Star Bulk Carriers Corp. Q1 FY2024 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call on the First Quarter 2024 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 Mr. Charis Plakantonaki, Chief Strategy Officer of the company. I must advise you that this conference is being recorded today. We now pass the floor to one of your speakers today, Mr. Christos Begleris. Please go ahead, sir.

Thank you, operator. I'm Christos Begleris, Co-CFO of Star Bulk Carriers, and I would like to welcome you to our conference call regarding our financial results for the first quarter of 2024. 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 Q1 results, cash evolution during the quarter, actions taken to create value for our shareholders, an update on the Eagle Bulk integration, vessel operations, fleet update, 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 first quarter 2024 highlights. In the first quarter, the company reported the following: net income amounted to $75 million with adjusted net income of $73 million or $0.87 adjusted earnings per share. Adjusted EBITDA was $123 million for the quarter. For the first quarter, as per our existing dividend policy, we declared a dividend per share of $0.75, payable on or about June 6, 2024. Since 2021, dividend distributions and share buybacks are over $1.2 billion and $0.4 billion respectively. Our total liquidity today stands strong at $472 million. Meanwhile, our total debt stands at $1.45 billion. On the top right of the page, you will see our daily figures per vessel for the quarter. Our TCE rate was $19,627 of $114 million. Including debt proceeds and repayments, CapEx payments for energy saving devices and ballast water treatment system installments and the Q4 dividend payment, we arrived at a cash balance of $262 million in cash and generated positive cash flow from operating activities, $269 million at the end of the quarter. Slide 5 provides an overview of the company's capital allocation policy over the last three years and the various levers we have used to create shareholder value. On the top left, we show our net debt evolution. We have taken advantage of historically elevated S&P values to sell some of our older and less efficient vessels using the equity proceeds to buy back our shares at attractive values. Since 2022, we have bought back $423 million worth of Star Bulk stock. 20 million shares valued at $380 million were bought in the fourth quarter of 2023 from Oaktree. Given that our shares at the time were trading at a significant discount to net asset value and we use proceeds from vessel sales at net asset value, we are taking advantage of the arbitrage to create shareholder value. Combining all of the above, we see that we are focused on returning capital to shareholders, while at the same time, deleveraging the balance sheet and buying back shares when there are opportunities to do so accretively. In total, since 2021, we have taken actions of $2.1 billion to create value for our shareholders. I will now pass the floor to our COO, Nicos Rescos, for an update on the Eagle Bulk transaction integration and our operational performance.

Thank you, Christos. Slide 6 illustrates a summary of the Eagle Bulk transaction integration. The merger with Eagle Bulk will allow us to leverage our strong global presence of the combined entity with offices in Singapore, the U.S., Greece, Denmark, and Cyprus. The respective Singapore offices are to merge into one and continue as a commercial and technical management hub covering the Asia-Pacific. The Stamford office is to continue both on commercial and technical management, covering the Atlantic and the U.S. markets. Together with the Athens Headquarters in Europe, we will maintain presence in Copenhagen for chartering operations covering the Atlantic, Continental, and Med area. We are creating a new integrated commercial team, managing the second largest Ultramax Supramax fleet globally to combine capabilities and aim for improved time charter performance. We also aim to rebalance employment strategy and include Voyage business. We have already refinanced the ex-Eagle debt facility, resulting in interest cost savings of $3.2 million per year. We have executed new insurance agreements for the ex-Eagle vessels, saving $1.9 million per annum in insurance costs. Crewing will be gradually taken in-house with an expected cost reduction of about $600 per vessel per day during the next 18 months. Significant synergies are expected from the centralization of procurement of all stores, spare parts, and lubricants. Drydocks of ex-Eagle Bulk vessels will benefit from Star Bulk competitive pricing agreements with service providers and shipyards globally. Marine Safety Quality and Technical maintenance standards, processes, policies, and systems are to be applied across the combined fleet, aiming to align with the Star Bulk Rightship Safety Score and Port State Control performance. Lastly, systems integrations are underway to enable efficiencies amongst offices and departments and create further synergies. Turning to slide 7, we provide an operational update. Operating expenses were at $4,962 for Q1 2024. Net cash G&A expenses were $1,223 per vessel per day for the same period. In addition, we continue to rate at the top amongst our listed peers in terms of Rightship Safety Score. Slide 8 provides a fleet update and some guidance around our future dry dock and the relevant total off-hire days. On the top right of the page, we provide a CapEx schedule illustrating our newbuilding CapEx and vessel energy efficiency upgrades, with 100% of our fleet now being ballast water system fitted. Our expected dry dock expense for the remainder of 2024 is estimated at $42.4 million for the drydocking of 51 vessels, including 12 ex-Eagle Bulk vessels. In total, we expect to have approximately 1,250 off-hire days for the same period. Based on our latest construction schedule, our newbuilding vessels are expected to be delivered during Q4 of 2025, Q2, and Q3 of 2026. In line with the EEXI and CII regulations, we continue investing in upgrading our fleet with the latest operational technologies available aimed at improving our fuel consumption and reducing our environmental footprint and further enhancing the commercial attractiveness of the Star Bulk fleet. Regarding our energy-saving devices program during the quarter, we have completed and tested retrofits on four vessels with 19 more vessels planned for retrofit by the end of 2024. The above numbers are based on current estimates around dry dock, retrofit planning, vessel employment, and yard capacity. Turning to slide 9 for an update on our fleet sales; on the vessel sales front, we continue disposing of vessels opportunistically at historically attractive levels, having agreed during Q1 to sell seven vessels for total gross proceeds of $134 million, reducing our average fleet age and improving overall fleet efficiency. During the second quarter, we have further agreed to sell one more vessel, the Crowned Eagle. We took delivery of three out of the six long-term charter-in Eco Vessels that will be delivered to us throughout 2024 and specifically two Tsuneishi Zhousan Kamsarmaxes and a Tsuneishi Cebu Ultramax. The Eagle Bulk existing charter-in contracts have been rolled over to Star Bulk following the merger. We operate one of the largest dry bulk fleets among U.S. and European listed peers with 161 vessels on a fully delivered basis at an average age of 11.3 years. I will now pass the floor to our Chief Strategy Officer, Charis Plakantonaki, for an ESG update.

Thank you, Nicos. Please turn to slide 10, where we highlight our continued leadership on the ESG front. The Star Bulks Sustainanalytics' ESG Risk Smart Core has further improved from 21.3 Medium Risk to 19 Low Risk, maintaining Star Bulks number 1 ranking among U.S.-listed peers and positioning the company as one of the best-performing companies globally in the category of transportation shipping. During Q1 2024, we began, along with our partners, the scoping of work and initial projects with the Maritime Emissions Reduction Center to develop and adopt new and existing solutions for reducing Greenhouse Gas emissions from the global fleet. The Center was granted the Motivation Award at the ESG Shipping Awards International 2024. On the regulatory front, MEPC 81 has progressed discussions related to IMO's midterm market-based measures, which are set to come into force in 2027. We are continuously assessing the impact of upcoming environmental regulations and considering action plan options for compliance. As part of Star Bulk's growth program to enhance diversity and inclusion, our first female cadets have embarked on board one of our Newcastlemax vessels. We continue the deployment of Starlink along with the installation of Firewalls on board our vessels and have embarked on a project to equip our vessels with the CyberOwl technology to digitalize and advance the monitoring of onboard systems' performance and security. On the governance front, and as part of our enhanced Code of Business Conduct and Ethics, we have launched a new online Whistleblowing platform on the company's website to encourage open reporting by employees, crews, and third parties, safeguard confidentiality and anonymity, and improve the handling and monitoring process of any whistleblowing reports. 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 11 for a brief update on supply. During the first four months of 2024, a total of 12.1 million deadweight was delivered and 1.6 million deadweight was sent to demolition for a net fleet growth of 10.5 million deadweight or 2.9% year-on-year. Uncertainty on future green propulsion, high shipbuilding costs, and limited shipyard capacity until late 2026 have helped keep new orders under relative control. The order book presently stands at a low level of 9.3% of the fleet. Furthermore, vessels above 20 and 15 years of age stand at 8.8% and 21.2% of the fleet, while scrap prices stabilized at elevated levels and should make demolition of overage and energy inefficient tonnage an attractive option during the seasonal downturns over the next years. The average steaming speed of the dry bulk fleet decreased to a new record low level in January due to downward pressures from inflated bunker costs and new environmental regulations. Having said that, over the last two months, speeds have rebounded to 11.2 knots following the higher freight rate environment and a stabilization of oil prices. We expect emissions regulations, including EEXI and CII, to increasingly incentivize slow-steaming retrofits and to help moderate supply over the next several years. Global port congestion followed a strong downward trend over the last two years that gradually deflated available supply by approximately 5%. During the first quarter of 2024, congestion appears to have fully normalized on all sizes. And going forward, we expect it to follow seasonal plans. Moreover, Panama Canal constraints since mid-2023 and rising tension in the Red Sea continue to cause strong inefficiencies for trade, positively affecting the supply and demand balance of 2024. As a result of the above trends, nominal fleet growth is unlikely to exceed 2.5% per annum over the next couple of years. Let us now turn to slide 12 for a brief update on demand. According to Clarksons, total dry bulk trade during 2024 is projected to expand by 1.6% in tons and 2.4% in ton miles. During the first quarter of 2024, total dry bulk volumes increased by approximately 5.5% year-on-year, supported by iron ore, coal, and record minor bulk exports, while ton-miles increased at a faster pace due to favorable conditions in Brazil and canal inefficiencies. The IMF is projecting global GDP growth at 3.2% for 2024 and 2025, the same pace as in 2023, with China projected to slow down to 4.6% and 4.1%, respectively. Nevertheless, Chinese GDP increased by 5.3% in Q1, faster than initially expected, while dry bulk imports were up by 8.2% compared to last year. The country's full economic recovery from COVID-19 has yet to unfold due to a struggling property market but has received support from strength in infrastructure, manufacturing, and exports. Dry bulk demand from the rest of the world is experiencing a strong recovery over the last quarters that is expected to continue as it receives support from lower commodity prices and expectations of easing monetary policy. During the first quarter, imports were up by 2.9% year-on-year, with the increase coming mainly from India and Far East countries, while imports from Western economies are also moving higher following two years of contraction. Iron ore trade is projected to remain flat in tons and to expand by 1% in ton-miles during 2024. China's steel production declined by 3.1% year-on-year during the first quarter. Weak domestic consumption is forcing steelmakers to export excess output, and some Western economies are raising tariffs as a response. At the same time, domestic iron ore production and imports increased by 15.7% and 7%, respectively, and have helped push stockpiles higher. On the other hand, steel production from the rest of the world has been on a strong upward trend since September and increased by 7.2% during the first quarter. Coal trade is projected to contract by 0.3% in tons and by 2.5% in ton-miles during 2024. Global focus on energy security has inflated coal trade, while Atlantic exporters have redistributed regional quantities with a positive effect for ton-miles. Chinese imports rose significantly during 2023 and remained strong during the first quarter of 2024, supported by a 4.1% year-on-year decline in domestic coal production and a 7.4% year-on-year increase in thermal electricity generation. Furthermore, India is emerging as a leading buyer of coal during the last quarters as consumption has outpaced domestic production and has led to a strong increase in imports. Grains trade is projected to expand by 2.1% in tons and by 5.2% in ton-miles during 2024. Exports from Latin America increased by approximately 14% during the first quarter following strong Brazilian soybean exports and a recovery of Argentinean volumes. However, Ukraine increased exports to the highest level since the start of the war, while lower grain prices, improving crop forecasts, and increased focus on food security are projected to support grain trade in the medium term. Minor bulk trade is projected to expand by 3.7% in tons and by 4.7% in ton-miles during 2024. Minor bulk trade has the highest correlation to global GDP growth, and the recent strength in the container market provides a positive indicator for short-term profits of smaller sites. The positive price arbitrage continues to incentivize Chinese steel exports and backhaul trades, while bauxite exports out of West Africa continue to expand at a high pace and generate strong ton miles for Capesize vessels. As a final comment, the long-term prospects of the dry bulk market remained positive due to favorable supply dynamics, increased inefficiencies in trade, and a recovery of demand supported by large global infrastructure investment needs for the world's green transition. Star Bulk expects to take advantage of the recent strength in the dry bulk market, having mostly maintained its diverse scrubber-fitted fleet in the spot market and 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 comes from Omar Nokta with Jefferies.

I have a couple of questions. You were asked this shortly after the Eagle announcement, but I'd like to hear your thoughts on the Star Bulk fleet moving forward. Petros, you mentioned the diversified fleet towards the end of your comments. You’ve been more dynamic recently, especially after the demerger and selling some ships. Now, you seem somewhat bottom-heavy on the super ultra side, which increases your exposure to the minor bulk trade. As we consider your evolving fleet dynamics, do you aim to have a higher ratio of Capesize vessels in Star's fleet moving forward, or do you prefer to expand the sub-Cape ratio instead? I apologize for the lengthy question.

Thank you, Omar. Well, it happened but this is a Supramax/Ultramax fleet. Next merger may be a Cape fleet, who knows. For the time being, you are right, we are smaller vessel heavy. But that also gives us an opportunity in the sense that during high markets like this, one can sell all their vessels of the fleet. And that way, keep the average age at a better level. So I think that going forward, you may see us sell some of our less efficient and older vessels. And that may rectify the count until we make our next move.

Makes sense. And maybe just a follow-up. In terms of just the debt load at the moment with the company, you have $1.4 billion of debt and you've got $470 million or so of cash. How are you thinking about that amount of debt in general? Are you comfortable keeping at that level? You have on slide 5, the 43% reductions in net debt since '21. Do you feel the need to keep that trend going and lowering that figure? Are you okay with the current balance?

For the moment, Omar, we're continuing to delever at basically the same absolute rate as we've been delevering for a while. We're paying down $250 million of debt a year. And for the foreseeable future, we're going to keep doing that. Obviously, at some point, we get to net debt zero and we'll figure out something to do then. But we want to set the company up to be able to get into the era of decarbonization. And we think you need a strong company with a strong balance sheet to do that well.

Yeah. No, I agree. And then I guess just on that potentially getting to net debt zero, does that in any way shift or change the dividend policy approach or the minimum cash requirements you're looking to keep?

We have no current plans to change any of our capital allocation policies. If the world changes, the policy may change, but for the moment, the policy is our policy.

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

Actually, first, Hamish, could you maybe dive into that comment that you made there about wanting to have a strong balance sheet to move into a decarbonized world, or I forget exactly how you framed it. But what does that mean? Does that mean at some point, you're going to need to replace the assets for things that have much lower carbon emissions or maybe just unpack that comment, if you could?

I mean, I guess the answer is we don't actually know what's going to happen. And if you don't know what's going to happen, that sounds like a really good reason to have a strong balance sheet. The more you know what's going to happen, the more you can leverage up in anticipation of what's going to happen. But yes, I mean, we think that probably there will be expenses shifting to burning expensive fuel, getting really high charter rates. And we think it will be very good for the business and very good for us because we think it will favor large companies that can afford R&D and compliance and all the overheads that go with having a difficult regulatory environment. But whatever it is, it's going to favor big companies with lots of resources and a strong balance sheet.

And if I may add to Hamish's point, this is Christos. Hi Ben. We think it's prudent that during a healthy market, we reduce debt as much as possible so that, in the future, effectively, we have more capacity to take on more debt when the prices are lower and when we want to further leverage on the upside.

Sure. Yeah. And I absolutely agree with that. Sticking with sort of the decarbonization theme a little bit. I know that you guys have investigated or invested in some cases in certain early-stage R&D type technologies. Curious if you have any updated thoughts on what that might look like, whether it's carbon capture or any particular fuel types that you think are emerging as the best candidates? Any new color in that respect?

Hi Ben, this is Nicos. For the time being, we're investing in technologies that have been tested, so basically improving as much as we can the existing fleet. We're continuing to install energy efficiency devices that are proven to decrease our consumption and improve the commercial appeal of each vessel. We are agnostic of all technologies growing in the market. We're testing hull cleaning robots. We're testing paints. They both have an effect on performance. We have tested carbon capture on all of our vessels. But it's a matter of putting all ends to meet in order to make things a viable commercial solution. We do believe that it is an intermediate solution until we have something that will be widely acceptable both in terms of fuel consumption and, of course, on the engines. But for the time being, we're trying to improve the existing vessels as much as we can. On carbon capture, yes, we do have plans that will materialize later in the year.

Okay, that's helpful. Lastly, it seems like the integration of Eagle is going well in terms of finding synergies, which can be challenging in this industry. Costs are down, share prices are up, and by my calculations, they are above NAV. So that aspect of the thesis has been validated so far. I'm interested to know if this is leading to other opportunities. Petros, you mentioned the next merger. Are you identifying potential sellers who might view this transaction as a good liquidity opportunity to maximize value for their assets, while also allowing you to use your shares as a form of currency?

Well, look, everything like this helps, right, closing one deal and doing a good job of it is clearly going to help our reputation in the market for other deals. But I don't underestimate how hard these deals already get done. We have gotten a lot of them done, but they're always hard to close and they're always low probability. That being said, we're looking at possible transactions. And we may be able to do one or more. We certainly intend to try to keep growing.

Okay. Are you feeling more optimistic about that than you were a few months ago?

I think we are more optimistic. But I hope our optimism is actually able to influence the way the world works. We're doing our best.

I think that we are more optimistic than usual also because of the environmental regulations. I think they will have a positive impact on supply. And I think this is going to take place for several years going forward. So that's a good basis for our optimism, I believe.

Yeah. I mean what the environmental regulations do in large part is make it no fun to operate a small shipping company. For a long time for centuries, it's been great fun to operate a small shipping company. I think that's changing. And the business is becoming less fun and more sort of demanding of a large corporate organization.

Yeah. Well, it's always fun to have fun. So I appreciate the color. I appreciate it.

Thank you. It appears we have concluded the question-and-answer session. I'll now hand the call back to Mr. Petros Pappas for his closing remarks.

No further comments, operator. Thank you very much.

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