Star Bulk Carriers Corp. Q2 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen. And welcome to the Star Bulk Carriers Conference Call on the Second Quarter 2022 Financial Results. We have with us Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Nicos Rescos, Chief Operating Officer; Mr. Simos Spyrou and Mr. Christos Begleris, Co-Chief Financial Officers 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. I must advise you that this conference is being recorded today. I will now pass the floor to one of your speakers today, Mr. Begleris. Please go ahead, sir.

Thank you, Operator. I am Christos Begleris, Co-CFO of Star Bulk Carriers, and I would like to welcome you to our conference call regarding our financial results for the second quarter of 2022. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on slide number two of our presentation. In today’s presentation, we will go through our second quarter results, cash evolution during the quarter, an overview of our balance sheet, an update on our scrubbers and vessel operations, the latest from the ESG front, and views on industry fundamentals before opening up for questions. Let us now turn to slide three of the presentation for a summary of our second quarter 2022 highlights. Net income for the second quarter amounted to $200.2 million with an adjusted net income of $204.5 million or $2 adjusted earnings per share. Adjusted EBITDA was at $258.3 million for the quarter. For the second quarter, as per our existing dividend policy, we declared a dividend per share of $1.65, payable on or about September 8, 2022. The graph on the bottom of the page highlights the cumulative performance over the last 12 months, illustrating the strength of the platform in the robust dry bulk market. Our last 12 months’ adjusted EBITDA is $1.12 billion, and adjusted net income is $907 million. Over the same period, we returned a cumulative dividend of $6.55 per share or $674 million to our shareholders. In the top right of the page, you will see our daily figures per vessel for the quarter. Our time charter equivalent rate was $30,451 per vessel per day. Our combined daily OpEx and net cash G&A expenses per vessel per day amounted to $5,684. Therefore, our TCE less OpEx less G&A is $24,767 per vessel per day. Looking at our chartering coverage for the third quarter of 2022, we have covered 61% of our fleet’s available days at the daily rate of $29,000 per day. Slide four graphically illustrates the changes in the company’s cash balance during the second quarter. We started the quarter with $444.4 million in cash and generated meaningful positive cash flow from operating activities of $239.9 million due to the strong freight market. After including debt proceeds and repayments, CapEx payments for ballast water treatment system installments, and the first quarter dividend payment, we arrive at a cash and cash equivalent balance of $385.6 million at the end of the quarter. Please turn to slide number five, where we highlight the continued strength of our balance sheet. Our total cash today stands at $474 million. Meanwhile, our total debt stands at $1,410 million. We have refinanced $310 million of old facilities, decreased our annual regular debt repayments by $11 million and reduced our interest costs by $4 million per year as a result of achieving significantly low margins. Our next 12 months’ amortization is $188 million. After the completion of the recent refinancings, we have 12 and 11 vessels with market value in excess of $210 million, improved debt maturities until 2024, where we have $2 million payments part of which we are in the process of refinancing. In an increasing interest rate environment, we have fixed 55% of floating interest rate exposure at an average fixed rate of 45 basis points and an average remaining maturity of 1.7 years. I will now pass the floor to our COO, Nicos Rescos, to talk about the scrubbers and provide an update on our operational performance.

Thank you, Christos. In slide six, I would like to update investors about our scrubber investment. We are pleased to report, as of the end of June, in a time span of 2.5 years, we have reported $250 million scrubber investment. This cost includes unrelated capital expenditure, as well as off-hire costs involved in the installation of our scrubbers. On the scrubber utilization front, Star Bulk achieved 108,000 scrubber operating days, with approximately 99.5% system availability for us. This translates to a consumption of approximately 700,000 tons of HSFO annually. The average Hi5 spread achieved during the second quarter was $323 per ton. As you can see at the bottom part of the slide, the total cost Hi5 spread is in backwardation versus the current market conditions. Please turn to slide seven, where we provide an operational update. Operating expenses excluding non-recurring expenses were at $4,674 for the quarter, second quarter 2022. Net cash G&A expenses were $1,010 per vessel per day for the same period. Despite continued adverse COVID-related expenses and inflationary pressures, which have a direct impact on our operating expenses, the combination of our in-house management and scale of the group enables us to sustain a competitive cost base and maintain our position as the lowest-cost operator amongst our peers. Additionally, we continue to rank at the top among our listed peers in terms of Rightship Ratings. Slide eight provides the fleet snapshot and some guidance around our future dry bulk and ballast water system expenses for the next 12 months and relevant total off-hire days. Our expected dry bulk expense for the next 12 months is estimated at $33.2 million for our 33 dry bulk vessels, with another $13.4 million towards our vessel upgrade CapEx. In total, we expect approximately 1,000 off-hire days for the full 12-month period. We anticipate that 98% of our fleet will be fitted with ballast water systems by the end of Q4 of 2022. The above numbers are based on current estimates around dry bulk and retrofit planning, vessel employment, and yard capacity. I will now pass the floor to Chief Strategy Officer, Charis Plakantonaki, for an ESG update.

Thank you, Nicos. Please turn to slide nine, where we highlight our continued leadership on the ESG front. A major new development is the decision by Star Bulk’s Board of Directors to establish an ESG Committee, which will guide and support management on environmental, social, and governance matters, ensuring that the company promotes and integrates ESG in its strategy and business operations. On the environmental front, Star Bulk has taken part for a second year in the annual assessment cycle for the Carbon Disclosure Project. In addition, we actively participate in the Iron Ore Consortium along with some of our major charters to assess the feasibility of the green corridor on the Australia-East Asia route up to 2050. Furthermore, in an effort to continuously improve our sustainability performance, we have participated in the annual S&P Global Corporate Sustainability Assessment, which will provide us with a score and ranking based on various financially relevant ESG criteria. Finally, from a societal point of view, Star Bulk has partnered with UNICEF to provide psychosocial support to refugee women and children who have fled to Greece as a result of the war in Ukraine. I will now pass the floor to our CEO, Petros Pappas, for a market update and his closing remarks.

Thank you, Charis. Please turn to slide 10 for a brief update on supply. During the first half of 2022, a total of 15.6 million deadweight tons were delivered, and 1.8 million deadweight tons were sent to demolition for a net fleet growth of 13.8 million deadweight tons, which is 1.5% year-to-date and 3% year-on-year. The supply outlook is the best in the recent history of dry bulk shipping. The order book stands at only 7.1% of the fleet, with just 9.4 million deadweight tons reported as firm orders between January and June. Uncertainty about future propulsion, along with surging shipbuilding costs, has helped keep new orders under control, while shipyards continue to fill their 2025 capacity with vessels that are more profitable for them. Furthermore, despite the correction of global steel prices during the second quarter, inflated scrubber prices may simplify the demolition of overage tonnage without scrubbers during seasonal downturns. We expect this to intensify after the implementation of the EEXI-CII regulations that come into effect in 2023. The average steaming speed of the fleet has decreased by 2.8% during the last year to 11.3 knots, as a result of a strong increase in bunker costs. We expect oil prices and bunker costs to remain inflated for the next quarters amidst the sanctions imposed by western countries on Russia. This situation, along with new environmental regulations, will continue to incentivize slow steaming and support wider scrubber savings. Global port congestion, especially Capesize congestion in China, has experienced a decline during the last few months as pandemic-related restrictions are easing and reduced arrivals help alleviate delays. Having said that, congestion for smaller vessel types remains high due to changes in trading patterns and seasonal bottlenecks. As a result of the above trends, net fleet growth is projected to drop below 2.5% in 2022 and is unlikely to exceed 2% during 2023 and 2024. Let’s now turn to slide 11 for a brief update on demand. According to Clarkson, total dry bulk trade during 2022 and 2023 is projected to expand by 0.1% and 1.7% in tons and by 1.4% and 1.9% in ton-miles, respectively. During the first half of 2022, total dry bulk volumes were down by approximately 0.5%, mainly due to a 6% decrease in Chinese imports as a result of a candid zero COVID policy, export disruptions, and the war in Ukraine. However, growth is expected to recover during the rest of the year, supported by export seasonality and winter destocking needs worldwide. Furthermore, there is a softening of coal, grain, and minor bulk trade patterns to longer-haul routes that will inflate ton-miles and help moderate the weaker volumes seen during the first half of 2022. Iron ore trade is expected to expand by 0.2% in tons and 0.1% in ton-miles during 2022. China’s steel industry went through a strong slowdown last year due to significantly higher input costs and a weak real estate market. During the first half of the year, output from China decreased by 6% and from the rest of the world by 3% due to negative profit margins and a drop in production from the high energy-intensive electric arc furnace. Nevertheless, China's big iron output is experiencing a recovery supported by infrastructure stimulus, and iron ore port stockpiles during the second half of the year have seen a sharp decline. During the first half of the year, Brazil's iron ore exports decreased by 7%, with Vale simply announcing annual guidance between 310 million tons and 320 million tons, which is flat from last year but indicates higher shipments for the rest of the year. Coal trade is expected to contract by 0.4% in tons but expand by 3.3% in ton-miles during 2022. Sanctions imposed by major importers on Russian coal, combined with limited capacity for expansions in Atlantic producers, have driven coal prices to record high levels. European buyers are stocking coal ahead of winter by substituting imports from Russia with Australia and Indonesia. Meanwhile, Russia is exporting more coal to China, India, and other Asian countries, benefiting ton-miles. During the first half of the year, China and India have significantly increased their domestic production to raise stock levels, reduce prices, and become less dependent on imports. However, India’s stockpiles remain low, necessitating a high imported coal mix to avoid last year’s blackouts, resulting in strong demand expected after the monsoon season. Grain trade is projected to contract by 3.7% in tons and 0.5% in ton-miles during 2022. Ukraine exports account for approximately 10% of total grain trade, and since the invasion in late February, exports have fallen to nearly zero. During the first half of the year, grain shipments declined by 11.5% due to wartime disruptions and weather conditions in Brazil, along with a surge in prices. Conversely, U.S. soybean outstanding sales stand at record-high levels for this time of year, and the Brazilian corn season has started with inflated volumes indicating stronger grain trade during the second half and fourth quarter. Looking ahead, it’s projected that China’s demand for grains will remain strong as their five-year plan focuses on food security and inventory building. Minor bulk trade is expected to expand by 1.1% in tons and 2.1% in ton-miles during 2022. Minor bulk trade has the highest correlation to global GDP growth and is being supported by strong containership markets. The IMF projects global GDP growth will slow down to 3.2% during 2022 and 2.9% during 2023. Shortages of steel products in the Atlantic and positively priced arbitrage will further inflate backhaul close from the Pacific and provide support for year-tonnage. Additionally, expanding West African bauxite exports continue to inflate ton-miles, with year-to-date exports up by 8%. Finally, we remain optimistic about the prospects of the dry bulk market, as the company is well-positioned to enjoy and take advantage. The record low order book, combined with the lack of yard space, upcoming environmental regulations, high bunker costs, and some pressing orders and speeds create a favorable supply-side picture for our industry in the long term. On the demand side, although there are short-term risks, strong commodity flows over longer distances due to changes in trade partners are expected to support earnings over the coming years. I will now pass the floor back to the Operator to answer any questions you may have.

Thank you, sir. I show our first question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.

Hi, guys. This is Chris Robertson on for Amit. Thanks for taking our call.

Hi, Chris.

I just wanted to ask. So you have relatively young Newcastlemaxes and Ultramax vessels as well. So you spent quite a bit of time talking about the scrubber premiums. But could I ask about the premiums you are getting or uplift you are getting on the younger eco vessels?

Yeah. You are talking, Chris, about the premiums due to vessels being eco, as opposed to the benefits derived from the scrubbers?

Well, the younger vessels have lower consumption than the older vessels, so in effect, the scrap advantage works one way. On the one hand, they have the eco advantage, but on the other hand, by burning fewer tons, they generate less over-scrubber benefit. For example, Newcastlemax burns, let’s say, 40 tons, whereas an older Capesize may burn 50 tons. So while I mentioned the eco advantage, it’s less significant as it pertains to the scrubber benefit.

Okay. Yeah. That’s fair. Thanks for clarifying that. My next question is on, you guys mentioned the speed of the fleet around 11.3 knots at the moment. How do you foresee that kind of evolving over the next few quarters and into 2023? And could you quantify or look at the effective capacity reduction that you expect?

It depends on two factors. First of all, it depends on the price of bunkers and second, on how the market rates are. The highest speed correlates with very high rates and very low bunker prices, while the lowest speed coincides with very high bunker prices and low market rates. We expect bunker prices to remain elevated and as a result, we anticipate that the speed will remain around the 11 knot range give or take. Now, considering vessel performance, a 1 knot difference from 11.3 to 12.3 represents about a 9% reduction or 8.5%, yielding about a 5% effect on supply. So, 1 knot less or more in speed would impact supply by approximately 5%.

Okay. Yeah. Thanks for that. My last question here is around the unwinding of the Chinese port congestion and how it relates to the containership market. So let’s say containership rates fall from here and port congestion eases, what do you think the impact will be on the dry bulk rates?

First of all, Chinese congestion has eased mainly within the Capesize sector. I’ve seen reports indicating about 68% less congestion this year than last year. We believe it has mostly run its course. If anything, given our expectation of an uptick in iron ore trade over the next four to five months, we predict congestion for Capesize vessels in China could actually increase. Regarding the Supramax containership market and Supramax vessels, yes, if containership rates drop, this could negatively impact Supramax. However, I observed that last week, a well-known public shipping company fixed containers for three years at around $54,000, which suggests that the containership market isn't yet significantly affected to the extent of impacting Supramaxes immediately. Notably, congestion on Supramaxes has increased by around 6%. Overall, on the Capesize question, I believe we will see more congestion, while for Supramax vessels, there may be an impact, but I do not foresee it to be immediate.

All right. Yeah. Thank you very much for the time and congratulations on the solid quarter.

Thank you very much.

Thanks, Chris.

Thank you. I show our next question comes from the line of Omar Nokta from Jefferies. Please go ahead.

Thank you. Hey guys. Good afternoon. Just wanted to…

Hi, Omar.

Hey, Hamish. Yeah. Just wanted to ask you, you guys have secured several new credit facilities and extended your maturities, lowering your cost base. You now have 12 unencumbered ships. I guess, could you provide us with a sense of why you have those down in terms of market value? And what do you think about those ships going forward? Are they sales candidates, or are they there for flexibility sake?

Well, as you can appreciate, we have a policy of not disclosing the value of our fleet in relation to securing loans. The truth is that the ships are worth more in our hands than in the hands of others due to our operational efficiencies. The unencumbered ships are largely unencumbered by happenstance; they are not particularly candidates for sale.

Okay. Thank you. That’s pretty clear. This might be a little nuanced, but I noticed you spent $20 million on the buyback this year, purchasing at an average price of $25 while also issuing close to $20 million under the ATM at $31. So, you had good pricing on both fronts, but is that coincidental?

Yeah.

Was it a coincidence, or…

It’s not a coincidence. We had an arbitrage situation lined up where we could issue shares and repurchase shares at a advantageous price for shareholders. Then that arbitrage opportunity started diminishing, and our share price began to drop. So we basically spent the proceeds from the share issuance on buying back shares at a lower price, effectively retiring some shares to reduce our net cost.

Okay. And do you believe that would be how you approach similar scenarios in the future?

Well, hopefully, in the future, we will find ways to issue shares and acquire multiple vessels profitably for our shareholders.

Yes. Yes. Very good. And one final question, I saw in the cash flow statement a $35 million pre-bill outlay. I don’t think I noticed that before and just wanted to know what it was for.

Omar, this is Simos. This was just a short-term investment we placed for below six months. Since the maturity was after June 30th, under U.S. GAAP, we must report it not as a cost, but in our investment portfolio. However, these pre-bills are considered costs in reality. So we factor them into our cost and add them back to the cash balance when calculating the dividend; all of these bills are maturing within the third quarter.

Got it. Okay. Thanks for that clarification. Makes sense. Thank you and I will turn it over.

Thanks, Omar.

Thank you. Our next question comes from the line of Climent Molins from Investor’s Edge. Please go ahead.

Good morning. Thank you for taking my questions. I want to start by asking about the dividend. You have declared another very strong distribution equal to the quarter one payout despite the slightly lower cash balances at the end of the quarter. What has driven this decision, and should we expect this to be rebalanced looking at the remainder of the year?

Climent, it’s the same dividend policy. It’s not a management decision. The cash balance divided by the number of shares outstanding determined the $1.65 figure based on a formula, and it was a straightforward calculation. You can anticipate that we will follow the same mechanical process every quarter.

So, Climent, this is Christos. It was simply coincidental that the second quarter dividend matched the first quarter payment. Essentially, as Hamish mentioned, what matters is the precise cash balance at the end of each quarter and the number of shares outstanding.

Yes, that's correct.

Yeah. It makes sense. Your extensive retrofit program is yielding outstanding results, given the external spreads. While the spreads in the futures market may slow, should we expect significant support moving forward? Is there any inclination to hedge part of your 2023 bunker consumption, or do you prefer to remain open?

At the moment, there is quite a steep discount for the 2023 forward curve concerning the spot prices we are currently receiving. Indicatively, the spread in Singapore hovers around high $200s per ton, near $300 per ton, while the calendar for 2023 is at levels around $160 per ton to $170 per ton. Even factoring in that we have already recouped our investment and anticipate a robust energy market and spread in 2023, our current inclination is to remain exposed to the market. Of course, we may adjust our approach based on future developments.

All right. Thank you very much for the insights. Thank you for taking my questions, and congratulations on another excellent quarter.

Thanks, Climent.

Thank you. That concludes our Q&A session for today. At this time, I’d like to turn the call back to Mr. Petros Pappas, CEO, for closing remarks.

Thank you, Operator. No further remarks. Have a nice summer to everybody.

Thank you everyone for participating in today’s conference call. This concludes the program. You may all disconnect.