Star Bulk Carriers Corp. Q4 FY2022 Earnings Call

Thank you, operator. I'm Simos Spyrou, Co-Chief Financial Officer of Star Bulk Carriers, and I would like to welcome you to our conference call regarding our financial results for the fourth quarter of 2022. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on Slide number 2 of our presentation. In today's presentation, we will go through our Q4 results, cost evolution during the quarter, an overview of our balance sheet, an update on banker benefit and vessel operations, the latest on the ESG front, and our views on industry fundamentals, before opening up for questions. Let us now turn to Slide number 3 of the presentation for a summary of our fourth quarter 2022 highlights. Net income for the quarter amounted to $86 million and adjusted net income of $93 million or $0.84 per share, adjusted earnings per share. Adjusted EBITDA was $135 million for the quarter. For the fourth quarter, as per our existing dividend policy, we declared a dividend per share of $0.60 payable on or about March 14, 2023. The graph on the bottom of the page highlights the cumulative performance over the last 12 months, which illustrates the strength of the platform in a robust drybulk market. Our last 12 months, adjusted EBITDA is $809 million and adjusted net income is $609 million. Over the same period, we have returned a cumulative dividend of $5.1 per share or $526 million to our shareholders. Since 2021, we have declared a total dividend of $9.35 per share or $961 million. On the top right of the page, you will see our daily figures per vessel for the quarter. Our time charter equivalent rate was $19,590 per vessel per day. Our combined daily operational and net cash cost G&A expenses per vessel per day amounted to $5,182. Therefore, our TCE less operational and G&A is approximately $14,400 per day. Slide 4 graphically illustrates the cash flow bridge for Q4. We started the quarter with $393 million in cash and generated positive cash flow for operating activities of $116 million. After including debt proceeds and repayments, CapEx payments for energy-saving devices and ballast water treatment system installments, and the third quarter dividend payment, we arrived at a cash balance of $286 million at the end of the quarter. For the calculation of our dividend distribution, we have backed the debt prepayment of $44 million that we drew from January 2023 to end at an adjusted balance of $331 million. Please turn to Slide 5 where we highlight the strength of our balance sheet. Our pro forma total liquidity to date stands at $356 million. Meanwhile, our total debt stands at $1.32 billion. Since 2022, we have completed refinancings totaling $430 million that reduced our interest costs by approximately $5.2 million per year as a result of achieving significantly lower margins. Our next 12 months amortization is $186 million. We have 13 unlevered vessels with a market value of $176 million and no debt maturities until 2024. In an increasing interest rate environment, we have interest rate swaps with an outstanding notional of approximately $722 million fixed at an average rate of 46 basis points for an average remaining maturity of 1.1 years. As of December 31, 2022, the mark-to-market value of these swaps was $33 million.

Thank you, Spyrou. In Slide 6, we will illustrate how Star Bulk continues to benefit from a widening of the fuel spread between HSFO and VLSFO. 120 scrubber-fitted vessels surpassed 131,000 operating days with an average system availability of 99.5%. At the current Hi5 spread at healthy levels, our scrubbers meaningfully contributed to our profitability. The average power fuel spread currently hovers at around $230 per ton based on Singapore export prices, when we cater approximately 60% of our annual fuel demand. Indicatively, the average lifetime spread achieved in Q4 was $253 per ton and $274 per ton for the full year of 2022. For restructuring purposes, on the top left of the slide, we present a sensitivity table that shows the impact that market benefit can have on our bottom line based on consumption of approximately 700,000 tons of HSFO per annum for our scrubber-fitted vessels. Please turn to Slide 7, where we provide the operational update. Operational expenses excluding non-recurring expenses were $4,205 for Q4 2022. Net cash G&A expenses were $977 per vessel per day for the same period. During calendar 2022, Star Bulk assumed management of an additional 19 vessels for third-party managers, streamlining ship management operations and cost spread. In addition, we continue to rate at the top of our listed peers in terms of Rightship safety score. Turning to Slide 8, we provide our fleet snapshot and guidance around our future drivers and vessel upgrade expenses, along with the relevant total off-hire days. We have completed our first quarter installation program across the fleet and in line with EEXI and CII regulations. We will continue investing in upgrading our fleet with energy-saving devices and telemetry, aimed at improving our fuel consumption and reducing our environmental footprint, further enhancing the commercial attractiveness of the cargo fleet. Our expected project expense for calendar 2023 is estimated at $27.8 million with a dry docking of 31 vessels with $141.1 million towards our vessels upgrade CapEx. In total, we expect approximately 870 days off-hire for the same period. The above numbers are based on current estimates around dry dock and retrofit planning, vessel employment, and yard capacity.

Thank you, Nico. Please turn to Slide 9, where we provide an update on the ESG margins. For the second year in a row, Star Bulk has participated in the Carbon Disclosure Project, exceeding its score of B and improving its performance versus last year for a score of B minus. A B rating continues to gain the Company’s management level, indicating maturity in taking coordinated action on climate issues. It also places Star Bulk above the industry average of C, and the global average of C, which indicates an Awareness Level. During 2023, Star Bulk will aim to continue improving its environmental stewardship by measuring and reporting for the first time also its Scope 3 emissions, namely the emissions which we indirectly affect in our value chain. On the regulatory front, Star Bulk has taken all necessary technical and operational measures to ensure compliance with the EEXI and CII targets set by the international maritime organization, which came into force in January 2023. We continue to enhance our well-being program onboard our vessels and onshore, and also make contributions towards vulnerable groups, environmental protection, education, and sports. With regards to the Company’s governance, Star Bulk is deploying new systems to optimize its commercial and operational performance and is also further strengthening its cybersecurity systems, processes, and controls.

Thank you, Charis. Please turn to Slide 10 for a brief update on supply. During 2022, a total of 31.2 million dwt was delivered, and 4.5 million dwt was sent to demolition, for a net fleet growth of 26.7 million dwt or 2.8% year-over-year. The supply outlook continues to be the best we have seen in the recent history of dry bulk shipping. Uncertainty on future proportions, high shipbuilding costs, and limited shipyard capacity until 2025 have helped keep new orders under control. The order book stands at a rate below levels of 7.3% of the fleet, with just 25.9 million dwt reported as firm orders during 2022. Furthermore, scrap prices have stabilized at elevated levels and should make the demolition of overage and fuel-efficient tonnage an attractive option during seasonal downturns on the back of the EEXI and CII regulation. The average steaming speed of the dry bulk fleet decreased by 3.2% to 11.3 knots during the last year due to record high bunker costs and a weaker freight market. We expect oil prices and bunker costs to remain inflated in the medium term amid sanctions on Russian oil and strong demand for energy-related commodities. The situation, along with new environmental regulations, will continue to incentivize slow steaming and support higher scrubber savings. Global port congestion experienced a correction during the second half of 2022 due to a gradual easing of restrictions and a strong decrease of Chinese imports during the first half. Nevertheless, global congestion remains above pre-COVID levels, especially for smaller vessel types due to changes in trading patterns related to the war and seasonal bottlenecks. As a result of the bulk trends, growth is unlikely to exceed 2% per annum over the next three years. Let's now turn to Slide 11 for a brief update on demand. According to Clarksons, total dry bulk trade during 2022 is estimated to have contracted by 1.9% in ton-miles. Trade was affected by the war in Ukraine, weaker Chinese imports, and a slowdown of global economic activity due to surging commodity prices, inflation, interest rate hikes, and a strong U.S. dollar. During 2023, dry bulk demand is projected to increase by 2% in ton-miles, with the IMF forecast for global GDP growth presently standing at 2.9%. We believe that the relaxation of the strict zero COVID policy and reopening of the Chinese economy will have a strong positive effect for the dry bulk market with larger sizes benefiting the most during the second half of the year. Furthermore, the shift of coal, grain, and minor bulk trade patterns to longer-haul routes due to inefficiencies related to the war in Ukraine will continue to inflate ton-miles. Iron ore trade contracted by 3.4% during 2022 and is projected to expand by 0.4% during 2023. China’s crude steel production decreased by 2% during 2022 as a strict COVID policy limited economic activity and offered no support to the property market downturn that began in 2021. Crude steel production from the rest of the world decreased by 6.5%, affected by a surge in energy costs and weaker steel margins following the war in Ukraine. Nevertheless, China's steel production showed signs of stabilization during the second half, while lower domestic iron ore output and stockpiles provided positive indicators for imports going forward. Coal trade expanded by 1.8% during 2022 and is projected to expand by 4.2% during 2023. The global focus on energy security and high gas prices have upgraded the coal trade outlook for the next few years while the suffering of European and Russian coal trade is benefiting ton-miles. Coal prices increased to record high levels in 2022 due to the disruptions and inefficiencies affecting export capacity. During the last month, a resumption of Chinese coal from Australian origin is taking place, marking the end of the unofficial ban that started during the fourth quarter of 2020. Grain trade contracted by 3.1% during 2022 and is projected to rebound by 5.3% during 2023. At the start of 2022, the grain trade market experienced a supply shock as the war abruptly halted Ukrainian exports for six months, which accounted for 10% of total grain trade. From August onwards, Ukrainian exports partially resumed through the Ukraine initiative at around 40% of free world levels. The outlook for 2023 is positive as resupply trade routes are already taking place, with other exporting nations filling the gap of the lost Ukrainian supply. Furthermore, a record high Brazilian soybean crop is currently being harvested while the recovery of the Chinese economy should substantially increase the demand for soybean crops. Minor bulk trade contracted by 2.1% during 2022 and is projected to expand by 1.3% during 2023. Minor bulk trade has the highest correlation to global GDP growth and the economic slowdown has affected trade volumes. Moreover, the container ship market correction is moderating support for smaller geared dry bulk vessels. On the other hand, the war in Ukraine disrupted European Union fertilizer and steel production creating Atlantic shortages that should benefit bulk trade. Furthermore, West Africa's bauxite exports continue to expand with the high base and generate strong ton-miles for Capesize vessels. Finally, despite the current seasonal spot market weakness, the long-term prospects of the dry bulk market remain encouraging given the 25-year low order book, the environmental regulations, and the positive effect on dry bulk demand from the opening of the Chinese economy. Star Bulk is well positioned due to its scrubber-fitted and diverse fleet to take advantage of the recovery in freight rates.

Hi. Good morning, everyone. This is Chris Robertson on for Amit. Sorry, he's traveling this morning. Just wanted to talk about the cash flow movement expected in the coming quarter. I think people are pretty hyper-focused on the upcoming dividend here and then testing the bottom of seasonally weak rates. Can you talk us through how you are thinking about working capital movements? You have laid out the maintenance capital and dry docking costs pretty well on Slide 8, but could you also remind us about the regular debt amortization expected this year as well?

Hi, Chris. So, let's start with the easy part, which is the debt amortization. As we said, this is approximately $190 million for 2023 for the entire year. So, it's slightly down from what we had in 2022 due to better amortization schedules that we obtained during our refinancing. Now for the first quarter of 2023 in a market that is essentially decreasing, we would expect the change in working capital to be slightly positive.

That is to be a source of cash.

Okay. That makes sense. Any other things that we could be aware of besides the ballast water system installations, dry docking, working capital, any other cash flow movements that could impact the dividend there?

We are providing the macro figures in our investor presentations. So if you go to that, on our website, you will find. It's actually Page 8 of our investor presentation. You will find all CapEx items as well as dry dock estimates that we expect for the next few quarters.

Okay, great. Just as a follow-up. You guys had some pretty good cost control here on the OpEx front. I think last quarter the non-recurring OpEx was reported around $4,700 per day, and now it's down around $4,200 per day. Can you talk about how you achieved the savings? And are there any cost pressures out there right now that we should be aware of that might put upward pressure back on OpEx? Or do you think you can maintain it at this new level for the coming quarters?

Hi, Chris. This is Nicos. This is a result of our offshore auction we have undertaken. As we mentioned earlier, it is taking in a big number of third-party managed ships and trying to streamline the cost basis. We are trying to increase our reach on getting better discounts amid the current inflation pressure we are experiencing on our spares and supplies, and that’s really the source of it.

Chris. This is Simos. Just to add to that, I would not expect and I would not budget for 2023, the figure that you have there for Q4, which was $4,200. It would be a bit more conservative, and I would give a figure of around $4,500, which is in the middle between Q3 and Q4 figures for the entire 2023.

Got it. No, that's really helpful. Just really quick last question for me, I mean, I think capital discipline is very much a feature of Star Bulk. You guys have done an incredible job over the years with creative acquisitions, in the past using your shares as currency. So I guess that said, you might not be looking at any deals on the table at the moment. But kind of looking forward, do you think there are interesting opportunities out there generally speaking for either en bloc acquisition or kind of anything that's come to you that you found compelling?

Well, Chris, we are looking at things now and we're hopeful that the environment may be a little easier to close deals in than it has been in the last year or so. So, we're optimistic actually that we may be able to get things done.

I was going to ask, but before I do, Hamish, could you clarify if the approach to getting deals done might involve using shares, similar to how Star Bulk has done it in the past?

Everything we're looking at would involve shares.

Okay. Thank you. So, I did want to ask maybe just a bit broadly about the earnings power of the Company. It looks like based off of Slide 13 that the bookings you've got so far in the first quarter that even if rates remain as soft as they are, you'll remain profitable in the first quarter. And my question is, I guess one, do you agree that you could remain in positive territory here in the first quarter? And then also, if we assume no changes in the market from here, and holding all else equal in terms of say, fuel spreads or eco spreads or maybe the size premium you're able to capture with your bigger vessels, would you be profitable in the second quarter also? And I guess what I'm getting at is really just trying to get a sense for how much of you being profitable in this down market is due to fixing shifts earlier before the pullback in spot rates, and then really how much of it is due to the quality premiums you were able to capture across the different shifts you have?

Hi. I am Petros. Yes, I think we will be profitable during Q1. I believe our break-even is around $12,000, and you see that we're just above $15,000 right now. The bulk of our open position has to do with Newcastlemax, and we think that we'll be able to maintain the level depending, of course, on how the market goes. One thing you have to understand is the following, when you look at the spot rate being $2,500 on the capes, it is based on a speed of I think 13 knots. What we usually do in situations like this is that we slow steam the vessels and a trip that would calculate at $2,500 actually ends up calculating at $8,000 because we burn much less fuel oil. If you add to that the scrubber benefit, which for capes Newcastlemax is higher than other vessels, and the carrying capacity of the bigger vessels, you can reach levels which should be very close to what the average is, even if the market during March stays where it is. Although, the market during March is a little bit better than what it is right now. Now regarding Q2, if you look at the FFA averages around $12,500, now, if you add to that, the scrubber benefits and the fact that we slow steam vessels during not very good markets, I think we will be profitable again in Q2, and probably, hopefully better than in Q1, and we're very positive for the rest of the year.

Thanks for that, Petros. Again, that's very helpful to, I guess to see that the $2,500 that we see published is really almost, I guess it's relevant, but not really indicative of the earnings power when you take into account speed, simply excluding the whole scrubber and whatnot.

If you run cape by 13 knots and you burn 50 tons, then if you go at 11 knots, which is about a 15% reduction in speed, you probably burn 25 tons or 28 tons, which is almost 50% less than the 13 knots consumption, and therefore, that's where you gain from.

And maybe just one final follow-up and maybe related to Chris's first question about the dividend; obviously, you've had this long-term policy paying out cash in excess of the $268 million threshold. What does the dividend look like? If ending cash is below that amount, does it just simply, do you stick with the actual policy and the dividend is zero or a few pennies or is there a certain floor that you have on the payout?

Well, our policy is pretty clear and we don't frankly anticipate any market in the foreseeable future leaving us with less cash than the minimum amount that would call for a dividend. But if basically our cash balance declines over the quarter and declines below the minimum threshold, then as in parts of 2020, there might not be a dividend, but we don't anticipate that actually happening.

Thank you. We will now be conducting a question-and-answer session. Our first question is from Amit Mehrotra with Deutsche Bank. Please proceed with your question. Our next question is from Omar Nokta with Jefferies. Please proceed with your question. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

No further comments, operator. Thank you very much.

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