Star Bulk Carriers Corp. Q1 FY2023 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 first quarter of 2023. 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 first quarter results, cost evolution during the quarter, an update of our balance sheet, an overview of interest rate risk management, then bunker benefit and vessel operations, the latest on the ESG front and our views on the industry fundamentals before opening up for questions. Let us now turn to slide number 3 of the presentation for a summary of our first quarter 2023 highlights. For the first quarter of 2023, the Company reported the following. Net income amounted to $46 million with adjusted net income of $37 million or $0.36 per share adjusted earnings. Adjusted EBITDA was at $85 million for the quarter. For the first quarter as per our existing dividend policy, we declared the dividend per share of $0.35, payable on or about June 27, 2023. During this quarter, we have bought back 531,223 shares at a cost of $11.26 million. Since 2021, dividend distributions and share buybacks are over $1 billion. On May 16, 2023, our Board of Directors canceled the previous share repurchase program under which $8.5 million was still outstanding and authorized the new share repurchase plan of up to an aggregate of $50 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 at $14,199 per day per vessel. Our combined daily OpEx and net cash G&A expenses per vessel per day amounted to $5,755. Therefore, our TCE less OpEx and G&A is around $8,444 per day per vessel. Looking towards fleet renewal, we have agreed to charter in seven high-specification, latest generation, scrubber fitted eco vessels. We have added the table at the bottom of the page with an overview. We have entered into the long-term charter-in agreements for four Kamsarmax newbuildings and two Ultramax newbuildings, which are expected to be delivered during 2024 with a minimum duration of seven years. In addition, in November 2021, we took delivery of the Capesize vessels Star Shibumi, under a long-term charter contract for a period up to November 2028. Slide 4 graphically illustrates the changes in the Company's cash balance during the first quarter. We started the quarter with $330.5 million in cash adjusted for the refinancings and generated positive cash flow from operating activities of $83.2 million. After including debt proceeds repayments, CapEx payments for energy saving devices and ballast water treatment systems, the Q4 dividend payment and share repurchases, we arrived at a cash balance of $305.9 million at the end of the first quarter, which implies a dividend payment of $0.35 per share to the shareholders of record of June 7, 2023. Please turn now to slide 5, where we highlight the strength of our balance sheet. Our pro forma total liquidity today stands at $375 million. Meanwhile, our total debt stands at $1.23 billion. Net sale proceeds from the three vessels stands at $75.5 million after debt repayment and will be excluded from the cash that can be distributed as dividends and will be kept for general corporate purposes. Note that the $11.2 million that have been spent on the buyback during the previous couple of months will be deducted from these $75.5 million proceeds. We had a positive trade working capital of $79.5 million and the mark-to-market of the derivatives of $21.9 million as of March 31, 2023. Given current market conditions, we expect that the trade working capital will grow further in the course of the second quarter of the year. Our next 12 months amortization is at $177 million. In slide number 6, we present an overview of our risk management on the debt side. Given the increasing interest rate environment we are in, we have focused on reducing leverage and managing interest expense in order to ensure the lowest possible finance costs compared to peers. Since 2022, we have completed refinancings totaling $525 million that reduced our interest costs by approximately $7 million per annum as a result of achieving significantly lower margins. In 2020, we proactively had the base rate for a significant part of our senior debt at an average rate of 45 basis points. The current outstanding notional is approximately $637 million for an average remaining maturity of one year. Total realized gain from these activities are $11.6 million as of March 31, 2023 and as of the same date, the mark-to-market of the remaining position of the swaps was at $26 million. The cumulative effect of this decision is depicted in the graphs at the bottom of the page, where one can see that Star Bulk has reduced its average interest rate and currently has a lower average interest cost among its listed peers.

Thank you, Simos. In slide 7, we illustrate how Star Bulk continues to benefit from the fuel spread between HSFO and VLSFO. Our 118 scrubber fitted vessels have surpassed 137,000 operating days with an average system availability of 99.5%. With the current Hi5 spread, our scrubbers meaningfully contributed to our profitability. The spread secured during the first quarter stands at $185 per ton and currently hovers at around $122 per ton, based on Singapore spot prices where we cater for approximately 60% of our annual fuel demand. Indicatively, our average Hi5 spread since inception stands at $170 per ton. For administrative purposes, on the top right of the slide, we present a sensitivity table that shows the impact the bunker benefit can have on our bottom line based on consumption of approximately 685,000 tons of HSFO per annum for our scrubber fitted vessels. Please turn to slide 8, where we provide an operational update. Operating expenses, excluding nonrecurring expenses were at $4,696 for Q1 2023. Net cash G&A expenses were $1,059 per vessel per day for the same period. In addition, we continue to rate at the top amongst our listed peers in terms of the Rightship safety score. Slide 9 provides a fleet update and some guidance around the future dry dock and vessel efficiency upgrade expenses and the relevant total off-hire days. In the first quarter, we took advantage of the increase in vessel values and agreed to opportunistically sell two 2011 built Capesize vessels, the Star Borealis and Star Polaris. We have further reached agreement on a constructive total loss of Star Pavlina with the war risk insurers, given its prolonged detainment in Ukraine following the war. As part of our strategy towards fleet renewal and improving the overall fleet fuel efficiency, we have secured seven long-term charter-in latest generation eco vessels, built at first class Japanese shipyards, six of which have delivery during 2024. We have by now completed our ballast water installation program across the fleet and in line with the EEXI and CII regulations, we will continue investing and upgrading our fleet further with energy-saving devices, telemetry and other technologies, all aimed at improving our fuel consumption and reducing our environmental footprint, together with enhancing the commercial attractiveness of the cargo fleet. Our expected project expense for the 9 months for remaining 2023 is estimated at $23.7 million for the dry docking of 28 vessels, with another $9 million towards our vessel upgrade CapEx. In total, we expect to have approximately 770 off-hire days 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, Nicos. Along with our ongoing efforts to continuously improve the energy efficiency of our fleet, we have now completed the first feasibility study with the Iron Ore Consortium on Green Corridor. The study has set the potential for the demand-supply in venturing of clean ammonia with the iron ore trade between West Australia and East Asia, and concluded that developments in vessel and fuel supply could allow bulk carriers powered by clean ammonia to be deployed in this trade by 2028 and reach 5% adoption by 2030. Key prerequisites for the corridor remain the acceptance of ammonia as a safe marine fuel, the development of suitable engines, policy support, and continued collaboration through the value chain. Parallel to this Green Corridor project, we continue our research and development efforts on different green fuels and technologies, including carbon capture storage. And we actively participate in the industry’s dialogue to help accelerate decarbonization of the sector. We remain focused on the well-being of our people, having completed a comprehensive Employee Survey to assess our company’s strengths and weaknesses as an employer and make improvements wherever necessary. On the governance front, we are enhancing the Company’s Code of Conduct and its relevant policies to comply with the new Global Reporting Initiative standards and with our broader ESG commitments.

Thank you, Charis. Please turn to slide 11 for a brief update of supply. During the first four months of 2023, a total of 12.7 million deadweight was delivered and 1.9 million deadweight was sent to demolition for a net fleet growth of 10.8 million deadweight or 2.9% year-on-year. Supply outlook continues to be the best we have seen in the recent history of dry bulk shipping. Uncertainty on future propulsion, high shipbuilding costs and limited shipyard capacity until late 2025 have helped keep new orders under control. The order book has decreased to a record low of 6.9% of the fleet with just 6.3 million deadweight reported as firm orders between January and April. Furthermore, versus ships above 20 years of age stand at 8.1% of the fleet, while scrap prices have stabilized at elevated levels and should make demolition of overage and fuel inefficient tonnage an attractive option during seasonal downturns over the next years. The average steaming speed of the dry bulk fleet decreased to record low levels of 11.05 knots during Q1 and over the last month has rebounded to 11.3 knots as spot freight rates improved and bunker prices lowered. Nevertheless, steaming speeds still stand below last year's levels, and we expect that the EEXI and CII regulations will continue to incentivize slow steaming. During the last 12 months, global port congestion experienced a strong correction from record highs that has gradually inflated active supply and has put downward pressures on earnings. Having said that, changes in trading patterns and inefficiencies related to the war, have normalized congestion slightly above pre-COVID levels. As a result of the above trends, net fleet growth is unlikely to exceed 2% per annum over the next three years.

Good morning, everyone. This is Chris speaking on behalf of Amit. I appreciate the opportunity to ask questions. I have a question for Nicos regarding the fleet's slow steaming. I understand the fleet has slowed down, and you mentioned a slight increase in your prepared remarks. Considering the EEXI regulations and particularly the CII, what do you think is the maximum speed the fleet could return to? Do you foresee any further downsides this year, or should we just anticipate that the fleet won't speed up as much as it potentially could?

Thank you, Chris. Well, at the moment, the fleet is speeding at around 11.5 knots. We feel that as the regulation tightens towards 2026 with an annual increase of about 2%, we don't see the speed increasing substantially. To the contrary, there will be some impact from the CII rating on every vessel. So, we believe that over the next few years, we should see a slowing down of the fleet. If you add on top of that the fact that there is a lot of idling taking place on a big portion of the fleet, which is the smaller ships, that's going to be a heavier impact on CII, so we cannot see much flexibility on speed for the fleet increasing.

Chris, this is Petros. Actually, I think it's actually below even 11.5. I think it's 11.3 or so. And if I remember well over the last years, we have not seen speeds go much above 11.5 anyway. So, I would say that the risk is on the downside. I think that in the future, we will see vessels actually slowing down.

Okay. Yes, got it. That's pretty distinct, Petros. Thank you for that. Just turning to China for a moment. We saw some increased steel production in the first quarter, there's been some inventory drawdowns since that time. But with the proposed production curbs there for the year, do you think there's further room for additional inventory drawdowns like we saw at the very low levels in 2020, or do you think that the drawdowns are kind of stabilizing, and we'll see a restocking cycle in the next few quarters?

We are observing that iron ore stocks have dropped to 126 million tons, which is a low level not seen in the last two years. As a result, we anticipate an increase in imports during the second half of the year, particularly from Brazil, which has not yet met its export expectations, potentially leading to higher ton miles. We are optimistic about the iron ore trade in the latter half of the year. Additionally, I believe that China will intensify its infrastructure efforts. I've noticed a significant decrease in new floor space, so as China continues its efforts to bolster its economy, we can expect support from both the private and public sectors.

Okay. I have one last question. You provided guidance on bookings for the current quarter, but can you share any insights on the second half of this quarter since we're already more than halfway through? We've noticed a slight slowdown in the economic recovery in China as we move into the second quarter. What are your thoughts on how rates might perform for the remainder of 2Q?

I believe that China will increase its efforts to support the economy. As oil and energy prices decline, I expect the overall global economy to improve in terms of GDP. It won't just be China; we will see a better economic situation ahead. Notably, as interest rates stabilize and potentially decrease later in the year, this improvement will be even more pronounced.

I just wanted to…

Hi Omar.

Hi there. The current trends are certainly new developments and quite significant. I wanted to inquire about how they operate. First, are these bareboat leases or regular charters? Also, regarding their relation to newbuildings, are these new orders that have been placed, or were these ships already under construction and have been chartered accordingly?

Omar, hi, it’s Petros. These vessels actually were ordered already or were being ordered. And we're doing these deals for four reasons. First of all, we think the rates we have fixed them are good. So, we expect to make profits. Secondly, it's a way to modernize our fleet. Third, as nobody knows when the new generation vessels will be in and when there's going to be the right infrastructure and ample fuels to fuel those vessels. This we consider to be a bridge between now and that time. And of course, let's not forget that these vessels come at no capital costs. Also, those vessels have scrubbers and they offer us optionality. So we have them for seven years plus options. So, I think only good things come out of these vessels. And I think that there is more to come as well.

Okay. More potential charter-ins as what you've reported?

Yes.

Okay, great. And then, I guess, you mentioned the four reasons in there. And I guess, I wanted to ask, also we've seen in terms of asset value, just a continuous move higher throughout the year despite the fact that the market has been off to a softer start, at least relative to '21 and '22, so ship values are moving higher. We've seen it for Capes especially. But I just wanted to ask, maybe from your perspective, what's been driving the S&P market climbing so significantly this year? And also, yes, one, what's maybe behind that?

Well, first of all, we ship owners, we're bullish people. There is not a lot of space in shipyards and the prices of newbuildings are going up. So, there is this idea that prices of newbuildings will not fall. So I think this is one of the reasons why ship owners are ordering. Also, the new vessels are much more eco than the vessels in the water, and that will allow them potentially to survive for longer periods until the zero ambition vessels come in. So I think basically, these are the reasons why people are ordering and why prices are going up.

Okay. And so maybe from your commentary, just now, it sounds like is more of the activity being done on the modern end of the curve, or is there also deals being done on the 10 plus year range as well?

What do you mean, newbuilding versus 10-year old vessels?

No, sorry. Just in terms of the S&P activity we've been observing, as you pointed out, there isn't much newbuilding slot capacity available and prices aren't expected to decrease from the newbuilding side. Thus, it appears that there's been a repricing of tonnage. Is that repricing occurring on the modern end of the age curve, or is it also taking place elsewhere?

Yes. There's also a repricing of the existing vessels in the water, the ones that are actually eco, exactly because if you order today, you will probably take delivery of a vessel in 2026. And therefore, we've seen that happen before. We've seen vessels in the water actually being sold for close prices or even higher prices than newbuildings.

Yes. Interesting. And I guess, maybe just one final one for me. You sold those two Capes at fairly good prices. Should we be thinking we'll be seeing something similar? As you mentioned earlier, you'll be adding more charter-in, even though those are a bit outward in terms of delivery. Should we be thinking you'll be adding more new buildings via charter-in and maybe selling some of the older ships to take advantage of the pricing dynamics today?

Yes. Well, first of all, the prices are pretty high compared to what charter levels are. So actually, this means that people expect the market to go up. But we don't know what will happen. We are positive, but prices are really, really very good. The two Capes that we sold, we sold them at prices that we were very, very happy with. So, I think what we will do going forward is we will sell some more vessels, trying to improve the average age of our fleet, probably getting rid of a few of the vessels and charter in newbuilding tonnage. That will improve the age profile, and we'll do all the good things that I told you earlier, plus it will strengthen our war chest. In case, we will want in the future and especially if new technologies that really cut down on the consumption of vessels, perhaps we would want to also order newbuildings, not right now, but it would happen in the future.

And Omar, this is Christos, just to add, given also the large discounts to NAV and trading performance lately, selling vessels, a few vessels and especially the inefficient ones, as Petros mentioned, is supported.

Yes. That makes sense. Thanks, Christos, very helpful. And thanks, Petros, for the overview. I'll turn it over.

Yes. Thanks for taking my questions. If I could start, I wanted to follow on with some of the charter-ins, just had a few other questions about those. First of all, do they include purchase options at the end? Secondly, how should we think about what your, let's say, annual cost, once all 7 are operating, would look like? And if these were related party transactions or not?

So, Ben, we can't comment, unfortunately, on the detail of those charters. You can see what we're able to comment on in our financial statements in the footnotes. And then, as far as related party transactions, Simos, they're not.

They’re not. We do not have anything.

No. But one advantage of chartering a vessel is that when you control a vessel and the owner decides to sell it, being the charterer puts you in a better position to buy it since you have advance notice about it. Therefore, having a chartered vessel is always beneficial, even if you don't have the option to purchase it.

Okay. That's helpful. I appreciate the color you were able to give there. And then, for my second question, as I was going through the release, it seemed like there was going to be a whole lot more dry docking days than what had previously been the case, unless I'm mistaken. I'm curious if you guys are bringing forward dry docks or something into the second quarter?

Hi, Ben. This is Nicos. That's correct. We are accelerating some of the larger vessels into the second quarter to take advantage of the current softer market for big ships and to prepare for the third and fourth quarters. We're also using this opportunity to install efficiency devices on these vessels, planning to return them to trade towards the end of the second quarter. That's the reason for the concentrations you see.

Okay. What should we expect for dry docking in 2024?

We have 24 ships scheduled for 2024.

Okay. All right. I appreciate you guys taking my questions.

Well, thank you very much for following us, and have a good day. See you next time around. No more comments.

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