Safe Bulkers, Inc. (NYSE:SB) Q3 2022 Earnings Conference Call November 10, 2022 10:00 AM ET
Company Participants
Loukas Barmparis – President
Konstantinos Adamopoulos – Chief Financial Officer
Polys Hajioannou – Chairman and Chief Executive Officer
Conference Call Participants
Chris Wetherbee – Citigroup, Inc.
Operator
Thank you for standing by, ladies and gentlemen, and welcome to the Safe Bulkers Conference Call to discuss the Third Quarter 2022 Financial Results. Today, we have with us from Safe Bulkers, Chairman and Chief Executive Officer, Mr. Polys Hajioannou; President, Dr. Loukas Barmparis; and Chief Financial Officer, Mr. Konstantinos Adamopoulos. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Following this conference call, if you need any further information on the conference call or on the presentation, please contact Capital Link 212-661-7566. I must advise you that this conference is being recorded today. [Operator Instructions]
Forward-looking statements will be read now. Before we begin, please note that this presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Concerning future events, the company’s growth strategy and measures to implement such strategy, including expected vessel acquisitions and entering into further time charters. Words such as expects, intends, plans, believes, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements.
Although the company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates, which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the company. Actual results may differ materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are not limited to, changes in the demand for drybulk vessels, competitive factors in the market in which the company operates, risks associated with operations outside the United States and other factors listed from time to time in the company’s filings with the Securities and Exchange Commission. The company expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company’s expectations with respect thereto or any change in events, conditions or circumstances on which any statement is based.
And now I will turn the floor over to Dr. Barmparis. Please go ahead, sir.
Loukas Barmparis
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 2022. The third quarter was a good quarter. We had a satisfactory financial performance of $0.41 earnings per share and we maintain our dividend policy of $0.05 per share. We operated in a gradually weakening charter market environment compared to the previous quarter, with increased revenues due to past contracts and earnings from Scrubber fitted vessels and higher interest expenses due to increasing interest rates. In this environment, we maintain a strong balance sheet, leverage comparable to our fleet scrap value and liquidity and capital resources providing us with the required flexibility.
As we see in Slide 3, certain of our characteristics differentiate us from our peers. The quality of our fleet and our fleet expansion on one hand, we leverage liquidity and protected revenues on the other, not only rewarding our shareholders through the dividend policy but in parallel creating intrinsic value through an extensive fleet expansion program with Phase 3 newbuilds.
We would like to focus on our fleet quality and our environmental investments presented in Slide 4 because this is the basis on which we compete in the market against our peers. All 44 vessels in our fleet, we have ballast water treatment system by the end of 2022, all eight of our Capes will have scrubbers by the end of 2023 and 21 vessels will be environmentally upgraded by the end of 2023. Furthermore, our fleet by the end of 2023, will consist of 19 vessels, 12 being Eco, out of the total fleet 19 vessels will be 12 ecoships and seven Phase III ships.
Please see in Slide 5, the environmental ratings according to the rightship of our two Phase III newbuilds, which we took deliver off during 2022, the MV VASSOS and the MV Climate Respect. These vessels are the best environmental performers globally in the dry bulk market on their deadweight tons and basic savings in fuel consumption. We intend to compete on this basis with our newbuild fleet with seven subships by the end of 2023 and 10 by the end of 2024.
We would like to focus on our improved capital structure in Slide 6. We are maintaining a comfortable level of $448 million compared to our fleet scrap value of $390 million with a peak of 10.5 years of age. During 2022, we had redeemed $37 million, about 8% with fair price C shares. At the same time, our average interest rate stands at 2.91% for our consolidated debt with a portion of €100 million at 2.95% fixed interest rate in unsecured 5 years bond.
Strong liquidity is presented on Slide 7. Our liquidity and capital resources are maintained strong at $266 million, which together with the contract revenue of $327 million, as seen on Slide 8, provides flexibility to our management in capital allocation. We are well hedged against the market cape volatility. Currently, the Baltic Capesize Index 5TC stands at $12,400 per day, while as in the left graph of Slide 8, 7 out of 8 of our Capesize class vessels are charted under period charters with 2.8 years average remaining duration and $22,700 average daily charter rate, totaling to $185 million contracted revenue from Capes alone.
As shown on Slide 9, we have maintained a level of dividend at $0.05 per share over last quarters translated to an improving dividend yield mainly reflecting prevailing conditions in the capital markets. Focal points in this uncertainty of this capital markets and the world economy is that we continue to direct a portion of our free cash flow to finance our vessels that will provide us with competitive advantage in terms of fuel consumption and environmental performance while maintaining our leverage at relatively low levels, as we have already discussed. In addition, we have repurchased 2.8 million of common shares.
In Slide 10, we show the relationship amongst our debt, fleet scrap value, contracted revenue, cash and liquidity and CapEx requirements. With the strong company balance sheet fundamentals, ample liquidity leveraged at a comparable level to fleet scrap value, secured cash flows from reliable counterparties, fleet expansion with 11 Phase III newbuilds are ahead of competition and environmental regulations of 2023 on board. The government is well positioned to react on challenges and take advantage of opportunities.
Let me now summarize the key takeaways on Slide 11. We believe that Safe Bulkers fundamentals offer financial flexibility to reflect market challenges and pursue opportunities. We believe that Safe Bulkers with [indiscernible] is among first companies that we successfully navigate the environment challenges of the energy transition and with the ageing dry bulk fleet and will tackle with the global uncertainties by utilizing the [indiscernible] qualities with its fleet and the efficiencies of each large-scale environmental upgrading program. In parallel to the company’s expansion, we believe, we will offer a meaningful dividend. We believe the company is well positioned for the long run with an environmental based environments.
Now let’s move to the Slide 13 for the Industry Update. We present on the graphs the current status of the market. Fleets have been able – driven by the commodity dynamics [indiscernible] earlier this year. On the Panamax – commodity’s market is likely to support the trade market throughout this year.
On the supply side, as presented in Slide 14, the orderbook started at 8.6% which is relatively low levels compared to the past and that we remain cautiously optimistic despite the global stability caused by war, energy crisis and evidently on inflationary pressures. We do expect scrapping to accelerate – of fleet aging, about 25%, 15 years old and environmental regulations will kick off in 1st of January 2023.
Moving on to Slide 15. We present the development of the CRB commodity index, which currently stands at a 5-year high. The index reflects basic commodity future prices, for example, energy, agriculture, precious metals and industrial metals, which represent leading indicators for shipping. Normalization of monetary and fiscal policies that delivered support during the pandemic is fully in demand as policymakers and lower inflation back to target. The October quarter of IMF downgrades expected growth of global GDP at 3.2% for 2022.
Global inflation has been revised up due to the [indiscernible] price increases. The ordering price pressures on food and energy prices as well as lingering supply-demand balances and is anticipated to reach 8.3% this year and 6.5% for the 2023. In 2023, discretionary monetary policy is expected to affect global output, with a projected increase by just 2.7%. The forecasted global dry bulk demand growth is expected to increase only by 1% in 2022 and also headwinds for the macro outlook.
In China the deepening of real estate crisis have led growth to be revised downward with major global and dry bulk spillovers. We expect that the electrification will be a major growth driver of global investments in renewable electricity capacity will continue to rise. An increase in several economies are in a growth slowdown or outright contraction. The global economy’s future restricting on the successful calibration of monetary policy, the cost of the war in Ukraine and the possibility of direct pandemic related supply disruption, for example, in China.
Turning to the Slide 16. We focus on increased value creation as a result of our investment in scrubbers technology currently installed on 18 of our vessels. The very low sulfur fuel oil price differential is translated to increased revenues for the scrubber fitted vessels. Presently, Hi-5 in Singapore stands at about $270 per ton and about 205 per ton for 2023 as the futures market. At this assured price for 2023, the implied scrubber gain potential is about 23 million for our 18 scrubber vessels. And as we said already, we are in a portion [indiscernible].
On our market on Slide 17, during 2022, there has been an increased industry wide volatility driven by geopolitical disruptions. The ESG framework and Paris agreement adherence becomes increasingly important in dry bulk trade and as result, demand for technological efficiency creates opportunities for those willing to invest as Safe Bulkers has done. Such environmental efficient fleets – company valuations and lead to two tier market with differential in earnings capacity of such vessel. Furthermore, there might be spill-over implications such as coal scale-back, ‘green’ – scrapping and near-shoring as a result of the potential environmental regulation. The market may tighten even further as a result of the uncertainty in the environmental regulation the transition towards green energy and the global inflationary environment.
Now let me pass the floor to our CFO, Konstantinos Adamopoulos, for our financial overview.
Konstantinos Adamopoulos
Thank you, Loukas, and good morning to everyone. As a general note, during this quarter we operated in a gradually weakening charter market environment compared to the previous quarter, with increased revenues due to past contracts and earnings from Scrubber fitted vessels and higher interest expenses due to increasing interest rates.
In Slide 19, we present our quarterly net revenues and adjusted EBITDA both standing at satisfactory levels. Slide 20, we present our strong chartering performance an example of our management alignment. We achieved a daily time charter equivalent of $23,403 compared to $24,427 during the same period in 2021. The net income for the third quarter of 2022 reached $51 million compared to net income of $55.4 million during the same period in 2021.
Our daily OpEx stood at $4.949 versus $4,608 last year. Our daily OpEx, excluding dry-docking pre-delivery expenses stood at $4,571, almost unchanged from last year’s figure of $4,570, our all-in OpEx and G&A for Q3 2022 stood at $6,309, which we believe is one of the most competitive compared to our peers. This number includes all our dry-docking and pre-delivery expenses as well as all our directors and officers compensation. We try to do the right thing. For example, we have 0% commission of chartering management for our managers and through our managers and management direct relations, we achieved lower average total chartering commissions to third parties of 4% compared to the market standard of 5%.
Moving to Slide 21. We’ll present our fleet contracted employment percentage, noting that we have contracted revenue of approximately $314 million net of commissions from our non-cancelable spot deals and charter contracts, and this does not include any scrubber benefit as of 4th of November. We’ll present the Slide 22 and 23, our low breakeven point for the nine months of 2022, which we believe is one of the load always in the industry, and the cash flow bridge millions for the same period. The global economy is experiencing a number of turbulent challenges, inflation higher than what was seen in several decades, tightening financial conditions in most regions, Russia invasion of Ukraine and the lingering COVID pandemic all weigh heavily on the market outlook. Of course, our main focus is lean operations in this inflationary environment.
On Slide 24, we present our own balance sheet analysis. Our balance sheet is very healthy and assets are presented in the book value, noting that [indiscernible] volumes exceeded the book values considerably.
Moving on to Slide 25 with our quarterly financial highlights for the third quarter of 2022 compared to the same period of 2021. Our adjusted EBITDA for the third quarter of 2022 stood at $66.9 million compared to $67.7 million for the same period in 2021. Our adjusted earnings per share for the third quarter of 2022 was $0.39, calculated on a weighted average number of 120.4 million shares compared to $0.40 during the same period in 2021, calculated on a weighted average number of 119.9 million shares.
In conclusion, on Slide 26, we show our quarterly operational highlights for the third quarter of 2022 compared to the same period last year. Based on a satisfactory financial performance, the company’s Board of Directors declared the $0.05 dividend per common share. We would like to emphasize that the company is maintaining a healthy cash position of about $136 million as of 4th November 2022, another $144.3 million in available revolving trade facilities as well as $51 million in undrawn borrowing capacity available on the two loan facilities in relation to newbuild vessels. That’s combined liquidity of over $330 million that provide us with significant firepower.
Furthermore, in addition to our contracted liquidity, we have contracted revenue from our non-cancelable spot deals and charters of more than $313 million, net of commissions and excluding scrubber revenue and additional borrowing capacity on relation to seven debt-free existing vessels and seven newbuilds upon their delivery.
We believe that a strong liquidity and relatively low leverage will enable us to be flexible with our capital structure, expanded fleet, while still rewarding our shareholders. Our press release presents in more detail our financial and operational results, and we are ready now for the Q&A session.
Question-and-Answer Session
Operator
Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Chris Wetherbee. Please proceed with your question.
Chris Wetherbee
Hi. Good morning. Yes, so if we could just dig in a little bit more into the Chinese COVID lockdowns, on softening demand over there in China and how that’s really impacting bulk shipments into year-end as well as the first half of 2023. I didn’t know if there was some additional color that you could shed on the situation and what you’re hearing out of there. And if there’s – if you have an anticipation of where that’s going to be headed both near term and into the first half of next year, that would be great.
Polys Hajioannou
Yes, situation with COVID in most countries is back to normal, and the trade is very normalized, including major hubs like Singapore has opened up where ships can do group changes and take supplies and all the necessary. In China, the situation is still a bit uncertain due to the low vaccine ratio of Chinese population. So there is still this question mark of how the winter will develop. And if there would be lockdowns or zero COVID policy will be maintained. For the time being, it’s under control, we don’t see something extraordinary happening there and business is as usual as it was over the summer. Now we see some lockdowns there then this will create congestion. And this in the previous one was not necessarily a bad thing to have in the trade market. But for the time being, it looks okay, but it’s still early in the winter.
Chris Wetherbee
That’s very helpful. Thanks for that additional color. And moving on to fleet sizing. So it looks like you guys reported 44 vessels within your fleet within this quarter in comparison to 42 in 2Q and 40 in 1Q. So just looking forward at the cadence of the fleet additions in newbuilds, what are you expecting in terms of fleet sizing moving forward both into 4Q and again into the first half of next year?
Polys Hajioannou
Yes. Look, the addition of the new ships that they start coming to already delivered and five more will be delivered in 2023. They are happening at a very good time as far as the contribution of that part of the fleet to the revenue of the company simply because the ships are the latest technology, very economical on fuel oil consumption at the time when fuel oil prices are around $700 per metric ton. So these ships when we order them back in 2020, we are estimating that fuel oil price would have been around $400 or $500. So at present levels, the ships could easily perform $5,000 but they better than other modern ships in the market. So it’s a very welcome contribution to the company at what it looks to be a challenging year ahead of us, mainly from non-shipping reasons, for reasons related to the war and reasons related to economies falling into a recession because of high interest rates and efforts to help the inflation created because of energy prices and the war.
So for the time being, we consider this additions very good, and they are very welcome coming into the fleet in 2023. At the same time, we are taking advantage of the high fuel oil prices to install scrubbers on the remaining capes in our fleet in order to work in spreads of around $200 for 2023, which are – give a very quick payback of 25 years for those ships. So I believe that 2023 is a year also to concentrate on environmental investments in the fleet. So we will – we are planning to increase the dry-dockings in the year of 2023 from the normal eight or nine we have every year to possibly 15 or 16 dry-dockings, taking advantage of the lower freight market. And at the same time, to invest in environmental improvements of the fleet to even be more competitive in the years to come. Because I believe that the last couple of years, shipping hasn’t done much towards decarbonization. But now with the low freight market, people will be more concentrated on how to invest surplus liquidity into environmental upgrading of their fleets. We are doing in twofolds. One is a Phase III newbuilds. And the second fold is upgrading our existing ships earlier than scheduled with the improvements on environmental devices like bags and other things and low-price and other things that today’s technology provides.
Konstantinos Adamopoulos
You see, I mean if you consider that a fleet of to-date, it is about 44 vessels. And at the end of 2023, 19 of our vessels will be either Eco or Phase III vessels. This means something for the ability of the company and the timing of the orders and everything. The other thing we consider 21 out of the other vessels that we upgraded environmentally. So to understand that we have gained substantially the revenue during 2023 in terms of environmental investments because this corresponds directly to our ability to take these cases at higher charter rate compared to the average in the market based on the consumption not only this is one part so another indication of how when we are prepared is that Capes, for example, we have expanded the fleet during 2022 and earlier. And now it happens that while the market is 12,000, we have charted on average for two years 22,000. So this shows how proactive our management has been and what we are trying to achieve by increasing our revenues and being always on-time reading and trying to reach the market as better as possible. Thank you.
Chris Wetherbee
That’s certainly very helpful. So in terms of the five additions you’re expecting to take on in 2023, I mean, is that going to be – do you have any indicator of is that going to be in the first half, the second half? Or any additional color around that?
Konstantinos Adamopoulos
Yes, four in the first half and three are in the second half. So we start in Q1 and Q2, then we have three more in the second half. So we are pretty much evenly spread throughout the year. So those ships will be, then we have three more in 2024, one more in beginning 2025. So by that time, we expect that the company would be able to assess better what new technologies other than the IMO Phase III, Tier 3 vessels. What new technologies will be offered by shipyards and what type of new engines will be offered by shipyards before considering the next move.
I’m recalling that in the past, we were considering two years ago, ships with dual engine powered by LNG. Later on, other things – other proposals, other ideas came around with vessels burning ammonia, later came methanol. Now it’s coming hydrogen. So there are so many things that they are appearing and disappearing in the last 12 months, but there is good that ship owners did not dive into these stories before markets becoming more clear.
But I believe by the time we complete our newbuilding program in the next year or year and a half, we will have more concrete evidence on what the company’s future investment would be. And to that extent, I mean, the program we are doing here as a company, you have seen on Slide 10 the liquidity we have in the company right now, it’s more on the CapEx to receive the nine new buildings, nine remaining newbuildings from the yard. So we are planning those the future debt on those newbuildings that we will be receiving in 2023 and 2024 to be wholly invested on new technologies.
So from our partners company, we are doing what we have to do and what we can do to stay sustainable in the future and to be able to be competitive in the future. So this is the planning we have done. And for this reason, we are happy today that we are getting delivery of these ships without the additional burden of any finances. So we are very well prepared when the yards develop the next technologies to be able to participate on those discussions.
Chris Wetherbee
Thank you very much for that additional color.
Konstantinos Adamopoulos
Thank you.
Operator
Thank you. [Operator Instructions] Our next question is from the line of [Gabriel Borate with Safe Bulkers]. Please proceed with your question.
Unidentified Analyst
I just wanted to get a little bit of insight into – I know you guys provided some insight into your fleet and how you’re looking to upgrade it. But my question kind of relates to the retiring of the previous vessels and how that was either losses or gains are being recorded. Is that being recorded as part of your normal operations? Or is that being charged against the retainers?
Polys Hajioannou
If I go to the question is what we do with the rest of the fleet, the older ships or something else you asked?
Unidentified Analyst
Yes. So what I’m asking kind of is the proceeds, whether it’s a gain or a loss on the old fleet, if that’s being reported against your operating income?
Polys Hajioannou
Look, the old fleets, the old part of our fleet is all ships we contracted, we contracted as newbuildings 20, 15 years ago or 10 years ago at very healthy prices. So we don’t have expensive newbuildings in our fleet. Maybe you’re showing a month ago that we showed one 2006 build vessel for $16 million and the planning was to continue and is to continue, maybe selling selectively if the market allows a couple of more older ships and create more liquidity for new technology. But even if we don’t sell those older ships, and we plan to play them till their economic life at the end their economic lives.
Unidentified Analyst
All right. Thank you so much. I appreciate the reply.
Operator
Thank you. At this time, there are no additional questions. I will now hand the floor back to management for closing remarks.
Polys Hajioannou
So there are no other questions?
Operator
No, there is not. Sir, if you’d like to make some additional comments, please go ahead.
Polys Hajioannou
Yes. Thank you very much for attending our webcast for the Q3 results of 2022. And we are looking forward to discuss again with you in next quarter. Thank you again, and have a nice day.
Operator
Thank you to everyone that participated in today’s call. You may now disconnect your lines at this time. Have a wonderful day.
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