Earnings Call Transcript - SB Q4 2020

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers' Conference Call to discuss the fourth quarter 2020 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. 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. 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 for drybulk vessels, 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 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 pass the floor to Dr. Barmparis. Please go ahead, sir.

Loukas Barmparis, President

Good morning. I am Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the fourth quarter of 2020. Starting our presentation, in slide three, 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. To that end, Safe Bulkers has become a signatory of the Neptune Declaration. We have joined this global coalition, signed by more than 600 companies and organizations in the shipping industry, to share initiatives and actions combatting the crew change crisis and repatriation of our seafarers. We are committed to the safety and wellbeing of our seafarers, while ensuring a stronger maritime supply chain, and the uninterrupted flow of commerce around the world. As a general comment for 2020, despite the negative effect of COVID-19, the company is maintaining a strong liquidity position that provides us with flexibility. It is following a plan which, in the first place, is based on our high-quality Japanese fleet, 32 out of 42 vessels, with built-in advantages of environmental footprint compared to the global drybulk fleet, and further, is aiming to upgrade and gradually renew our fleet with certain views of our forthcoming environmental changes, and sensibly deleverage our balances, targeting to create value for our shareholders, and be a leading quality drybulk company. Management alignment with shareholding and the performance and trust built over the years are of paramount importance in the success of this plan. Moving on to slide five, in the Industry Section, let us analyze the market conditions. Recent COVID vaccine announcements brought optimism in the global trade markets, together with the underlying demand. The graphs present the development of the charter rates for Capes and Kamsarmaxes as published by the Baltic Exchange. Both Capes and Panamaxes have recovered after the low first half of 2020, which was mainly due to the COVID-19 outbreak. For Kamsarmaxes, the market has been trading above $10,000 since June 2020, and more impressively, is basically trading in the region of $17,000 or more, which is exceptionally strong given the seasonally low market during the first quarter of each year. Similarly, for Capes, the market peaked three times after June 2020, with the most recent in January 2021, when it reached $25,000 per day. Presently, the market is lower and trading at about $11,000 for Capes. However, in the case of FFAs, market levels are closer to $20,000 for the remaining of the year. The resumption of economic activity and the healthy volumes of iron ore, coal, and grain are the major drivers of these sets on raised. COVID-19 is still a concern, although the acceleration of vaccination will likely control this pandemic. Turning to slide number six, we present certain aspects of Chinese activity, which are indicators of the charter market conditions. The iron ore imports of China have been the driving force of the Cape market, and that during the course of 2020, were up 9.3% year-on-year despite finishing lower towards the end of the year. Regarding the thermal coal imports, as shown in the middle graph, we show a big surge of imports during the end of the year, a recorded increase of 1.4% for the whole calendar year of 2020. The high demand for thermal coal, especially towards the winter months, has been reflected in the Panamax and Kamsarmax charter market. It is important to analyze the drivers of this big surge in the month for the thermal coal. As presented at the bottom graph, we see that the power generation in Mainland China, in December 2020, jumped by 13.4% month-on-month and by 11.2% year-on-year. Most importantly, the total China power generation was up 4% year-on-year, reflecting the overall economic development. The demand for Panamax and Kamsarmax is expected to remain firm as we are entering towards the grain season of exports from South America. The grain harvest of this year is expected to be remarkably high and essentially the demand for Panamax and Kamsarmax vessels is also expected to be high. Having analyzed the three important drivers of the demand, let's step now into slide seven, where we presented the Panamax order book as a percent of the existing fleet for the last 25 years. The order book for both Capes and Panamaxes is the lowest since 2002. In combination with the 20% of the world fleet being over 15 years of age, moving on to slide eight, we see that for the remainder of 2021, the new orders are above 3% of the existing fleet of Capes, and 3.7% for the Panamax and Kamsarmaxes. Until 2021, the orders remain minimal. Taking into account the aging of the fleet, it is highly possible that scrapping activity will increase. It is also important to note that the capacity is presented covered with orders from other sectors, such as container ships and tankers. On top of that, the ongoing environmental discussions for emissions and decarbonization certainly do not encourage new orders. Turning into slide nine, we present the latest developments on the fuel markets. During 2020, due to the pandemic and the worldwide lockdown, the demand for distillate products dropped dramatically. Towards the end of 2020 and year-to-date, there has been gradual reopening of the economies, which in turn has resulted in the demand for oil and distillate products, leading to higher prices. The futures market of bunkers indicate a sustainable spread differential between the IMO 2020 compliant fuel, very low sulfur fuel oil, and the 3.5% high sulfur fuel oil, the so-called Hi5. As shown in the graph, and according to ICE Report Center, the spot price for the Hi5 is in the region of $130 per metric ton and for the remaining of calendar '21, '22, and '23 is trading above $120. This spread differential, of above $120 per metric ton for a Post-Panamax vessel equipped with a scrubber, could be translated to a good gain of about $900,000 per year, or about $2,500 per day. Let me remind you that our company invested in scrubbers and has already retrofitted scrubbers to half of our fleet. The recovery of global economies, the restoration of mobility, and the recovery of crude oil prices may push this Hi5 differential to pre-COVID-19 levels. Let me summarize certain key market takeaways in slide 10. We have experienced an exceptionally strong start to 2021, with healthy volumes of iron ore, coal, and grain trade, as the recent COVID vaccine use has brought optimism in global markets, despite the trade tensions between China and Australia. The global lockdown has adversely affected demand for oil and distillate fuels. We may have a slow oil demand rebound as global lockdowns ease, based on mobility which eventually may lead to the recovery of Brent prices and lead to even wider Hi5 spread differentials. We have the lowest order book since 2002, as the ongoing decarbonization discussions do not favor new orders. The aging of the fleet and the increased environmental restrictions for emissions may enhance the scrapping activity. And lastly, only a few shipyards have developed new environmental efficient vessels. In slide 11, we present our fleet growth over the last years. In the context of our fleet renewal strategy, we have entered into agreements to acquire two Japanese-built top design ships, which are designed to comply with the Energy Efficiency Design Index Phase 3 and the Tier 3 in relation to NOx emissions, with scheduled delivery dates in the first half of 2022 and the third quarter of 2022. Presently, only a few shipyards have developed these new environmentally efficient designs. At the same time, we have agreed to sell two of our older vessels, built in 2003 and 2004, replacing one immediately with a 2011-built Japanese Panamax at a modest price differential. It is important to note that our growth is gradual. The government regulations and several orders have distorted the supply side. At the same time, the government has skipped the rate of growth even at loss-making markets and has invested always in the forefront of the technology ahead of the competition. Turning to slide 12, I would like to focus on our fleet mix and point out that 75% of our fleet is Japanese versus 46% of the world fleet, providing us with a lower environmental footprint, overall lean operations, and cost advantages. Furthermore, as seen in slide 13, currently only a small number of purchases compared to the world's drybulk fleet is built with the EEDI index. We believe that we can identify less efficient vessels that are not built in Japan, and older designs before 2010. We expect that such vessels will face restrictions, incurring additional costs of carbon emission taxes, making them less attractive in the following years. As presented in Slide 14, Safe Bulkers has made significant investments in new technologies and modern designs, totaling $67.2 million as of December 31, 2020. We have already retrofitted scrubber violations with an additional scrubber order placed in 2021, and 30 of our vessels are already equipped with ballast water treatment systems. At the same time, as part of our fleet renewal strategy, we have placed two orders for greenhouse gas EEDI Phase 3 newbuilds for 2022. Now let's move to slide 16, where we have plotted a BPI index as a market performance indicator. The correlation history has been very strong. In 2019, the correlation weakened due to trade wars, and during 2020 we saw fluctuations due to the COVID pandemic. At present, we believe levels are relatively lower than the chartering market performance. Now let's summarize our key points for Safe Bulkers. We are a major player in the drybulk industry with a history of 16 years of uninterrupted presence in the market. Our management team has more than 30 years of experience and continuous presence in the drybulk industry. We are here for the long run. We preserve our liquidity which provides financial flexibility, security in turbulence, and opportunistic asset acquisitions. Our stock market exposure allows expansion of profits under improving charter market conditions. We have locked in 38% of our fleet days chartered under period end charters, 68% of which are index leased, enjoying the improving charter market conditions. About 75% of our fleet is Japanese-built, providing us with a lower environmental footprint, lean operations, and cost advantages from scrubber-fitted vessels based on the increased fuel spread differential. We have actively positioned for environmental preservation as part of our competitive strategy by investing more than $65 million in 2019 and 2020, retrofitting 50% of our fleet with exhaust gas cleaning devices, which provide us with extra income capability in a rising oil price environment. Our management team is fully aligned with shareholders. We have demonstrated our twofold fleet renewal strategy. On one hand, looking towards 2030, we are ordering greenhouse gas EEDI Phase 3 NOx-Tier 3 Japanese newbuilds, and on the other hand, capturing the present market by opportunistic secondhand acquisitions replacing older vessels at a modest price differential. At the same time, we continue the deleveraging of the company. Now, I will pass the floor to our CFO Konstantinos Adamopoulos for the analysis of our financial results.

Konstantinos Adamopoulos, CFO

Thank you, Loukas, and good morning to all. Let me start with our chartering performance in slide 18, where we present our quarterly time charter equivalent, which stood at $12,319 versus our quarterly OpEx for the same period which stood at $3,978. Moving on to slide 19, we present our quarterly daily OpEx versus our quarterly daily G&A, which stood at $1,469. The aggregate figure for both OpEx and G&A for the last quarter of 2020 was $5,447 demonstrating our focus on operations. We believe that this number for both OpEx and G&A, when comparing apples-to-apples, is one of the industry's lowest, if not the lowest, given the fact that we included in this figure delivery expenses and also in our G&A, our management fees, directors and officers compensation, and all expenses related to the administration of our company as a public entity. Moving on to our debt profile, as seen in slide 20, the debt prepayment schedule as of the end of the year for 2020 shows our liquidity at the end of the year stood at $171.2 million consisting of cash and one-time deposits, restricted cash, contracted undrawn capacity and the revolving credit facility and secured commitments including sale and leaseback financing. In slide 21, focusing on our liquidity versus our CapEx commitments, as of February 12, we had liquidity of $184.3 million, which included cash and cash equivalents, time deposits, restricted cash, funds available after the sale and leaseback agreements, new term loan agreements and the revolving credit facility. Our aggregate remaining CapEx for the acquisition of the two newbuilds, as well as the secondhand vessel, were $64 million, of which $12.6 million is due in 2021 and the remaining $51.4 million in 2022. In slide 22, we present our debt amortization schedule versus the scrap value of our fleet. We have a small debt repayment profile for the next two years, gradually deleveraging our company. Let's now move to slide 23 with our quarterly financial highlights for the fourth quarter of 2020 compared to the same period of 2019. As a general note, during the fourth quarter of 2020, we operated in a relatively weaker target market environment with lower operating and interest expenses compared to the same period in 2019, while our revenues were partly supported by the additional earnings from scrubber fitted vessels, the operation of one additional vessel which we took delivery back in April of 2020, and also from reduced voyage expenses. The net effect is reflected in our TCE of $12,319 for the fourth quarter of 2020 compared to $13,770 during the same period in 2019. Net revenues decreased by 2% from $53.2 million to $52.2 million, mainly due to the TCE being lower because of weaker market, partially offset by the additional revenues earned by our scrubber fitted vessels and the additional vessel delivered in 2020. Daily vessel operating expenses decreased by 22% to $3,978 compared to $5,103 for the same period in 2019. This decrease is associated with reduced drydockings and provisional services and increased COVID-related expenses due to the COVID pandemic. Daily operating expenses excluding drydocking and pre-delivery expenses also decreased by 13% to $3,955 for the fourth quarter of 2020 compared to $4,540 for the same period in 2019. Our adjusted EBITDA for the fourth quarter of 2020 increased to $26.3 million compared to $23.1 million for the same period in 2019. Our adjusted earnings per share for the fourth quarter of 2020 was $0.04 calculated on a weighted average of 100.2 million shares compared to $0.01 in '19, calculated on a net weighted average number of 102.6 million shares. On the table of slide 24, we provide an estimation of the expected downtime in Q4 2020 and Q1 2021 in order to assist analysts with their projections. Turning our presentation to slide 25, we present our quarterly fleet data and average daily indicators compared to the same period last year. We would like to emphasize that in this period, we have worked extensively despite the tough market conditions. We have concluded the order of two Japanese modern design and technologically advanced newbuilds, with delivery scheduled in the first half and third quarter of 2020. We believe that impacts on our liquidity by agreeing to 90% financing for the sale and leaseback agreement for one, and by committing term loan facility for the other one. We have sold two of our oldest vessels built in 2003 and 2004 at attractive prices, and immediately agreed to the acquisition of a 2011 Japanese-built vessel to replace two of our vessels, with limited impact on our liquidity. We have a strong balance sheet with comfortable leverage, a smooth debt profile for this and the next year, and a liquidity position of $184.3 million as of February 12. We took measures to protect our seafarers and our employees' health and wellbeing, and kept all of our vessels sailing, continuously servicing our charters. Once again, we would like to thank our seafarers for their commitment and dedication throughout this tough period, ensuring both their wellbeing and the wellbeing of our seamen. We are now open to take your questions.

Operator, Operator

Thank you very much. Our first question today is from Randy Giveans. Please go ahead.

Randy Giveans, Analyst

Howdy, gentlemen, how is it going?

Polys Hajioannou, CEO

Yes, hi, Randy.

Randy Giveans, Analyst

Hey. I guess a few questions, looking at first, the agreement for the acquisition of the 2011-built or the Panamax there. What are the thoughts behind that in terms of the ages, and also comparing that with the recent announcement for the two newbuilds or additional vessels on the water? So kind of comparing and contrasting a 10-year-old vessel and newbuilds?

Polys Hajioannou, CEO

Yes, we acquired a 10-year-old vessel when we sold two of our older ships from 2003 and 2004. At a slight premium, we were able to purchase an 11-built vessel before prices escalated, adjusting the age factor by eight years. The new builds represent long-term investments in compliance with new regulations and enhanced energy efficiency, scheduled for delivery in the middle of the second and third quarter of 2022. This timeline allows us to secure favorable delivery periods since current deliveries are booked until 2023. Our strategy focuses on two key aspects: selling older ships and replacing them with younger vessels, as well as integrating new technology in our fleet.

Randy Giveans, Analyst

Got it, okay. And then I guess also looking at the repurchasing of the Series A, right, what is the kind of thought process around that, and the savings with that? Would you look to maybe start a dividend or what are your thoughts around that incremental capital that's not being paid out now on the Series A?

Konstantinos Adamopoulos, CFO

Look, that was a financing for the newbuild that Pedhoulas Cedrus, which was done three years ago. So we thought it was the time to call it to redeem it. In its place, we have refinanced the vessel through a sale and leaseback transaction, increasing also our liquidity. As a result, this aligns with our strategy to increase our liquidity and be more flexible in the market. Now, having the strategy, we have substantial liquidity that provides us flexibility for other acquisitions, for future orders, and whatever comes.

Randy Giveans, Analyst

Got it. And then in terms of maybe potential dividends at some point, are we still maybe too early in the appraisal?

Konstantinos Adamopoulos, CFO

Yes, in case of the potential dividend, there are two real truths. First of all, the management has about 50% of the company, so the basic target of the family is to create value for shareholders and to be able to restore the dividend. The second point is that, we have just come out of several years of bad markets, and even last year, while it was profitable at the end, was overall not profitable. Thus, we need to see the development of the market, in order to enable a more sustainable good market before considering additional dividends, which ultimately is the target for anyone investing in any company, including our management.

Polys Hajioannou, CEO

Basically, the fourth quarter of 2020 was the first profitable quarter after a very challenging first half of 2020 and a breakeven quarter in Q3. The company has seen both its profits and its stock price bouncing back following the positive shift in freight rates. We are quickly adjusting to the new environment, turning the losses of COVID-19 into profits. If things develop as we expect in 2021, we will have more profitable quarters, making it more likely to consider how we distribute funds.

Randy Giveans, Analyst

Yes, that completely makes sense. We're expecting many more profitable quarters, so we can have some patience on the dividend. Thanks so much.

Polys Hajioannou, CEO

Thank you.

Konstantinos Adamopoulos, CFO

Thank you.

Operator, Operator

The next question is from Ben Nolan from Stifel. Please go ahead.

Frank Galanti, Analyst

Yes, hi. This is Frank Galanti on for Ben. For my first question, I just wanted to ask, given the sales and the buyback between the three transactions and then the ordering of the new vessel, how much dry powder do you think you have in order to grow the fleet without tapping the ATM?

Polys Hajioannou, CEO

There is some dry powder, and there is more to be created by possibly selling a couple of more of the older ships late in 2021 and replacing them with younger vessels. However, the most important strategy is to assess how the profits from Q4 will develop, as the market is improving. As freight rates start increasing meaningfully in the first two months of this year, we believe that our profits will strengthen. But we need to bear in mind that the company also wants to deleverage because that results in long-term sustainable profits and dividends for the shareholders, not just short-term dividends that might stop when the market changes. Therefore, we want to both deleverage as we progress, as the market increases by selling the older ships and replacing them with newer ones, keeping it debt-free. The new acquisitions aim to maintain that approach, contributing to earnings just like the two older ships used to. We are feeling optimistic about the current situation. The drybulk market is recovering from a very difficult position. We have survived the depression of 2015 and 2016, and we also faced challenges due to trade wars and the pandemic in 2020. We are now witnessing a strong recovery phase as there's an order book at a historically low level. Currently, the order book is below 6%, which we haven't seen for years. This is crucial since we usually had order books of 45% to 50% during previous commodity booms. The recovery and the market conditions as experienced now are favorable, and if we maintain this trajectory, we can expect high profitability for vessels prepared for this market phase.

Konstantinos Adamopoulos, CFO

If I may add, if you consider slide 21, our liquidity reached about $94 million against our capital expense requirements of about $60 million. It's important to note that for each $1,000 increase in the time charter equivalent, the profit of the company rises by about $15 million. Therefore, we anticipate that liquidity will continue to increase in the coming quarters.

Frank Galanti, Analyst

Okay, great. That's really helpful. Then I guess I want to ask about the Lake Despina, the Capesize that had the contract terminated early. Can you give us a bit more context on why that transaction was completed and if you'd be interested in doing the same for other vessels?

Polys Hajioannou, CEO

Look, the Lake Despina was subject to a washout agreement with the charter of the vessel on their request. They had to pay the differential between the market at the time and what was the charter rate for the ship. The ship had around three years remaining on her charter at $24,800 a day. We agreed on a compensation of $8 million, which we have already received, and the ship has been redelivered. We believe it’s more favorable to keep this ship due to its premium status in the spot market and to fix it on the index link, similar to what we have done for a significant part of our period vessels. This was a positive decision for us and for our charterers, who have performed outstandingly for seven years and compensated us well. As for other contracts, we do not expect similar requests as we have solid long-term charters with good counterparties who have invested in environmental measures for their vessels. We have confidence in our partnerships and long history with these companies.

Frank Galanti, Analyst

Okay, great. Thanks very much.

Polys Hajioannou, CEO

Thank you.

Operator, Operator

There are no further questions coming through. I will now hand back to management for closing remarks. Thank you.

Polys Hajioannou, CEO

Thank you very much for attending this presentation and our quarter results. We look forward to discussing with you in about three months for our first quarter results. Thank you to all, and have a nice day.

Operator, Operator

Thank you very much. Ladies and gentlemen, that does conclude the call. Thank you everyone for joining. You may now disconnect.