Safe Bulkers - Q2 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call to discuss the second 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 a 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 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 in Section 27 A of the Securities Act of 1933, as amended, and Section 21 E 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 the operation 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 and 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 pass the floor over 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 2023. During the second quarter, the charter market has weakened, which we believe is reflective of economic growth uncertainties. In this quarter, we took delivery of our fourth newbuild, while our revenues were supported by fast charter contracts. Our strong liquidity and comfortable leverage enabled us to be flexible with our capital at the same time reward our shareholders with a dividend of $0.05 per share of common stock. Our capital structure is conservative, with significant cash and renewable capacity. Our CapEx requirements are adequately covered by our contracted future revenues. Our balance sheet is strong. After reviewing the forward-looking statements language in slide two, we will move to slide three.

There has been volatility in the Cape market, with Capes at low levels. It's worth noting that all eight of our Capes are period chartered, with an average remaining charter duration above two years at an average daily rate of $22,000, with the market currently at $14,000, actually today is $15,000. On the Panama side, the charter market remains very weak. Moving on to slide four, we present the development of CRB Commodity Index, reflecting the basic commodity futures prices, which represent leading indicators costs for shipping, including energy, agriculture, precious metals, and industrial metals. Commodity prices declined sharply over the past months, and according to the World Bank Energy Price Index, a drop of 21% is projected for 2023, after rising by 45% in 2022.

We continue to witness the increase of interest rates, such as the one yesterday, by a quarter of a percentage point by the Federal Reserve, as policymakers aim to fight global inflation, which is the result of the Russian war and the Chinese economy weakening. The July focus of IMF raised marginally the expected growth for 2023 of global GDP to 3% from 2.8% in April, as global inflation projections for 2023 stand at 6.8% due to the war-induced prices, pressures on food, energy prices and on the supply-demand imbalance. According to BIMCO, the forecasted global dry bulk demand growth stands at 2% increase in 2023, still demand output remains positive at 2.3% for 2023.

High inflation and recent financial effect of the oil preceded soft landing expectations of the world economy. The underlying core inflation is projected to decline more gradually, and the forecast for 2024 inflation were revised upwards to 5.2%. In China, the IMF July projection growth for 2023 was stable at 5.2%, even though there are signs that the consumption-led recovery could slow. There are unresolved real estate problems with negative cross-border spillovers, as the Chinese economy seems to be losing steam, then leading to weaker than expected demand. The inflation may be well below target and the central bank has cut interest rates. Nonetheless, continued weakness in the real estate sector is weighing on investment. Foreign demand remains weak and rising and elevated youth unemployment at 20.9% in May 2023 indicates future labor market weakness.

India's emergence and expectations is reflected again in IMF's July projections for a 6.1% increase in GDP for 2023, an increase from 5.8% in eighty, as a result of stronger domestic investments. The World Bank Commodity Price Index declined by 2% as the World Bank July 2023 projection forecasts a 21% drop in commodities for the whole 2023. Let's move on to supply side, as presented in slide five. The total dry bulk order book stands at single digits. We remain cautiously optimistic about the medium-term prospects of the trade market in the coming years. About 25% of the medium-sized fleet is older than 15 years old, as the effect of fleet aging and environmental regulations are expected to accelerate this traffic. Japanese fleet vessels like ours, have more efficient designs.

As we said, 80% of our fleet is Japanese fleet, versus 40% of the global fleet, which means that our fleet can compete better in the forthcoming environmental-based charter market. We are one of the very few global companies with a Phase 3 order book ahead of our peers, signifying our intention to compete on the basis of operational and environmental performance. As in slide six, the majority of global fleet is out of any phase. Safe Bulkers, owning today 44 vessels, has 12 eco ships built after 2014, an order book of 12 Phase 3 new builds, seven of which will have been delivered by the end of 2023. At the same time, a major ongoing environmental upgrade program, increasing the energy efficiency of existing fleets, and thus reducing the CO2 emissions on our vessels.

This program is also reflected in our increased OpEx, as low friction preparation, and paints are not capitalized, but are expensed. We are expect to complete upgrades in 20 vessels by the end of 2023. We are raising from time to time by fuels and monitoring the development of alternative fuels. Concluding our market view in slide seven, during the first half of 2023, there has been an increased industry-wide volatility, driven by geopolitical disruptions in tight monetary policies, demand. Demand for technological efficiency creates opportunities for those willing to invest, as Safe Bulkers have done. Such environmental efficient fleets may lead to two-tier market, with differential in earning capacity of such fleets.

We believe that the combined effects of the aging of the fleet, the low order book and the new regulations will favor fleet compression of efficient Japanese vessels and vessels delivered after 2014, tightening the market even further. Let me present in slide eight, seven of key characteristics which differentiate us from our peers. The key fundamentals are our strong alignment of interest with 40% management ownership, the comfortable leverage effect 5%, the ambiguity and product revenues, our track of the creation of intrinsic value through our 12 Phase 3 new builds, and the environmental upgrading of our existing fleet. We are currently taking delivery of four Phase 3 new builds, which are the best performing vessels when they get weighed on it, in the dry bulk market globally. We intend to compete on the basis of lower fuel consumption and environmental performance the following years.

Lastly, concurrently with building the future of this company, we have consistently been rewarding our shareholders with what we consider to be a meaningful dividend. Let's focus now on our liquidity, our cash flows and our capital structure as presented in slide nine. By maintaining a comfortable leverage of about 35%, our debt of $433 million remains comparable to our fleet's cap value of $385 billion. Although our fleet is only 10.6 years old and will continue to be the same age the next two years as we take delivery of new vessels in our fleet. Our weight average interest rate, which is slightly below 6% for our consolidated debt, with a portion of EUR 100 million being fixed at 295.8 and secured 5-year bond.

We have paid $73.8 million for our capital expenditure requirements in relation to our order book of eight new builds. Have already paid this amount, and the remaining capital expenditure of $210 million in aggregate. Our liquidity and capital resources stand strong at approximately $100 million, which together with the contracted revenue of $202 million, provide flexibility of management in capital allocation. Furthermore, we have additional borrowing capacity in relation to seven existing and 10 addresses and four new builds upon their delivery. Let's move to slide 10, where we analyze the investment rationale for Safe Bulkers. We have concluded a share buyback program, having repurchased about 10 million shares.

We declared a dividend of $0.05 per share over the last seven consecutive quarters, rewarding our shareholders while directing remaining customers to finance our new build program that will provide us with a distinct commercial competitive advantage in terms of fuel consumption and environmental performance. The intention is to maintain a relatively comfortable leverage and a strong balance sheet. We believe that Safe Bulkers, strong fundamentals offer financial flexibility to reflect market challenges and pursue opportunities. We believe that the Safe Bulkers with each order book, is among those companies that will navigate the environmental challenges of the energy transition and advancing drive fleet by utilizing the inherent qualities of our fleet and the efficiencies of our large-scale environmental upgrading program.

Before passing to floor to our CFO, Konstantinos Adamopoulos, for our financial review, let me here make a special note for the issuance of our 2022 sustainability report, which has been prepared in accordance with the standards provided in the new Global Reporting Initiative, GRI, the Sustainability Reporting Guidelines and the Sustainability Accounting Standards Board, SASB. A recommendation for maritime transport, alongside additional indicators that are materially important to us and our stakeholders. This report is available for download through our website. I would like to invite you to have a look on it, because we are doing a very good job there, and we are trying to improve our environmental and social governance footprint. Konstantinos, the floor is yours.

Konstantinos Adamopoulos (CFO)

Thank you, Loukas. Good morning to everyone. As a general note, during the second quarter of 2023, we operated in a gradually weakening charter market environment compared to the same period in 2022, with decreased revenues due to lower hires, decreased earnings from scrubber-fitted vessels, increased operating expenses and higher interest expenses due to increased interest rates. Slide 11 with our quarterly financial highlights for the second quarter of 2023 compared to the same period of 2022. Our adjusted EBITDA for the second quarter of this year stood at $33.3 million, compared to $66.5 million for the same period last year.

Our adjusted earnings per share for the second quarter of 23 was $0.12, calculated on a weighted average number of 115 million shares, compared to $0.40 during the same period in 2022, calculated on a weighted average number of 122 million shares. In slide 20, 12, we present our quarterly operational highlights for the second quarter of 23 compared to the same period of 2022. During the second quarter of 23, we operated 44.01 vessels on average, earning an average Time Charter Equivalent of $17,271, compared to 41.04 vessels, earning an average Time Charter Equivalent of $25,050 during the same period of 2022. Concluding on slide 13, we present our breakeven point for 2023.

The global economy is experiencing multiple challenges: inflation higher than seen in several decades, tightening financial conditions in most regions, with interest rates being at historical highs, Russia's invasion of Ukraine all weigh heavily on the market outlook. Based on our financial performance, the company board of directors declared a 5% dividend per common share. We would like to highlight and emphasize that the company is maintaining a healthy cash position of about $96.7 million as of July 21st, and another $152.5 million in available RCF facilities and $80.7 million in undrawn borrowing capacity. A combined liquidity and capital resources of $330 million provide us with significant firepower.

Furthermore, we have contracted revenue from a non-cancellable spot and period time charters contracts, in total about $212 million network commissions, excluding scrubber revenue. We also have additional borrowing capacity on relation to seven debt-free existing vessels and four new builds upon their delivery. We believe that a strong liquidity and our comfortable leverage will enable us to be flexible with our capital, be able to expand the fleet while still rewarding our shareholders and taking advantage of possible opportunities that may arise. Once again, let us remind that you may download our 2022 sustainability report from our website, which was just published. Now we are ready for the Q&A session.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, "please press star one"on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may "press star two" if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, if you would like to ask a question, "press star one" on your telephone keypad. One moment please, while we poll for questions. Thank you. Our first question comes from the line of Omar Nokta with Jefferies. Please proceed with your question.

Omar Nokta (Equity Analyst)

Thank you. Hey, guys. Good afternoon. Just have a, yeah, I have just a couple of questions as follow-up just in relation to the, you know, the liquidity that you were just highlighting. Just maybe first on, on the share buyback. You've been very active for much of the past year buying back shares. You put it on pause for now, at least just based off of the way the press release was reading. I guess the reasoning is probably the softer freight market that's developed here in recent months. Just wanted to ask, you know, what drove the suspension of the buyback, and what are you looking for to give you confidence to restart it?

Loukas Barmparis (President)

Yes. Good morning to you. As you have seen the market the last quarter was not performing as per expectation, we have many quarters in front of us to continue the buyback program. We emphasize our strategy now on the environmental improvement of our 10-year-old ships, combined with the delivery of our new buildings as they come in the following couple of quarters. We have around five new buildings to get delivered in the next two quarters. We decided to suspend it temporarily, but not withdraw it. To suspend it for the second quarter of the low-performing. I think the market may start improving soon. As soon as we see better freight rates, this program will be reinstated.

I don't think that stock markets will react immediately on, on improving markets, ourselves, we can revitalize this program earlier. It's more important, I consider at this point, to continue the environmental investments, even if the market is low, because the regulations are changing very fast. No one is doing anything on this front from many competing owners. Very few owners are doing these investments. The order book is very low. Yards are increasing their prices. You have to remember that our 12 ships of order book, eight ships order book and four ships delivered were ordered in the low 30s, whilst the yards in Japan are asking over 40 for Kamsarmax now, still despite that last quarter, the market was not performing. S&P prices, which have dropped 20% second-hand ships.

Everyone is after them to find modern ships, but they cannot find in the market. There is heavy competition for ships around 15 years old at the moment. Any ship that's coming in the market, like MV Vasilis, that they dropped their prices by 20% from the beginning of the year. You have 20 or more buyers competing for this simply because many owners of other type of vessels make good money and still making good money in tankers and in the past years in container ships. They are now investing heavily on tankers. We will have the phenomenon that even if the market is low for this quarter or next, prices will not drop a lot. We are approaching the bottom of S&P prices.

The best thing we can do right now is invest on environmental efficiency of our products, which is giving us real returns and savings in fuel, because no one expects a fuel oil price of $600 per metric ton to come lower. Actually, the buyback program has been canceled for the time being, this is a program that can be reinstated at any given point.

Omar Nokta (Equity Analyst)

Great. Thanks. for that. Yes. No, no, they're very helpful and detailed, discussion on the market.

Loukas Barmparis (President)

Good.

Omar Nokta (Equity Analyst)

Also just on the buyback. Maybe just as a simple follow-up and getting maybe a little deeper into the weeds, not too much, but just want to make sure we have it correct because you outlined having plenty of liquidity. I think it was $300+, you had just highlighted. In terms of the new buildings, you have eight that are due to deliver between second half and then into 2025. The total CapEx is expected at $210 million. What's the amount that you have secured right now in terms of financing? What do you expect to finalize ahead of deliveries of the remainder that's not financed?

Loukas Barmparis (President)

Yes, the guys will give you the details, but we have cash, $88 million. As we said, we have RCF facility of $170 something. Only the cash on the RCF, on the existing fleet, is enough to pay for that program without adding debt on the remaining eight ships. We are in a comfortable position. We don't want to increase a lot our leverage from the current leverage. Of course, we will put some financing on this new ships.

Remember that there are many owners, especially in Asia, that they have a preferential interest rate situation, that they can do the so-called sale and leaseback without covenants and without other things, that they are eager to finance some of our new buildings. We're very comfortable on this front. I think the most important is to engage in this program of upgrading the 10-year-old ships and be more competitive because I sincerely believe that heavy consumption vessels in the environment of global warming and the environment of new regulations from EU and other regions are gonna hit us very soon. People will get a big surprise of how fast things will be changing towards environmentally friendly vessels.

For the time being, most of the owners are pretending that this is not going to happen. I'm sure that events that are unfolding in front of us, especially in USA, Canada and Europe for the last few weeks, with the overheating of the temperatures, you know, in Mediterranean and Southern countries. In Greece, we have 46, 47 degrees temperatures, which we haven't had for the last, I don't know how many decades. All these things will push into faster implementation by European Union. We have wildfires in Greece the last couple of weeks. All these things will expedite what is happening now in Europe.

I think owners who are investing on all these things ahead of the economic recovery that will come hopefully in the early part of next year, when interest rates start easing off. If you have the proper ships in that market, I think you will make the biggest returns for your shareholders. This is our policy for the time being. In the slide nine, if you may, you can look, I mean, a good summary of what Polys has just mentioned just before. The CapEx, as you said, is $210, and the liquidity, and which is also cash and undrawn borrowing capacities, about $297.

Also, we need to point out the contracted revenue is $232 million. If we add all together, you can see that we have the flexibility. We have already paid $73 million-$74 million in advances for these vessels. The question sometimes, if I may make an additional comment, is how you allocate your capital. We are in a good position to have low leverage, 35%, and be able to allocate it in the most advantageous way for the future of the company, which as Polys said before, is the environmental adaptation, because things will change very, very quickly. I believe you have a look on page nine, I think all the numbers are there.

Omar Nokta (Equity Analyst)

Yeah. Thank you. No, that's helpful. Great! Well, I appreciate that. nice to see the liquidity where it's at, and obviously, you guys are one step ahead of the regulations. I'll turn it over. Thank you.

Loukas Barmparis (President)

Thank you.

Operator (participant)

As a reminder, if you would like to ask a question, press star one on your telephone keypad. One moment, please, while we re-poll for any additional questions. Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Loukas Barmparis (President)

Thank you very much for attending our conference call. I would like to emphasize once more on the new regulations, the FuelEU, which and the EU ETS, which is coming in in Europe or has come. Also the regulations that will be adopted gradually by IMO that will be implemented worldwide and which will change the environment and the environmental impact of the shipping industry. We would like to thank you all for attending our conference call, and we're looking forward to discuss again with you in our next conference call for the Q3 results. Thank you very much.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.