Earnings Call Transcript - SBLK Q1 2025

Christos Begleris, Co-Chief Financial Officer

Thank you, operator. I'm Christos Begleris, 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 2025. 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 highlight results, actions taken to create value for our shareholders, cash evolution during the quarter, an update on the Eagle Bulk transaction, vessel operations, fleet update, the latest on the regulatory 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 2025 highlights. For the first quarter of this year, the company reported the following; net income amounted to $0.5 million with adjusted net loss of $7.8 million or $0.07 adjusted loss per share. Adjusted EBITDA was $49 million for the quarter. During Q1, we repurchased 1.3 million shares for a total consideration of $19.6 million. For the first quarter, we declared a dividend per share of $0.05, payable on June 6, 2025. Despite the fact that no dividend will be due based on our existing dividend formula, our Board of Directors decided to continue prioritizing returns to shareholders, given the company's strong position. Our pro forma total cash today stands at $437 million. Meanwhile, our pro forma total debt stands at $1.2 billion. Through an undrawn revolver facility, we have additional liquidity of $50 million, resulting in pro forma liquidity of almost $0.5 billion. Finally, we currently have 13 debt-free vessels with an aggregate market value of $270 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 $12,439 per vessel per day. Our combined daily OpEx and net cash G&A expenses per vessel per day amounted to $6,217. Therefore, our TCE net OpEx less cash G&A is around $6,220 per day per vessel. Since the Ecobank transaction was completed on April 9, 2024, until today, the synergies achieved from integration resulted in almost $40 million. The integration process has been completed across all departments. Slide 4 provides an overview of the company's capital allocation policy over the last three years and the various levers we have used to strengthen the company, increase intrinsic value of our shares and return capital to shareholders. In total, since 2021, we have taken actions of $2.6 billion in dividends, share buybacks, and debt repayments to create value for shareholders. At the same time, Star Bulk has been growing the platform at opportune times through consecutive fleet buyouts by issuing shares at or above net asset value. On the bottom of the page, we show our net debt evolution per vessel. Since 2021, our average net debt per vessel has decreased from $11.6 million per vessel to $5.4 million per vessel, which corresponds to a reduction of more than 50%. As a result of this deleveraging process, our current net debt is covered by the fleet scrap value. Slide 5 graphically illustrates the changes in the company's cash balance during the fourth quarter. We started the quarter with $441 million in cash. We generated positive cash flow from operating activities of $49 million. After including debt proceeds and repayments, CapEx payments for energy-saving devices and ballast water treatment system installments, vessel sales proceeds, share buybacks, and the fourth quarter dividend payment, we arrived at a cash balance of $437 million at the end of the quarter. I will now pass the floor to our COO, Nicos Rescos for an update on Eagle Bulk integration and our operational performance.

Nicos Rescos, Chief Operating Officer

Thank you, Christos. Slide 6 provides an update on the Eagle integration and synergies. We continue to realize savings this quarter on the operating expenses front, have completed consolidation of ship management practices across the relevant vessels and offices with the company's headquarters, reflecting our low general and administrative expenses. Importantly, we expect to complete the phase-out of third-party crew managers by Q3 this year, replacing critical functions with our in-house system, thereby realizing further cost optimization. On completion of the last remaining crew changes, our dedicated crewing pool will comprise of more than 5,000 seafarers. For Q1, operating expense and G&A savings for the Eagle fleet stand close to $2,140 per vessel per day. In addition, due to our scale relationships with the shipyards and service providers, we have significantly reduced the dry dock costs of the former Eagle fleet, achieving a saving of $8.6 million for the quarter. Interest expense savings have accumulated, thanks to the refinancing of the former Eagle debt, which took place during the second quarter of 2024. Almost $40 million of cumulative cost synergies have been achieved since closing on the Eagle Bulk transaction in April 2024. Our cost synergies for Q1 stand at €18.4 million. Please turn to Slide 7, where we provide an operational update. Operating expense for Q1 2025 stands at $4,898 per vessel day. Net cash and expenses were $1,319 per vessel per day for the same period. In addition, we continue to rank among 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 of high days. On the bottom of the page, we provide our expected drydock expense schedule, which for the remainder of 2025 is estimated at $47 million for the dry docking of 38 vessels. In total, we expect to have approximately 1,210 high days for the same period. We have arranged to frontload dry dock in the first half of this year to take advantage of the dry dock market seasonality during the second half of the year. On the top right of the page, we have our CapEx schedule illustrating our newbuilding CapEx and vessel energy efficiency upgrade expenses. Based on our latest construction schedule, our 5 Kamsarmax newbuilding vessels constructed at Qingdao Shipyards are expected to be delivered during the first half of 2026. For these vessels, we have secured $130 million of debt financing against the newbuilding installments. In line with IMO carbon reduction regulations, we will continue investing in upgrading our fleet with the latest operational technologies available aimed at improving fuel consumption and reducing our environmental footprint, further enhancing the commercial attractiveness of the carbon fleet. Regarding our energy-saving technologies retrofit program, we have so far completed 42 installations with another 21 planned for 2025. Please turn to Slide 9 for an update on our fleet. On the vessel sales front, we'll continue disposing of non-vessel opportunistically, reducing our average fleet age and improving overall fleet efficiency. During Q1, we agreed to sell some of our less efficient Supramax vessels, including Star Bittern, Star Omicron, and Strange Attractor. Furthermore, during the second quarter, we have further agreed to sell Star Puffin, Canary, and Star Petrel Supramax vessels at attractive levels. We expect to receive an aggregate net sale proceeds of $38.6 million in the second and third quarters of 2025. Following the rollover of the Eagle Bulk existing chartering contracts, we now have a total of nine chartering vessels. Considering the aforementioned changes in our fleet mix, we operate one of the largest fleets amongst US and European listed peers with 150 vessels on a fully delivered basis and with an average age of 11.9 years. I will now pass the floor to our CSO, Charis Plakantonaki, for an update on recent environmental regulation developments.

Charis Plakantonaki, Chief Strategy Officer

Thank you, Nicos. Please turn to slide 10, where we highlight the major developments on global environmental regulations. The 83rd session of the IMO's Marine Environment Protection Committee introduced a new net zero framework marking a major regulatory milestone toward achieving climate neutrality in international shipping by 2050. The new regulation introduces a greenhouse gas fuel intensity metric, which is a way to weigh greenhouse gas emissions for a unit of energy used on board the ship. This is similar to the fuel regulation that came into force in January 2025. Ships are required to report their full intensity annually to the IMO, with peers' requirements set on the annual fuel intensity for ships. They target a more stringent combined target with ships required to meet those levels. A ship that generates compliance surplus can transfer surplus units to ships with compliance deficits, or it can bank the units for later use within two subsequent calendar years. A ship with a compliance deficit can use surplus units from other ships or purchase remedial units from the IMO at $100 or $380 per tonne CO2 equivalent deficit depending on whether the ship's full intensity is between the base and direct targets or above the base target. The proceeds from the new regulation will go into the IMO net zero fund to be set up and managed by the IMO. Part of the revenues are intended to be circulated directly back to the industry as a reward for using near-zero fuel or energy sources. This new framework is set for adoption in October 2025, subject to final approval, with the first reporting period starting on January 1, 2028. Star Bulk remains focused on researching and adopting optimal strategies to ensure timely and efficient compliance with the new global regulations. I will now pass the floor to our CEO, Petros Pappas, for a market update and his closing remarks.

Petros Pappas, Chief Executive Officer

Thank you, Charis. Please turn to slide 11 for a brief update on supply. During the first 4 months of 2025, a total of 12.2 million deadweight was delivered, and 1.1 million deadweight was sent to demolition for a net fleet growth of 11.1 million deadweight or 2.9% year-on-year. The newbuilding order book stands at a modest 10.3% of the existing fleet, with new contracts during Q1 falling to an 8-year low of 2.8 million deadweight, limited spar capacity availability up to the second half of 2027, high building costs, and uncertainty over future grain propulsion have kept new orders under control. At the same time, the fleet is aging; by the end of 2027, approximately 50% of the fleet will be over 15 years old. Moreover, the increasing number of vessels undergoing the third special survey is estimated to reduce effective capacity by approximately 0.5% per annum between 2025 and 2027. The average steaming speed of the fleet adjusted to a new record low of 10.8 knots in February driven by soft freight rates, inflated bunker costs, and environmental regulations. Although, speeds have rebounded slightly on the back of improved earnings and lower oil prices, they remain below last year's levels. In the medium term, new regulations on carbon emissions introduced by the IMO can be expected to continue to incentivize slow steaming and moderate effective supply. Finally, global port congestion fully normalized in the second half of 2024 after a two-year decline that inflated effective supply by about 6%. In Q1 2025, loading delays due to weather disruptions were recorded, while congestion at Chinese discharge ports fell to historic lows driven by a sharp drop in import volumes. For the remainder of 2025 and 2026, we expect congestion to have a neutral or slightly positive impact on the supply balance and to follow seasonal trends. Let us now turn to Slide 12 for a brief update on demand. According to Clarksons, after two years of strong demand expansion, total dry bulk trade is projected to contract during 2025 by 1.2% in tons and 0.4% ton-miles. Recent geopolitical events and policy shifts have introduced uncertainty in traditional forecasting models. Following recent trade agreements, international agencies lowered their projections for global GDP growth and trade. The IMF revised its 2025 global economic growth forecast to 2.8%, down from 3.3% in January, with the U.S. forecast reduced to 1.8% from 2.7% and China to 4% from 4.6%. However, upward revisions could now be expected after initial trade agreements between the U.S. and China were established last weekend. During the first quarter of 2025, total dry bulk volumes grew year-on-year, supported by strong bauxite and minor bulk shipments, while iron ore, coal, and grain volumes combined declined by 3.5% year-on-year. Suez Canal crossings remained at 50% of pre-crisis levels and Red Sea passage will probably be slow to restart. China's GDP exceeded expectations during Q1 and grew by 5.4%, fueled by aggressive stimulus measures in September 2024 and increased retail sales, industrial production, and exports. Chinese dry bulk imports contracted by 8.3% year-on-year during the first quarter due to elevated inventories and rising domestic production of iron ore, coal, and grains throughout 2024. On the other hand, dry bulk imports from the rest of the world expanded by 4.5% year-on-year due to lower commodity prices, easing monetary policy, and stockpiling in anticipation of U.S. tariffs. Growth has been driven mainly by developing Southeast Asian nations and the Middle East, while European imports have steadily increased since mid-2024. Iron ore trade is projected to contract by 1.3% in tons and by 0.6% in ton-miles during 2025. During Q1, China's steel production increased by 1.1% year-on-year, supported by strong exports and lower input costs. During the rest of the year, government efforts to reduce overcapacity in the steel sector and growing protection measures by major steel importers remain significant factors. However, iron ore imports may gain support as Chinese port stockpiles have declined in recent months, and domestic iron ore production fell by 11.7% in Q1 2025. Iron ore ton-miles are projected to receive further support by late 2025 as new high-grade Atlantic iron ore mines begin operations, progressively replacing lower-quality Chinese domestic production and imports. Coal trade is projected to contract by 3.2% in tons and by 3.6% in ton-miles during 2025. Following record-high imports in 2024, Chinese and Indian coal imports sharply contracted in early 2025 due to robust domestic coal production and a year-on-year contraction of thermal electricity generation. Rising renewable energy production in China and elevated coal inventories heighten downside risks, while lower commodity prices over the past six months have compressed profit margins for international coal miners. Nevertheless, strong demand from Southeast Asian economies will provide some support for coal trade over the next year. Grain trade is projected to contract by 2.1% in tons but expand by 0.6% in ton-miles during 2025. During Q1, total grain net exports declined by 5.6% year-on-year, driven by a significant drop in Chinese imports. The Brazilian soybean season was delayed, affecting long-haul shipments early in the year, and export sales in recent months have been influenced by increased Chinese buying ahead of expected U.S. export decisions. The recent U.S.-China trade agreement may boost U.S. exports to China in Q4, echoing trends seen during previous trade deals. However, the 2025 grain rate outlook will depend on the strength of China's harvest. Minor bulk trade is projected to expand by 0.4% in tons and by 0.8% in ton-miles during 2025. Minor bulk trade may counter challenges due to heightened trade tensions, but recent progress in U.S.-China trade relations may drive upward revisions to projections. Bauxite exports from West Africa performed strongly, expanding by 31% during Q1, generating heightened ton-miles for the Capesize fleet. As a final comment, we expect a volatile market in 2025 due to the evolving trade landscape shaped by U.S. administration policies. However, we remain cautiously optimistic about the medium-term outlook for the dry bulk market, driven by favorable supply dynamics, stricter environmental regulations, and stimulus measures from the Chinese government as well as positive developments in U.S.-China tariff negotiations. In a time of heightened geopolitical uncertainty, we remain focused on actively managing our diverse scrubber-fitted fleet to exploit emerging market opportunities and create value for our 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.

Omar Nokta, Analyst

Thank you. Thanks, operator. Hi, Petros. Hi, everyone. Thanks for the update. You mentioned at the end of your comments expecting a bit of a volatile year, given everything that's going on. It seems when we look at the dry bulk market that it is somewhat in a holding pattern with rates that aren't terrible but also not exciting, which is interesting. We've also seen asset values hold up quite well, especially as confirmed by your latest sales. I'm curious to get a sense from you on what you think is ahead here for this market? I know it's a big picture question, but in general, what do you see for asset values and the underlying rates moving forward?

Petros Pappas, Chief Executive Officer

Thank you, Omar. Let me quote someone first; Niels Bohr, the father of atomic energy, famously said that prediction is very difficult, especially about the future. That being said, there are pros and cons in this market. The pros are mainly geopolitical and macroeconomic. The cons are more micro, in my opinion. On the pros, we have bauxite from West Africa and iron ore from West Africa and Brazil that are expected to drive demand, especially due to environmental regulations which would likely incentivize importing iron ore from longer distances. This is going to be a positive, especially when new iron ore producers begin exporting later this year. The environmental regulations will help drive overall demand, and if the war in Ukraine stops, potential reconstruction there could lead to increased congestion. Additionally, a potential agreement with Iran would also boost trade. These are possibilities we foresee over the coming months that would benefit the market. Furthermore, China may boost their economy in response to geopolitical tensions. On the cons, we have China reducing its coal imports moving forward, and overall coal trade will likely continue to decline annually. Additionally, China is trying to increase its own grain production and engage in GM crops, which could have negative consequences if they succeed. If they indeed cut crude steel production, it would also adversely affect iron ore imports. The opening of the Red Sea is another potential negative, though bulk carriers have been less impacted than others. Importantly, we’ve observed low scrapping rates and when you consider the typical order book growth, achieving needed demand increases is essential to avoid oversupply. In conclusion, my assessment is that we’re likely to see a similar market with limited fluctuations following seasonal patterns, meaning that the second half should be stronger than the first without extraordinary results. However, if any significant geopolitical changes occur, like in Ukraine or Iran, that could provide a substantial market boost. Thus, I believe we will likely see a moderate year ahead, with potential upward movement if certain conditions change.

Chris Robertson, Analyst

Hey, good morning, everyone. Thank you for taking my questions. I wanted to follow up on the recent asset sales, specifically in terms of timing for delivery and incoming cash over the next couple of quarters. Should we be thinking about those aggregate sales proceeds as roughly 50-50, or will some of the older assets be more weighted in the near term? Could you elaborate on the cadence of incoming cash?

Christos Begleris, Co-Chief Financial Officer

Chris, all vessels that we've announced for sale, those three Supramax vessels that we’ve committed to sell, are being delivered to their buyers in the second and early third quarters of this year. Therefore, the total proceeds that we've announced of $38.5 million are expected to be fully received upon the delivery of each vessel during this quarter and the beginning of next.

Chris Robertson, Analyst

Got it. Thank you. Just as a follow-up, how are you thinking about the use of these sales proceeds? Are you reserving that cash on the balance sheet for potential reinvestment opportunities, or are you looking at further share repurchases given that shares continue to trade at such a significant discount to NAV?

Christos Begleris, Co-Chief Financial Officer

Chris, as long as our shares trade at a meaningful discount to NAV, like today's levels, the opportunity to buy back shares at a significant discount essentially provides us with a nice arbitrage. Therefore, we view the first priority as being share buybacks.

Doug Smith, Analyst

Thank you. As shown in your slides, the order book over the last five years has been relatively stable, but demolition rates have been negligible. As you mentioned, roughly 0.5% a year. This has led to net fleet growth exceeding the underlying growth in ton miles. What is your outlook for demolition rates in the coming years, and what do you think is driving the low rates we've seen over the last five years?

Petros Pappas, Chief Executive Officer

Yes, to address that gap of 3%, I believe environmental regulations will play a significant role moving forward. Increases in exports from West Africa and Brazil, along with the increased demand for high-quality iron, will also boost ton miles, which is crucial. I think these elements will help reduce the net fleet growth over time. If reconstruction happens in places I mentioned earlier, that congestion could further support our industry. The current order book is remarkably low at 2.9 million tons deadweight, partly because of unpredictability in the future driven by geopolitical situations; as a result, people hesitate to order. And vessel costs are quite high as well. Without significant changes, we expect the order book to continue decreasing. In a slow market, many may choose not to order because there’s uncertainty about future fuel types and engines. Therefore, this uncertainty contributes to the current trends and could potentially benefit only the strong players in the long term.

Doug Smith, Analyst

As you're disposing of several of your older ships, can you share insights on how the buyers plan to use them? These ships seem unlikely to leave the fleet, particularly older ships over 20 years old. What's their purpose? Do buyers pay a premium for more efficient or newer ships, or is the market not offering such premiums right now?

Petros Pappas, Chief Executive Officer

For as long as vessels do not lose money, owners will hold onto them. The buyers are primarily Chinese corporations, and their reasoning might differ from ours. For us, the return on investment from these older vessels is insufficient, even though our operating expenses and the presence of scrubbers keep our costs low. However, the return for us is not adequate. That said, it remains to be seen what the buyers see in these vessels and if they foresee profitability that we do not.

Doug Smith, Analyst

Do you view environmental regulations as a catalyst that might eventually push ships into scrapping, or will that not likely be a factor for a while?

Petros Pappas, Chief Executive Officer

Yes, I believe environmental regulations will influence ship operations, affecting steaming speeds and vessel maintenance practices. It will take longer to service vessels and keep them running efficiently in light of these new rules, making older vessels less competitive. I think that will lead to some scrapping, particularly of older, less efficient models. While not all vessels over 20 years will be scrapped immediately, some will definitely be phased out. The impact will favor newer, more efficient fleets, and I believe the regulations will catalyze scrapping among certain segments over time. Thank you, Doug.

Operator, Operator

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Petros Pappas, Chief Executive Officer

No further comments, operator. Thank you very much.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines to log off the webcast at this time, and enjoy the rest of your day.