Safe Bulkers - Q3 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the third quarter 2023 financial results. Today, we have with us Mr. Polys Hajioannou, Chairman and Chief Executive Officer, Dr. Loukas Barmparis, President, Mr. Konstantinos Adamopoulos, Chief Financial Officer of the company, and Mr. Athanasios Antonakis, Assistant Chief Financial Officer. 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 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 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 will pass it forward to Dr. Loukas Barmparis. Please go ahead, sir.

Dr. 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 third quarter of 2023. During the third quarter, our financial performance was weaker, aligned with the charter market as a result of global economic growth uncertainties. Our newbuild order book, with more efficient vessels in our environmental upgrades program on our existing fleet, was complemented with the orders for two methanol dual-fuel newbuilds for the fourth quarter of 2026 and for the first quarter of 2027, marking a significant step towards decarbonization. At the same time, we took delivery of our fifth and sixth newbuilds and rewarded our shareholders with a dividend of $0.05 per share of common stock. Our capital structure is conservative, with significant cash and revolver capacity.

Our CapEx requirements are adequately covered by our contracted future revenues, and our balance sheet is strong. After reviewing the forward-looking statement language in slide two, we may move to slide three. There has been significant volatility in the Cape market. It's worth noting that all our 8 Capes are period chartered, with an average remaining charter duration of about above two years and an average, at an average daily rate of about $23,500, with the market currently at about $18,500. On the Panamax, with the chartered market remains somewhat stable. Moving on to slide four, we present the development of the CRB Commodity Index, reflecting the basic commodities future prices, which represent leading indicators for shipping, including energy, agriculture, precious metals, and industrial metals.

Commodity prices declined sharply over the past months, according to the World Bank Energy Price Index, led by coal minus 12.5%, oil minus 3.4%, and metal prices minus 2.7%. We continue to witness the rise of the economic fragmentation, intensification of geopolitical tensions, noting the Middle East region, an increase of interest rates as policymakers aim to fight global inflation. Global headwinds will continue to persist and intensify due to the high global interest rates, geopolitical tensions, and sluggish global demand. As a result, global economic growth is also set to slow down over the medium term against a background of these combined factors. The resilience that global economy or economic activity exhibited earlier this year might fade.

The October forecast of IMF raised marginally in the projected global GDP growth for 2023 to 3% from 2.8% in April, as global inflation projections for 2023 stands at 6.9% due to the war-induced prices, pressures on food and energy prices, and on and off the supply-demand imbalances. According to BIMCO, the forecasted global dry bulk demand growth stands at 3% increase in 2023. A slowdown is especially concentrated in advanced economies, where high inflation receded soft landing expectation of world economy. Growth in emerging markets and developing economies remains stable at 4% for 2023, 4.1% for 2024. Battle against inflation is not yet won, with inflation expectations well anchored in major economies.

In China, the IMF October projection for GDP growth was 5.1%, even though there are signs that the consumption-led recovery could slow. China recovery seems to be losing steam due to persistent domestic difficulties, such as the elevated debt, weakness in property sector, structural factors such as aging, which weigh on growth, with the Chinese GDP estimation for 2024 to stand at 4.4%, leading to a weaker demand. On the other hand, India's growth is set to remain resilient despite global challenges underpinned by robust domestic demand, strong public infrastructure investments and a strengthening financial sector, as it, as reflected in IMF's October projection for a 6.3% increase in GDP for 2023. Let's move now to the supply side, as presented in slide 5. The total dry bulk order book stands at single digits.

We remain cautiously, cautiously optimistic about the medium term to its prospects of the trade market for the coming years due to the relatively low order book. About 25% of the medium-sized fleet is older than 15 years, thus, the effect of fleet aging and environmental regulations are expected to accelerate the scrapping. Japanese-built vessels have more efficient designs. 80% of our fleet is Japanese-built 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 dry bulk companies with a phase III order book ahead of our peers, timely placed at lower prices than the present values in the market, signifying our intention to compete on the basis of operational and environmental performance.

As presented in Slide 6, we recently took an additional significant step towards decarbonization, with a contract for two methanol dual-fuel newbuilds. These vessels, when powered by green methanol, will be able to produce close to zero greenhouse gas emissions based on a life cycle assessment methodology well-to-propeller. Following the extensive order book for 12 phase III vessels, which were placed timely at relatively low prices and environmental upgrade of the existing fleet, we set a clear path towards the decarbonization of our fleet by placing these two additional orders for methanol dual-fuel vessels. We believe that the company will have one of the most environmentally competitive fleets the following years. Concluding our market view in slide 7, there has been an increased industry-wide volatility, driven by tight monetary policies, rising fears of geoeconomic fragmentation, and growing signs of global economy losing momentum.

Demand for technological efficiency creates opportunities for those willing to invest, as Safe Bulkers has done. Such environmental efficient fleets may lead to two-tier market with differential in earnings capacity of such fleets. We believe that the combined effect of the aging of the fleet, the low order book, lower sailing speeds, and the new regulations and the greenhouse gas targets will favor fleets comprising of efficient Japanese vessels and vessels delivered after 2020, 2014, tightening the market. Especially, we have, as we said already, about 14 vessels, newbuild vessels, that will be, brand new phase III vessels, that will be able to compete with any vessel out there. It is certain that ESG adherence becomes increasingly important for the years to come.

Let me now present, in brief, in slide 8, our recent developments, which include the declaration of a $0.05 dividend per common share from the board, the election of three directors of our during our annual shareholders meeting, and the delivery of two phase III newbuilds, as well as the order book, as well as the order of two dual-fuel vessels. In slide 9, we present certain of our key characteristics which differentiate us from our peers. The key fundamentals and our strong alignment of interest with a significant percentage of management ownership, the comfortable leverage, the ample liquidity and contracted revenues, our track record, and of course, the quality and competitiveness of our fleet. Let's focus now on our liquidity, our cash flows, and our capital structure, as presented in slide 10. We are maintaining a comfortable leverage of 35%.

Our debt of $449 million remains comparable to our fleet scrap value of $355 million, although our fleet is only 10.6 years old. Our weighted average interest rate stood at 6.24% for our consolidated debt, with a portion of EUR 100 million being fixed and 2.95% coupon in an unsecured five year bond. We have paid $71 million for our capital expense requirements in relation to our order book of eight newbuilds, and the remaining capital expenditure are $233 million, including the recent order of the dual-fuel vessels. Our liquidity and capital resources stand strong at approximately $280 million, which, together with the contracted revenue of about $250 million, provide flexibility to our management in capital allocation.

Furthermore, we have additional borrowing capacity in relation to eight existing unencumbered vessels and six newbuilds upon their delivery.

Before passing the floor to our Assistant CFO, Athanasios Antonakis, for our financial review, let me make a note about our strategy of directing cash flows to finance our new build program, which will provide us with a distinct commercial competitive advantage in terms of fuel consumption and environmental performance. We expect that by maintaining a comfortable leverage and a strong balance sheet, this creates the basis for rewarding our shareholders and position Safe Bulkers among those companies that will successfully navigate the environmental challenges of the energy transition and of the aging of the dry bulk fleet. Thanasis, the floor is yours.

Athanasios Antonakis (Deputy CFO)

Thank you, Loukas, and good morning to everyone. As a general note, during the third quarter of 2023, we operated in a weaker charter market environment compared to the same period in 2022, with decreased revenues due to lower hires, decreased earnings from scrubber vessels, increased operating expenses, and higher interest rates due to increasing interest rates. Moving on to slide 11, with our quarterly financial highlights for the third quarter of 2023 compared to the same period of 2022. Our Adjusted EBITDA for the third quarter of 2023 stood at $30.9 million, compared to $66.9 million from the same period in 2022.

Our adjusted earnings per share for the third quarter of 2023 was $0.08, calculated on a weighted average number of 111.6 million shares, compared to $0.39 during the same period in 2022, calculated on a weighted average number of 120.4 million shares. We present in slide 12 our quarterly operational highlights for the third quarter of 2023 compared to the same period of 2022. During the third quarter of 2023, we operated 44.13 vessels on average, earning a TCE of $14,861, compared to 43.25 vessels, earning an average TCE of $23,403 during the same period in 2022.

The company's net income for the third quarter of 2023 was $15 million, compared to net income of $51 million during the same period in 2022. Concluding on slide 13, we present our breakeven point for Q3 2023. It is evident that the global economy is experiencing multiple challenges: inflation higher than seen in several decades, tightening financial conditions in most regions, Russian invasion in Ukraine and the crisis in the Middle East all weigh heavy on the market outlook. Based on our 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 $67 million as of 3 November 2023, and another $158 million in RCFs, and $53.5 million in undrawn borrowing capacity, a combined liquidity and capital resources of $278.6 million. Furthermore, we have contracted revenue from our non-cash operating period and charter contracts of $233 million, net of commissions and before scrubber revenue, and additional borrowing capacity in relation to eight unencumbered existing vessels and six 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. We are ready now for your questions. Thank you.

Operator (participant)

Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad and 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. Our first question comes from the line of Christian Wetherbee with Citigroup. Please proceed.

Speaker 5

Hi, guys. Good morning. This is Matt on for Chris. Thanks very much for taking the question. First, I wanted to just take some time to see what you might be hearing in the market from some of your customers. You know, how are they looking at, you know, dry bulk, and the rate environment moving into year-end? And, further, sort of thinking more so in, in 2024, particularly as it relates to the, the sustainability of increased Chinese import activity and, you know, as that should be, you know, a, a key business driver moving forward. Just, any details there I think would, would be very helpful.

Polys Hajioannou (Chairman and CEO)

Yes, good morning to you. I'm Polys. Look, the Chinese activity, the imports, we have seen that have been increasing lately on iron ore, and we think that this will be supportive to the market. On the other hand, we see a lot of activity into India. There's a lot of cargos into India from all over the, from all over the world, not only from nearby countries like Indonesia or Australia, but even from the Atlantic Basin, which is giving more support to the market and made at low levels. For 2024, the expectation is that we will see better demand than we had in 2023, if we don't have big surprises on the geopolitical front, events that are happening in various parts of the world.

So we expect demand to do better, and we expect the capacity utilization to be better than it was in 2023. Now, this means in freight rates, it's quite possible we will see a better market. But again, we don't expect something, something, anywhere near to the levels we were in 2021 or 2022. Overall, because the order book is at comfortable levels for 2024 and 2025, we don't expect the yards to unexpectedly supply us for these two years. So any kind of boost on demand is gonna give positive surprise. But everything is very vague because of all the things that are happening in various parts of the world.

Speaker 5

Fantastic. Yeah, no, thank you very much for the detail. Certainly very helpful on that front. And then, so it looks like you contracted revenue took a nice step up in the quarter versus 2Q. You know, could you just touch a little bit more on what is driving that, you know, amid the market weakness, and sort of how you see that backlog moving into 2024?

Polys Hajioannou (Chairman and CEO)

Yes. And look, the contracted revenue mainly we have is from our Capesize bulk carriers. Capesize is when the market is moving higher, it's easier to fix for three years or more, as FFA curve responds. It's not the same on Panamax's. Usually, in a good market, the Panamax FFA market responds for the next three or four quarters, so it's not enough to secure long-term charters with you know, increased activity. So we have some Capesizes that they are still fixed until 2025. We have one vessel that is fixed until 2031. These are giving us contract revenues for year, for the years to come. Our new buildings are easily fixed in one year TC rates.

They are in demand because they are very economic ships, and we're very optimistic also for next year, when we will have the EU ETS start applying, that those vessels with very low consumption will be in a good demand for European cargos. We think that charters will be trying to fix these phase III vessels into European business. At the moment, it's not happening because still no one is paying attention to the ETS, but, you know, we are prepared, and we expect from next couple of quarters to start seeing increased activity for the modern ships sailing into Europe.

Speaker 5

Great, yeah, really helpful. Very, very insightful detail. And then just for my last question, you know, given the developments going on in the Middle East currently with, you know, international turmoil, have you noticed this impacting specific trade lanes that you operate in, or do you see it impacting, you know, any areas, you know, that you operate in? Just trying to get a little bit of a better understanding of how that could be, you know, potentially impacting international trade routes.

Polys Hajioannou (Chairman and CEO)

It's too early to get any change of trade patterns because of what is happening in the Middle East. I think that also during the Russian conflict with Ukraine, it took some time before we saw the changes on the trade lanes, and it was mostly because of sanctions that are created extra ton miles and extra cargos for, especially for the tanker owners. In the Middle East, there's not so much cargo going into Israel. It's not affecting a lot of dry bulk movement.

It was very limited cargos going into there because Israel was self-sustained on electricity and not so many coal cargos as it was in the past five or 10 years. The conflict, of course, there is one concern that we don't know how Egypt will react should there be an escalation of what is going on in Israel, and we hope there won't be. But we don't know if there is a movement of people if Egypt will take some steps into reducing the amount of commercial ships passing through Suez Canal. This is a question mark.

For the months to come. Again, we hope that this does not happen because that is not nice to see happening. But everything is uncertain. I think we need the next two, three months to understand how this conflict will be resolved because one way or another, it has to be resolved for humanitarian purposes, a solution must be found. And hopefully things will not escalate because it's against humanity if it escalates. But at the moment, it's too early to have any clear opinion or picture.

Speaker 5

Understood. Understood. Got it. Okay. Thank you very much for the detail, and, and I will turn it over on that note.

Dr. Loukas Barmparis (President)

Thank you.

Operator (participant)

Ladies and gentlemen, as a reminder, to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Climent Molins with Value Investor's Edge. Please proceed.

Climent Molins (Head of Shipping Research)

Good morning. Thank you for taking my questions. I wanted to start by asking about the order for two methanol dual-fuel Kamsarmaxes. Could you provide some commentary on the main drivers behind the decision to offer methanol instead of, say, LNG or ammonia dual fuels? And secondly, have you seen a lot of interest from potential charterers for these kind of assets?

Dr. Loukas Barmparis (President)

Hello, I will take this.

Climent Molins (Head of Shipping Research)

Yes.

Dr. Loukas Barmparis (President)

Yes, I may take this response. It's Loukas. Look, first of all, the first part, if we discuss about ammonia or methanol, basically, ammonia is not well developed yet. There is a, it's, it has those, so it needs more development. We cannot discuss at this stage, availability of ammonia ships out there. Maybe this can happen after two, three, four, five years. While methanol ships are there, they are real. The question about methanol ships is whether the, at the end of the day, we will be able to find a green methanol instead of brown methanol, that will... Which means that if we are able to use green methanol, the vessel will operate closely to a zero greenhouse gas emissions well-to-propeller.

Now, the second, another part, which is, interesting, is that that's why we need to have dual-fuel methanol ships and not, only methanol ships. Because, in the first period, we expect that the vessels will run with fuel as all the other ships, and, they will be phase III as, the other ships that we have already ordered. And the important thing for us is that, in total, we have, about 14 vessels on which are phase III.

Just think a fleet, I mean, after a couple of years, two, three, four years from now, a fleet which is of a size of between 40 million-50 million, or 40,000-50,000 vessels, that will consist of 14 phase III ships and two and 12 eco ships. About 36% of the fleet out of 40-45 vessels will be very modern to compete. We will have one of the most young and modern fleet able to tackle all new environmental regulations. Why we need to go towards, let's say, an alternative fuel? The question is simple.

Back in 2019, 2020, we started ordering ships for phase III, which is basically [ships] that will be the, they have a design after 2025. That was the first step. Of course, we updated our fleet environmentally and so by the end of this year, 20 vessels will be upgraded with low-friction paints and have a substantially better efficiency. This is a logical step to assess, study and conclude an alternative design which leads to decarbonization. So it's not something which is peculiar for us because we are always in the forefront of technology.

We want to be the most advanced reliable company, and we couldn't, I mean, miss the target of start ordering methanol ships, which is a real solution, while methanol while ammonia is not. One other point that I want to make is that sometimes some people may ask about our OpEx, and I want to just again once more clarify that in OpEx we include the cost of paints because they are not amortized, they are expensed immediately. So that's why sometimes we are showing some additional OpEx because of the large number of dry dockings, which include environmental upgrades.

Climent Molins (Head of Shipping Research)

Thank you. Thanks for the call. Your fleet will indeed be very modern. I actually also wanted to ask about operating expenses, which declined significantly quarter-over-quarter. Ex dry dock, what were the key drivers behind the decline towards more normalized levels? And looking ahead, should we expect them to remain at levels similar to this quarter?

Dr. Loukas Barmparis (President)

You mean the OpEx?

Climent Molins (Head of Shipping Research)

Yeah.

Dr. Loukas Barmparis (President)

Got it. Yeah, I think that's... Yes, I think that, according to our budgets, we are about there. We expect to have a similar OpEx, let's say, the... I mean, we cannot say about quarter to quarter because sometimes we do more dry dockings in one quarter, so they can go higher. But, during a period of a year, I think we have a similar amount of dry docking scheduled for next year as it was before. So we expect a stability in our OpEx. I think that also reply to this is that sometimes some quarters are more OpEx-intensive, and then the other quarter is less intensive. Sometimes it happens like this, but you should see the hourly, the average of the year.

Climent Molins (Head of Shipping Research)

Thank you. That's all for me. I'll pass it over. Thank you for taking my questions.

Dr. Loukas Barmparis (President)

Yes, thank you.

Operator (participant)

Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to pass the call back to Dr. Barmparis.

Dr. Loukas Barmparis (President)

Thank you very much for attending this conference call once more. We are looking forward to see you again and discuss again with you the next quarter. Thank you very much, and have a nice day. Thank you. Bye.

Operator (participant)

Bye. This concludes today's conference. You may disconnect your line at this time. Thank you for your participation.