Safe Bulkers, Inc. Q2 FY2024 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call on the Second 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. The archived webcast of this 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 second-quarter 2024 earnings release, which is available on the Safe Bulkers' website, www.safebulkers.com. I would now like to turn the conference call to one of your speakers today, the Chairman and CEO of the company, Mr. Polys Hajioannou. Please go ahead, sir.

Good morning, everyone. I am Polys Hajioannou, Chairman and CEO of Safe Bulkers. During the second quarter, we experienced a stronger market compared to last year, implemented our new integrated management system in line with DryBMS Standards, ordered two additional Phase 3 new builds in line with our fleet renewal strategy, and released our 2023 sustainability report which outlines our ESG practices and vision for the future. Our robust liquidity and manageable leverage have allowed us flexibility in capital allocation, a focus on long-term value creation, and provided a $0.05 per share dividend to our shareholders. After reviewing the forward-looking statements in slide 2, we will now move to the market update in slide 4. The Cape market segment has remained strong this quarter, with all eight of our Capes secured on period charters, averaging a remaining charter duration of 2.4 years at an average day rate of $24,500, which gives us substantial cash flow visibility. In the Panamax segment, the charter market is around $15,000. On slide 5, we present an overview of fluctuations in our CRB commodity index for basic commodities. Ongoing geopolitical tensions in areas like the Middle East, Red Sea, and Ukraine highlight global uncertainty. Persistently high asset inflation has prompted major central banks to adopt a more cautious approach to policy easing since the end of the first quarter, leading to lower expectations for policy rate cuts in 2024. Rising inflation risks suggest a likelihood of prolonged high-interest rates amid increasing policy uncertainty. In the dry bulk sector, we maintain a positive outlook as demand outpaces supply, setting the stage for additional growth. The limited supply coupled with resilient demand contributes to higher rates in the short to medium term. We believe the focus on decarbonization efforts and the energy efficiency of new vessels will be significant in the medium term. Overall, demand for iron ore remains strong, coal demand is stable despite energy transition forecasts, and grain demand is healthy. The IMF projects a 3.2% global GDP growth for 2024 and 2025, factoring in inflationary pressures. According to BIMCO, global dry market demand is expected to grow by 3% in 2024. China, as the main global importer, is prioritizing energy security in the short term, with coal serving as a quick means to expand renewable energy, evident in the 12% year-on-year increase in renewable generation in the first half of 2024, outpacing the 6% growth in fossil fuels. However, we do not expect this trend to continue as coal imports are stabilizing, even as steam coal imports rose nearly 30% year on year. The forecast for China's growth has been increased to 5% for 2024, though GDP is anticipated to slow to 4.5% in 2025 due to challenges from an aging population and reduced productivity growth. Geopolitical shifts have influenced trading patterns, increasing shipping distances for dry bulk commodities, which has heightened demand in smaller segments. Despite a decline and weakening global steel and iron ore prices, the dry bulk market remains stable, with solid trade averaging $22,000 per day in the second half of the quarter, moderating from $24,000 per day in the first quarter and averaging $37,000 per day this quarter. A constrained supply environment, modest growth this year, and tightening effects from long-haul box trade have been pivotal. The third quarter appears to mirror the second quarter with favorable earnings. Global coal investment is projected to increase by 2% in 2024, driven by advances in India, Indonesia, and Australia. India's strong domestic demand and ongoing infrastructure investments have played a crucial role, leading to a growth forecast of 7.3% for this year. Now, let's take a look at supply dynamics on slide 6. Currently, around 25% of the fleet is over 15 years old, as regulations are tightening on less fuel-efficient vessels, which will gradually phase them out. Additionally, the dry order book stands at about 9%, with an optimistic near- to medium-term freight market outlook, taking into account the availability of space and limited new orders for decarbonization technologies. Safe Bulkers currently has 10 Phase 3 vessels operating, all delivered post-2022, with the last delivery occurring just days ago. Furthermore, we have environmentally upgraded 22 vessels, with 11 being eco vessels showcasing superior design efficiencies. A significant 85% of our fleet consists of Japanese-built vessels, surpassing the global average of 40%, and we have an average fleet age of 9.9 years. Overall, our fleet has been fundamentally upgraded and is now commercially more competitive than two years ago due to the ESD strategy we implemented during this timeframe, reinforcing our commitment to sustainable business. We aim to amplify our commercial competitiveness further, with eight more Phase 3 vessels in our order book being procured at prices well below current market rates, scheduled for delivery within the next two years. The anticipated combined effects of fleet aging and evolving environmental regulations will position us favorably in the charter market, aligning with regulatory frameworks and greenhouse gas targets.

Moving to slide 8, we present another review of our green fleet advantage. The breakdown in the top right graph emphasizes our fleet comparison of 46 vessels, with 22 having undergone environmental upgrades, including 10 in Phase 3 and 11 classified as ECO. The remaining systems are set to be upgraded this year. The bottom graph outlines our fleet renewal strategy, which includes divesting three older vessels, acquiring secondhand vessels, delivering 10 Phase 3 new builds, and maintaining an order book for eight additional Phase 3 vessels, resulting in a stable 10-year average fleet age over the past four years. As highlighted in slide 9, our fleet expansion adjustments reflect our commitment to sustainability. In slide 10, we showcase our impressive 65-year track record, our management team’s ownership stake of 48%, a comfortable leverage ratio of 32%, output liquidity of $276 million, and a significant constructed backlog of $250 million. Our green fleet advantage is illustrated by a 7.4% reduction in fleet higher VAT emissions and by our DryBMS Standard management system, which prepares us for upcoming environmental regulations. The quality and competitiveness of our fleet position us well to take advantage of regulatory requirements while staying true to our goal of building a resilient company and providing our shareholders with a 21% to about 31% dividend payout ratio. Our aim is not only to have the best fleet in terms of energy efficiency but also to enhance our managerial capabilities to compete effectively. I will now hand over to our CFO, Konstantinos Adamopoulos, for our quarterly financial overview. Konstantinos, the floor is yours. Thank you, Loukas, and good morning to everyone. This is Konstantinos Adamopoulos, the CFO. I will present our Q2 numbers. During the second quarter of 2024, we operated in a stronger chartered market environment compared to the same period in 2023, resulting in increased revenues due to higher charter hires. These earnings came from our vessels, along with higher interest expenses linked to rising interest rates. Regarding our liquidity, cash flows, and capital structure, we maintain a solid leverage of around 32%. Our debt of about $500 million is comparable to our fleet cap value of around $350 million, even though our fleet is only 9.9 years old. Our weighted average interest rate for consolidated debt was 6.3%, with EUR100 million fixed at 2.95% from unsecured five-year bonds. We have paid $110 million or 30% of our CapEx against the outstanding order book. Our liquidity and capital resources are robust at approximately $281 million, and combined with contracted revenue of about $252 million, we total approximately $523 million, which is double the outstanding CapEx of $252 million. This gives our management flexibility in capital allocation. We also have ordering capacity for four unencumbered vessels and nine new builds upon delivery. We ensure our CapEx is well-supported by future revenues to strengthen our balance sheet for sustainable growth. Now, moving to our quarterly financial highlights for the second quarter of 2024 compared to the same period in 2023. Our adjusted EBITDA for Q2 2024 was $41.8 million, compared to $74.3 million in 2023. Our adjusted earnings per share for Q2 2024 was $0.17, based on a weighted average of 106.8 million shares, versus $0.12 during the same period last year with a weighted average of 112.9 million shares. In Q2 2024, we operated an average of 45.43 vessels, achieving a Time Charter Equivalent (TCE) of $18,615, compared to 44.01 vessels earning an average TCE of $17,271 in Q2 2023. The company's net income for Q2 2024 was $27.6 million, an increase from the net income of $15.4 million in the same period last year. To conclude, based on our financial performance, the company's Board of Directors declared a 5% dividend per common share, equating to $0.05. We want to highlight that the company has a healthy cash position of about $77 million as of July 19, 2024, plus another $180 million in available revolving credit facilities, and an additional $20 million from our held-for-sale vessel, totaling $276 million in liquidity and capital resources. Additionally, we have contracted revenue from non-cancellable spot and charter contracts of $252 million, after commissions. We believe our strong liquidity and comfortable leverage will allow us to expand our fleet while still rewarding our shareholders. Thank you for your attention, and we are now ready for the Q&A session.

Thank you, guys. Good afternoon. Thanks for the update. Just wanted to ask, obviously, on the fleet, you've been very dynamic here for the past maybe two-plus years. You've been adding these modern, perhaps super eco dual fuel Kamsarmax newbuildings. You've been selling the older ships. Yes, you have a series of these eight newbuildings delivering here over the next three years. Just wanted to ask, what are your thoughts on the Cape fleet at this point? Obviously, scrubber fitted and you have contracts in place on all the shifts. But just in general, as you think about that fleet and investing going forward and given the low order book we're seeing in the broader Cape market, is that something that maybe you're considering investing in here in terms of perhaps free cash versus continuing to look at further Kamsarmax newbuildings?

You mean investing in Capesize?

Yes. Look, Capesize newbuildings, the prices are really out of the question at the moment. They are hovering over $75 million in Japan. And as long as interest rates remain at current levels, we cannot proceed with such investment. Maybe at a future time, maybe in a year's time, we will see some easing of interest rates. We may revisit that case but always in relation to fleet renewal. So we would have to sell an old Capesize to buy a newer one. So we don't want to touch for the time being because of high interest rates.

I would like to point out that the last two years of fleet have been expanded substantially. So in the past, we had about three Capes, and then right now, we have eight. So this shows a proactive movement from our side to invest in the Capesize market before the prices reach these very high levels.

Yes, that's a good point. I wanted to ask about the Capes because they have performed well this year and have a low order book ratio. However, as you mentioned, the returns on new buildings aren't there. You mentioned being active in the secondhand market. Are there interesting returns there, or do Capes generally appear too expensive compared to the Kamsarmax or midsized segments?

Yes. I think cost of both, they are too expensive. So you need $50 million to buy an eight-year-old Capesize from a good yard. So for us, it's not a good investment at this point. We are 3% and would have been a different proposal. But right now, we want to wait for that time.

Okay. Thank you for that color. Maybe just a follow-up, maybe thinking about just the market in general. Obviously, dry bulk rates across the board this year have been very healthy, much better than last year. We've seen some softer steel prices and a bit more of a tougher maybe still complex. Obviously, in China, but globally, it seems that things are under pressure. The Capes have generally held up, even though they've eased here recently, but Capes have been very good. As we think about this market dynamic, do you think, I guess, overall, for dry bulk, has it been a tight supply picture that's perhaps insulated the sector from weakness in the steel markets? Or is it perhaps just eventually weakness will make its way into the dry bulk rates, so we're not seeing it yet? Any color you're able to perhaps give on what's driving the market here recently.

Currently, the market is a bit weak, which is typical for the summer months, but we anticipate an improvement in the fourth quarter. Recently, we haven't experienced significant congestion in major loading or charging areas for dry bulk tonnage, and there are few backhaul cargoes returning to Europe from the Far East. Overall, there’s some weakness in the Atlantic market, but we expect that to pick up as we move into autumn, particularly around September and October. This seasonal increase will raise the market. A stronger Atlantic market is necessary to improve conditions, but even at daily spot rates between $15,000 and $17,000, we still view it as healthy. Therefore, we are not overly concerned. Additionally, the restrictions affecting trade in the Red Sea and Panama Canal are significant factors. The Panama Canal has had issues for several months, and the restrictions in the Red Sea have been in place since early this year. This situation means there are very few dry bulk ships passing through the canal. We believe this will help maintain decent market levels for a longer time. In the long term, our company does not focus on short-term quarterly fluctuations. We are aware that environmental regulations are becoming stricter, starting January 1, with penalties for CO2 emissions increasing significantly. This will likely create more demand for younger ships in the Atlantic market, making it difficult for older vessels to compete due to higher costs associated with these regulations. Many older ships, especially those over 15 years old, may not be able to operate efficiently in both the Atlantic and Pacific markets, leading some to be scrapped. Therefore, even though the current market may seem weak, it won't significantly impact us as Safe Bulkers has already deployed Phase 3 vessels, which are very efficient, and we have more coming over the next two years. Our focus is more on the next two to three years rather than just the upcoming months.

Yes. Thank you. That makes sense. And I appreciate the insight and the deep detail. That's it for me. Thank you.

Good afternoon. Thank you for taking my questions. I wanted to start by asking about the returns and the environmental upgrades you've pursued on your existing fleet. Could you provide some commentary on some of the initiatives you've done? And secondly, what kind of returns are this investment generating?

Yes. Look, first of all, we'll start with the scrubber investment, which we started in 2019 and we completed in 2020. This has been paid off already. Whatever income is generated by the scrubbers now is a profit on the annual result. Right now, the spread is around $80, $90. It's not at a very good level, but still on those numbers. The company is earning an extra $20 million a year. So after that, we take this money, and we draw them on environmental investment of the existing fleet by upgrading them on all of them on dry dockings even on our older ships. We just finished now six build Kamsarmax by drydocking that we applied low friction paints and other improvements on the hull. We have reduced the consumption of those ships by 2 tonnes, from 24 tonnes down to 22 tonnes. So a 17-year-old ship is doing better consumption than the BKI average, which is 23 points. With this improvement, the ships are saving around $1,000 a day more because of the fuel savings, and we have been able to pay $1,000 in charter rates higher. We will carry on doing this investment on the existing fleet. We take the scrubber revenue and put it back on the remaining ships.

Thanks for the color. Following up on Omar's question on your fleet positioning, you still have a few 2006, 2007 built Kamsarmax and Post-Panamax. Considering that asset pricing has done pretty well over the past year, should we expect the disposal of some of these going forward? Or are you comfortable holding on to them for the foreseeable future, especially after the recent upgrades?

Yes, there is an upgrade works in two-folds. The first is that the ships can earn extra income, whilst they remain under the company's operation. You have to remember these are ships we contracted as new buildings, 17, 18 years ago. So they are very well kept and looked after. Of course, the company is not selling at any price. When we receive the right buyer at the right price, and we get a premium over the market rates because we believe the ships are worth premium, we can sell. Of course, we are not in a hurry to sell a lot of them. We are selling one ship, every six months because we have to allow time for the newbuildings to get delivered into the fleet. It will be a process that will be going on for the next two or three years at good periods of the market, and when we find the right buyer to appreciate the condition of the ships and the investments we have done in the recent drydocking. Of course, we will sell if we can achieve prices like the last deals we have done. It will be a slow process, and it will take some time, but we are not in a hurry to complete the sale of the older ships in the next six months.

That's very helpful. That's all for me. Thank you for taking my questions.

This concludes the question-and-answer session. I would like to turn the floor back over to Loukas Barmparis. Dr. Loukas Barmparis for closing comments.

Thank you very much for being with us this morning and listening to our presentation. We wish you a pleasant summer, and we look forward to discussing our next quarterly call with you. Thank you again.

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