Earnings Call Transcript - SB Q3 2020

Operator, Operator

Thank you for standing by, ladies and gentlemen and welcome to the Safe Bulkers conference call to discuss the third quarter 2020 financial results. Today, we have with us from Safe Bulkers, Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; Chief Financial Officer, Mr. Konstantinos Adamopoulos; and Chief Operating Officer, Mr. Ioannis Foteinos. Following this conference call or you need any further information on the conference call or on the presentation, please contact. And I advise you the conference is being recorded today. I will now read the forward-looking statement. Before we begin, please note that this presentation contains forward-looking statements as defined by Section 27A of the Securities Act 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 of dry bulk vessel, 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 therein 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. I would now like to 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 2020. Before I start the presentation, I would like to express our gratitude to all our seafarers hoping that within 2021, we will reach a point that all efforts of the global community to produce treatments and vaccines will conclude and the pandemic will be controlled. There has been a negative effect from the COVID-19 pandemic on the company's results of operations and financial condition year-to-date due to lower demand, which resulted in relatively lower charter rates as well as higher crew and related costs. We are happy to return to profitable operations in the last quarter. In parallel, the company is maintaining a strong liquidity position that provides us with flexibility and is following a plan, which is based on our high-quality Japanese fleet, 32 out of 42, with a big advantage over the environmental footprint compared to the global dry bulk fleet. Furthermore, we aim to gradually renew and deleverage our fleet, targeting to be the leading quality dry bulk company and create value for our shareholders. Management alignment due to shareholding stake and performance and trust built over the years are of paramount importance in the success of this plan. Let's move to Slide 4. We present this year the performance of the Capes and Kamsarmax charter market for 2019 and year-to-date, as published by the Baltic exchange. The COVID effect has been the major driver in both sizes. During the first wave of Q1, the chartering market traded at very low levels. However, after Q1, and the resumption of economic activities, we added a 30% increase in volumes of iron ore, coal, and grain, particularly on Capes, the market picked up twice, reaching the levels of USD 35,000. On Kamsarmax, the market has been trading above $10,000 since May, and peaked during the summer months, exceeding $15,000 per day. Looking forward, we are closely modeling the trade tensions developing between China and Australia, and we remain cautious on how a second wave of COVID may negatively affect the trade. However, recent COVID vaccine announcements brought optimism to the global markets. Turning to Slide 5, we provide more input related to the Chinese economic recovery, which remains a driving force of dry bulk. As shown in the graph, following a significant contraction in Q1 of almost 7%, the Chinese GDP has grown for two consecutive quarters. According to the National Bureau of Statistics of China, the Chinese GDP grew by 3.2% in Q2 and by 4.9% in Q3, showing a stable recovery after controlling the pandemic. The resumption of trading activity is evidenced by the Chinese imports. There has been a substantial drop in imports during April and May. A gradual recovery of the Chinese economy during the summer months in combination with muted trading activity of Q1 led to an aggressive import spree resulting in a year-on-year increase of 13.2% in September and 4.7% in October. Turning to Slide 6, we elaborate on Chinese import development. September's iron ore imports increased by 8.2% month-on-month, and 9.3% year-on-year, while for the period from January to September, there was an actual increase of 10.6%. For thermal coal and lignite, imports dropped by 9.6% in September month-on-month and 16.3% year-on-year. However, the total increase from January to September is 18.4%. This mixed outlook can be attributed first to seasonality; and second, to the ongoing tensions in China-Australia trading relations. The lower graph represents the Chinese imports of soybeans. September's soybean imports increased by 1.9% month-on-month and by 19.4% year-on-year, with imports from January to September increasing by 15.4% compared to the same period in 2019. Moving to Slide 7, we present the current status of the order book in the two charters where we operate, the Capes and the Panamax-PostPanamax. For the first time after many years, the order book is minimal. The contracted orders for Capes amount to 4.6% of the total Capes fleet. From 2022 onwards, the orders are minimal. Similarly, for Panamax-PostPanamax, orders for 2021 represent a growth of the fleet of about 3.4%, with less than 1% growth going forward. The aging of the fleet and the increased environmental capital expenditure requirements, such as complying with ballast water treatment system regulations, may enhance scrapping activity, especially in an environment of low freight rates. Increased scrapping may lead to lower net growth of the fleet as discussed above. Moreover, the ongoing environmental discussions for emissions are beyond most of the current fleet's ability with technological advances and improved designs. Specifically, for Phase 3 of the energy efficiency design index, only very few cities can provide highly efficient designs that comply with these emission requirements. Under these circumstances, the order book and hence the existing dry bulk fleet will not reinflate anytime soon. In this regard, let me refer to our focus on developing a plan for renewing our fleet with modern designs that adhere to new environmental regulations. We recently ordered a Japanese-built dry bulk 82,000 dwt Kamsarmax class vessel, with scheduled delivery in the first half of 2022. This vessel is designed to meet the latest requirements of the energy efficiency design index for greenhouse gases and EEDI Phase 3, and it will also comply with the latest NOx emissions regulations of NOX-Tier III. Turning to Slide 8, we give a brief presentation on the status of the fuels market. Global lockdowns and mobility restrictions have reduced demand for fuels and distillate products. Currently, the price of the 0.5%, a very low sulfur fuel oil, the IMO 2020 fuel, is relatively weak compared to heavy fuel oil prices, with their spread differential, the so-called Hi5, in the region of USD 65 to USD 70. The graph on the left presents the future market prices for very low sulfur fuel oil, high sulfur fuel oil, and Hi5 in Rotterdam and Singapore. The futures market indicates a recovery of the 0.5% very low sulfur fuel oil, and the Hi5 is trading at higher levels in the range of $80 to $90 for 2021, and further up to about $100 for 2023. The recovery of global economies, the restoration of mobility, and the recovery of crude oil prices may increase the demand for distillate products and will likely push the Hi5 differential to higher levels. Let's now summarize in Slide 9 the key takeaways for the market. We see a resumption of economic activity after lockdowns, with China's GDP indicating a V-shaped recovery, witnessing significant volumes in the iron ore, coal, and grain trade. At the same time, the second wave of COVID-19 remains a threat, but recent COVID vaccine news brings optimism in global markets despite the recent trade tensions between China and Australia. Global lockdowns have adversely affected demand for oil and distillate fuels; we may see a slow oil demand rebound as global lockdowns ease with the restoration of mobility, which will eventually lead to a recovery of Brent prices and a wider Hi5 spread differential. We have a declining order book from 2020 onwards, and the ongoing decarbonization discussions do not favor new orders. Finally, the aging of the fleet, the low freight rates, and the increased environmental CapEx may enhance scrapping activity. Moving to Slide 10, we show our fleet growth over recent years, having added a new order recently. It is important to note that our growth is gradual. The company has never entered into several orders that would have distorted the supply side. We have maintained a steady growth rate even in loss-making markets and have always invested in cutting-edge technology. Moving to Slide 11, in the context of our environmental and social responsibility policies, we undertake significant environmental investments by retrofitting scrubbers and ballast water treatment systems on our fleet. We have already invested $66.7 million as of September 30, 2020, and have retrofitted all 20 of our scheduled scrubbers and 30 ballast water treatment systems so far. The table provides an estimation of the expected downtime in days for Q4 2020 and Q1 2021 to assist analysts with projections. On Slide 12, we have uploaded the BPI index as a market performance indicator alongside our stock price. Historically, the correlation has been strong. In 2019, the correlation decoupled due to the trade war, and during 2020, we have seen further decoupling due to the COVID pandemic. Presently, our stock is trading at levels which we believe do not correspond with market performance. This could potentially be a good entry point. Moving to Slide 13, we focus on our strategic plan to gradually renew our fleet, investing in new technologies and vessels with an environmental footprint that adheres to new greenhouse gas regulations. So far, our environmental investments include ballast water treatment systems and the installation of scrubbers, a project that has been completed. Until now, we have invested $66.7 million, as I have already mentioned. Furthermore, we show the improvements that the new designs bring, related to faster dynamics, improved efficiency of propulsion, systems, and managerial actions focused on environmental operations. Concluding on Slide 14, let's summarize Safe Bulkers' key takeaways. SB stock is at an attractive entry point. Exposure in the spot market allows for a quick return to profits whenever market conditions improve. Built-in advantage in environmental footprint due to Japanese tonnage with 32 out of 42 vessels, management holding about a 50% stake is aligned with shareholders. We have developed a plan for the following year that includes, in summary, lean operations, operational excellence and technical expertise, maintaining strong liquidity, which provides for flexibility in this stable environment, and a cushion for opportunistic moves; gradual fleet renewal with EEDI Phase 3 and NOx-Tier III vessels in parallel with financing arrangements, deleveraging in parallel with chartering markets, targeting to become the leading quality dry bulk company and create value for all our shareholders. Now I will pass the floor to our Chief Financial Officer, Konstantinos Adamopoulos, who will present our quarterly financials.

Konstantinos Adamopoulos, Chief Financial Officer

Thank you, Loukas, and good morning, everyone. Let me start with our chartering performance in Slide 16, where we'll present our quarterly time charter equivalent, which was $12,575 versus our quarterly operational expenses (OpEx), which stood at $4,896. Moving on to our debt profile, as seen in Slide 17, we present the repayment schedule as of September 30, 2020. As of November 6, 2020, our liquidity stood at $136 million, consisting of cash and bank time deposits, restricted cash, funds available under our secured revolving credit facility as well as the sale and leaseback arrangement for the newly built Kamsarmax class vessel. Let me continue to Slide 18 and focus on our debt amortization schedule versus the scrap value of our fleet. We have a smooth debt repayment profile for the coming two years, gradually deleveraging our company. Moving on to Slide 19, we present our quarterly daily OpEx, which stood at $4,896 versus our quarterly daily General and Administrative expenses (G&A), which stood at $1,418. The aggregate figure for both OpEx and G&A for the third quarter of 2020 was $6,314, demonstrating our focus on lean operations. We believe that this amount for both OpEx and G&A, when comparing apples-to-apples, is one of the industry's lower, if not the lowest. We include in this figure all our dry-docking expenses and in our G&A, we account for executive officers' compensation and all expenses related to the administration of our company. Let's now move to Slide 20 with our quarterly financial highlights for the third quarter of 2020 compared to the same period last year. Net revenues increased by 2% to $51.9 million from $50.7 million. During the third quarter of 2020, our time charter equivalent was $12,575 for the third quarter of 2020 compared to $13,311 during the same period in 2019. Net revenues were supported by the benefit from scrubber-fitted vessels despite the reduced price differential between heavy fuel oil and compliant fuel, which was caused by the oil price war. Additionally, revenue contributed by our newbuilding delivery took place back in April. Voyage expenses increased due to increased vessel repositioning expenses, higher loss on bunker sales, again due to the oil price war, and consumption costs for scrubber-fitted vessels. Daily vessel operating expenses increased by 10% to $4,896 compared to $4,448 for the same period in 2019. Daily vessel running expenses, excluding light docking and predelivery expenses, also increased by 10% to $4,459 for the third quarter of 2020 compared to $4,053 for the same period last year. Our adjusted EBITDA for the third quarter of 2020 decreased to $22.3 million compared to $25.1 million for Q3 of 2019. Our adjusted earnings per share for the third quarter of 2020 was almost $0.00, calculated on a weighted average number of 102.2 million shares compared to $0.03 during the same period in 2019, calculated on a weighted average number of 101.3 million shares. Closing our presentation in Slide 21, we show our quarterly fleet data and average daily indicators compared to the same period last year. We would like to emphasize that during this period, we have worked extensively despite tough market conditions, completing installations of all 20 scrubbers. We have concluded the order of a Japanese modern design and technology advanced vessel with delivery scheduled for the first half of 2022, with limited impact on our liquidity as we agreed to finance 90% through a resale and leaseback arrangement. We have a strong balance sheet with comfortable leverage and a small spread profile for the next two years, alongside a liquidity position of $136 million. We have also taken measures to protect our seafarers’ and shore employees’ health and well-being and kept all of our vessels continuously servicing our charters. Once again, we would like to thank our seafarers for their commitment, dedication, and efforts throughout this tough period. Our press release presents in more detail our financial and operational results. We are now ready to take your questions.

Operator, Operator

We will now take our first question.

Christian Wetherbee, Analyst

It's Chris Wetherbee from Citi. I have a couple of questions. First, I'd like to discuss the fleet as it currently stands, particularly regarding some of the older Panamaxes that are nearing the 20-year mark in the next few years. What are your thoughts on those? Can you share a bit about the leverage those vessels carry, if any? Are you considering potential sales as you look to refresh and renew the fleet while moving towards a more eco-friendly approach? I'm interested in how you view fleet management over the next several quarters.

Loukas Barmparis, President

Yes. The idea is to gradually renew the fleet. We've ordered a new technology vessel for 2022. The plan is to sell one or two of the older vessels by that time. Of course, the right timing should be next year, simply because right now, there are challenges due to the pandemic and COVID, which restricts visits of people onboard ships. A buyer of an older ship has to inspect it, which is operationally challenging under the current restrictions in various parts of the world. So yes, the idea is to try and sell a couple of the older ships next year while we renew our fleet going forward. I believe 2021 will offer more operational flexibility and improved market conditions for materializing such sales.

Christian Wetherbee, Analyst

That makes sense, and I appreciate the information. We are seeing a slight increase in the order book for 2021. Depending on the size of the vessels, it might align with 2020. However, there are few deliveries planned beyond 2021. What is the tone of the conversations with shippers? What are the discussions like regarding charter terms and duration? I'm curious if there are any improvements in discussions with customers about increasing rates and potentially extending charter durations. I'm just trying to understand how your customers are preparing for the upcoming year.

Loukas Barmparis, President

Yes, up until last week, the market's views were very skeptical, particularly with what was going on with the American elections and all the talk about a second round of COVID-19. However, the announcement by Pfizer about a vaccine availability by the start of the new year has changed sentiment a bit. It will take some time to work into the system, but I believe that as clarity emerges regarding economic recovery and prospects for full recovery as we enter 2021, our charters will show increased interest in period business and attempting to fix charters. Currently, there's very little activity, and it's better for an owner to stay in the spot market since period activities are below breakeven levels. Overall, we are optimistic if we find a solution to the COVID-19 situation that demand will increase while supply remains manageable. This could lead us into a better year if these vaccine announcements materialize into effective solutions for humanity.

Christian Wetherbee, Analyst

Got it. Makes sense. And I guess the last question should be specifically around expenses. We've seen decent growth year-over-year, and I know there are some seasonal variations, with Q3 historically being a bit of an elevated OpEx quarter. However, when I consider OpEx and G&A, both are at elevated levels year-over-year. What can you do to sustainably decrease those numbers? I know you operate relatively well compared to the broader industry, but I'm thinking specifically about your fleet. Are there strategies to improve cost efficiency and enhance profitability?

Loukas Barmparis, President

First of all, the G&A expenses are quite stabilized. They also depend a little on the exchange rates between euro and dollar. The only parameter that could substantially change this level is the exchange rate. In these G&A expenses, we include management fees, audit fees, and expenses related to running a public company. The operating expenses have been influenced heavily by dry-docking. We had about 12 to 15 dry-dockings this year due to various reasons, including fitting scrubbers and ballast water treatment systems in several vessels. The program was intense. When you go to a shipyard, sometimes earlier than scheduled, it allows for additional checks on equipment and increases costs. Moving into next year, we anticipate a significantly lower number of dry-dockings, likely about five scheduled dry-dockings. This reduction should lead to lower operational costs. Combined with our internal program to control further operating expenses, I believe these numbers can be substantially reduced, targeting around 4.2 to 4.4 for next year.

Operator, Operator

Thank you. We will now take our next question.

Randall Giveans, Analyst

It's Randy Giveans from Jefferies. On the Kamsarmax, the 2022 new building, what was the purchase price of that? And then following that, why purchase this vessel instead of potentially repurchasing common or preferred shares here? Regarding the vessel acquisitions and fleet renewal, are there any interests in an en bloc purchase of modern secondhand Ultramaxes or Kamsarmaxes?

Loukas Barmparis, President

First of all, we are a ship-owning company. We need to begin rebuilding our fleet, particularly in the context of decarbonization, which will be crucial for the next five years. We took a proactive approach by securing new building prices at an all-time low, in the high 20s for a modern technology ship with full compliance with new regulations. If we wanted to buy back stock, we could do that anytime. We currently have a plan to commence fleet renewal but, as I mentioned earlier, selectively buying new technology ships. Ideally, next year, with favorable market conditions, we could sell our well-maintained older ships as the world recovers from the pandemic. This process need not be on a large scale; it can be done gradually with one or two ships each year. At the same time, we aim to sell three to four older ships at different times throughout 2021. It's crucial to keep our fleet’s average age as low as possible. That was the rationale behind this decision. I cannot predict the future pricing of ships when the market recovers—it could be $34 million, $35 million. We won’t scale up purchasing like in 2013 or 2014 but will proceed gradually with better results as the market improves. Importantly, we’ve shown that even this year, during an extremely challenging environment, we could quickly pivot from red to black, even if the profits are modest.

Konstantinos Adamopoulos, Chief Financial Officer

If I may add something about the question of buying back the common stock. During previous years and at each quarter-end, we record the number of shares. If you notice, this number has reached $106 million, above $106 million and presently stands at about $102 million. This shows that the company's interest is not to dilute shares. We have historically issued some shares but have managed to buy back some to maximize value. Currently, we are at nearly the same number of shares as a few years ago, demonstrating our commitment to an anti-dilution policy. At some point in the future, we may start buying shares, but we will ensure that our actions remain anti-dilutive since the management holds about 50% of the company, and no dilution is intended that would not create value for all shareholders.

Randall Giveans, Analyst

Understood. Okay. You mentioned turning profits, which is impressive, considering a tough third quarter. Your TCE rates increased significantly from around $8,000 a day in the second quarter to almost $13,000 a day in the third quarter. How big of an increase do you expect in the fourth quarter?

Loukas Barmparis, President

The fourth quarter is not developing much differently from the third quarter; the first month was at similar levels. However, we are facing a headwind currently due to a trade dispute—not a trade war—between China and Australia related to the import of Australian coking coal. This involves political pressures from the Chinese government to Australian exporters and tariffs on other commodities due to the ongoing blame game regarding the pandemic. At present, this is a headwind for us. However, I believe this situation will result in a strong tailwind in the end. We are already beginning to see increased cargo from the US Gulf and East Coast as they replace Australian imports, which could significantly benefit the market. As the Chinese begin to source coal from further away, this issue could evolve into a real opportunity. Thus, while I expect Q4 will be similar to Q3, Q1 could be much better than recent quarters, especially if the COVID-19 situation also shows signs of improvement based on recent positive vaccine news. We remain cautiously optimistic, as we typically say, but genuinely believe this will lead to a favorable market in 2021.

Randall Giveans, Analyst

Alright, I guess last question for me. Can you provide guidance on ballast water treatment CapEx for the remaining 12 months, I guess in Q4 and 2021?

Konstantinos Adamopoulos, Chief Financial Officer

As Loukas mentioned, we have five dry-dockings remaining planned for 2021, significantly down from the 13 we had for 2020. Out of these five, we plan three ballast water treatment systems installations, which should lead to a more favorable cost structure. We believe this will significantly influence our OpEx for 2021.

Loukas Barmparis, President

It should amount to about $0.5 million per vessel, so approximately $1.5 million in capital expenditure for these three vessels.

Randall Giveans, Analyst

What was that number?

Konstantinos Adamopoulos, Chief Financial Officer

About $0.5 million for each.

Randall Giveans, Analyst

Got it. So the remaining BWTS systems will be in 2022 and 2023 to complete your 12?

Loukas Barmparis, President

Yes. Not many remain since we have already completed 30 installations. We'll reach about 33 next year, with the remainder planned for 2022 and 2023.

Konstantinos Adamopoulos, Chief Financial Officer

Let's say, 75% is already done. We have three years for the last 25%. We've made significant investments in technology, and while investments will never stop, our focus moving forward will be on new projects related to energy efficiency improvements and similar initiatives. We won't have much to manage in the way of delays moving forward.

Operator, Operator

We will now take our next question.

Frank Galanti, Analyst

This is Frank Galanti on for Ben. Our question: How do you view adding to the fleet beyond the Kamsarmax new build, considering current asset values? Given the fleet renewal process, are you constrained in taking advantage of these asset values? How do you weigh that against protecting the balance sheet?

Loukas Barmparis, President

We cannot fully scale up to do what we would have in 2013 or 2014; we must proceed very gradually and under careful evaluation. If we manage to sell three or four ships next year, this will free up opportunities to invest. Currently, we might do one new building and possibly another in the next few months. Asset prices are very low, approximately $5 million to $6 million below previous levels. We will only take action when the timing is right, ensuring that we maintain liquidity in the company and our relationships with banks, which is crucial not to overstretch our balance sheet. Therefore, if we proceed with a new building, it will come with financing, either through resale and leaseback arrangements or other approaches that won't strain our cash position. We need to be deliberate in our actions, and hopefully next year, the market allows us to achieve better sales for older units.

Frank Galanti, Analyst

Okay. Switching gears a bit. I wanted to ask about scrubber operations. There’s been less emphasis on them with the fuel spread compressing. Have there been any issues operating the scrubbers? Have you been able to run them at near 100% utilization? Is there HSFO available everywhere in a post-COVID world?

Loukas Barmparis, President

We've been operating scrubbers since May 2019, so that's 18 months. We've encountered no downtime, and we are satisfied with the quality of the equipment from a renowned manufacturer. As we advance into next year, the current market expectations suggest an $80 spread between heavy fuel oil and low-sulfur fuel oil, which could yield an extra $10 million in revenue for us. This is an additional revenue stream on top of what the vessels are already earning. We see this as a positive development, especially when 2020 started with a $200 spread. Subsequently, it declined to $40 or $50 due to the oil price collapse. It appears the situation is improving again. Regarding the availability of HFO, we have encountered no issues securing it across the globe. In fact, some ports have stocked heavy fuel oil and offered us deals better than market rates, which is quite advantageous for us. Generally, as we call major ports, we have no problem obtaining heavy fuel oil. There may be minor ports where availability could be restricted, but our operations are standardized, allowing us to take advantage of key locations. You need to approach operations by understanding that we are not merely managers; we are ship owners looking to maximize returns from our ships. We use our knowledge of the market to optimize opportunities that arise to benefit all our shareholders.

Operator, Operator

There are no further questions. Please continue. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

Loukas Barmparis, President

Thank you to all, and we're looking forward to discussing again with you for our results next quarter. Thank you.

Konstantinos Adamopoulos, Chief Financial Officer

Thank you.