Safe Bulkers - Q2 2024

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers conference call on the second quarter 2024 financial results. 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. The archived webcast of this conference call will soon be made available on the Safe Bulkers website, www.safebulkers.com.

Many of the remarks today contain forward-looking statements based on current expectations. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that can cause the actual results to differ materially from those in the forward-looking statements is contained in the second quarter 2024 earnings release, which is available on the Safe Bulkers website, again, www.safebulkers.com. I would now like to turn the conference call to one of your speakers today, the Chairman and CEO of the company, Mr. Polys Hajioannou. Please go ahead, sir.

Loukas Barmparis (President)

Good morning to all. I'm Loukas Barmparis, President of Safe Bulkers. I will do the presentation. Key developments of the second quarter include the stock market compared to the previous year, the implementation of our new integrated management system in compliance with DryBMS standards, the order of two additional phase three new builds consistent with our fleet renewal strategy, and the issuance of our 2023 sustainability report detailing our ESG practices and our vision for the future. Our strong liquidity and comfortable leverage enabled us to be flexible with our capital allocation, remain focused on long-term value creation, and at the same time reward our shareholders with a dividend of $0.05 per share of common stock. Following a comprehensive review of the forward-looking statements language presented in slide two, our attention transitions to the market update in slide four.

The Capesize market segment has been strong throughout the quarter. All eight of our Capesizes are presently fixed chartered, with an average remaining chartered duration of 2.4 years with an average daily rate of $24,500. This provides us with a considerable degree of cash flow visibility. On the economics front, the chartered market stands at about 15,000. Progressing to the slide number five, we present here an overview of our CRB commodity index fluctuation in basic commodities prices. The geopolitical landscape, with tensions in regions such as the Middle East, the Red Sea, and Ukraine, underscores the heightened level of global uncertainty. Persistently elevated uncertainty around the inflation outlook has led central banks and major economies to become more cautious about the pace of policy easing, compared with their positions at the end of the first quarter.

Consequently, markets' expectations of the number of policy rate cuts to be delivered in 2024 have been revised downward. Upside risks to inflation have increased, raising the prospect of higher for longer interest rates in the context of increased policy uncertainty. In terms of dry bulk, we enjoy a positive dry bulk outlook as supply has been outpaced by demand, setting the stage for additional dry bulk market growth. The limited supply of assets on one hand and the resilient demand on the other enhance interest rates over the short to medium period. We believe that the existing fleet decarbonization efforts and the energy efficiency of new builds will gather all focus on market in the medium term. Overall, on the commodity side, demand for iron ore remains strong, for coal is stable despite energy transition forecasts, and for grains and minor bulk stands at very healthy levels.

The IMF April forecast of a 3.2% expansion in global GDP for both 2024 and 2025 is accompanied by control of inflationary pressures. According to BIMCO, the forecasted global dry bulk demand growth stands at 3% in three years for 2024. China, being the major global importer and key driver of the market, seems to be having a soft landing. Prioritization of energy security, with coal being the fastest way of that, drives the significant expansion of Chinese renewable energy infrastructure, as clearly evidenced by the renewable electricity generation during the first half of 2024, which increased by 12% year-on-year, outpacing the 6% fossil fuels growth. Nevertheless, coal power plants stabilize the demand for coal inputs, as steam coal inputs rose by almost 30% year-on-year.

The trend we do not expect to continue as steam coal shipments into China will decrease due to the increased electricity generation from renewables and due to stronger domestic mining in the second half of 2024. China's growth forecast has been raised to 5% for 2024. However, GDP is expected to slow to 4.5% in 2025 and continue to decelerate over the medium term due to challenges from an aging population and slowing productivity growth. Geopolitical developments, of course, have altered the trading patterns and increased demand for dry bulk commodities. Rerouting away from the Red Sea and Panama Canal has also bolstered demand in smaller segments. The dry bulk market is hanging on despite the weakening and falling global steel and iron ore prices.

Coke, especially, has been solid, averaging $32,000 per day in the second quarter, down moderately from their first quarter average of $24,000 per day and averaging $27,000 per day so far in the third quarter. A tight supply picture with modest growth this year and tightening effects from the long-haul bulk trade have played a key role. So far, the third quarter is looking similar to the second quarter with decent earnings. Global coal investment is set to grow by 2% in 2024, led by increases in India, Indonesia, and Australia. The resilience of India's robust domestic demand and sustained infrastructure investments seem to play a stabilizing factor, easing the effects of Chinese uncertainty. The growth forecast for India has also been raised to 7.3% for this year, reflecting the positive growth and enhanced profits for private consumption, especially in rural areas.

Let's proceed now to examine the supply side dynamics in slide six. Currently, about 25% of the existing fleet is older than 15 years, as environmental regulations are sitting in these vessels, being on the lower end of fuel efficiency, which gradually become less competitive, forcing them to be phased out. On top of that, the dry order book remains at about 9%, as the near to medium-term trajectory of the freight market remains optimistic, especially when taking into account availability of yard space and restraining new orders due to uncertainties in decarbonization technologies. Safe Bulkers Fleet now counts 12 phase three vessels on the water, all delivered after 2022, with the last delivery taking place just a few days ago. In addition, 22 vessels have been environmentally upgraded, and 11 are eco vessels having superior design efficiencies.

85% of our fleet comprises of Japanese-built vessels, surpassing the global average of 40%, with our average fleet age of 9.9 years old. Overall, our fleet today is fundamentally upgraded and commercially more competitive than two years ago as a result of the ESG strategy implemented throughout this period, underscoring our commitment to sustainable business. We will continue to become even more commercially competitive as we have now order booked eight more phase three vessels placed at prices well below the prevailing market to be delivered to us within the next two years. The anticipated combined impact of fleet age and impending environmental regulations will position our fleet favorably to compete with the environmentally-based charter market, the statutory regulatory framework, and greenhouse gas targets. Moving to slide eight, we present an overview of our green fleet advantage.

The breakdown presented in the top right graph underscores the environmental credentials of our fleet, comprising of 46 vessels, with 32 having undergone environmental upgrades, 10 being Phase 3, 11 being eco, and the remaining 6 scheduled to be upgraded within this year. The bottom graph presents our fleet renewal strategy with the investment of 15 older vessels, acquisition of several second-hand vessels, delivery of 10 Phase 3 new builds, and a fast order book combination of 8 more Phase 3 vessels, resulting in a stable 10-year average fleet age over the past 4 years. As confirmed by slide nine, this adjustment of fleet expansion serves as a testament to our commitment towards sustainability.

In slide 10, we present Safe Bulkers' key attributes such as our solid 65-year track record, a robust management ownership aligned with 14%, comfortable leverage of 32%, our open liquidity of $276 million, our significant contracted backlog of $250 million, our green fleet advantage evidenced by a 7.4% decrease in fleet's AER, GHG emissions, and by our DryBMS standard management system implementation in anticipation of forthcoming statutory environmental regulations. The quality and competitiveness of our fleet is strategically positioned to leverage on the regulatory landscape, remaining true to our commitment to expand by building a resilient company and reward our shareholders with a 21%, about 21% dividend payout ratio. Our effort is not only to have the best fleet in terms of energy efficiency, but also to upgrade our company managerially and be able to compete worldwide with anyone.

I now pass the floor to our CFO, Konstantinos Adamopoulos, for our quarterly financial overview. Konstantinos, the floor is yours.

Operator (participant)

Ladies and gentlemen, thank you for waiting. I apologize about the technical difficulties. We will now return to our regularly scheduled conference.

Konstantinos Adamopoulos (CFO)

Thank you. Loukas, can you hear us?

Loukas Barmparis (President)

Yes, I can hear you. Did I finish? Did I say everything or?

Konstantinos Adamopoulos (CFO)

Yes.

Loukas Barmparis (President)

You said everything.

Konstantinos Adamopoulos (CFO)

Thank you, Loukas. And then I will, yes, Leo, of course.

Loukas Barmparis (President)

I can hear you, Konstantinos.

Konstantinos Adamopoulos (CFO)

Thank you, Loukas. Good morning to everyone. This is Konstantinos Adamopoulos, the CFO. I will make a presentation about our numbers, the Q2 numbers. As a general note, during the second quarter of 2024, we operated in a stronger chartered market environment compared to the same period in 2023, with increased revenues due to higher chartered hires, distancing from chartered fleet vessels, and higher interest expenses due to increased interest rates. If we focus now on our liquidity, our cash flows, and our capital structure, as presented in slide 12, we maintain a comfortable leverage of around 32%. Our debt of about $500 million remains comparable to our fleet's current value of around $350 million, although our fleet is only 9.9 years old. Our weighted average interest rate stood at 6.3% for our consolidated debt, of which €100 million is fixed at 2.95% in an unsecured five-year bond.

So far, we have paid EUR 110 million, or 30%, for our CapEx in relation to the outstanding order book. Our liquidity and capital resources stand strong at approximately EUR 281 million, which, together with the contracted revenue of about EUR 252 million, makes a total of around more than $533 million, which is double of the outstanding CapEx of EUR 252 million. This provides flexibility to our management in capital allocation. Additionally, we have borrowing capacity in relation to four existing unencumbered vessels and nine new builds upon their delivery. We ensure that our capital expenditure is adequately covered by our contracted future revenues, fortifying our balance sheet towards a trajectory of sustainable growth. Moving on to slide 13, we have quarterly financial highlights for the second quarter of 2024 compared to the same period of 2023.

Our adjusted EBITDA for the second quarter of 2024 stood at $41.8 million, compared to $34.3 million for the same period in 2023. Our adjusted earnings per share for the second quarter of 2024 were $0.17, calculated on a weighted average number of 106.8 million shares, compared to $0.12 during the same period last year, calculated on a weighted average number of 112.9 million shares. In slide 14, we present an overview of our quarterly operational highlights for the second quarter of 2024 compared to the same period of 2023. During the second quarter of 2024, we operated 45.43 vessels on average, earning a TCE of $18,615, compared to 44.01 vessels earning an average TCE of $17,271 during the same period in 2023.

The company's net income for the second quarter of 2024 was $27.6 million, compared to net income of $15.4 million during the same period last year. Concluding our presentation, we would like to point out that based on our financial performance, the company's board of directors declared a 5% dividend per common share, $0.05 dividend per common share. We'd like to emphasize that the company is maintaining a healthy cash position of about $77 million as of July 19, 2024, and another $180 million in available revolving credit facilities, as well as another $20 million from our held-for-sale vessels, a combined liquidity and capital resources of $276 million.

Furthermore, we have contracted revenue from our non-cancelable spot and period and chartered contracts of $252 million, net of commissions and default scrubber revenue, and additional borrowing capacity in relation to five unencumbered existing vessels and eight new builds upon their delivery. We believe our strong liquidity and our comfortable leverage will enable us to expand the fleet while still rewarding our shareholders. Thank you for your understanding, and we are now 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. One moment, please, while we pull for questions. Our first question comes from Omar Nokta from Jefferies. Please proceed.

Omar Nokta (Managing Director and Senior Equity Analyst)

Thank you. Hi, guys. Good afternoon. Thanks for the update. Just wanted to ask, obviously, on the fleet, you've been very dynamic here for the past maybe 2+ years. You've been adding these modern, perhaps super eco, dual-fuel Kamsarmax new buildings. You've been selling the older ships. You have this series of these 8 new buildings delivering here over the next three years. Just wanted to ask, what are your thoughts on the Cape fleet at this point? Obviously, it's scrubber-fitted, and you have contracts in place on all the ships. But just in general, as you think about that fleet and investing going forward, and given the low order book we're seeing in the broader Cape market, is that something that maybe you're considering investing in here in terms of perhaps free cash versus continuing to look at further Kamsarmax new buildings?

Konstantinos Adamopoulos (CFO)

You mean investing in Cape size?

Omar Nokta (Managing Director and Senior Equity Analyst)

Yes.

Konstantinos Adamopoulos (CFO)

Yes, look, Capesize new buildings, the prices are really out of the question at the moment. They're hovering over $75 million in Japan. As long as interest rates remain at current levels, we cannot proceed with such investment. Maybe at a future time, maybe in a year's time, we will see some easing of interest rates. We may revisit that case, but always in relation to fleet renewal. We would have to sell an older Capesize to buy a newer one. We don't want to touch for the time being because of high interest rates.

Loukas Barmparis (President)

Thanks. I would like to point out that the last two years, the fleet has been expanded substantially. So in the past, we had about three Capes, and right now we have eight. So this shows a proactive movement from our side to invest in the Cape size market before the prices reach these very high levels.

Omar Nokta (Managing Director and Senior Equity Analyst)

Right. Yeah, good point. And I guess I wanted to ask then on the Capes because that's been a, obviously, that's part of the market perhaps this year that's done quite well, and it has that low order book ratio. But yeah, the returns aren't there, as you're mentioning, at least on new buildings. You were acquisitive on the second hand, as you just mentioned. Are there returns there that look interesting, or is it kind of across the board Capes look too expensive relative to, say, the Kamsarmax or midsize segments?

Konstantinos Adamopoulos (CFO)

Yes, I think across the board they are too expensive. So you need $50 million to buy an 80-year-old Capesize from a good yard. So for us, it's not a good investment at this point. The prevailing interest rates were 3%. It would have been a different proposal, but right now we want to wait for that time.

Omar Nokta (Managing Director and Senior Equity Analyst)

Okay. Thank you for that, color. And maybe just a follow-up, maybe kind of thinking about just the market in general. Obviously, dry bulk rates across the board this year have been very healthy, much better than last year. We've seen some softer steel prices and a bit more of a tougher, maybe steel complex. Obviously, in China, but globally, it seems that things are under pressure. But Capes has generally held up, even though they've eased here recently. But Capes has been very good. Do you think that's-as we think about this market dynamic, do you think, I guess, overall for dry bulk, has it been a tight supply picture that's perhaps insulated the sector from weakness in the steel markets? Or is it perhaps just eventually weakness will make its way into the dry bulk rates and we're not seeing it yet?

Any color you're able to perhaps give on what's driving the market here recently?

Konstantinos Adamopoulos (CFO)

Yes. Right now, the market is a little bit on the weak side. Traditionally, it's weaker in the summer months. We expect improvement in the fourth quarter of this year. What we have not seen in the last few months is we have not seen real congestion in any of the major loading or discharging areas for dry bulk tonnage. Also, we have seen very little backhaul cargoes to Europe from the Far East, and generally a bit of a weak market in the Atlantic. We believe that the Atlantic will pick up as we enter in the autumn, in the September, October period, as it always does. This will lift the market. We need a bit of stronger Atlantic market to lift at least the Kamsarmax market.

But of course, even at $16,000 or $17,000 a day, the spot market, $15,000-$17,000 is still a healthy market as far as we are concerned. So we don't really complain about it. Of course, a key part to it is all the closure of the Red Sea and not closure, but the restriction of the trading via the Red Sea and Panama Canal, which exists at the moment. Panama Canal is for a number of months, and the Red Sea since January, February of this year. And this will continue to be that case. We don't see any dry bulk vessels passing through the canal, but maybe one or two every week. That's about it. And I think this will guarantee that the market will stay a bit longer at good levels. What is the most important for us in the long run as a company?

Well, we don't plan on a quarter-basis. We are planning on a long-term basis. It's the fact that environmental regulations are getting tougher. From the 1st of January, the trading into European waters will be costing 70% of the EU ETS penalty we're paying for CO2, from 40% that it was this year. This will make demand for younger ships to trade the Atlantic business, which traditionally the Atlantic business was a market for older ships. And these older ships will not find it comfortable to trade cargo from U.S. Gulf to continent or Brazil continent or U.S. East Coast to the continent because simply they will have to pay extra cost for the EU ETS fee. And hence, they will try to find business in the Pacific.

In the Pacific, they are not very welcome, especially in Australia, if you are over 15 years old or you are approaching 20 years old. So they would not be able to trade easily in the Atlantic. They will not be able to trade easily in the Pacific. And some of those ships will head to the scrapyard. So a bit of a weak market will not do us any harm because, as you know, Safe Bulkers have already delivered 10 Phase 3 vessels, very economic ships, and another 8 are coming through in the next 2 years. So we are looking more into what will happen in the next 2 or 3 years rather than the next 2 months.

Omar Nokta (Managing Director and Senior Equity Analyst)

Yeah. Thank you. That makes sense. And appreciate the insight and the deep detail. That's it for me. Thank you.

Konstantinos Adamopoulos (CFO)

Thank you.

Operator (participant)

Our next question comes from Climent Molins from Value Investor's Edge. Please proceed.

Climent Molins (Head of Shipping Research)

Good afternoon. Thank you for taking my questions. I wanted to start by asking about the returns on the environmental upgrades you've pursued on your existing fleet. Could you provide some commentary on some of the initiatives you've done? And secondly, what kind of returns are these investments generating?

Konstantinos Adamopoulos (CFO)

Yes. Look, first of all, we'll start with the scrubber investment, which we started in 2019, and we completed in 2020. This has been paid off already. Whatever income is generated by the scrubbers now is a profit on the annual result. Right now, the spread is around $80-$90. It's not at a very good level, but still on those numbers, the company is earning an extra $20 million a year. After that, we take this money and we throw them on the environmental investment of the existing fleet by upgrading them on all of them on dry dockings, even on our older ships. We just finished now an 16-year-old Kamsarmax dry docking that we applied low friction paints and other improvements on the hull. We have reduced the consumption of those ships by two tons, so from 24 tons down to 22 tons.

It's a 17-year-old ship. It's doing better. An 18-year-old ship is doing better consumption than the big Capesize average, which is 23 tons. With this improvement, the ships are saving around $1,000 a day more because of the fuel saving. You are paid $1,000 charter rates higher. We will carry on doing this investment on the existing fleet. Basically, we take the scrubber revenue and we put it back on the remaining ships.

Climent Molins (Head of Shipping Research)

Thanks for the caller. Following up on Omar's question on your fleet positioning, you still have a few 2006, 2007-built Kamsarmax and Post-Panamax. Considering that asset pricing has done pretty well over the past year, should we expect the disposal of some of these going forward? Or are you comfortable holding on to them for the foreseeable future, especially after the recent upgrades?

Konstantinos Adamopoulos (CFO)

Yes. Well, there is an upgrade that works in two folds. First is the two-fold. The one is that the ships can earn extra income while they remain under the company's operation. You have to remember these are ships we contracted as new buildings 17, 18 years ago. So they are very well kept, looked after. Of course, the company is not selling at any price. When we receive the right buyer at the right price and we get a premium over the market rates because we believe the ships are worth the premium, we can sell. Of course, we are not in a hurry to sell all of them. We are selling one ship quarter or one ship every six months because we have to allow time for the new buildings to get delivered in the fleet.

So it will be a process that will be going on for the next two or three years at good periods of the market and when we find the right buyer to appreciate the condition of the ships and the investments we have done in the recent dry dockings. Of course, we will sell if we can achieve prices like the last deals we have done. So it will be a slow process, and it will take some time, but we are not in a hurry to complete the sale of the older ships in the next six months.

Climent Molins (Head of Shipping Research)

That's very helpful. That's all for me. Thank you for taking my questions.

Konstantinos Adamopoulos (CFO)

Thank you.

Operator (participant)

Once again, I would like to remind participants that if they would like to ask a question, they may press star one on their telephone keypad. This concludes our question and answer session. I would like to turn the floor back over to Loukas Barmparis, Dr. Loukas Barmparis, for closing comments.

Loukas Barmparis (President)

Thank you very much for having this, for being with us this morning and hearing our presentation. We wish you to have a pleasant summer, and we're looking forward to discussing again with you in our next quarter call meeting. Thank you very much.

Konstantinos Adamopoulos (CFO)

Thank you.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.