Safe Bulkers, Inc. Q1 FY2024 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call on the First Quarter 2024 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. Following this conference call, if you need any further information on the conference call or on the presentation, please contact Capital Link at (212) 661-7566. I must advise you that this conference is being recorded today, April 30, 2024. The archived webcast of this conference call will soon be made available on the Safe Bulkers website at 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 first quarter 2024 earnings release which is also available on the Safe Bulkers website. I would now like to turn the conference call to one of your speakers today, the President of the company, Dr. Loukas Barmparis. Please go ahead, sir.

Good morning everyone. I'm Loukas Barmparis, President of Safe Bulkers. In the first quarter of 2024, we operated in a stronger market compared to the previous year. In line with our environmental, social, and governance strategy, we launched an additional Phase III new build. At the same time, we are modernizing our fleet by selling three vessels. Furthermore, we bought back 4.9 million shares of our common stock and declared a dividend of $0.05 per share. Our strategic focus continues to be on creating lasting value for our shareholders while maintaining a resilient capital structure. This is demonstrated by our commitment to a young and energy-efficient fleet, ensuring operational excellence in light of upcoming strict environmental regulations. We make sure that our capital spending is well-supported by our contracted future revenues, which strengthens our balance sheet for sustainable growth. After a thorough review of our forward-looking statements presented on Slide 2, let's move on to the market update on Slide 4. It's important to note the volatility in the cape market segment. Currently, eight of our Capes are under period charters, with an average remaining charter duration of over two years at an average daily rate of about $24,400, giving us strong cash flow visibility, even though the current daily market rate is around $19,500. In the Panamax segment, the charter market stands at about $17,200. Moving to Slide 5, we show our CRB commodity indexes and the fluctuations in futures prices for basic commodities. The geopolitical situation in areas like the Middle East, the Red Sea, and Ukraine highlights the increased global uncertainty. The global economic recovery is gradual but consistent. We expect the dry bulk market to remain strong in 2024 due to a tightening supply and demand balance, driven by increased cargo volumes, especially in the Capesize segment from higher iron ore shipments from Brazil to China. The rerouting from the Red Sea and Panama Canal has also increased demand in smaller segments. Inflation is expected to be virtually controlled despite delays in interest rate cuts, and projections for global economic resilience are strong. The IMF's April forecast predicts a 3.2% global GDP growth for 2024 and 2025, along with managed inflationary pressures. BIMCO anticipates a 3% growth in global dry bulk demand for 2024. In China, the IMF's April GDP growth projection for 2024 is 4.6%. Although China faces internal challenges, India's strong domestic demand and ongoing infrastructure investments offer stability amid economic uncertainty. Now, let's look at the supply side dynamics on Slide 6. The dry bulk order book remains limited. We have an optimistic outlook for the near to medium-term freight market, supported by the low order book. About 25% of the medium-sized fleet is over 15 years old, heightening the anticipated effects of fleet aging and environmental regulations. Vessels built in Japan have better design efficiencies. Our fleet outperforms the global average of 40% compared to Japanese-built vessels. This strategic advantage positions our fleet well in the environmentally focused charter market. As one of the pure dry bulk companies with a significant Phase III order book, we are well-positioned below current market valuations and are committed to competing based on operational and environmental excellence. Our efficient fleet and vessels delivered after 2014 will remain relevant and competitive within the regulatory frameworks and greenhouse gas targets. Our recent developments are presented on Slide 8. This includes the declaration of a $0.05 dividend per common share, the divestment of three older vessels, the delivery of two Phase III new builds alongside the initiation of two additional Phase III vessels. In Slide 9, we present Safe Bulkers' key attributes such as our robust management ownership alignment, comfortable leverage, ample liquidity, contracted revenues, a stellar track record, and the quality and competitiveness of our fleet strategically positioned to leverage the evolving landscape while remaining true to our commitment to expand by building a resilient company and rewarding our shareholders. Moving to Slide 10, we present an insight into the advantage of our green fleet strategy. The breakdown presented in the top right graph exposes the environmental credentials of our fleet comprising today of 46 vessels with 20 vessels having undergone environmental upgrades, 9 being Phase III and 11 being eco, with the remaining six scheduled to be upgraded within this year. The bottom graph represents our fleet renewal strategy, with the divestment of 12 older vessels and the acquisition of seven second-hand vessels, which results in a stable 10-year average fleet age over the past four years, as confirmed by Slide 11. This trajectory of fleet expansion attests to our commitment towards sustainability. I now pass the floor to our CFO, Konstantinos Adamopoulos for our quarterly financial overview.

Thank you, Loukas, and good morning to everyone. As noted, during the first quarter of 2024, we operated in a stronger charter market environment compared to the same period in 2023. With increased revenue due to higher charter hires, these earnings from scrubber fitted vessels increased operating expenses and higher interest expenses due to increased interest rates. Let us focus now on our liquidity, our cash flows, and our capital structure, as presented in Slide 13. We are maintaining a comfortable leverage of 34%. Our debt of $534 million remains comparable to our free cash value of $338 million, although our fleet is about 10 years old. Our weighted average interest rate stood at 6.51% for our consolidated debt with a portion of EUR 100 million being fixed at a 2.95% coupon in an unsecured five-year bond. We have paid $79 million of our capital expenditure requirement in relation to our existing order book and the remaining capital expenditure is at $201 million. Our liquidity and capital resources stand strong at approximately $215 million, which together with contracted revenue of about $276 million provides flexibility in our management and capital allocation. Furthermore, we have additional borrowing capacity in relation to seven existing unencumbered vessels and eight new builds upon their delivery. Moving on to Slide 14, we have quarterly financial highlights for the first quarter of 2024 compared to the same period of 2023. Our adjusted EBITDA for the first quarter of this year stood at $46.8 million compared to $33.1 million for the same period in 2023. Our adjusted earnings per share for the first quarter of 2024 was $0.20, calculated on a weighted average number of 100.4 million shares compared to $0.10 during the same period in 2023 calculated on a weighted average number of 118.4 million shares. In Slide 15, we present our quarterly operational highlights for the first quarter of 2024 in comparison to the same period of 2023. During the first quarter of this year, we operated 47.08 vessels on average, earning a TCE of an average of $18,158 compared to 43.83 vessels earning an average TCE of $15,760 during the same period in 2023. The company's net income for the first quarter of 2024 was $25.3 million compared to net income of $19.3 million during the same period in 2023. Including in Slide 16, we present a list of our first Phase 3 vessels already in our fleet. The global economy is experiencing multiple challenges: persistent inflation, tight financial conditions, the Russian invasion in Ukraine, and the Middle East crisis, all with an impact on the market outlook. Based on the financial performance, the company's Board of Directors declared a $0.05 dividend per common share. I would like to emphasize that the company is maintaining a healthy cash position of about $82 million as of April 19, 2024, with another $164 million available in revolving credit facilities. Overall, the combined liquidity and capital resources amount to $246 million. Furthermore, we have contracted non-cancelable sport and period time charter contracts of $274 million, net of commissions and before scrubber revenue, as well as additional borrowing capacity related to seven unencumbered existing ships and eight new builds upon delivery. We believe our strong liquidity and our comfortable leverage will enable us to further expand our fleet while still rewarding our shareholders. This concludes our presentation. We are now ready for the Q&A session.

Our first question comes from the line of Omar Nokta with Jefferies.

I have a couple of questions. First, regarding the charter market, I saw that you fixed the Maria for 4 to 5 years at just under $26,000. This seems like a standard cape, about 10 years old, but the rate appears quite high compared to market averages in recent years and even against forward assessments, such as the FFAs or the 1-year, 3-year, 5-year charter market evaluations. Is there something specific about this charter? Or is there anything particular about the shift that justifies this premium, or is it simply the current going rate for a 4- to 5-year contract?

Yes. This vessel had a specific charter on an index linked and as the market was rising in Q1, the charter wanted to change it into a long-term period charter of fixed rates. So the company took advantage of that requirement and converted it to a four-year charter, which, as you said, is above the current market, given that the vessel is Japanese built and environmentally upgraded with various features that have improved recent fuel consumption. So we managed to achieve for four years, a minimum of $25,950 per day, which is a very healthy rate. The company was timely in this decision. Also, at the same time, we had another vessel, a 2012 build, which we fixed forward for delivery in September of this year for 18 to 24 months at $26,000 a day, which is also a very healthy rate given that the fixture is on forward days. So there was this sort of opportunity, and we had the right vessels at the right time available, and we managed to secure these long charters, which typically are available in markets of Capesize vessels.

Yes, yes. And obviously, the market has eased a bit. It's still obviously very solid, generally speaking. How would you characterize the liquidity now in the term market? Would you be able to repeat that type of duration going out 12 to 18 months or 4 years, could you do that? Obviously, the rate may have come down, but is there enough liquidity still to be able to secure that type of visibility?

Look, these sorts of charters come at the peak of a very hot Cape spot market. So if the spot market is $40,000, then going higher than $40,000, charterers can book contracts, cover in the futures market their exposure, and such deals are available as long as you have the right vessel available at the right moment. Most of our Capesize vessels are on period charters, some of them expiring in '25, some in '26. But in a hot market, let’s assume we have a hot market in the second half of the year, there would be opportunities. One charter may want to extend one year ahead of time, or we could renegotiate existing charters into longer versions. We are very hands-on with what’s going on in the freight market as we manage all our chartering activities in-house. When opportunities arise, we look to take advantage of such requirements. On the Kamsarmax vessels, of course, the charter durations are much shorter because the forward curve does not typically move as fast as with Capesize rates, and those charters are more like one year or 1.5-year duration.

Okay. And then just kind of a separate topic just on the capital allocation. I just wanted to ask what you're thinking in terms of the buyback going forward. You bought a good amount of stock under the 5 million share authorization from late last year. You did cancel just before finishing the full $5 million; you effectively got close to it, but you didn't do it all. I just wanted to get a sense, any reason why you canceled it with a little bit left to go? And any thoughts on a new one? And then also, is it just that the stock performance being so strong is why you backed off on the buyback recently?

About capital allocation. As you are aware, we push our earnings from operations towards new investments because it's very important to renew the fleet and be competitive in the coming years. The new regulations will create substantial challenges for ships that cannot perform, and we don't want to leverage the company unduly. So I want to point out that the leverage today is at 34%. In terms of the buyback program, it has almost been exhausted, but we all believe in the company that the price of our stock is low compared to the asset value. So from time to time, we may take advantage of opportunities to initiate an additional buyback program, although this has not yet been decided. At the same time, we reward our shareholders with a steady dividend of $0.05 per share, which I think is reasonable based on capital increases as we expect the stock price will increase as new regulations come into play, which will have a major role in the charter market.

Our next question comes from the line of Climent Molins with Value Investor's Edge.

Following up on Omar's question on the repurchases, could you provide some commentary on the average price paid per share and on the amount that was spent post quarter end?

Yes, that's the shift.

Look, we don't declare the exact prices. But what we can say is that we have almost exhausted the existing buyback program. Any future decisions will depend on the capital allocation that we think is best. For example, we could decide to move towards acquiring a new big vessel. This plays an important role in our strategic focus.

Of course, if I may add, in the last quarter, the stock price was between $4 and $5. So we had the low part of that range on the bottom side and in the upper part. It was within that range. The purchases were at market rates. What I may add more is that we have seen secondhand prices rising in the last two quarters, especially in the first quarter of this year with a strong freight market. We see this trend across all types of vessels from Ultramax to Kamsarmax to Capesize, with secondhand vessel prices rising by $3 million to $4 million in the last quarter. The company is also using some of its older ships, as you have noticed, to finance new acquisitions, mainly focusing on new technology Phase III ships. On the other hand, we have to consider that the opportunity for fleet renewal is not unlimited, given most shipyards are now quoting berths in the second half of '27 or even the first half of '28. So these opportunities are becoming fewer. We do maintain good relationships with our yards in Japan, and we must seize such opportunities as they arise. We must not miss out on benefiting from the current favorable market conditions, especially as we cannot order a new build for delivery in 2028. The next 6 to 9 months will be crucial, and we believe this market is tightening. The latest data from the Suez Canal indicates that passages are 66% lower now than at the end of November. Additionally, strikes on merchant shipping by Yemen rebels continue. Therefore, we do not expect this situation to improve soon, which will support the current freight market. Therefore, the company must be prepared to use its liquidity for share repurchases and for other opportunities as they arise.

I also wanted to ask about operating expenses, which increased quarter-over-quarter, although from a very low starting point. Could you provide some commentary on the forecast you have for operating expenses for the remainder of the year?

Usually, the operating expenses that we see in the first quarter are a little bit higher. The reason is the substantial supplies of spares that will be used for dry dockings. Therefore, if you compare the last quarter of the year with the first quarter of this year, you will see that there is a substantial increase. However, we do not expect significantly different figures on an annual basis.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you for joining our quarterly results webcast, and we look forward to speaking with you again next quarter. Have a nice day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.