Climent Molins with Value Investor's Edge. Please proceed with your question.

Good morning. Thank you for taking my questions. You've provided ample commentary on your fleet renewal approach. But I was wondering if you could provide some insight on the reasoning for focusing on ordering midsized vessels instead of Capesizes? Is it because of pricing or because you have a relatively more positive view on Kamsarmax?

What did you say? Because the line was not good, why we invest in midsized vessels?

Yes, instead of a Capesize.

Yes. Yes. We're not a Capesize trade. We feel uncomfortable with the type of vessel that relies on one commodity, namely iron ore and a bit of coal. We wanted to be more versatile and be able to trade on more routes. Iron ore is closely tied to the Chinese economy. Of course, now we are — I believe we are in the right place also for Capesize opportunities. Of course, the competition there is huge. The order book is very low. I'm optimistic about Capesize as well. But we are a bit concerned about the high capital cost of ordering a Capesize from a reputable shipyard like those in Japan. It exceeds $70 million. When you consider all the calculations of interest rates at 6%, you realize that it poses a substantial risk for a company like ours to make any major investments in that sector. We did that in 2021; we bought four Capesize bulk carriers, which are in Kamsarmax, and rates for us now are in the mid-20s for two to three years or so. We fitted scrubbers on them, adding $1.5 million per vessel per year. So we engaged in minimal investment there. I don't believe we'll find opportunities in the next six months. We're attempting to inspect a couple of ships, but I'm hearing interest from 15 to 20 buyers for every ship. I doubt we will succeed in winning any of those bids, but we're pleased with our timely investments in Kamsarmax new builds beginning in 2020. The price we started investing was around $28 million; today, the same ships are valued above $40 million to order from those shipyards. So we're satisfied with our actions so far.

I also wanted to ask about the 2024 outlook for coal. China recently reinstated the tariffs, and I was wondering whether you expect this to have an impact on the overall market.

Yes. Chinese coal imports were at their highest in 2023. It remains a vital commodity for China. We know they will eventually consider environmental consequences and will reconsider their consumption levels. But the Chinese consume approximately four billion tonnes of coal a year. The imported quantity which constitutes around 10% of that total is relatively insignificant. I don't think they will drastically decrease coal imports in the next five to ten years. Later on, we may see a reduction in coal into China, but we may observe an increase of coal shipments to other regions such as India, Malaysia, Vietnam, and Southeast Asian nations. I believe coal will continue to be significant, especially cleaner coal from alternative sources or technologies that make it more environmentally friendly. But I doubt that coal consumption will reduce significantly in the coming years.

Thanks for the call, sir. That's all from me. I'll pass it over. Thank you for taking my questions and congratulations on the quarter.

Thank you. We have reached the end of the question-and-answer session. Therefore, I'll turn the call back over to Mr. Polys Hajioannou for closing remarks.

So thank you very much for attending our presentation, and we're looking forward to discussing again on the financial results of our next quarter. Thank you all and have a nice day.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.