Earnings Call Transcript - SB Q3 2023

Operator, Operator

Thank you for standing by ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the Third Quarter 2023 Financial Results. Today, we have with us Mr. Polys Hajioannou, Chairman and Chief Executive Officer; Dr. Loukas Barmparis, President; Mr. Konstantinos Adamopoulos, Chief Financial Officer of the company; and Mr. Donatus Antonacci, Assistant Chief Financial Officer. 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 the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such 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 the 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 and 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.

Loukas Barmparis, President

Good morning. I'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the third quarter of 2023. During the third quarter, our financial performance was weaker, aligned with the charter market as a result of global economic growth uncertainties. Our newbuild order book with more efficient vessels in our environmental upgrades program on our existing fleet was complemented with the orders for two methanol dual-fuel newbuilds for the fourth quarter of 2026 and for the first quarter of 2027, marking a significant step towards decarbonization. At the same time, we took delivery of our fifth and sixth newbuilds and rewarded our shareholders with a dividend of $0.05 per share of common stock. Our capital structure is conservative with significant cash and revolver capacity. Our CapEx requirements are adequately covered by our contracted future revenues and our balance sheet is strong. After reviewing the forward-looking statements language on Slide 2, we may move to Slide 3. There has been significant volatility in the Cape market. It's worth noting that all our eight Capes are period chartered with an average remaining charter duration of above two years and another average daily rate of about $23,500, with a market currently at about $18,500. On the Panamax, the charter market remains somewhat stable. Moving on to Slide 4, we present the development of the CRB commodity index, reflecting the basic commodities future prices, which represent leading indicators for shipping including energy, agriculture, precious metals, and industrial metals. Commodity prices declined sharply over the past months according to the World Bank Energy Price Index, led by coal down 12.5% and metal prices down 2.7%. We continue to witness the rise of economic fragmentation, intensification of geopolitical tensions, particularly in the Middle East, alongside an increase in interest rates as policymakers aim to combat global inflation. Global headwinds will continue to persist and intensify due to the high global interest rates, geopolitical tensions, and sluggish global demand. As a result, global economic growth is also set to slow down over the medium term against a backdrop of these combined factors. The resilience that global economic activity exhibited earlier this year might signal a slight improvement, as the October forecast from the IMF raised the projection for global GDP growth for 2023 to 3% from 2.8% in April, even though global inflation projections for 2023 stand at 6.9% due to pressures on food and energy prices and supply-demand imbalances. According to BIMCO, the forecasted global dry bulk demand growth stands at a 3% increase in 2023. The slowdown is especially pronounced in advanced economies where high inflation raises concerns about a soft landing. Growth in emerging markets and developing economies remains stable at 4% for 2023 and 4.1% for 2024. The battle against inflation is not yet won, with inflation expectations well anchored in major economies. In China, the IMF's October projection for GDP growth was 5.1%, although there are signs that the consumption-led recovery could slow. China's recovery seems to be losing steam due to persistent domestic difficulties such as elevated debt, weakness in the property sector, and structural factors that weigh on growth, with the Chinese GDP estimation for 2024 set at 4.4%, leading to weaker demand. On the other hand, India's growth is expected to remain resilient, supported by robust domestic demand, strong public infrastructure investments, and a strengthening financial sector, as reflected in the IMF's October projection for a 6.3% increase in GDP for 2023. Let's now turn to the supply side as presented on Slide 5. The total dry bulk order book stands at single digits. We remain cautiously optimistic about the medium-term prospects of the trade market for the coming years due to the relatively low 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 vessels have more efficient designs; 80% of our fleet is Japanese-built versus 40% of the global fleet, which means that our fleet can compete better in the forthcoming environmental-based charter market. We are one of the very few pure dry bulk companies with a Phase 3 order book ahead of our peers, placed at lower prices than the present values in the market, signifying our intention to compete based on operational and environmental performance. As presented in Slide 6, we recently took an additional significant step towards decarbonization with a contract for two methanol dual-fuel newbuilds. These vessels, when powered by green methanol, will be able to produce close to zero greenhouse gas emissions based on life cycle assessment methodology. Following the extensive order book for 12 Phase 3 vessels placed timely at relatively low prices and the upgrade of the existing fleet, we set a clear path towards the decarbonization of our fleet by placing these two additional orders for methanol dual-fuel vessels. We believe that the company will have one of the most environmentally competitive fleets in the coming years. Concluding our market view in Slide 7, there has been an increased industry-wide volatility driven by tight monetary policies, rising fears of geoeconomic fragmentation, and growing signs of a global economy losing momentum. Demand for technological efficiency creates opportunities for those willing to invest, as we have done. Such environmentally efficient fleets may lead to a two-tier market with differential earnings capacity of such fleets. We believe that the combined effect of aged fleets, the low order book, slower selling speeds, and new regulations regarding greenhouse gas targets will favor fleets comprising of efficient Japanese vessels and those delivered after 2014, tightening the market. Especially, we have, as we said already, about 14 vessels, newbuilds that will be brand new Phase 3 vessels that will be able to compete with any vessel out there. It is expected that ESG adherence will become increasingly important in the years to come. Let me now present in brief on Slide 8 our recent developments, which include the declaration of a $0.05 dividend per common share from the Board, the election of three directors during our Annual Shareholders Meeting, and the delivery of two Phase 3 newbuilds, as well as the order of two dual fuel vessels. In Slide 9, we present certain of our key characteristics that differentiate us from our peers: the key fundamentals, our strong alignment of interest with a significant percentage of management ownership, our comfortable leverage, ample liquidity and contracted revenues, our track record, and of course the quality and competitiveness of our fleet. Let's focus now on our liquidity, cash flows, and capital structure as presented in Slide 10. We are maintaining a comfortable leverage of 35%. Our debt of €449 million remains comparable to our fleet scrap value of €355 million, although our fleet is only 10.6 years old. Our weighted average interest rate stood at 6.24% for our consolidated debt, with a portion of €100 million being filled and a 295% coupon in an unsecured five-year bond. We have paid €71 million for our capital expense requirements concerning our order book of eight newbuilds, and the remaining capital expenditures are €233 million, including the recent order of the dual fuel vessels. Our liquidity and capital resources stand strong at approximately €280 million, which together with contracted revenue of about €250 million provide flexibility to our management and capital allocation. Furthermore, we have additional borrowing capacity in relation to existing dry bulk vessels and six newbuilds upon delivery. Before passing the floor to our Assistant CFO, Konstantinos Adamopoulos, for our financial review, let me make a note about our strategy of directing cash flows to finance our newbuilds program, which will provide us with a distinct commercial competitive advantage in terms of fuel consumption and environmental performance. We expect that by maintaining a comfortable leverage and a strong balance sheet, this creates the basis for rewarding our shareholders and positions us among those companies that will successfully navigate the environmental challenges of the energy transition and the aging of the dry bulk fleet. Konstantinos, the floor is yours.

Konstantinos Adamopoulos, CFO

Thank you, Loukas, and good morning to everyone. As a general note, during the third quarter of 2023, we operated in a weaker charter market environment compared to the same period in 2022. We observed decreased revenues due to lower hires, decreased earnings from scrubber-fitted vessels, increased operating expenses, and higher interest rates. Moving on to Slide 11, our quarterly financial highlights for the third quarter of 2023 compared to the same period in 2022 reveal that our adjusted EBITDA stood at $30.9 million, compared to $66.9 million for the same period in 2022. Our adjusted earnings per share for the third quarter of 2023 was $0.08, calculated on a weighted average number of 111.6 million shares, compared to $0.39 during the same period in 2022, calculated on a weighted average number of 120.4 million shares. In Slide 12, we present our quarterly operational highlights for the third quarter of 2023. During this period, we operated 44.13 vessels on average, earning a TCE of $14,861, compared to 43.25 vessels earning an average TCE of $23,403 during the same period in 2022. Our net income for the third quarter of 2023 was $15 million, compared to net income of $51 million during the same period in 2022. Concluding on Slide 13, we present our breakeven point for Q3 2023. It is evident that the global economies are experiencing multiple challenges: inflation higher than seen in several decades, tightening financial conditions in most regions, and the ongoing crises in Ukraine and the Middle East all weigh heavily on the market outlook. 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 of about €67 million as of November 3rd, 2023, and another €158 million in RCF and €53.5 million in undrawn borrowing capacity, leading to combined liquidity and capital resources of €278.6 million. Furthermore, we have contracted revenue from our non-cash of spot and period time charter contracts amounting to €233 million, net of commissions, and before scrap revenue. We believe our strong liquidity and comfortable leverage will enable us to expand the fleet while rewarding our shareholders. We are ready now for your questions. Thank you.

Operator, Operator

Our first question comes from Chris Wetherbee with Citigroup. Please proceed.

Unidentified Analyst, Analyst

Hi, guys. Good morning. This is Matt on for Chris. Thanks very much for taking the question. First, I wanted to just take some time to see what you might be hearing in the market from some of your customers. How are they looking at dry bulk and the rate environment moving into year-end? And further, thinking more so in 2024, particularly as it relates to the sustainability of increased Chinese import activity and how that should be a key business driver moving forward. Just any details there would be very helpful.

Polys Hajioannou, CEO

Yes, good morning. I'm Polys. The increase in Chinese imports we've observed lately should provide support to the market. Additionally, there's significant activity directed toward India, with numerous shipments arriving from across the globe, not just from neighboring countries like Indonesia or Australia, but even from the Atlantic region, contributing to market support at lower levels. For 2024, we anticipate stronger demand compared to 2023. We do not foresee any major surprises arising from geopolitical events across different regions, leading us to expect an improvement in demand. We expect capacity utilization to be better than in 2023, suggesting a more active market, although we do not expect to reach the levels seen in 2021 or 2022. Overall, with the order book at comfortable levels for 2024 and 2025, we do not expect demand to exceed supply during these years. Any increase in demand would be a pleasant surprise, but the situation remains uncertain due to rapidly changing conditions.

Unidentified Analyst, Analyst

Fantastic. Yes, thank you very much for the detail. Certainly, very helpful on that front. And then, it looks like your contracted revenue took a nice step up in the quarter versus Q2. Could you just touch a little more on what is driving that amid the market weakness and how you see that backlog moving into 2024?

Polys Hajioannou, CEO

Yes. Look, contracted revenue mainly comes from our Capesize period charters. When the market is moving higher, we can secure long-term charters for three years or more. But the response in the Panamax market isn't the same, and you can secure long-term charters with increased activity. We have some Capesizes that are still contracted until 2025; we even have one vessel that is fixed until 2031. This is providing us with contracted revenue for the coming year. Our newbuilds are easily securing one-year TC rates due to their demand because they are highly efficient vessels. We are very optimistic for next year when we will have new vessels with very low consumption, which will be in good demand for European cargo; we anticipate fixing these Phase 3 vessels into European business. At the moment, there isn't significant activity because the market is not paying attention to these opportunities, but we are prepared and expect the coming quarters to bring increased interest for modern ships operating in Europe.

Unidentified Analyst, Analyst

Great. Yes, really helpful. Very insightful detail. And then just for my last question, given the developments going on in the Middle East currently with international turmoil, have you noticed this impacting specific trade lanes that you operate in? Or do you see it impacting any areas that you operate in? Just trying to get a little bit of a better understanding of how that could potentially impact international trade routes?

Polys Hajioannou, CEO

It's prudent to consider any change in trade patterns due to the situation in the Middle East. However, during the Russian conflict with Ukraine, it took some time to observe changes in trade lanes, primarily due to sanctions that created extra per-mile costs and additional cargos for tanker owners. In the Middle East, there's not much capital flowing into Israel, so it hasn't affected a lot of dry bulk movement—there are very limited cargos going in there because Israel has also transitioned towards self-sufficient energy and doesn't have as many cargoes as in the past. The conflict raises some concern, but we don't know how connected it is to the situation in Israel. We hope there won't be a movement towards reducing the amount of commercial ships passing through the Suez Canal, as that would negatively influence market conditions in the coming months. We hope that the situation does not escalate, but it's too early to provide a clear opinion.

Unidentified Analyst, Analyst

Understood. Got it. Okay. Thank you very much for the detail, and I will turn it over on that note.

Polys Hajioannou, CEO

Thank you.

Operator, Operator

And our next question comes from Climent Molins with Value Investor's Edge. Please go ahead.

Climent Molins, Analyst

Good morning. Thank you for taking my questions. I wanted to start by asking about the order for two methanol dual fuel vessels. Could you provide some commentary on the main drivers behind the decision to offer methanol instead of, say, LNG or ammonia dual fuels? And secondly, have you seen a lot of interest from potential charters for these kinds of assets?

Loukas Barmparis, President

Yes, I may take this response. It’s Loukas. Look, first of all, when we discuss methanol versus ammonia, ammonia is not well developed yet. There needs to be more development before we can assess the availability of ammonia ships out there. This may happen in two to five years, but methanol ships are currently available. The key question regarding methanol ships is whether we will be able to find green methanol instead of brown methanol. If we can use green methanol, the vessel will operate close to zero greenhouse gas emissions at the propeller level. Now, regarding our dual fuel methanol ships, the key aspect is that initially, we expect these vessels will operate on conventional fuel, similar to other ships, and will be phased in as the alternative fuel becomes viable. We have about 14 ships, which include these Phase 3 vessels, and this will lead to a fleet composition designed to comply with and excel under new environmental regulations. We positioned ourselves to assess and conclude on alternative designs that lead to decarbonization. This decision aligns with our goal of being at the forefront of technology in the dry bulk sector.

Climent Molins, Analyst

Your fleet will indeed be very modern. I actually also wanted to ask about operating expenses which declined significantly quarter-over-quarter excluding dry dock costs. What were the key drivers behind the decline towards more normalized levels? And looking ahead, should we expect them to remain at a level similar to this quarter?

Loukas Barmparis, President

You mean the OpEx? Yes. According to our budgets, we are about there. We expect to maintain a similar OpEx level. However, we cannot predict quarter-to-quarter changes as sometimes we do more dry docking in one quarter which can drive costs higher. But over the course of a year, I anticipate our OpEx will remain comparable to this quarter.

Polys Hajioannou, CEO

I think it's important to note that sometimes some quarters are more OpEx intensive than others, but the overall average should be stable throughout the year.

Climent Molins, Analyst

Thank you. I'll pass it over. Thank you for taking my question.

Polys Hajioannou, CEO

Yes. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to pass the call back to Dr. Barmparis.

Loukas Barmparis, President

Thank you very much for attending this conference call once more. We look forward to seeing you again and discussing again with you in the next quarter. Thank you very much and have a nice day.

Polys Hajioannou, CEO

Thank you. Bye.

Operator, Operator

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