Star Bulk Carriers Corp. Q3 FY2023 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call on the Third Quarter 2023 financial results. We have with us Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Simos Spyrou; and Mr. Christos Begleris, Co-Chief Financial Officers; Mr. Nicos Rescos, Chief Operating Officer; and Mrs. Charis Plakantonaki, Chief Strategy Officer 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. We now pass the floor over to one of your speakers today, Mr. Spyrou, please go ahead.

Thank you, operator. I am Simos Spyrou, Co-Chief Financial Officer of Star Bulk Carriers, and I would like to welcome you to our conference call for our financial results for the third 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 Q3 results, financings and share buybacks, an update on fleet and 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 third quarter 2023 highlights. Net income for the third quarter amounted to $44 million or $0.46 per share and adjusted net income of $33 million or $0.34 adjusted earnings per share. Adjusted EBITDA was $84 million for the quarter. For the third quarter, as per our existing dividend policy, we declared a dividend per share of $0.22 with record date as of December 5th, 2023. Since 2021, dividend distributions and share buybacks exceed $1 billion or $10.7 per share. Our total cash today stands at $268 million, pro forma for the delivery of our four remaining sold vessels and share buyback from Oaktree. Meanwhile, our total debt stands at approximately $1.26 billion. On the top right of the page, you will see our daily figures per vessel for the quarter. Our time charter equivalent rate was $15,068 per vessel per day. Our combined daily operating expenses and net cash G&A expenses per vessel per day amounted to $4,851. Therefore, our TCE less OpEx, less G&A is approximately $9,200 per day per vessel. Looking towards fleet renewal, we have agreed to sell five of our vessels with an average age of 15.6 years. During the nine months of 2023, we have sold 12 vessels and received insurance proceeds from one vessel, which had a combined average age of 12.4 years. Total gross proceeds from these sales were $272.5 million. This additional cash has been used for share buyback at a discount to NAV. On October 2023, we entered into two firm and two optional shipbuilding contracts for the construction of up to four 82,000 deadweight ton Kamsarmax new building vessels with delivery dates in Q4 2025 and Q2, Q3 2026. Slide 4 illustrates a summary of the recently announced strategic repurchase that was agreed with Oaktree Capital. We believe we have utilized a variety of tools to drive shareholder value and we expect these transactions to be accretive to NAV per share, EPS and BPS. As of today, we have agreed to repurchase 20 million shares at an average price of $19 per share from affiliates of Oaktree Capital. Given that the share repurchases have been mostly financed by vessel sales at attractive prices, we are creating significant shareholder value as the implied NAV from these historical sales is higher than current NAV. During this quarter, we have issued and sold 678,282 common shares under our effective ATM offering program at an average price of $19.81 per share, resulting in gross proceeds of $13.43 million unlocking a favorable arbitrage. As of the date of this release, we have 93,861,792 shares outstanding or 83,861,792 shares as adjusted for the closing of the second block repurchased by Oaktree. At the bottom of the page, you will see an illustration of our share repurchase and the sources of financing that allowed us to complete the buyback. I will now pass the floor to our COO, Nicos Rescos, to talk about our operational performance and update us on our fleet renewal efforts.

Thank you, Simos. Let me turn to Slide 5, where we provide an operational update. Operating expenses, excluding non-recurring expenses, were $4,851 for Q3 2023. Net cash G&A expenses were $1,024 per vessel per day for the same period. In addition, we continue to rank at the top amongst our listed peers in terms of RightShip scores this quarter. Slide 6 provides a fleet update and some guidance around our future dry dock and vessel efficiency operating expenses and the relevant total of hired days. Our expected dry bulk expense for the next quarter in 2024 is estimated at $39.7 million for the dry docking of 33 vessels, with another $8.6 million towards our vessel upgrade CapEx. In total, we expect to have approximately 1,000 off-hire days for the same period. In line with the EEXI and CII regulations, we will continue investing in upgrading our fleet with the latest operational technologies available, aimed at improving our fuel consumption and reducing our environmental footprint, further enhancing the commercial attractiveness of the Star Bulk fleet. Regarding our Energy Saving Devices program, we have completed and tested retrofits on 26 vessels with seven more vessels to be retrofitted by the end of this year. The above numbers are based on current estimates around dry dock, merger planning, vessel employment, and yard capacity. During the third quarter, we have progressed further with onboard testing of carbon capture technology with a capability to retain up to 30% in net CO2 emissions. We will continue working on carbon capture technology with our industrial partners, aiming to develop our cost-effective solution, which can be selectively retrofitted in the future on vessels of our fleet. We are actively working on the demand/supply impacts of carbon-neutral fuels together with safety considerations and vessel design developments. Please turn to Slide 7. I have an update around the recent new building order. We have decided to take further steps towards our Kamsarmax fleet renewal. Having designed and subsequently ordered the latest generation Kamsarmax vessels which will be delivered in Q4 2025 and Q2 2026, including options. The vessels are to be built in China for high specifications, treated with the latest fuel-efficient engine, coming into production in 2024. A short generator will use the energy requirement while at sea, allowing marine power provisions aimed at offering our charters the optionality to connect to a land-based power grid to support the vessel's entire loading and discharge operations. The above measures ensure best-in-class fuel consumption and emissions. On the sales front, we continue disposing of vessels opportunistically, having agreed to sell five vessels at historically attractive prices, reduced our average fleet age, and improved overall fleet efficiency. I will now pass the floor to our Chief Strategy Officer, Charis Plakantonaki, for an ESG update.

Thank you, Nicos. Please turn to Slide 8, where we highlight our continued leadership on the ESG front. For the sixth consecutive year, Star Bulk published its annual ESG report, which provides a transparent and comprehensive account of the company's ESG performance, strategy, and objectives. The report has been prepared in accordance with the latest 2021 CRI standards and has received limited external assurance from Ernst & Young on specific GRI disclosures and SASB indicators. Among other key performance indicators, we report a reduction of 4.6% in total CO2 equivalent emissions as well as an improved average fleet annual efficiency ratio compared to the previous year as a result of operational and technical initiatives. The report also discloses the company's Scope 3 emissions, a first among Greek-based dry bulk shipping companies. Having engaged with the company stakeholders, we present an impact analysis towards the environment, people, and economy, paving the way for double materiality to be implemented next year. Following this development, Star Bulk has improved its Sustainalytics ESG Risk Smart Score from 23.2 in 2022 to 21.3 today, achieving the highest score among our US-listed peers. On the societal front, we have improved the company's employee retention rates, following the implementation of well-being and engagement programs. And we have contributed to the Union of Greek Shipowners' efforts to support the local communities in Greece, which have suffered severe damages from floods. We continue our active involvement in the development of an Iron Ore Green Corridor between West Australia and East Asia. 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 9 for a brief update on supply. During the first 10 months of 2022, a total of 30.7 million deadweight was delivered and 4.9 million deadweight was sent to demolition for a net fleet growth of 25.8 million deadweight or 2.8% year-to-date and 3% year-over-year. The supply outlook continues to be close to the best we have seen in the recent history of dry bulk shipping with an order book of 8.1% of the fleet and 29.6 million deadweight firm orders year-to-date. Uncertainty on future propulsion, high shipbuilding costs and limited CPR capacity until the end of 2026 have helped keep new orders under control. Furthermore, vessels above 20 years of age stand at 8.2% of the fleet, while scrap prices have stabilized at elevated levels and should make demolition of old and fuel-inefficient tonnage an attractive option during seasonal downturns over the next few years. The average steaming speed of the dry bulk fleet decreased to a new low of 10.95 knots during Q3 as a result of higher bunker costs, lower freight rates, and new environmental regulations. We expect the EEXI and CII regulations to increasingly incentivize slow steaming and help moderate supply over the next few years. Global port congestion adjusted significantly lower during the last two years and inflated supply by approximately 5% with a negative effect on earnings throughout 2023. Nevertheless, changes in trading patterns and inefficiencies related to the war in Ukraine have normalized congestion slightly above pre-COVID levels during the third quarter and from now on, should follow seasonal patterns. As a result of the above trends, net fleet growth is unlikely to average above 2% per annum during 2024 and 2025. Let's now turn to Slide 10 for a brief update on demand. According to Clarksons, total dry bulk trade during 2023 is projected to expand by 4.6% in ton-miles. During the first three quarters of 2023, total dry bulk trade volumes increased by 3.1% year-over-year supported by record coal and minor bulk trade and a recovery of iron ore exports. Despite weak macro sentiment and a struggling property sector, China's dry bulk imports have increased by 13.7% during the first nine months. On the other hand, imports to the rest of the world have declined by 3.7% as demand was affected by the war in Ukraine, increased food and energy costs, and tightening monetary policy by Western economies in the effort to fight inflation. During 2024, dry bulk demand is projected to increase by 1.8% in ton-miles with the IMF forecast for global GDP growth presently standing at 2.9%. A series of government stimulus measures over the last year are expected to support Chinese demand for raw materials during 2024. Moreover, dry bulk demand from the rest of the world, especially India and the Middle East, is experiencing a recovery. Iron ore trade is expected to expand by 4.7% during 2023 and to marginally contract by 0.2% in 2024. China's steel production increased by 2.4% year-over-year during the first three quarters, supported by infrastructure projects, manufacturing, and strong exports. At the same time, domestic iron ore output contracted by 5.5%, while stockpiles decreased to a three-year low. Steel production from the rest of the world declined by 3.8% over the same period, affected by high energy costs and weak steel margins. But a noticeable rebound in output is taking place, supported by rising steel prices in the Atlantic. Coal trade is expected to expand by 6.9% during 2023 and to contract by 0.9% in 2024. The global focus on energy security has inflated coal trade, while the reshuffling of European and Russian traders benefited ton-miles. Moreover, the unofficial ban by China on Australian coal has been lifted, providing support to Capesize and Panamax vessels. During the first nine months of 2023, Chinese imports surged compared to last year, as thermal electricity increased by 6.1%, while hydropower contracted and domestic coal production growth was limited to 4.2%. India is emerging as a leading coal importer as electricity demand is currently outpacing domestic oil production growth while stocks at power plants stand at very low levels. Grain and soybean trade is expected to expand by 3.4% during 2023 and 3.6% in 2024. During the first three quarters of the year, grain trade was affected by the decrease of exports from Argentina, the US, and Ukraine. Brazil experienced record soybean and corn seasons that have helped fill the gap of crop losses. Increasing constraints in Panama Canal crossings are likely to benefit ton-miles during the US export season this year. Grain supply in 2024 is projected to remain high, but the El Niño weather conditions might affect Latin American and Australian crops. Nevertheless, Chinese demand and increased global focus on food security is expected to inflate grain trade over the next years. Minor bulk trade is expected to expand by 3.9% during 2023 and 3.8% in 2024. Minor bulk trade has the highest correlation to global GDP growth and is supported by improving global macroeconomic fundamentals. The war in Ukraine and the subsequent sanctions on Russian industries have disrupted the Atlantic fertilizer and steel industry, creating shortages to support backhaul trades. Moreover, expanding West Africa bauxite exports continue to generate strong ton-miles for Capesize vessels with exports up by approximately 30% year-to-date. Finally, the outlook for the dry bulk market remains positive due to increasingly favorable supply dynamics, improving macro sentiment, and large global infrastructure investment needs for the world's green transition. Star Bulk is well-positioned due to its scrubber-fitted and diverse fleet to take advantage of market opportunities and remain focused on actively managing its fleet and continuing to create value for its shareholders. Without taking any more of your time, I will now pass the floor over to the operator for any questions you may have.

Thank you. Ladies and gentlemen, at this time, we will begin our question-and-answer session. Our first question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Hey, good morning, good afternoon. This is Chris Robertson on for Amit. Thank you for taking our questions. Yes, guys just looking at the rates booked quarter-to-date, it looks so far to be sequentially stronger than Q3. But just looking forward for the remainder of the quarter, do you think that we'll see a bit of a pullback on normal seasonality? Or are there any short-term factors like congestion or anything else going on that might keep the rates a little bit more robust than usual as we enter into the end of the year?

Hi Chris. We think that this Q4 is going to be a normal Q4, better than the rest of the year as it almost always has been because the second part of the year usually carries about 54% of trade versus the first part. I don't think anything will change that. Also, the holidays are coming. We believe that Q4 will be better than the rest of the quarters as usual.

Okay. Yes. Got that. Just looking at the dividend policy moving forward here, is the minimum liquidity threshold going to continue to be calculated off the 128 vessels? Or will that be adjusted at some point to reflect the recently concluded and announced special sales?

Chris, we have announced today that we have released the $2.1 million for the 13 vessels that have been sold or are committed to be sold. So, in reality, the threshold is now 115 remaining vessels times $2.1 million.

Got it, that's helpful. Okay, and last question for me, just on the new building vessels, looks like they'll be built with conventional but very efficient engines. Are there any design aspects to enable future retrofitting of different technologies? And can you explain a little bit more what AMP is?

Hi Chris, this is Nicos. Thank you for the question. Well, first of all, the ships have been upgraded with the latest engine from MAN B&W that is coming out next year. And these are some of the first ships ordered with this engine, which automatically brings the consumption down compared to other vessels currently built by about two to three tons a day. So, that's pretty significant. AMP is a piece of equipment that allows you to basically import and connect to ports that have our grid on dock so that you can shut off generators. You can actually operate the entire vessel using shore power, basically a plug-in facility. We believe that apart from the US, which is already available in certain ports, this is going to be adopted worldwide in the next few years, and we'd prefer to offer this option to charter traders.

Got it. Yes. It sounds good. There are possibilities.

Well, we have conducted the study for methanol, geofuel methanol. We will wait to see developments on the supply side of green methanol before we make any firm decision to upgrade the vessels.

Any idea on the CapEx that might be required on that in the future?

You mean for methanol? That's estimated on account to be roughly around $5 million.

Okay, got it. That’s helpful. All right guys, I'll turn it over. Thanks for taking my questions.

Thank you.

Our next question comes from the line of Omar Nokta with Jefferies. Please proceed with your question.

Thank you. Hey guys. Good afternoon.

Hi Omar.

Hi. Yes, just first question I have is maybe following up on Petros talking about the market a bit in Q4 or fourth quarter being the strongest of the year. Obviously, we've seen rates improve and strength thus far into the quarter and average best across the board. I guess in terms of this improvement, is this basically just purely seasonal? Or are there other demand factors or fundamental factors in the background that have caused us to improve accordingly?

Well, during the second part of the year, there are more iron ore trades. There's more production from Brazil, which also improves ton-miles. I think this time around coal imports in India will also be strong because India has very low stocks. And the rest of the trade, bauxite and grains, will continue as usual. So, I think iron ore ton-miles and coal imports in India will be the major reasons why this market is going to be stronger during Q4.

I was just wondering if you've observed any market strength recently. It's not necessarily strong, but it’s definitely an improvement compared to the past. Has this influenced your confidence in the outlook for next year or the medium term? Or do you see this more as a seasonal trend, suggesting we shouldn't get too excited? I’d like to understand how Star Bulk is generally perceiving the market strength we've experienced over the last couple of months.

Well, my personal opinion is that 2024 is going to be similar to 2023 unless there are any geopolitical developments that are difficult to foresee. I think that iron ore, for example, will be about the same mainly because the rest of the world is going to start improving their economies and also because China has very low stocks. On the coal front, I think we may see lesser trade to a certain degree mainly because of the El Niño effect. And of course, the world is trying to reduce coal consumption. I think bauxite to China will improve and will do as every year. And I think that grains are going to be doing better. The El Niño is actually positive for grains. So overall, I would say a similar market, perhaps a bit better.

Okay. Thank you. Thanks for that market color Petros. And then maybe just kind of a follow-up perhaps with the new building. As Chris was asking, you've obviously disposed of the 13 ships this year. You raised a good amount of capital doing so. You used it to buy the bulk of the Oaktree position. I guess in terms of where Star Bulk is today, in your market footprint, you're down to 115 ships, still substantial critical mass. But how do you think about the fleet footprint as it is as we kind of think about where you're going into next year? You have the Kamsarmax new building that you just announced. Should we be thinking of Star Bulk continuing to be a seller in this market of older tonnage and then perhaps replacing them over time with more of these new buildings?

I think we'll do the right commercial thing. Obviously, our fleet is getting older every year and it can't get old indefinitely. So, we will look at the right opportunities to sell ships that are not going to have a long life and get ships that will have a long life. And as always, we also continue to look at merger possibilities, and we see opportunities all the time. As we've said in the past, these are always hard to close.

And just to add, Omar, this is Christos. We also have the seven chartered-in vessels, which are effectively young vessels that further renew the fleet.

And of course, those vessels give us a lot of optionality.

Yes, and they are all delivering this year, right?

Got it. Okay. Well, thank you. That’s it from me. Thanks guys.

Thanks Omar.

Our next question comes from the line of Ben Nolan with Stifel. Please proceed with your question.

Thanks. I'm a little bit curious on the new builds. Obviously, you're selling assets at historically a little bit higher price. And I appreciate the need to replenish the fleet and so forth. The new builds are a bit more expensive than they normally would be, too. Do you view this as just sort of a necessary evil in terms of paying a little bit of a higher price in order to make sure that your fleet is new? Or do you think maybe we're in a new paradigm where just asset prices are higher and the price that you're paying for the new builds is reasonable on that basis?

Well, Ben, first of all, we're buying these vessels that actually have the same speed and consumption as the best Japanese vessels. And we made sure that this would be the case; otherwise, we wouldn't have gone forward. And Japanese vessels are being sold for $6 million or $7 million more expensive than these ones. So, we do not consider them that expensive. Secondly, vessels like that, which burn about seven to eight tons less fuel than the other Kamsarmaxes, actually save you almost $4,000 a sailing day. So, you recoup the differential very, very quickly. And at the end of the day, we do not think that new building prices are going to go down. There is very little availability right now. And if one so wanted, I'm pretty sure the closer to the delivery dates, one could sell these vessels even at a higher price.

And also, since the beginning of the COVID pandemic, US dollar inflation has not been small. It's over 10% change in prices. Therefore, you have to expect that nominal dollar prices of new buildings will go up.

Plus, we are seeing that decarbonization will probably take longer than what we initially thought it would. And that will mean that best-in-class vessels will have the chance to trade for a lifetime.

Got it. That all makes sense. And then my next question was around the buyback and also the ATM activity. And I appreciate that you're buying at a lower price than you're selling with respect to the share price. Although again, at least according to my math, the shares are still trading below NAV. Just curious about the strategic thinking behind not just selling a few extra ships to help fund the share repurchase versus being active on the ATM below NAV?

Ben, basically, if you have a shareholder coming to you and saying, I'm afraid that when Oaktree sells, the overhang is keeping your share price down. When Oaktree sells, the price is going to collapse. Can you do something about it? And then we sell shares at $0.81 above where we buy them in. Obviously, the shareholder is better off. It would have been even better if we could sell more ships at a very high price. But what we did basically was we wanted to buy 20 million shares. And we funded that with debt, equity, and proceeds from ship sales, and we did what we could do in each of those areas. In each case, we think it was beneficial for the shareholders.

The ATM was like 3.5% of the buyback.

Yes. But basically, we sold the ships we could sell. We issued the equity that we could issue at prices that we knew would be profitable. We tried to limit the borrowings to the extent we could, but all of it was good for the shareholders, we think.

Right. Okay. No, I appreciate the color there.

Our next question comes from Nathan Ho with Bank of America. Please proceed with your question.

Thank you for taking my question. I would like to continue the conversation Ben initiated. You mentioned buying back shares from Oaktree, the discount to NAV, and the share issuance. With the disposal of vessels, all this seems to follow the same strategy. However, with the new build, I'm curious about how the team is considering capital strategy in light of your current net asset value. How are you deciding what to do with your cash considering the relationship between your asset value and share price?

Thank you for the question, Nathan. We view these new buildings as a unique opportunity that we cannot replicate. This situation is exceptional because the shipyard specifically wanted us as a client and offered us slots that wouldn't be available elsewhere for a ship of a quality we couldn't find in other shipyards. They collaborated with us to include an engine that isn't widely available yet and to add a shaft generator, as well as make adjustments to their design to meet our requirements. To clarify, we are not looking to replace our fleet with new buildings, but we believe this opportunity is too valuable to pass up.

Got it. Just to follow up on that. For a comparable vessel, what would the lead times be in a Japanese or Korean yard?

Well, basically, we are about a year late. I mean Japan is presently offering mid-2027. For vessels in Korea, they don't build bulk carriers because they're occupied with LNG, container, and tanker vessels. And I guess in China, there are no slots offered for 2025. You can only find slots for 2026, and those are very few and not this quality.

And I think for the second half, not in 2026, actually not, yes, as you said, very few.

Okay, that's helpful. And Hamish, I think you brought up earlier about the possibility of potentially using mergers as another way of renewing the fleet. Maybe if you wouldn't mind just expanding a little bit about that, what kind of opportunities you're seeing and how you're seeing the market currently?

Well, we always see opportunities to buy fleets, and much of the time we see the opportunity to use our shares. We only do these transactions if we can use our shares at or above NAV. Frankly, we're not looking to increase our leverage by any significant amount if we can avoid it. So, we're a bit sticky. The sellers have been, until recently, a bit sticky. It's been hard to get these things done since the COVID pandemic. Although before COVID, we did about eight of them, I think. The market seems to be turning around a little bit and maybe making it easier to close these transactions, so I'm hopeful.

Great. Thank you so much. That’s really helpful.

Thank you.

Our next question comes from the line of Bendik Folden Nyttingnes with Clarksons Securities. Please proceed with your question.

Yes. Thank you. I think I just wanted to touch return to the market and touch upon some of the ESG aspects. Do you see any impact from factors such as the carbon intensity indicator or the EU ETS system? Do you see that affecting the dry bulk market going into 2024 and beyond with regards to stuff like slow steaming?

Well, we think that vessels will probably among the means to have a better CII. I think that vessels will probably also reduce speed. So, I think that this is going to be beneficial because there's going to be basically less supply of vessels. So, we consider in this company the environmental regulations as only positive for the shipping industry.

Okay. Thank you. And just a little technical detail at the end, the price point for the options, are those the same as for the firm vessels? And also can you elaborate on what you would expect the financing to look like if you decide to exercise those?

The option price is exactly the same as the firm vessels. That's the first part. And we don't have a lot of cash to pay for the near term. It's like $7 million for the two firm vessels, and it would be $7 million for the two optional vessels. That holds us for a while. So, we can finance it, frankly, with debt to begin with. It's not a big deal, and then closer to delivery, we'll figure out the best way to finance it from the shareholders' point of view.

Just to clarify, this plus $7 million will not affect our cash balance for the distributable cash for dividends.

Yes, exactly. We're not planning to finance these out of operating cash flow.

No further remarks, operator. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

You, too. Thank you very much.