Star Bulk Carriers Corp. Q4 FY2023 Earnings Call

Thank you for standing by ladies and gentlemen. And welcome to the Star Bulk Carriers Conference Call on the Fourth 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 will now pass the floor over to 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 regarding our financial results for the fourth 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 Q4 results, financings and share buybacks, a short update on the Eagle Bulk transaction, fleet development 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 fourth quarter 2023 highlights. Net income for the fourth quarter amounted to approximately $40 million and adjusted net income of approximately $64 million. Adjusted EBITDA was $114 million for the quarter. For the fourth quarter, as per our existing dividend policy, we declared a dividend per share of $0.45, with record date as of March 12, 2024. Since June 2021, we have returned to shareholders $1.1 billion in dividend distributions, and over $400 million in share buybacks. Our total cash today stands at $312 million pro forma for the delivery of our four remaining sold vessels and a payment of the respective debt, as well as the bridge facility. Meanwhile, our pro forma total debt stands at approximately $1.121 billion, translating in a pro forma net debt of approximately $800 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 $18,296 per vessel per day. Our combined daily operating expenses (OpEx) and net cash general and administrative (G&A) expenses per vessel per day amounted to $6,081. Therefore, our TCE less OpEx and G&A is approximately $12,215 per day per vessel. Looking towards fleet renewal; in the last 12 months we have agreed to sell 17 vessels with average age of 13.7 years and received insurance proceeds from one vessel which was declared as a constructive total loss. Total gross proceeds from these vessels were $366 million. During the fourth quarter, we completed a $380 million repurchase of 20 million shares from Oaktree Capital. The shares were repurchased and subsequently cancelled. The Oaktree share buyback was funded from vessel sale proceeds of $254 million, plus $76 million of new debt financing, $13 million of proceeds from the ATM, and $38 million cash released from the minimum cost threshold of $2.1 million per vessel for the 18 vessels that have been sold. Slide 4 graphically illustrates the changes in the company's cash balance during the fourth quarter. We started the quarter with $302 million in cash and generated positive cash flow from operating activities of $88.6 million. After including debt proceeds and repayments, capital expenditure (CapEx) payments for energy saving devices and Ballast Water Treatment System installations, the third quarter dividend payment, the Oaktree share repurchases and ATM issuances; we arrived at a cash and cash equivalent balance of $282 million at the end of the quarter. This figure includes a $20 million adjustment as this amount was released from the vessel sales and went against the financing of the Oaktree share buyback. Slide 5 illustrates a summary of the recently announced Eagle Bulk transaction. We have been working closely with our team and our lawyers to be able to complete the merger in early April 2024. This transaction will create a global leader in dry bulk shipping with a large diversified and scrubber-fitted fleet of 167 vessels. This is a low stock transaction on NAV-to-NAV basis, with a combined market cap of approximately $2.6 billion. Eagle shareholders will receive 2.6211 shares of Star Bulk per share of Eagle. Star Bulk shareholders will own approximately 71%, and Eagle’s shareholders will own approximately 29% of the combined entity. Since the deal was announced, we filed with the SEC an F4 registration statement with respect to the shares of Star Bulk common stock based to Eagle shareholders pursuant to the Eagle merger agreement, which became effective on February 12, 2024. The Board of Directors of Eagle fixed February 12, 2024 as the record date for the determination of Eagle shareholders entitled to receive notice of, and vote at the Eagle special meeting. The Eagle special meeting will be held on April 5, 2024. Subject to Eagle shareholder approvals and customary closing conditions, we expect that the Eagle merger will close shortly thereafter. I will now pass the floor to our COO, Nicos Rescos, to talk about our operational performance and then update on our fleet renewal and CapEx update.

Thank you, Simos. Let's turn to Slide 6 where we provide an operational update. Operating expenses excluding non-recurring expenses were up $4,977 for Q4 2023. Net cash G&A expenses were $1,104 per vessel per day for the same period. In addition, we continue to rate at the top among our listed peers in terms of Rightship safety score. Please turn to slide 7 for an update on our fleet sales and our recent newbuilding orders. In December, we entered into a contract for three additional shipbuilding contracts with Qingdao Shipyard for the construction of 82,000 Kamsarmax newbuilding vessels at competitive price levels, increasing the size of our order from two to five vessels. The vessels are being built in China to high specifications, using the latest fuel-efficient engines coming into production in 2024. Our shaft generator reduces energy requirements while the vessel is at sea, and now turned to marine power provisions. The above measures ensure best-in-class fuel consumption and emissions. On the vessel sales front, we continue disposing of vessels opportunistically at historically attractive levels, having agreed during Q4 to sell 7 vessels for total gross proceeds of $122 million, reducing our average fleet age and improving overall fleet efficiency. During Q1, we agreed to sell another two Capesize vessels, the Big Bang and the Pantagruel for total gross proceeds of $36.3 million. Furthermore, we took delivery of 2 out of the 6 long-term chartering Eco vessels that will be delivered to us throughout 2024. And specifically, a tenacious Kamsarmax and a tenacious Star Bulk Ultramax. Considering the aforementioned changes in our fleet mix, we operate one of the largest dry bulk fleets among U.S. and European listed peers with 122 vessels on a fully delivered basis and an average age of 10.5 years. Slide 8 provides a fleet update and some guidance around our future dry bulk and available total of 5 days. In the top right of the page, we provide a CapEx schedule illustrating our newbuilding CapEx and vessel energy efficiency upgrade expenses, with 100% of our fleet now being fitted with ballast water treatment systems. Our expected dry dock expense for 2024 is estimated at $20.5 million for the dry docking of 40 vessels. In total, we expect to have approximately 950 of five days for the same period. Based on our latest construction schedule, our newbuilding vessels are expected to be delivered in Q4 2025, Q2 and Q3 2026. In line with the Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (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 of 31 vessels, with 16 more to follow for retrofit by the end of 2024. The above numbers are based on current estimates around dry dock, the rate of planning, vessel employment and yard capacity. Finally, we are working together with Eagle management towards a seamless integration of the ship management platforms from April 2024 onwards, should the merger receive shareholder approval. I'll 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. Star Bulk, along with four other leading ship owners in Greece, have joined the Loads Register Foundation in establishing the Maritime Emissions Reduction Center in Athens-based nonprofit organization. The center supports the development and adoption of new and existing solutions to reduce greenhouse gas emissions from the global fleet while fostering the collaboration among maritime value chain stakeholders to safely navigate to net-zero. For a third year in a row, Star Bulk has participated in the carbon disclosure project, maintaining its score of fleet, which indicates a maturity in management levels or taking coordinated action on climate issues. This call placed Star Bulk above the industry average and also above the global average, indicating awareness levels. On the regulatory front, Star Bulk has taken all necessary measures to prepare for and ensure compliance with the inclusion of shipping in the EU Emissions Trading Scheme, which came into force on January 1, 2024. We have also prepared to timely align our ESG reporting with the EU Corporate Sustainability Reporting Directive, which will apply for the first time in the 2024 financial years for reports published in 2025. Due to fall 2023, we continued enhancing our employee engagement and wellbeing programs, increasing the retention rates of our teams. With regard to regulations, Star Bulk continues to invest in new systems, technologies, policies and training to strengthen its communications in cybersecurity, including the deployment of high-bandwidth internet and next-generation firewalls onboard. In December 2023, Star Bulk was granted the Sustainability Award at the Annualized Greek Shipping Awards. I will now pass it over 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 2023, a total of 35.3 million deadweight was delivered and 5.4 million deadweight was sent to demolition for a net fleet growth of 29.9 million deadweight or 3.1% year-over-year. Furthermore, 42.8 million deadweight were placed during the year, with newbuilding order books presently standing at the still low level of 8.5% of the fleet. Limited shipyard capacity until late-2026, high shipbuilding costs and future green propulsion uncertainty are keeping new orders under relative control. Furthermore, vessels above 20 years and 15 years of age stand at 8.5% and 20.6% of the fleet, respectively. While scrap prices have stabilized at elevated levels, making demolition of overweight and energy-inefficient tonnage a more attractive option during seasonal downturns in the next few years. During the second half of the year, the average steaming speed of the dry dock fleet decreased to a new low of 10.95 knots due to downward pressures from inflated bunker costs and new environmental regulations. We expect the EEXI and CII regulations to increasingly incentivize slow steaming retrofits and to help moderate supply over the next several years. Global port congestion adjusted lower over the last two years, and we expect that it will follow seasonal patterns from now on. In the short term, the combination of draught in Panama and Red Sea tensions has led to a major decrease in canal transits and is causing inefficiencies that are being organically mitigated by the seasonal market weakness. As a result of the above trends, nominal fleet growth is unlikely to exceed 2.5% per annum over the next few years. Let's now turn to slide 11 for a brief update on demand. According to Clarkson's, total dry bulk trade during 2023 is estimated to have expanded by 4.4% in ton-miles. Trade volumes during the fourth quarter increased by 6.2% year-over-year, supported by record coal and iron ore exports and recovery of minor bulk trade, while stronger Atlantic exports and inefficiencies have benefited from ton-miles. China's dry bulk imports increased by 12.2% despite weak macro sentiment and a struggling property sector. Gradual stimulus measures over the last year, heavy investment in infrastructure and manufacturing, and higher exports have provided support for raw materials demand. On the other hand, dry bulk imports from the rest of the world declined by 2% as demand during the first half of 2023 was affected by high energy and food costs related to the war in Ukraine and tightening monetary policy by Western economies in the efforts to fight inflation. During 2024, dry bulk demand is projected to increase by 1% in terms, with the IMF upgrading its global GDP growth forecast to 3.1%. The Chinese economic recovery from the zero COVID policy is still at early stages and is expected to accelerate once the property market stabilizes and consumer confidence returns. Demand from the rest of the world is experiencing a strong recovery since September, supported by a decline in energy, food, and borrowing costs. Meanwhile, the year started with ton-miles receiving strong support due to geopolitical and canal inefficiencies. Iron ore trade expanded by 6.2% during 2023 and is projected to contract by 0.4% during 2024. China's crude steel production increased by 0.9% during 2023 after two consecutive years of contraction, supported by inflated steel product exports. Domestic iron ore output and stockpiles are moving higher but still stand well below last year's levels. Crude steel production from the rest of the world declined by 1.2% during 2023, as the first half was affected by high energy costs and weak margins. Having said that, steel prices in China experienced a strong recovery during the fourth quarter and are expected to remain strong throughout 2024. Coal trade expanded by 6.9% during 2023 and is projected to contract by 1.4% during 2024. The global focus on energy security inflated coal trade, while the sampling of Russian exports has benefited ton-miles. Chinese imports surged by an impressive 61% compared to 2022. As thermal electricity increased by 6.4%, hydropower contracted by 4.9%. Domestic coal production growth was limited to 4.3%. India is emerging as a leading coal importer with electricity demand currently outpacing domestic coal production growth and stockpiles at relatively low levels. Grains trade contracted by 0.6% during 2023 and is projected to be down by 2.9% during 2024. Grain trade was affected by the increase of exports from Argentina, the U.S., and Ukraine, while Brazil experienced record soybean and corn seasons that helped fill the gap. Falling prices of agricultural commodities, better crop yields in North and South America, the recovery of Ukrainian volumes and increased demand from emerging economies are expected to inflate grain trade over the next years. Moreover, Panama Canal constraints this year will inflate ton-miles as historically 25% of U.S. exports are moving through the canal. Minor bulk trade expanded by 3.7% during 2023 and is projected to expand by 3.9% during 2024. Minor bulk data has the highest correlation to global GDP growth and is supported by COVID-related global macroeconomic fundamentals. Atlantic steel shortages continue to incentivize Pacific exports and inflate backhaul trades. Furthermore, expanding West Africa bauxite exports generate long-term miles for capesize vessels, with Guinea exports up 24% during 2023. As a final comment, the outlook for the dry bulk market remains positive due to favorable supply dynamics, geopolitically driven inefficiencies in trade, and a recovery of demand supported by large global infrastructure investment needs. Star Bulk expects to take advantage of variation strength in the dry bulk market, having mostly maintained this diverse scrubber-fitted fleet in the stock market and will thus continue to create value for its shareholders. Without taking any more of your time, I will now pass the floor over to the operator to answer any questions you may have.

Thank you. Our first question is from Amit Mehrotra with Deutsche Bank. Please proceed.

Hi, everybody. Good to talk to you all. I want to maybe start with the dividend expectations. For the first quarter, there's obviously a lot of moving parts in terms of year-to-date bookings and asset sales, asset acquisitions. You've been helpful in the past in kind of helping us calibrate, you know, directionally at least. Wondering if you can kind of help us synthesize all those moving parts and what our expectations to be of dividend for the first quarter?

I was actually thinking that might be a CFO question but, you know, obviously we don't give guidance on dividends. The first quarter is not looking at that.

We currently have a pro forma cost estimate of $112 million, which includes the remaining deliveries for the four vessel sales. Amit, we are focusing on the liquidity aspect, which is currently $2.1 million per vessel on the water. For the last four deliveries, that translates to 110 vessels. Additionally, we need to factor in approximately $38 million, which is the dividend we just declared for payment in the coming days for Q4. This gives you an idea of the remaining excess cash as of today, which can help you project for the remainder of the quarter.

Okay.

And working capital you know…

Do we expect working capital to be a source or a use?

Well, more or less it should be slightly negative.

Okay. That's helpful. And if you follow-up on maybe more precise numbers later on. I guess the second question for me; obviously, there is a lot of disruption in the Red Sea. I think there were some reports that maybe a few of your vessels have been kind of under threat in that region. I mean, Hamish or Petros, what do you guys think is going to happen now? Obviously, we've seen containership rates move higher, we've seen tanker rates move higher; is there a synthetic reduction in capacity occurring as dry bulk vessels go around the Cape of Good Hope? What are you seeing in terms of the latest for the dry bulk market in terms of what's happening in the Red Sea?

Hi, Amit. First, I'd like to clarify our company's situation. We encountered two instances where we advised our charters against passing through the Suez Canal, but legally we couldn't enforce this as we were unaware of the attacks on the Eagle Bulk and Jenko vessels at that time. Consequently, we were instructed to adhere to the charter party and send the vessels through Suez; the first vessel made it through but was attacked three times without any harm to the crew or the ship. Meanwhile, the second vessel was already en route through Suez, preventing us from diverting it, and it was also attacked. Moving forward, we will avoid the Suez Canal entirely since we are clearly a target of the Houthis as a U.S.-registered public company. I wanted to provide this clarification for everyone's awareness. To give some examples, if a vessel is in the U.S. Gulf and traveling to Qingdao, China, the distance would be around 10,000 miles. If the Panama Canal is unavailable for bulk carriers, which it currently is, the vessel would have to take the Suez Canal, increasing the distance to 14,100 miles—41% longer. If Suez is also off-limits, the journey would then go around the Cape, totaling 15,400 miles—54% longer than going through Panama Canal. For a journey from Rotterdam to Qingdao, taking the Suez Canal would be 11,000 miles, while going around the Cape would stretch it to 14,300 miles, a 30% increase. In theory, if no vessel could use the Suez or Panama Canals and voyages began from the U.S. Gulf or other areas, it could result in about a 35% increase in distance, translating to an additional 10 to 15 days. Therefore, a 50-day trip could extend to 60 or 65 days. This is the most challenging scenario. However, if starting from Brazil, there would be no issue as the route goes around the Cape. Similarly, starting from the south offers the same advantage. If vessels in the Mediterranean bypass the Suez Canal, the situation becomes more dire because they have to navigate to Gibraltar and back around. Considering that front-hauls and back-hauls are less profitable than inter-Atlantic, inter-Pacific, or Indian Ocean trades, I estimate that if both canals were completely closed, supply of vessels could decrease by about 8%. However, this isn't the case currently. While we aren’t using the Panama Canal, many vessels are still operating through the Suez Canal. Therefore, I'd estimate the current impact on supply from both canals to be around 3% to 4%. Apologies for the lengthy explanation.

Thank you, Petros, that was very helpful. I have one last question before I pass it on. Hamish, I wanted to ask you this because of your extensive corporate finance background. I'm impressed by how much you've grown over the last five years, adding around 55 to 60 vessels through share transactions that were completed below the company's public equity value, which is remarkable. Now you're also adding the Eagle transaction, so the potential for Star Bulk to develop as a platform through this low debt structure is becoming evident. My question is, is there a certain size at which you might find it difficult to manage, or can you continue to expand as opportunities arise? Hamish, could you address that? Additionally, are you noticing increased interest in deals now that you have a record of completing more transactions, potentially leading to even more opportunities coming your way?

Well, I mean first of all, from your lips to God's ears; this is how we would love to have everything work out. First of all, let's get the Eagle deal done first before worrying about what to do next. You know, there is a little bit of not wanting to bite off more than we can chew. And we do need to integrate Eagle properly and make sure we keep the best of both companies before we start looking for follow-on deals. But, you know, I don't think there is a specific level at which the company is too big to manage. We are a pretty small company compared to say, a large airline or a large container line. And those companies are quite well managed. I think Nicos Rescos may have something to say about our ability to manage a fleet of two or four times the size but, you know, if a container line or an airline can do it, I think we can do it. We haven't seen an increase in interest yet, but I think it's reasonable to think we might once the Eagle deal is closed.

Okay, all right. Thank you. Congrats on all your success, everybody. Appreciate it.

Our next question is from Omar Nokta with Jefferies. Please proceed.

Thank you. Good afternoon, everyone. I wanted to address a few mixed questions that came up earlier. Petros, in your opening comments about the market, it seems that Q4 performed better than many of us anticipated going into the quarter, and Q1 is also showing stronger averages compared to last year. Your bookings to date in Q1 are higher than in Q4. You mentioned that the disruptions in the Red Sea and the Panama Canal may have alleviated some of the typical declines we see. That seems to be a significant factor, but is there also a demand aspect contributing to this, or do you believe the market's current state is solely due to the disruptions?

Hi, Omar. I should mention the impact that the Ukraine war is having on the market. They are no longer exporting to nearby European destinations and are now focusing on exports to China and India, which also affects the situation. These factors, along with the issues in the Panama Canal and the Red Sea, are creating significant benefits for shipping and influencing the market in a typically slower quarter. I believe these inefficiencies will persist; they are unlikely to disappear soon and may take months or even years to return to normal. Thus, they will continue to support the market for a while. Additionally, we're observing a robust U.S. economy and a strong Indian economy. We expect China to support its economy moving forward, which is crucial because, in 2023, China was primarily responsible for sustaining trade, increasing its imports by around 280 million tons while the Rest of the World faced a decline. We anticipate that China will maintain this trajectory as it hasn't yet achieved its economic goals, alongside the growth in U.S. and Indian economies, while the Rest of the World also begins to recover. It's important to note the environmental regulations, which will impact supply without a doubt. Moreover, we currently have a relatively low order book at 8.5%, with an influx of vessels expected to be about 3% to 3.5% each year. So far, there hasn't been much scrapping due to favorable market conditions, but that may change in the future. We estimate a 3% to 3.5% influx in vessels and about 1% to 1.5% scrapping, indicating a potential demand need of around 2% to 2.5%. The existing inefficiencies cover that demand and even exceed it. Therefore, I foresee a strong market throughout 2024 and likely into 2025 as well.

Thank you, Petros, for that information. I wanted to shift the discussion to the dividend. Amit mentioned that you are becoming more dynamic in managing the fleet. It was easier for us to model the dividend when you had 128 ships and it was fairly static. With the buybacks and your more active approach to the fleet, you seem to be more transaction-oriented. What are your thoughts on adjusting the dividend policy to a percentage of earnings payout, or do you prefer the clarity of sticking to an ending cash balance approach?

Yes. I think we value the fact that you can't get it wrong if it ends up depending on cash on your balance sheet that you have. A percentage of any other quantity could somehow due to some unanticipated events, not match up with cash that you actually have. So I think you do like this formulation. I feel your pain as far as forecasting it.

But Omar, this is Simos. Just to reiterate again what I said before to Amit, we gave a figure of our cash balance pro forma today as of the delivery of the last four vessels to be delivered within the following months. This is $312 million. On purpose, we said that we are releasing the $2.1 million for minimum cash threshold for the 18 vessels that have been sold. So you may assume that after the delivery of the last vessel, all the proceeds of the sales are used for the financing of the two blocks that we have acquired during the fourth quarter and the repayment of the bridge facility. So the $312 million cash pro forma that we have as of today is the net cash, net of any sale proceeds, and it includes only the $2.1 million threshold for the remaining 110 vessels, the $38 million of cash that we will distribute as a dividend for the fourth quarter and any cash above this is potentially the dividend free cash for the first quarter. So you may start modeling out of this balance the dividend for the first quarter.

Got it. Thanks, Rescos, for that information. I also appreciate you, Hamish, and Petros. That's all from me.

Our final question is from Nathan Ho with Bank of America.

I think I'd like to just maybe follow up a little bit more on the fleet strategy, especially post-acquisition, how we should be thinking about your fleet size over 2024 and 2025? Obviously, a pretty significant expansion, but still, I think nearly 30% of your current fleet is approximately 15 years and older. How much of a focus is it to source additional vessel sale opportunities from here?

We will be concentrating on both growth and fleet renewal. The fleet is likely to undergo significant changes for the time being, as we need to ensure we sell older vessels at the right time and acquire newer ones when appropriate. Additionally, we aim to pursue business combinations that benefit our shareholders. Therefore, we're not planning to remain idle. While we do need to focus on effectively integrating Eagle, we hope that this integration process won't extend throughout all of 2024.

Okay, that's helpful. I would like to follow up on the questions from Omar and Amit regarding the Red Sea. How have your discussions with the insurers gone about ensuring charters through the Suez Canal now? Do you see this as a significant capacity constraint for other carriers moving forward from an economic perspective to transit across?

Up to a couple of weeks ago, the cost hadn't increased significantly. Currently, it has gone up slightly. We are well-covered at relatively low rates. However, we are not affected by the situation in the Red Sea anymore. For those who are, I would think that as more vessels are deployed, the insurance rates will rise. Overall, the cargo still needs to reach its destination, which is all about calculations. For instance, if someone departs from the continent with a chartered vessel, they need to calculate whether it's more beneficial to go around the Cape or through the Suez Canal. If they choose the Suez Canal, they must consider the associated risks. Just in terms of cost, the journey will take 11 days longer via the Cape, which means incurring higher banking fees for those additional days. Conversely, going through the Suez Canal involves paying the canal fees and insurance costs as well. As insurance rates rise, the financial difference between routing through the Cape or the Suez may diminish.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

No remarks, operator. Thank you very much.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.