Earnings Call Transcript - SB Q2 2022

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the Second Quarter 2022 Financial Results. Today, we have with us from Safe Bulkers’, Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Mr. Konstantinos Adamopoulos. 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 the presentation, please contact Capital Link at 212-661-7566. 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 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 for dry bulk vessels, competitive factors in a 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 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 will 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 second quarter of 2022. The second quarter was a good quarter. As we see in Slide 3, our EPS reached $0.40 per share, and we maintain our dividend policy of $0.05 per share. We are different from many of our peers as their free cash flows not only reward our shareholders through the dividend policy, but in parallel, we create intrinsic value through an extensive fleet expansion program with 11 newbuilds which comply with environmental regulations after 2025 known as IMO Phase 3 or CO2 emissions. They also comply with the most stringent NOx regulations Tier III. Having taken delivery of the first Kamsarmax MV Vassos, we are expecting the next delivery of a post Panamax, namely Climate Respect, in the next few days. We have already seen in the first vessel a notable increase of earnings capability due to impressive savings in fuel consumption. We tend to compete on this basis with our fleet, but the most important aspect is that all these orders with deliveries within the next two and a half years were placed timely at relatively low prices, substantially lower than the valuations today. We are maintaining a comfortable leverage in relation to our fleet's scrap value, about $6.8 million per vessel, while the average age of our fleet, although it is aging, has stabilized at about 10.5 years due to our renewal strategy and the delivery of the newbuilds. Our liquidity and capital resources are maintained strongly at $294.8 million, which, together with a contracted revenue of $390 million, provides flexibility and solid management in capital allocation. I also need to highlight the importance of our scrubbing investments in a challenging environment. We have recently installed additional scrubbers on all of our Capesize vessels. The operation of scrubbers in our fleet further enhances our earnings capabilities. During the last quarter, as we see in Slide 4, we continued taking steps that improve our capital flow. In other words, we redeemed $37.3 million of preferred dividends, saving 8% of this amount on an annual basis, and have initiated the buyback program acquiring from the market one million shares. Our main focus is to manage operations in this inflationary environment. As a result, our daily operating expenses were $4,981 and our daily G&A expenses, which include the management fees, were $1,382. We believe that the increase in fuel prices is reflected in several OpEx cost components such as transportation costs, lubricants, and costs for tickets during crew changes, although the overall repatriation costs may gradually reduce if there are no restrictions. Additional costs for dry docking have also increased. Moving to Slide 5, we would like to highlight additional points that make our management unique compared to our peers. Being one of the ten pure global companies with over six years of experience in public trading since 2008, we enjoy the benefits of sound corporate governance together with the alignment of our CEO and Chairman of the Board of Directors, Polys Hajioannou, whose shareholding percentage is about 40%. With a management stake of 40%, even during the extensive low charter market conditions and the oversupply experienced in the past, we have never done a reverse split, nor have we filed for Chapter 11. We have avoided unwanted capital increases unless it benefits our shareholders. We try to make prudent decisions. For example, we have a 0% commission on chartering management, and through direct relations achieved lower average startup chartering commissions to third parties of 4% compared to the market standard of 5%. Our actual scheme is what differentiates us. When we make newbuild orders during low market times and create value for our shareholders, when such newbuild orders appreciate by 20% to 25% today, or when we manage our vessels aiming to achieve the best performance, or when we take prudent actions to make our company stronger. The advantage we see today is that there are no orders on the levels of the past. So we remain cautiously optimistic, despite the global instability caused by various factors such as invasions, energy crises, or inflationary pressures, and we are well-prepared in terms of environmental regulations. As you can see in Slide 6, our second ESG report was issued on July 25, focused on corporate governance, support of local communities through scholarship programs, support of seafarers during COVID restrictions, training of personnel, a $371 million investment in 11 Phase 3 newbuilds ahead of our peers, and environmental upgrades in 2022 on our existing fleet totaling 2.2 million. We have used about 2,000 tons of biofuel by the end of May 2022, leading to a decrease of 1,550 tons of CO2 emissions. We have reported verified EOI data for 2021. Please take a look at our sustainability report on our website, as making investments that qualify for deductions is what differentiates Safe Bulkers. Moving on to Slide 7 regarding our quarterly results: as a general comment, our profitability for the second quarter of 2022 exceeded that of the second quarter of 2021 by $10 million, with net revenues of $91.6 million and net income of $50.3 million. We achieved EBITDA of $66.5 million and maintained significant liquidity and capital resources of over $600 million. We redeemed in April 2020 more than a quarter of our preferred shares, improving our weighted average cost of capital. We have significant cash flow visibility with over $360 million in charter contracts. Our financial strength, as reflected in our EPS of $0.40 per share, enabled our board to declare a dividend of $0.05 per common share. At the same time, we are renewing our fleet with second-hand and new investments well ahead of the competition. Moving on to Slide 8, we highlight certain key figures of Safe Bulkers. All numbers presented here are as of quarter end. More specifically, on the right graph, we compare our liquidity with our outstanding CapEx. Our total capex resources amount to $294.8 million, consisting of $159.4 million in cash, $55.4 million in available revolving credit facilities, and secured commitments. Against outstanding CapEx of $319.5 million related to the remaining 10 Phase 3 newbuilds on order, we have already paid advances of $58.9 million. On top of our liquidity capital resources, we can access borrowing capacity related to seven unencumbered vessels, reinforcing our financial position. On the left graph, we compare our debt against scrap value, contract revenues, and cash. Our cash was $139.4 million, while our contract revenue, excluding benefits from the scrubbers, totaled $393.7 million net of commissions from our non-cancelable time charter contracts. This is against our outstanding consolidated debt of $432.6 million, which includes the €100 million in unsecured bonds. Our fleet's cap volume of $359.3 million is in line with our projected growth. Moving on to Slide 10, I will present developments in the dry bulk market: the CRB commodity index currently stands at a five-year high, reflecting key commodities such as energy, agriculture, precious metals, and industrial minerals, which are leading indicators for Safe Bulkers. As a result of the ongoing Russian-Ukrainian war, we have witnessed a rapid surge in prices during 2022. The updated forecast from the IMF released yesterday downgraded the expected growth of global GDP to 3.2% for 2022, reduced from 3.6%, and 2.9% for 2023, also lowered from 3.6%. In China, further lockdowns and the deepening real estate crisis have necessitated a revision downward of 1.1%, with significant global implications. In the U.S., reduced household purchasing power and tighter monetary policy have led to a downward revision of 1.4% in real GDP growth. These downgrades illustrate the spillovers from the war in Ukraine and tighter monetary policy. Global inflation is projected to rise, driven by war-induced increases in commodity prices, exerting pressure on food and energy prices, and lingering supply-demand imbalances, anticipated to reach 6.6% in advanced economies and 9.5% in emerging markets and developing economies this year, reflecting an upward revision of nearly 1% since April. In 2023, it is expected that discretionary monetary policy will affect global output, with a projected increase of only 2.9%. The forecast for China's GDP for 2022 stands at 3.3% despite the zero COVID policy lockdowns, with a projection of 4.6% for 2023. We note increased activity in Chinese iron ore demand as the national targets to control carbon emissions evolve, alongside struggles with domestic coal production. In India, the projected GDP for 2022 is 7.4%, anticipated to reach 6.1% in 2023. The projected global dry bulk demand is only expected to increase by 0.2% in 2022, supported by industrial materials like iron ore and coal as well as agricultural commodities. Let's turn to Slide 11 for a quick overview of our Capesize market conditions. The Capesize market so far has remained healthy this year. Although volatile, the market dynamics reflect significant commodity fluctuations. The forward freight agreement curve currently projects shipping rates at around $25,000 for 2022 for Capesize vessels and about $20,000 for Panamax as seen in the bottom graph. The commodity market conditions are likely to support freight rates throughout this year. On Slide 12, we present our scheduled order book deliveries. One additional delivery is anticipated in 2022, specifically the post Panamax MV Climate Respect, which is imminent, with five more newbuild deliveries in 2023, three in 2024, and one at the beginning of 2025. A total of 11 Phase 3 newbuilds will ensure Safe Bulkers maintains an average fleet age of 10.8 years by 2025. The bottom graph presents record low order books and expected fleet growth for the upcoming years across all vessel sizes. The supply dynamics remain robust, reflecting a historically low order book and a shortage in capacity driven by orders in other sectors, particularly containerships. Moving on to Slide 15, we focus on creating intrinsic value from our investments in scrubber technology currently installed on 18 of our vessels. The recent surge in fuel prices has widened the differential between high sulfur fuel oil and low sulfur fuel oil, leading to increased revenues for scrubber-fitted vessels. Currently, the Hi-5 price in Singapore is about $290 per ton, and future projections suggest an average of around $280 per ton for 2022. Given our average scrubber utilization of approximately 7,200 metric tons for our 18 scrubber-fitted vessels translates to a potential annual gain of approximately $26 million based on a $250 assumed spread. Additionally, we have agreed to install five more scrubbers on our Capesize vessels. Furthermore, the Company is engaged in a vessel upgrade program during dry dockings, amounting to about $2.2 million for 2022, which includes environmental improvements such as applying low-friction paints and installing energy-saving devices. In conclusion, as shown on Slide 14, we emphasize that our existing liquidity and contracted revenues, paired with our order book and strong financial position, lay the groundwork for a period where environmental regulations will dictate competitive dynamics. We believe that we are well-prepared for a market that will continue to present opportunities in both operations and profitability, as well as in new technologies and fleet renewal. Now, let me pass the floor to our CFO, Konstantinos Adamopoulos, for our financial coverage.

Konstantinos Adamopoulos, CFO

Thank you, Loukas, and good morning to everyone. Let me start with our quarterly financial highlights on Slide 16. During the second quarter of 2022, we operated in an improved charter market environment compared to the same period of 2021, with low interest expenses and increased revenues, which also include earnings from scrubber-fitted vessels. Our quarterly net revenues stood at $91.6 million, up from $81.6 million for the same period last year. Net revenues increased by 12% compared to 2021, primarily due to the increased time charter equivalent rate resulting from the improved market, assisted by additional revenues from chartered vessels. The daily time charter equivalent was $25,050 compared to $21,098 in 2021. Net income for the second quarter of 2022 reached $50.3 million, compared to net income of $32.4 million during the same period in 2021. Our daily OpEx was $4,981 versus $4,874 last year. Excluding dry docking and delivery expenses, this number was $4,648 versus $4,539. Daily vessel operating expenses increased marginally by 2%, mainly due to higher repair and maintenance expenses and increased lubricant costs. Our all-in OpEx G&A for Q2 2022, which we believe is highly competitive compared to our peers, stood at $6,363, including all dry docking and additional expenses along with directors' and officers' compensation. Our adjusted EBITDA for Q2 2022 was $66.5 million, compared to $54.1 million for the same period in 2021. Our adjusted earnings per share for Q2 2022 was $0.42, calculated based on a weighted average of 121.6 million shares, compared to $0.31 during the same period in 2021, based on a weighted average of 109.7 million shares. In conclusion, on Slide 17, our quarterly operational highlights for Q2 2022 suggest a satisfactory financial performance with an EPS of $0.40 per share, resulting in the Board of Directors declaring a $0.05 dividend per common share. During this quarter, we took delivery of our first newbuild. We believe this will provide us with substantial operational advantages in the coming years. We would like to emphasize our healthy cash position of about $167 million as of July 22, alongside $140.4 million in revolving credits and secured commitments. The combined liquidity of over $300 million offers us significant flexibility. Additionally, we have contracted revenue from our non-cancelable time charter contracts exceeding $360 million, and this does not take into account scrub revenues. We also have additional borrowing capacity relative to seven debt-free vessels, including one secondhand vessel and nine newbuilds upon their delivery. We believe that strong liquidity and relatively low leverage will allow us to remain flexible with our capital while continuing to reward our shareholders. Our press release contains more detailed information on our financial and operational results, and we are now ready to take your questions.

Operator, Operator

Thank you. Our first question comes from Omar Nokta from Jefferies. Please go ahead.

Omar Nokta, Analyst

Hey guys, good afternoon. Thanks for the overview; I think it was pretty good and detailed. I did want to ask about the buyback you guys announced last month, the $5 million buyback, and you put it to work pretty quickly, I would say, with a million already repurchased. The stock has performed fairly well here over the past several weeks. How are you thinking about buybacks from here? The stock has gone up; it still has more potential, but just wanted to hear your thoughts regarding further capital deployment in the buyback?

Loukas Barmparis, President

We have announced that we will do a buyback of up to $5 million. We have completed one million thus far. This buyback is executed opportunistically when market conditions are favorable. We believe that our stock is undervalued. We expect this program will continue and will evaluate this size of the buyback program from time to time when we feel the timing is right.

Omar Nokta, Analyst

Thanks. Regarding the dividend, obviously, we initiated that last year. Do you have any updated thoughts on how you see that number evolving? I'm asking because, as you know, the majority of your U.S. peers have a systematic payout for their dividend based on quarterly earnings. I'm not suggesting you have to adopt that method, but just wondering if you might maintain the dividend at the current nominal rate of $0.05 per quarter? Could you see yourselves transitioning to a systematic payout like some of the other players?

Loukas Barmparis, President

Due to our dividend policy, we analyze our dividend quarterly. We would like to maintain a steady dividend, but I want to remind you that we are one of the few companies with a substantial investment program in newbuildings. We direct our free cash flows in several ways: one is investment, particularly in Phase 3 vessels, which we have seen can be significantly more profitable. This point about profitability is evident in our ESG report, available on our website. Secondly, we aim to reward our shareholders with a meaningfully related dividend, not just a fixed amount, as it should reflect the actual value of our stock. A small portion of our free cash flows is allocated to the buyback program to support the company. We have taken actions such as redeeming a significant amount of preferred stock, improving our capital structure. All these decisions are aimed at being beneficial in the long run for our common shareholders. Our focus remains on sustainability and compliance with stringent regulations. Our CEO has a substantial ownership stake in the company, so he also benefits significantly from dividends. However, our main priority is to strengthen the company amidst upcoming regulatory changes and ensure we can compete effectively in terms of environmental performance.

Omar Nokta, Analyst

That makes sense, thank you. One follow-up regarding the mechanics of the Capesize time charters. You mentioned them previously, but I wanted to clarify how the scrubber benefits work. In your latest release, you mention two vessels fixed for three years, with an additional fuel benefit of $5.4 million based on that $220 assumption. Is that just a baseline assumption? Could you share the mechanics?

Konstantinos Adamopoulos, CFO

Yes, currently our Capesize bulk carrier consumes around 10,000 tons of fuel annually based on operational days. Assuming a $220 price, typically, we provide a 10% discount to charters from period charters benefitting from the scrubber. This translates to a potential gain of about $2 million per year, leading to a revenue expectation of between $5 million and $6 million over three years from each vessel. It's a substantial return considering the initial scrubber installation cost was around $3 million per vessel. We invested in scrubbers at a time when the market conditions were favorable, enhancing earnings potential as fuel prices surged this year, influenced by geopolitical tensions.

Omar Nokta, Analyst

That's interesting, thank you. Just to clarify, you mentioned the charter typically takes a 10% discount, allowing you to retain 90% of the benefit, but does that fluctuate based on market conditions?

Loukas Barmparis, President

Yes, regarding these two specific charters, we managed to keep 90%. It can depend on market conditions; sometimes we have to concede more, maintaining 80%, while on other occasions, we can secure 90% or retain higher benefits depending on negotiating terms. These terms also depend on the base rate offered for the charter.

Omar Nokta, Analyst

That makes sense. Are the scrubber installations for the remaining Capes executed proactively, or will it be part of their normal service?

Loukas Barmparis, President

We plan to do some installations earlier and others during routine maintenance. Enhancements will be prioritized to reduce fuel consumption and improve efficiency. We'll use the downtime wisely to execute the scrubber installations alongside those improvements to ensure timely returns on these investments, especially amidst rising fuel prices. We believe prices will remain high over the next year, thus presenting an ongoing opportunity for enhanced earnings—especially given historical trends and geopolitical factors affecting supply.

Omar Nokta, Analyst

Great, thank you for the insights. I will leave it at that.

Loukas Barmparis, President

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Ben Nolan from Stifel. Please go ahead.

Benjamin Nolan, Analyst

Yes, sorry. Omar asked my question. Thanks, guys.

Operator, Operator

Thank you. I show our next question comes from the line of Climent Molins from Value Investors' Edge.

Climent Molins, Analyst

Hi, thank you for taking my questions. I wanted to follow up on the installation of scrubbers on the remaining Capesize vessels. When should we expect these retrofits to be conducted? How many will be completed before year-end?

Polys Hajioannou, Chairman and CEO

One will definitely be completed before year-end. The remaining three are expected in the first quarter, just after the Chinese New Year at the end of Q1 2023. Loukas, please feel free to correct me if I'm mistaken.

Loukas Barmparis, President

Yes, that is correct. We aim to align the installation schedules with maintenance and survey cycles to minimize downtime while achieving our goals for the fleet's environmental compliance.

Climent Molins, Analyst

You have been very active with fleet expansion recently, adding new orders and selective second-hand tonnage. What is your current stance on further acquisitions, and how do you treat the oldest portion of your fleet?

Polys Hajioannou, Chairman and CEO

Regarding fleet expansion, which started in late 2020, we felt the market would gradually recover from the impacts of COVID-19. We are strong believers in the dry bulk market's fundamentals. In terms of expansion: our oldest vessels, built in 2004, remain efficient in their environmental performance, so we intend to retain them for longer. We may choose to selectively dispose of some older vessels, but we do not anticipate any drastic actions in that regard. Our primary focus is on investing in Phase 3 vessels that show significant profitability potential, particularly in the context of evolving regulations.

Loukas Barmparis, President

We've achieved substantial savings by acquiring younger vessels, which allows us to maintain a competitive edge. We'll monitor the market for second-hand opportunities but primarily focus on sustainable investments in our fleet.

Konstantinos Adamopoulos, CFO

The deliveries of our newbuildings currently coincide with a time when the price of fuel is significantly elevated. Our initial investment in these vessels has proven sound even amidst cost fluctuations because we anticipated normalizing expenses while delivering superior consumption efficiency over time.

Climent Molins, Analyst

Thank you for the insights, and congratulations on this quarter.

Polys Hajioannou, Chairman and CEO

Thank you very much.

Operator, Operator

Thank you. I see no further questions in the queue. I would like to turn the call back over to Dr. Loukas Barmparis, President, for closing remarks.

Loukas Barmparis, President

Thank you very much, everyone. We look forward to discussing our financial performance for the third quarter, which will occur around November. Thank you again, and have a nice day.

Operator, Operator

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.