Star Bulk Carriers Corp. (NASDAQ:SBLK) Q3 2023 Earnings Call Transcript

Star Bulk Carriers Corp. (NASDAQ:SBLK) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: 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. [Operator Instructions] 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.

Simos Spyrou: 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. I kindly ask you to take a moment to read the safe harbor statement on Slide #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 repurchase 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 million shares outstanding or 83.861,792 million 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, update us on our fleet renewal efforts.

Nicos Rescos: Thank you, Simos. Let me turn to Slide 5, where we provide an operational update. Operating expenses, excluding non-recurring expenses, was $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 sale 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 in 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 with planning, vessel employment, and yard capacity. During the second quarter — 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 developing 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 and impacting of carbon-neutral fuels together with safety consideration 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 will be delivered in Q4 2025 and Q2 2026, including options. The vessels are to be built in China for high specification, treated with the latest fuel-efficient engine, coming into production in 2024.

A short generator using the energy requirement while at sea and now turns 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 improving overall fleet efficiency. I will now pass the floor to our Chief Strategy Officer, Charis Plakantonaki, for an ESG update.

Charis Plakantonaki: 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 the company stakeholders, we present an impact analysis towards 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.

Petros Pappas: Thank you, Charis. Please turn to Slide 9 for a brief update of 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, over-wage, and fuel-inefficient tonnage an attractive option during seasonal downturns over the next years.

The average steaming speed of the dry bulk fleet decreased to 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, CII regulations to increasingly incentivize slow steaming and help moderate supply over the next 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 — 2024 and 2025.

Let’s now turn to Slide 10 for a brief update of 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 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 and 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 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. 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 and is 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%, whilst 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 Nino 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 and have created 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, outlook for 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.

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Q&A Session

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

Chris Robertson: 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 3Q. 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 now 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?

Petros Pappas: Hi Chris. We think that this Q4 is going to be a normal Q4, better than the rest of the year as it always has — 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 to that. Also, the holidays are coming. We believe that Q4 will be better than the rest of the quarters as usual.

Chris Robertson: Okay. Yes. Got that. Just looking at the dividend policy moving forward here, is the minimum liquidity threshold going to be — 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?

Simos Spyrou: 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.

Chris Robertson: 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 it that would enable future retrofitting of different technologies? And can you explain a little bit more what AMP is?

Nicos Rescos: 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 that are ordered with engine, which automatically brings the consumption down compared to other vessels currently built by about two to three points a day. So, that’s pretty significant. AMP is a piece of equipment, which allows you to use a real — basically import and connect to port that do 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 chart traders.

Chris Robertson: Got it. Yes. It sounds good. [Technical Difficulty] possibilities.

Nicos Rescos: Well, we have made 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.

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

Nicos Rescos: You mean the methanol?

Chris Robertson: Yes.

Nicos Rescos: That’s estimated on account so much roughly around 5 million.

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

Nicos Rescos: Thank you.

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

Omar Nokta: Thank you. Hey guys. Good afternoon.

Petros Pappas: Hi Omar.

Omar Nokta: Hi. Yes, just first question I have is maybe kind of following up on Petros talking about the market a bit in the 4Q 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 — would you characterize this as purely seasonal? Or are there other sort of demand factors or fundamental factors in the background that have caused us to improve accordingly?

Petros Pappas: Well, during the second part of the year, there is more iron ore trades. There’s more production from Brazil, which also improves ton-miles. I think this time around coal in — coal imports in India will also be strong because India is — has very low stocks. And the rest of the trade, bauxite and grains, will continue to — 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.

Omar Nokta: Okay. Yes. Just kind of wondering if you — nobody has seen this market, I guess, “strength,” not necessarily saying it’s strong, but it’s definitely much better than it has been. Has that maybe given you a bit more conviction on perhaps next year or the medium term outlook being better? Or do you not look at this as a shift? And that you maybe characterize this as just much more of a seasonal thing, and so let’s not get too excited. Just wanted to get maybe kind of how Star Bulk in general is viewing this market strength we’ve seen over the past couple of months?

Petros Pappas: Well, my personal opinion is that 2024 is going to be similar to 2023 unless if 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 that we may see lesser trade actually to a certain degree, mainly because of the El Nino effect. And of course, the world is trying to reduce coal consumption. I think bauxite to China will improve and will — as every year. And I think that grains are going to be doing better. The El Nino is actually positive for grains. So, overall, I would say a similar market, perhaps a bit better.