Earnings Call Transcript - SB Q3 2021

Operator, Operator

Thank you for standing by, ladies and gentlemen. And welcome to the Safe Bulkers conference call to discuss the third quarter 2021 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 on the presentation, please contact us at 212-661-7566. I must advise you, 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 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 everyone. I am Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast where we will discuss our financial results for the third quarter of 2021. I am pleased to share that our profitability has improved during this quarter compared to the previous one. As the year comes to a close, we are approaching our targeted leverage, maintaining a strong liquidity position and making important progress on our fleet renewal strategy. We have also started contracting period time charters to enhance the visibility of our future cash flows. We reported $92.5 million in net revenues, $72.4 million of EBITDA, and $0.40 of adjusted earnings per share. We currently have eight new builds on order that are compliant with the Green House Gas EEDI Phase 3 and NOx-Tier III regulations, with early delivery scheduled—two ships in 2022, four in 2023, and two in the first quarter of 2024—at very competitive prices. Additionally, we have sold seven vessels, with two yet to be delivered, and have $37.3 million outstanding in the sales process along with $7.3 million in outstanding debt. We have also acquired four secondhand vessels, one of which is still to be delivered, with $28.1 million outstanding in capital expenditures. We anticipate that by 2024, we will renew approximately one-fourth of our fleet with Phase 3 compliant new builds while simultaneously substituting some older vessels with newer secondhand ones. Regarding our debt situation, we have reduced our debt by $214.3 million from $616.2 million at the end of 2020 to $401.9 million as of October 29, 2021. We are maintaining our financial flexibility with a strong cash position of $92.2 million, $88.9 million in undrawn borrowing capacity under revolving credit facilities, $46.2 million in secured commitments, and $29.3 million available from an expected new credit facility. We believe these actions will significantly enhance our competitiveness. We are committed to long-term success. In our balance sheet analysis, we indicate that current asset values are likely to exceed book values significantly. Let's now discuss the current charter market position. The Capes market year-to-date has significantly outperformed 2020, exhibiting volatility lately due to varying dynamics. It reached a high of $87,000 per day and is currently trading around $27,000 per day, averaging about $53,800 for the year compared to $13,000 in 2020. The Kamsarmax market has also remained strong, trading currently at around $26,000, with a year-to-date average of $29,200 versus $9,500 in the same period last year. The ongoing energy crisis and coal shortages in China, combined with COVID-19 restrictions, are likely to sustain market demand. Next, we examine the pricing trends of certain commodities that signal shifts in shipping activity. During 2021, we observed strong demand for various commodities and a notable price surge that has recently corrected. Iron ore prices have risen sharply due to robust demand from China, followed by a seasonal easing. Coal prices have increased due to stockpile shortages; however, traders are facilitating deferred purchases at lower prices, resulting in a brief rise in rates until they adjust. The anticipated Northern Hemisphere winter and ongoing industrial activity are expected to keep coal demand high. Soybean prices have been stable, typically rising after the first quarter each year. Notably, copper prices remain near five-year highs, supporting ship growth linked to post-pandemic economic recovery plans. Regarding our fleet values and future supply, we have observed noteworthy increases in vessel values lately. For five-year-old Capes, values have jumped over 48% since 2020, while five-year-old Panamaxes have risen approximately 59% since the same period, indicating the overall demand for high-specification vessels. Currently, the order book for Capes is about 4.5% of the existing fleet, and for Panamaxes, it stands at 7.8%, mostly set for delivery in 2022 with limited orders afterward. The shipbuilding market conditions suggest we won't see a significant increase in the order book over the next couple of years due to full shipyards occupied with other orders. Additionally, with upcoming IMO regulations for greenhouse gas emissions, we note that a significant portion of the dry bulk fleet may require retrofitting to comply. The majority of both Capesize and Panamax fleets are already more than ten years old, which will necessitate careful planning regarding fleet renewal. Finally, on fuel pricing, Brent crude has risen to around $85 per barrel. Our investment in exhaust gas cleaning technology enables our ships to utilize high sulfur fuel oil, which presents a revenue opportunity compared to compliant fuels. The current Hi5 price in Singapore suggest favorable margins for scrubber-fitted vessels. In summary, we have seen strong demand for commodities, robust volumes for iron ore, coal, and grain, and anticipate continued pressures in the coal market due to supply shortages related to the energy crisis. The order book remains limited as environmental considerations reduce new orders, while recovery in oil prices may enhance revenue differentials. Aging vessels and regulatory pressures may also influence scrapping activities. Now, I will hand the call over to our CFO, Konstantinos Adamopoulos, for the financial overview.

Konstantinos Adamopoulos, CFO

Thank you, Loukas, and good morning, everyone. I will begin by discussing our chartering performance, as highlighted in slide 14, where our quarterly PCE was $24,427 per day, compared to our quarterly OpEx of $4,608 per day. Moving to slide 15, we provide details on our daily OpEx of $4,608 and our daily G&A of $1,590. The average for both OpEx and G&A in Q3 2021 was $6,198, reflecting our commitment to efficient operations. We believe this is one of the lowest figures in the industry, as it incorporates all our drydocking and pre-delivery costs in OpEx and management fees along with administrative expenses in G&A. Now, looking at our debt profile on slide 16, our repayment schedule as of September 30, 2021, indicates we had $108.6 million in cash and cash equivalents, $88.9 million in undrawn borrowing capacity under our revolving credit facilities, and $46.2 million in secured commitments for loans and sale and leaseback agreements related to two new vessels. Excluding the two vessels committed for sale, we have further borrowing capacity tied to three debt-free vessels and six new builds once they are delivered. On slide 17, we show our debt amortization schedule alongside the scrap value of our fleet, highlighting a manageable debt payment profile for the next two years as we continue to reduce our debt following significant repayments in previous quarters. Now, let's move to slide 18, where we compare our financial highlights for Q3 2021 to the same time last year. Overall, we performed in a stronger charter market during Q3 2021 than in the earlier quarters of this year, combined with lower interest expenses. Our net revenues reached $92.5 million in Q3 2021, up from $51.9 million in the same quarter of 2020, bolstered by earnings from scrubber-fitted vessels and lower voyage expenses. We recorded a time charter equivalent rate of $24,427, significantly higher than the $12,575 from the previous year. Our net income was $55.4 million for Q3 2021, compared to $3.3 million last year. We saw a 78% increase in net revenues to $92.5 million versus $51.9 million in 2020, driven by the higher time charter equivalent rate due to market improvements, along with additional income from our scrubbers. Our daily OpEx fell by 6% to $4,608 from $4,896 in 2020, influenced by a 3% reduction in ownership days from vessel sales, a lack of drydockings in Q3 2021, and higher crew repatriation expenses linked to the pandemic. Excluding drydocking and pre-delivery costs, daily vessel OpEx increased by 3% to $4,608 from $4,459. Our adjusted EBITDA for Q3 2021 rose to $67.7 million, compared to $22.3 million in the same quarter of 2020. Our adjusted EPS for Q3 2021 was $0.40, based on a weighted average of 119.9 million shares, compared to zero in the equivalent period in 2020, from a weighted average of 102.2 million shares. In conclusion, on slide 19, we highlight our quarterly fleet data and average daily indicators relative to last year. We want to stress that the company has a solid cash position of $92.2 million at the end of October 2021, which will give us flexibility as we approach year-end, making significant strides in our fleet renewal strategy and time charter agreements to enhance the visibility of our future cash flows. Our press release offers more detail on our financial and operational results, and we would now like to open the floor for your questions.

Operator, Operator

We will now take the first question from Chris Wetherbee at Citi. Please proceed.

James Monigan, Analyst

James Monigan, on for Chris. Hi guys. Good morning.

Loukas Barmparis, President

Hi. Good morning.

Konstantinos Adamopoulos, CFO

Hi.

James Monigan, Analyst

I just wanted a better understanding of your view around sustainability at the current rate and also vessel values. Just vessel values have obviously come up off the bottom. But just how much of that do you think is driven by the -

Loukas Barmparis, President

Can you go a bit slower?

James Monigan, Analyst

I am sorry guys.

Loukas Barmparis, President

Yes, better.

James Monigan, Analyst

Yes. I just wanted to ask first off about vessel values. They have obviously come up off the bottom which is good to see. But like how much of that do you think is driven by the input prices versus stronger sort of market sentiment around your longer-term outlook? I am just trying to get your understanding of where you think sort of the perception of the long-term -

Loukas Barmparis, President

Yes. The sound is very bad. So we didn't get the question. But anyway, I presume you are asking about the long-term prospects of the markets?

James Monigan, Analyst

And it gets reflected in the vessel values or reflects just essentially commodity pricing in the vessel value at the moment.

Loukas Barmparis, President

Look, the commodity prices are only recent. We see that there is demand for commodities because recently we have seen drops in coal prices with Chinese government intervention to cool down that part of the market. And iron ore price as well have slowed down in the last two months because of reducing the steel output for environmental reasons before the Olympics. I think overall the demand for commodities, especially the minor ones is very healthy. And we see it from the rates that are being enjoyed by this smaller size of vessels like Handysize and Supramaxes as well as Panamaxes that the demand is very strong. So we believe commodities, including oil, will be kept at strong levels. And most likely, prices will also increase further.

James Monigan, Analyst

Got it. But just given the strength of the market, it seems that the vessel values aren't necessarily reflecting -

Loukas Barmparis, President

Please, sorry. There is an issue with your sound which makes it very difficult. So please speak slowly.

James Monigan, Analyst

I will turn the call. I will follow-up separately and just turn the call over so that someone else can ask questions given the difficulty.

Operator, Operator

Thank you. We will move to the next question. And the next is from the line of Magnus Fyhr from H.C. Wainwright. Please go ahead.

Magnus Fyhr, Analyst

Yes. Good afternoon. This is Magnus Fyhr from H.C. Wainwright. Just you secured some time charters here in the last year and also you have been pretty active in the S&P market. With the current volatility and some uncertainty going forward, do you see more opportunities for you to potentially secure time charters or make acquisitions? Or do you think the volatility has created less opportunities?

Loukas Barmparis, President

Look, the last couple of weeks, the market has been very strong lately. We have seen big volatility which also resulted from big increase of Capesize rates approaching $100,000 a day. So there has been a correction that is looking huge. Of course, if we would exclude these extra $30,000, $40,000 achieved on the Capes for two or three weeks in the spot market, the rest of the market, we can say that has been fairly stable because we still enjoy after the correction rates of around $30,000 a day on all classes of vessels. So for us, this is a healthy market and it is good that we have a correction and we call it a correction when the market reaches $30,000 a day. So I don't expect ship prices to be affected by this volatility because owners of vessels, they are not going to let them go cheaply because they have seen what earnings you can make in the last nine months. And right now we see other sectors which have very low freight rates that ship prices are going up for many reasons. One of them is the steel prices and another is expectations that the market will change in other sectors. We have seen what is happening in the container market. Also, dry bulk market is really healthy and very strong. I don't expect surprises to correct to give us opportunities to step in and buy vessels like in the first quarter of 2021. So I guess it may not go higher but I don't expect them to go down.

Magnus Fyhr, Analyst

Okay. So from a capital allocation standpoint, your balance sheet looks very good. You are going to generate a lot of cash flow here at current market rates. What is the priority going forward? Reduce debt, potentially buy back stock, or some kind of dividend to shareholders?

Konstantinos Adamopoulos, CFO

If we see on page 17, we put the projection of the debt for the end of the year and for the following couple of years which shows exactly that our deleveraging policy will almost be ended by the end of the year. And then we will go to the formal principal repayments. So the debt will be about $350 million next year compared to the scrubbed value of the vessels which is $378 million according to the pricing today of the fleet. This makes us feel very comfortable about the leverage of the company because the debt that we have basically reflects what is the sale value per vessel. Having done that and also having completed the renewal strategy in terms of ordering, what we have ordered most of what we could do. In terms of secondhand vessels, there might be some opportunities still. However, we have done the big volume. I think in terms of CapEx and in terms of leverage, priorities are becoming lower. So the new cash that is generated in the future, I think will give opportunities in the next year also to be able to reward our shareholders. However, we need to point out two things. We want to be building our cash flows which can be established through time charter and we want the markets to continue to be at comfortable levels as it is, let's say, today.

Magnus Fyhr, Analyst

Okay. So you have done a couple of three-year charters. Is there an appetite there for more of those from your side and from the charter side?

Loukas Barmparis, President

Look, these charters were available in early October when the freight market was hitting levels of $50,000, $60,000 per day on the Capes. So charters came along with these proposals with these charters. We considered it prudent to secure this business at that time. So right now, we don't see three-year charters available because of the recent volatility of the last weeks. But I am sure that this will come back in the market when things settle down. As I said before, the spot market of around $30,000 in all sectors is not an uncertain market. And we wish this stays for the whole of next year.

Magnus Fyhr, Analyst

Yes. I hope so too. That's all I had. Thanks for answering my questions.

Loukas Barmparis, President

Thank you.

Konstantinos Adamopoulos, CFO

Thank you.

Operator, Operator

Thank you. We will now take the next question. This is from the line of Randy Giveans from Jeffries. Please go ahead.

Randy Giveans, Analyst

Hello gentlemen. How is it going?

Loukas Barmparis, President

Hi. I am fine.

Randy Giveans, Analyst

All right. So I guess just following up on some of the recent refinancings, what is now your kind of expected interest expense and maybe weighted average interest rate for next year and then your debt amortization for 2022?

Konstantinos Adamopoulos, CFO

Debt amortization, I think, we are showing on slide number 16. Basically, we have very low interest rates. As you know, we have kept it short at very good levels, almost 85% of all of our debt. So we are immune against a probable increase of interest rates. We have 84% on telematics maturing some of that up to 2026. So I think that the numbers are very comfortable for next year. The principal repayment is only $35 million which is increased in 2023 to $63 million. So we understand that these are very comfortable numbers for the company. So the exact calculation, we can send it to you after this call. On page 16, if you see page 16, you can follow-up the numbers.

Randy Giveans, Analyst

Got it. Okay. And then just for the remainder of the ATM, I think there's $28.5 million remaining. Do you plan on using this imminently? And how is that decision made? Is it based on a kind of NAV basis? What would be the reason to or not to further execute that ATM?

Konstantinos Adamopoulos, CFO

Look, we execute the ATM from time to time. We don’t necessarily do it continuously or at any price. So you may see us coming out in the market and selling some portion. We have started the ATM last year and this continuation figure is a substantial amount of, as you said, about $25 million which we have not executed. We don’t know exactly, based on the market conditions and the pricing of the stock and how well we perform, because we really have the cash liquidity and cash reserve. And we don’t feel in a rush to execute the ATM at any price.

Randy Giveans, Analyst

Got it. Well, that's it for me. Thanks so much.

Loukas Barmparis, President

Thank you.

Operator, Operator

Thank you. There are no further questions coming through. We have one question, but it has been withdrawn. In that case, there are no further questions, and I will hand back to the speakers now. Thank you.

Loukas Barmparis, President

Thank you to all. And we are very happy to discuss again with you today. And we are looking forward to discuss again once more in our next quarter for our results. Thank you and have a nice day.

Operator, Operator

Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.