Safe Bulkers - Q1 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call to discuss the first quarter 2023 financial results. Today we have with us Mr. Polys Hajioannou, Chairman and Chief Executive Officer, Dr. Loukas Barmparis, President, and Mr. Konstantinos Adamopoulos, Chief Financial Officer of the company. At this time, all participants are in listen only mode. There will be a presentation followed by a question-and-answer session.

At which time, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Following this 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 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 expect, 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 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. Now I'll pass the floor to Dr. Barmparis. Please go ahead, sir.

Loukas Barmparis (President)

Good morning. I'm Loukas Barmparis, President of Safe Bulkers. Welcome to our conference call and webcast to discuss the financial results for the first quarter of 2023. During the first quarter of 2023, we operated in a relatively weak market compared to the previous year. Having comfortable liquidity and leverage, we terminated the ATM Program which was opted in June, September 2021. Have continued our buyback program, targeting 10 million shares aggregate repurchase and declared a dividend of $0.05 per share of common stock.

Our balance sheet is strong with significant cash and developed capacity. Our capital requirements are substantially covered by our contracted future earnings and our capital structure is conservative. Let's start with market update in slide three. Presents on the graphs the current status of the market.

Rates have recovered from the recent lows and dry bulk freight markets overall may recover with China's easing zero-COVID policy and newly active supply in new builds. Freight congestion has declined with lower import demand and the easing of supply chain issues. In the Panamax, the prevailing commodities market is likely to provide support to the current market throughout the second half of this year. It's worth noting that all our rates are clear charter at an average daily rate of $24,000.

Moving on slide four, we present the development of our CRB Commodity Index, reflecting the basic commodity future features of future prices. For example, energy, agriculture, precious metals and industrial metals, which represent leading indicators for shipping.

Although the index currently stands at high levels, commodity prices declined sharply over the past six months, following the post-record high levels of the last year of 2022. After rising by 45% in 2022, commodity prices are projected to fall by 21% in 2023. We continue to weigh the rise in federal bank interest rates as policy makers aim to fight inflation and Russian war consequences, the policy which is expected to affect the global output.

The early forecast of IMF set the expected growth of global GDP to 2.8% for 2023 as global inflation projection for 2023 stands at 7% due to the war-induced broadening price pressures on food and energy prices and because of lingering supply demand imbalances.

In this environment, the contracted global dry bulk demand growth is expected to increase only by 2% in 2023, with a forecasted drop in iron ore by 1% as construction activity remains muted and an expected drop in coal import demand as a result of higher domestic mining in India and China. During the period of this outlook, the demand remains positive as growth affected the rate and made targets in major exporting countries like USA and Argentina.

In China, there are no current projection growth for 2023 set at 5.2%, with major global dry bulk as still others. GDP growth regarded to 4.5% year-on-year in first quarter 2023 from 2.9% in fourth quarter 2022.

This was a steady recovery as sales contributed by 3.1% growth, where our industry contribution accounted for 1.2%. In March, the non-manufacturing PMI rose to 58.2, the highest level in over a decade, and the manufacturing PMI to 51.9. Metal prices fell by 3% in March in the search of a less metal-intensive recovery in China. India's emergence and expectations improved again in IMF's April production to 5.9%, increasing GDP for 2023.

Global investments in renewable electricity capacity will continue to rise. The global economy's short-term progress, critically on the course of the war in Ukraine and the pursuit of health pandemic and related supply-side disruptions, for example, in China.

The World Bank Commodity Price Index declined by 32% after World Bank early 2022 projection, with prices at 31% rise in raw commodities for the whole 2023. On the supply side, as we move to slide 5, the total dry bulk order book stands at single digits. For this reason, we remain cautiously optimistic about the medium-term prospects of the trade market.

Furthermore, about 25% of the medium-sized fleet is older than 15 years, but scrapping is expected to accelerate as a combined effect of the fleet aging and environmental regulations kicking in from the first of January 2023. It is worth noting that Japanese ships have more efficient design compared to Chinese.

8% of our fleet is Japanese-built, versus 40% of the global fleet, which means that our fleet consists of more efficient vessels compared to market average and can compete better in the new environment. Furthermore, we are one of the very low, very few global companies with such an extensive order book ahead of our peers.

Our expansion intention remains to better renew our fleet and further elevation operational and environmental performance. As we move to slide six, the majority of global fleet is out of age. Only about 10% of the dry bulk fleet is expected to probably be exiled without requiring modification or upgrades.

That is holding today, 44 vessels has 12 eco ships built after 2015, the fleet is almost comprised of phase III newbuilds, seven of which will have been delivered by the end of 2023, at the same time enable ongoing environmental upgrade program, increasing energy efficiency and reducing CO2 emissions in our fleet, completing upgrades in 20 vessels by the end of 2023. Furthermore, Seabird is using combined time by a year for monitoring the development of alternative fuels. Continuing our market view, slide seven.

During 2023, there has been an increased industry-wide volatility driven by geopolitical disruptions and high environmental policies. In today's environmental regulations, appearance becomes increasingly important in dry bulk trade, as a result, demand for technological efficiency creates opportunities for those willing to invest as Seabird has done.

Such environmental efficient fleets may affect company valuations and lead to good year market with differential demand capacity for such vessels. The combined effect of the aging of the fleet, the low order book, and the new regulations will favor fleets with more efficient Japanese vessels and vessels delivered after 2015, limiting the vessel supply and balancing the market even further. In this market of increased environmental-based competition, let us move on to slide eight, second of our key characteristics which differentiate us from our peers.

The strong alignment of interests with 40% managed in owners' participation, the low leverage of 33%, the comfortable liquidity and compact leverage, our track record, the creation of intrinsic value through an extensive fleet expansion program with 12 phase III newbuilds, and environmental upgrading our existing fleet, including installation of new scrubbers.

All 44 vessels in our fleet have Ballast Water Treatment Systems. All of our ships will have scrubbers by the beginning of 2024, and 20 vessels will be environmentally upgraded by the end of this year. We are expecting delivery of three phase III newbuilds already, which are the best performing vessels on their deadweight in the dry bulk market globally. We intend to compete on the base of lower fuel consumption and environmental performance in the following years. Let's now focus on our liquidity, our cash flows, and our capital structure as per moving slide nine.

We are maintaining a comfortable leverage of 43%. Our debt of $430.2 million is comparable to our fleet scrap value, which presently is $389.4 million, although our debt is 10.6 years old. Our weighted average interest rate stood at 4.63% for our consolidated debt, with a portion of EUR 100 million fixed at a 2.95 coupon in an issued five-year bond.

We have paid $72.8 million for our capital expense requirements in relation to our order book of nine newbuilds, and the remaining capital expenses are $234.5 million net of it. Our liquidity and capital ratios stand at $359.9 million, $355.9 million, which together with a contract revenue of $392.1 million provides liquidity to our balance sheet and capital allocation. Furthermore, we have additional borrowing capacity in relation to seven existing and in-tempo vessels and five newbuilds upon delivery.

Moving to our dividend policy in slide 10, we declared a dividend of $0.05 per share over the last six consecutive quarters, rewarding our shareholders. At the same time, we have an active common share buyback program under which we have already repurchased 8.3 million shares as of May 2023 out of a total of 10 million shares currently authorized under the repurchase program. Furthermore, we have terminated the ATM program under which the last sale had occurred in September 2021.

Central point in this uncertainty of the capital markets and the world economy is that we continue to direct a portion of our free cash flows to counter our unique among peers newbuild program that will provide us with competitive advantage in terms of fuel consumption and environmental performance while maintaining our leverage at very, really low levels. Now let me summarize the investment rationale of Safe Bulkers in slide 11.

We believe that Safe Bulkers' strong fundamentals offer financial flexibility to reflect market balances and pursue opportunities. Safe Bulkers with its order book is among those companies navigating environmental challenges of the energy transition with the aim to drive back risk and tackle the global authorities by utilizing the integrated qualities of its fleet and the efficiencies of its large-scale environmental upgrading program. In parallel with the company's expansion, we offer a meaningful dividend. We believe we are positioned for the long run with an environmental-based advantage.

With our strong balances, our liquidity leverage at comparable levels to fleet scrap value, secure cash flows from reliable charter parties, ESG-focused fleet expansion with 12 to 13 newbuilds, a total of our peer competition and the environmental regulations, a company experienced management team is well-positioned against market challenges and stands ready to take advantage of market opportunities. Let me pass to the floor to our CFO, Konstantinos Adamopoulos, for our financial overview.

Konstantinos Adamopoulos (CFO)

Thank you, Loukas. Good morning to all. As a general note, during this quarter, we operated in a gradually weakening charter market environment compared to the same period in 2022, with decreased revenues due to lower hires, increased earnings from charter-fixed vessels, increased operating expenses, and higher interest expenses due to increased interest rates.

In slide 12, we present our strong chartering performance, an example of our management alignment. We earned a Time Charter Equivalent of $2,760 compared to $21,352 during the same period in 2022. Net income for the first quarter of 2023 is $19.3 million compared to net income of $36.4 million during the same period in 2022. Our daily running expenses stood at $5,550 versus $5,732 last year, while our daily running expenses excluding dry docking and pre-delivery expenses stood at $5,133 versus $4,922 for the first quarter of 2022.

Our all-in OPEX and G&A for first quarter 2023, which we believe is one of the most competitive compared to our peers, stood at $10,033. We note that this includes all our dry docking and pre-delivery expenses as well as all our director and officers' compensation. Moving on to slide 13, we have quarterly financial highlights for the first quarter of 2023 compared to the same period in 2022. Adjusted EBITDA for the first quarter of 2023 stood at $33.1 million compared to $46.1 million for the same period in 2022.

Adjusted earnings per share for the first quarter of 2023 was $0.10, calculated on a weighted average number of 118.4 million shares, compared to $0.24 during the same period in 2022, calculated on a weighted average number of 121.6 million shares. With the end of slide 15, our quarterly operational highlights for the first quarter of 2023 compared to the same period of 2022. We operated 43.83 vessels on average, earning an average Time Charter Equivalent of $15,000,760 compared to 39.54 vessels, earning an average Time Charter Equivalent of $21,364 during the same period in 2022.

On slide 15, we present our low breakeven point for first quarter 2023, which we believe is one of the lowest in the industry. The global economy is experiencing multiple challenges. Inflation is higher than seen in several decades, tightening financial conditions in most regions, commercial continued war in Ukraine also weighs heavily on the market outlook. Thus, our main focus is lean operations in this inflationary environment.

Based on a satisfactory financial performance, the company's board of directors declared a $0.05 dividend per common share. We would like to emphasize that the company is maintaining a healthy cash position of about $90.7 million as of May 2023. Another $119 million in revolving credit facilities. An additional $148.2 million in available borrowing capacity.

Combined liquidity and capital resources of $351 billion that provides us with significant flexibility and firepower. Additionally, we have contracted revenue from our non-cancelable spot and time charter contracts in excess of $285 million, including commissions and excluding standard revenue from certain vessels, as well as additional borrowing capacity in relation to seven

unencumbered existing vessels and five newbuilds upon their delivery. We believe that our strong liquidity and relatively low leverage will enable us the flexibility of our capital structure, which fundamentally while fully reloading ourselves and taking advantage of possible opportunities that may arise. Thank you. We are now ready for the Q&A session.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question today, please press star one from your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star two if you would like to withdraw your question from the queue.

For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Once again, that's star one. Thank you. Thank you. Our first question is from the line of Christian Wetherbee with Citigroup. Please proceed with your questions.

Christian Wetherbee (Senior Research Analyst)

Yeah. Thanks. Good afternoon, guys. Maybe I can start on the fleet and curious how you guys think about fleet opportunities from here. Obviously, a pretty tight order book relative to what we've seen over, you know, the past. I'm curious how you guys think about approaching it. Are there going to be new building opportunities for you that you'd like to execute on at this point? Does secondhand make more sense or, you know, given where vessel values, does it make sense just kind of to stand pat and sort of see how things develop over time? Just kind of curious how you're thinking about that right now.

Loukas Barmparis (President)

Yes. I should say... [crosstalk] I can certainly have asked about newbuild, I guess, whether there are such opportunities where the people are.

Christian Wetherbee (Senior Research Analyst)

Correct. Yes.

Loukas Barmparis (President)

Yeah. Okay. Because the line is not so clear. Okay. Look, right now, I think the newbuild, the newbuild market is little bit confusing, because we see prices rising because of demand created from other sectors. We don't have a clear path what will be the next fuel available for newbuilds.

Since we have still eight vessels, nine vessels to be delivered from our existing newbuilding program in phase III, low consumption, newbuildings, we are not rushing into making some investment in new and fuel ships because simply we don't have a clear view. We know we are trying to monitor the market, but we don't have a clear view.

I think like us, there are many people with the same confusion at the moment, at least in the dry bulk sector. I think for now, container ships is more clear. They have more options there. In dry bulk, we don't have that many options. At the moment, you would see very small orders for 2025, and the yards are almost full. If someone wants to consider designs of dual fuel, the availability is late 2026 and 2027, so it's very, very far away.

Also, for that delivery positions, you have to bear in mind the high interest cost of the pre-delivery installments. Right now, I don't think that the market will see many more newbuildings. Owners I think will wait to have more crystallized designs in front of them.

Christian Wetherbee (Senior Research Analyst)

Okay. That's helpful. I appreciate that color. Then, you know, I guess as you think about scrubbers in particular, I know you've highlighted some of the hurdles and, you know, opportunities, I guess, as well in terms of emissions and sort of how much the fleet sort of meets in the current and future emissions standards. I guess as you think about your approach to that market and then maybe scrubbers in particular, is that still an investment that is worthwhile? I guess two questions on existing vessels. Is there a desire or a idea that you might do more of that?

Number two, the vessels that you have the scrubbers on, do you feel like they're earning a reasonable return, understanding that probably some of those were or most of those were underwritten by your customers? Just kinda wanted to get a sense of your thoughts on scrubbers generally.

Konstantinos Adamopoulos (CFO)

As scrubber spreads below 150, the option to invest in scrubbers is not so attractive because you have to remember at the same time, owners are making environmental investments, and they are reducing 10% of consumption of the vessel. We will see scrubber spread going in the future above 150, then we may see more scrubbers being placed. The current spread is heading towards 120. It's not so attractive to make new investments there.

As said, we have done, we have all the scrubbers for all our Capesize. By the end of the year, all of them will have their scrubbers. Capesize are burning around 35 to 40 tons a day. There it's a more viable proposal. Smaller ships, I don't think anymore it's viable to install scrubbers. I think that the payback time is much longer than what it used to be.

Christian Wetherbee (Senior Research Analyst)

Okay. All right. That's helpful... [crosstalk] Thanks very much for your time. Appreciate it.

Loukas Barmparis (President)

Having said that, companies that are investing in scrubbers in 2018, 2019, and they've been working them after the middle of 2020, I think, they've made back their money already.

Christian Wetherbee (Senior Research Analyst)

Okay. Yeah, that's a fair point. Great. Well, thanks very much for the time. I appreciate it.

Loukas Barmparis (President)

Yeah. Thank you.

Operator (participant)

Thank you. As a reminder, to ask a question today, you may press star one from your telephone keypad. Our next question is from the line of Omar Nokta with Jefferies. Please proceed with your questions.

Omar Nokta (Managing Director)

Thank you. Hey, guys. Good afternoon. Just wanted to maybe touch a little bit on capital allocation. Obviously, your strategy there has been fairly balanced. You've got the dividend, the buyback, which was fairly active recently. Acquisitions with the new buildings and focusing on the balance sheet and making sure that debt is getting paid down. Just wanted to ask about how you are thinking about the fleet as it is going forward.

You, you outlined in the report you have the 44 vessels, of which 12 are eco design, built after 14, and you have the three very modern ones, the phase IIIs. You've also got the nine new buildings that are coming on.

How should we think about those new buildings as they deliver and what the plan is for sort of that existing fleet today that's, that isn't mentioned as being in the eco portion of the business. Basically, call it 20 to 25 vessels that make up, you know, your older age fleet. What's your plan with those, especially as you start taking delivery of the new buildings?

Konstantinos Adamopoulos (CFO)

Okay. First of all, I will say a few things about our capital allocation. Basically, at the early stage when we decided about the dividend, we thought of a meaningful dividend policy, but also to divert a reasonable question of pre-cash flow towards the investment in new builds. Our level of our Loan-to-Value will not be bad than in the following years. We, we're going to see something like in the range of 30% to 35%, also, Loan-to-Value, this will feel very comfortable. The second point of our policy is that we have a substantially contracted revenue, we have visibility in order to support our dividend.

We also have a substantial liquidity in order to be able to take actionable tunes of the day arise in the market. Now, in terms of our fleet, you can see that by the end of 2025, half of the fleet basically will be either eco ships or 43 vessels. Which will be, I think, a very impressive figure. The other half, it probably consists of 25 vessels. 20 of them will be upgraded between 2023. Which means that an efficiency in the range of 10% improved efficiency in the range of 10% will be there.

Also, the other fact is that our ships, Japanese build, which are, have, are inherently more efficient than I mean, the most of the remaining global group, which is by about 50% Chinese, and there is no change. I think that the company will very comfortably be able to compete on the basis of fuel performance, having about half of the fleet, new builds of phase III and eco, and the other half upgraded fleets which are basically percent of those are Japanese build.

Omar Nokta (Managing Director)

Okay. That's a very good overview. Appreciate that. You know, I think in earlier in the... I think it was in response to Chris's question about new buildings and you highlighted the, you know, you'd have to go out to 2026 or 2027 to take delivery. Again, there's uncertainty on the propulsion. Earlier this year, you had added to your Kamsarmax, I believe, tally with a 2025 delivery. If I remember, it was first half of 2025. If you guys were to place an order, is that achievable again to be able to get something in the first half of 2025 or is it basically now the window has passed and we're looking at 2026, 2027?

Loukas Barmparis (President)

No. In Japan it's very hard to find the new builds in 2025. It's 2026 onwards. If you go also to see the LNG or fuel possibilities. At the moment you have to go to late 2026, early 2027 and even there we don't know if the designs are viable and if the designs, the shipyards are really worked well by the yards and are they are at the very primary stage. I think ship owners in general are very skeptical which path to follow. For us, we are pleased that we have an ongoing program of nine ships still to be delivered.

We don't have a real anxiety to do some early moves on something else simply because we can renew our fleet with the addition of the new ships joining the fleet, which also we are ordered at a very good price or no price before, during the start of COVID. From my point of view we can afford to wait another six to 12 months before we may make a move. Of course, if we find the right opportunity earlier and we have a clear sign that what may be coming, we will consider some more ships. I don't see really us with the interest rate of dollar at 5% like the margin of the banks, another 2%, 7%.

I don't see us ordering ships for 2027. You know, it's too far away and the interest burden is too much. We prefer to wait for later on. Now we will be selectively selling our older ships or ships built over 15 years old or around 15 years old, since we already have the replacement coming in. We wait and see how the market develops.

The interesting thing is despite the trade market has been underperforming the first four months or five months of this year in the containment. So far, we have seen that prices are increasing. Secondhand prices are increasing. Either the market has to go up and or ship prices will have to come down. There will be plenty of opportunity to gain one way or another.

We don't need to make more moves at the moment simply because we are very well placed. We have to wait a little bit to see if the market gonna firm up this year or it's gonna be next year. Our prices, if the market doesn't firm up in the second half of this year, maybe prices will correct, secondhand prices will correct. We'll be in the investment opportunity will come to invest on existing modern ships under the, under seven, eight years range. We have to be a little bit, you know, take our time and see how things move.

Omar Nokta (Managing Director)

Thank you. Actually, that was just gonna be, I was gonna have a follow-up on that call.

Loukas Barmparis (President)

At the same time, if I may add, at the same time, we have seen that our NAV is trading at 50% of the value of the fleet. If prices continue to go up and our NAV is static, it's much healthier to invest the shareholder's money in buyback of own stock, which maybe we have, as you have seen, we have stepped up a bit on that front. This program may continue. We'll see how things develop. If we don't see appreciation of our share price, we will continue and as the prices keeping moving, we will continue investing in our ships.

Omar Nokta (Managing Director)

Yeah, that sounds good, and it's very clear. I'll, that's it for me. Thank you.

Loukas Barmparis (President)

Thank you.

Operator (participant)

Thank you. At this time, there are no additional questions. I'll turn the floor back to management for closing remarks.

Loukas Barmparis (President)

Okay. Thank you very much for attending this conference call for our first quarter financial results. We're looking forward to discuss again with you in the next quarter. Thank you to all.

Operator (participant)

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