Star Bulk Carriers - Q2 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers conference call on the second quarter 2023 financial results. We have with us Mr. Petros Pappas, Chief Executive Officer, Mr. Hamish Norton, President, Mr. Symeon Spyrou and Mr. Christos Begleris, Co-Chief Financial Officers, Mr. Nikos Vreskos, Chief Operating Officer, and Ms. 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, at which time, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. We will now pass the floor over to one of your speakers, Mr. Begleris. Thank you. Please go ahead.

Christos Begleris (Co-CFO)

Thank you, operator. I am Christos Begleris, Co-Chief Financial Officer of Star Bulk Carriers, I would like to welcome you to our conference call regarding our financial results for the second quarter of 2023. Before we begin, 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 second quarter results, cash evolution during the quarter, an overview of our balance sheet, 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 3 of the presentation for a summary of our second quarter 2023 highlights.

Net income for the second quarter amounted to $44 million, adjusted net income amounted to $49 million or $0.47 per share adjusted earnings. Adjusted EBITDA was $96 million for the quarter. For the second quarter, as per our existing dividend policy, we declared a dividend per share of $0.40, payable on or about September seventh, 2023. During this quarter, we bought back 307,439 shares at a cost of $6.1 million. Since 2021, dividend distributions and share buybacks exceed $1 billion or $10.5 per share. On the top right of the page, you will see our daily figures per vessel for the quarter. Our time charter equivalent rate was $15,835 per vessel per day.

Our combined daily OpEx and Net Cash G&A expenses per vessel per day amounted to $5,824. Our TCE less OpEx and G&A is approximately $10,000 per vessel day. Looking towards fleet renewal, we have agreed the sale of five Supramax vessels built in 2012 in China. Our opportunistic sale of these vessels, inclusive of trading profits produced during the period, realized excellent returns for our shareholders with a cash multiple of 4.6x on the equity invested and an IRR of approximately 42%. The accounting gain from sale of the vessels is approximately $20 million in total. Looking at the first half of 2023, we have sold seven vessels and received the insurance proceeds from one vessel for total net equity proceeds of $153.1 million.

Out of these, we have already used $13.1 million for share buyback, for total remaining net sale proceeds of $140 million. This additional $140 million will be added to our existing cash buffer and can be used for general corporate purposes, including fleet renewal, debt repayment, and share buybacks. Slide 4 graphically illustrates the changes in the company's cash balance during the second quarter. We started the quarter with $254.6 million in cash and generated positive cash flow from operating activities of $96.9 million.

After including debt proceeds and repayments, CapEx payments for energy saving devices and ballast water treatment system installments, the first quarter dividend payment and share repurchases, we arrived at a cash and cash equivalent balance of $310 million at the end of the quarter, which implies a dividend payment of $0.40 per share to the shareholders of record of August 22, 2023. The ex-dividend date is expected to be August 21, 2023. Please turn to slide 5, where we highlight the strength of our balance sheet. Our total cash today stands at $457 million, pro forma for the delivery of our two remaining Supramax vessels. Meanwhile, our total debt stands at approximately $1.19 billion. The scrap value of our fleet is more than $800 million, based on scrap price of $400 per light displacement ton.

Taking into account the share repurchases and the debt repayments in connection with the changes in our fleet made in 2023. The cash threshold above which we will distribute dividends is set at $409 million. We have a positive trade working capital of $64 million, and mark to market of derivatives of $18 million as of June 30th, 2023. Following the completion of the refinancings performed during 2022 and 2023, and the sale of the 5 Supramax vessels, we will have 9 unlevered vessels. Our next 12 months amortization is $177 million. I will now pass the floor to our COO, Nikos Vreskos, to provide an update on our operational performance.

Nikos Vrescos (COO)

Thank you, Christos. Please turn to Slide 6, where we provide an operational update. Operating expenses, excluding non-recurring expenses, were $4,772 for Q3, 2022. Net Cash G&A expense were $1,051 per vessel per day for the same period. In addition, we continue to rate at the top among our peers in terms of RightShip safety score. Slide 7 provides a fleet update and some guidance around our future dry dock and vessel efficiency, upgrade expenses, and a relevant total of hire days. Our expected dry dock expense for the next 12 months is estimated at $33.6 million for the dry docking of 37 vessels, with another $9.6 million towards our vessel upgrade CapEx. In total, we expect to have approximately 960 off-hire days for the same period.

In line with EEXI and CII regulations, we will continue investing in upgrading our fleet further with energy-saving devices and latest operational technologies deployed across the fleet, aimed in improving our fuel consumption and reducing our environmental footprint, further enhancing the commercial attractiveness of the Star Bulk fleet. Regarding our ESG retrofit program, we have completed 21 vessels until today, and 12 more vessels are planned to be fitted by the end of the year. The above numbers are based on current estimates around dry dock and retrofit planning, vessel employment, and job capacity. During the second quarter, we have successfully completed the onboard testing of carbon capture technology, with the capabilities to retain up to 30% in net CO2 emissions.

We will continue working on carbon capture technology with our industrial partners, aiming in developing a cost-effective solution which can be selectively retrofitted in the future on select vessels of our fleet and within the scope of our carbon credit scheme. Finally, we're actively working on demand, supply, and bunkering of carbon-neutral fuels together with the safety considerations and vessel design development, with a particular focus on clean ammonia and in line with developing work taking place under the IMO consortium and the Green Corridors initiative. I will now pass the floor to our CSO, Charis Plakantonaki, for an ESG update.

Charis Plakantonaki (Chief Strategy Officer)

Thank you, Nikos. Please turn to slide 8, where we highlight our continued leadership on the ESG front. Star Bulk remains committed to transparent reporting. For the first time, we have completed the measurement of the company's Scope 3 emissions, which will be reported publicly in our upcoming ESG report. We have also submitted Star Bulk's questionnaire for the company's participation in the 2023 Carbon Disclosure Project for a third year in a row. Following the increased decarbonization ambitions agreed for the industry during MEPC 80 and in view of the inclusion of shipping into the EU ETS, we are enhancing our strategic planning to comply with greenhouse gas emission reduction regulations, both at an international and European level.

On the societal front, we have created the first company blood bank through blood donations of our employees, and we have committed to supporting people with disabilities, as well as contributions related to education and health in Greece. During Q2, 2023, all our company employees attended mandatory trainings on cybersecurity to help raise awareness on cyber risks and on the company's relevant policies and procedures. Star Bulk is also piloting new cyber technologies on its vessels to help monitor onboard systems and manage cyber risks for the fleet. We are increasing the company's ESG commitment, the Star Bulk code of ethics conduct and its relevant policies, including whistleblowing, have been enhanced in compliance with the UN Global Compact principles and the new Global Reporting Initiative standards. I will now pass the floor to our CEO, Petros Pappas, for a market update and his closing remarks.

Petros Pappas (CEO)

Thank you, Charis. Please turn to slide 9 for a brief update of supply. During the first half of 2023, a total of 18.6 million deadweight was delivered, and 2.6 million deadweight was sent to demolition, for a net fleet growth of 16 million deadweight or 1.6% year-to-date and 2.9% year-over-year. The supply outlook continues to be the best we have seen in the recent history of dry bulk shipping. Uncertainty on future propulsion, high shipbuilding costs, and limited shipyard capacity until late 2025 have helped keep new orders under control.

... The order book stands close to record low levels of 7.4% of the fleet, with 14.4 million deadweight reported as firm orders between January and June. Furthermore, vessels above 20 years of age stand at 8.1% of the fleet, while scrap prices have stabilized at elevated levels and should make demolition of overaged and fuel-inefficient tonnages an attractive option during seasonal downturns over the next years. The average steaming speed of the dry bulk fleet has corrected to a new record low level of 10.95 knots over the last month as a result of higher bunker costs, lower freight rates, and new environmental regulations. We expect that the EEXI, CII regulations will increasingly incentivize slow steaming and help moderate supply over the next years.

Over the last five quarters, global port congestion experienced a strong reduction from record highs that has gradually increased supply by approximately 5% and has put downward pressures on earnings over the first half. Nevertheless, changes in trading patterns and inefficiencies related to the war have normalized congestion slightly above pre-COVID levels, and the market may find further support over the next quarters from seasonal strength and trade volumes. As a result of the above trends, net supply growth is unlikely to exceed 2% per annum during 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 and 2024 is projected to expand by 2.7% and 1.9% in tons, and by 3.3% and 2.4% in ton-miles, respectively.

During the first half of 2023, total dry bulk volumes increased by approximately 3% year-on-year on the back of the reopening of the Chinese economy, the record high coal and minor bulk exports, and the recovery of iron ore exports from Australia and Brazil. China GDP increased by 6.3% in Q2, but the recovery is losing steam as the country's property market continues to struggle. Despite the overall uncertainty for the outlook of its economy, the demand for dry bulk commodities is very strong, as import volumes increased by 15% year-on-year during the first half of 2023.

On the other hand, the rest of the world imports declined by 3.6% as commodities demand was affected by the war in Ukraine, high energy costs, and the tightening monetary policy in Western economies during their ongoing fight with inflation. The IMF is projecting global GDP growth to slow down from 3.5% in 2022 to 3% in 2023 and 2024. Iron ore trade is expected to expand by 2.5% in tons as well as in ton-miles during 2023. China's steel production increased by 2.2% year-on-year during the first half of 2023, following the total lift of the strict COVID policy. At the same time, domestic iron ore output contracted by 11%, while stockpiles have decreased to a two-year low, providing a positive indicator for imports.

Steel production from the rest of the world declined by 6.2% over this period, affected by high energy costs and weak steel margins. During June, output increased on a year-on-year basis for the first time since January 2022. More infrastructure stimulus from China is expected to keep steel production at least at par with last year's levels, and a gradual recovery from the rest of the world could further inflate iron ore demand. Coal trade is expected to expand by 5.7% in tons and 6.4% in ton-miles during 2023. Global focus on energy security has upgraded the outlook of coal trade for the next few years, while the reshuffling of European and Russian trade is benefiting ton-miles.

During the first half, Chinese imports almost doubled compared to last year, as hydropower is underperforming and there are limitations in the expansion of domestic coal production. Moreover, the unofficial ban by China on Australian coal that started during the fourth quarter of 2020 has been lifted and is already providing support to Capesize and Panamax vessels. Grain trade is expected to expand by 2.5% in tons and 3.7% in ton-miles during 2023. During the first half, corn and wheat trade was affected from poor crop conditions in Argentina and high U.S. prices. On the other hand, Brazil experienced a record soybean export season and had a strong corn crop that is expected to more than mitigate the loss of Ukrainian cargoes following the closure of the Black Sea grain corridor last month.

Moreover, strong Chinese demand and increased focus on food security are expected to inflate grain trade over the next years. The recent correction of grain prices provides a positive indicator for grain volumes during the second half. Minor bulk trade is expected to expand by 1.3% in tons and 2.3% in ton-miles during 2023. Minor bulk trade has the highest correlation to global GDP growth and was affected by the global slowdown. The war in Ukraine disrupted EU fertilizer and steel production and created Atlantic shortages that inflated bulk haul trades during the first half. Moreover, expanding West African bauxite exports continued to generate strong ton-miles for Capesize vessels, with year-to-date exports up by 30%.

Finally, the long-term prospects of the dry bulk market remain positive given the record low order book, new environmental regulations, and large infrastructure investment needs for the world's clean transition. Star Bulk is well positioned due to its scrubber fleet and diverse fleet to take advantage of a recovery in freight rates and remains 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 to answer any questions you may have.

Operator (participant)

Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, that is star one to register a question at this time. Today's first question is coming from Amit Mehrotra of Deutsche Bank. Please go ahead.

Chris Robertson (Shipping Analyst)

Hey, good morning and good afternoon. This is Chris Robertson on for Amit. Thanks for taking our questions.

Petros Pappas (CEO)

Hi, Chris.

Chris Robertson (Shipping Analyst)

I just wanted to start on the updated dry docking schedule. Looks like it ticked up since the last earnings call by a few hundred days. Just wanted to drill into that a bit. Is that pulling forward some 2024 dry docking that was scheduled, or is that due to just maybe longer time periods for installation of equipment? Just trying to get an idea of why it's gone up.

Nikos Vrescos (COO)

Thank you, Chris. This is Nikos. We're basically accelerating some of the vessels into this quarter, and we're basically installing it the device a bit earlier due to the lower market instead of keeping it for 2024. It's basically more ships running on more days on specific dry docks.

Chris Robertson (Shipping Analyst)

Okay. Yeah, got it. That's, that's good. This is related to the use of proceeds from the vessel sale. I wanted to ask about, just looking at the net share count from the beginning of the year to the end of the quarter. It looks like, net of repurchases, but also offsetting that, the issuance of shares under the compensation program. It looks like the net share count is up around 326,000 year to date. As we think about coming quarters, do you expect this net share count will that increase further, do you think? Or will there be some opportunities here to use some of the proceeds from the vessel sale to more aggressively repurchase shares to offset any issuances remaining under the comp program?

Petros Pappas (CEO)

I don't think we intend to issue more shares under the comp program this year. you know.

Symeon Spyrou (Co-CFO)

We haven't issued yet the, the 2nd batch of the shares, which is going to be issued in November.

Petros Pappas (CEO)

Oh, it will be issued?

Symeon Spyrou (Co-CFO)

Yes.

Chris Robertson (Shipping Analyst)

Okay. There will be some shares issued in November.

Symeon Spyrou (Co-CFO)

Yeah.

Petros Pappas (CEO)

Roughly how much?

Symeon Spyrou (Co-CFO)

It should be to the tune of an additional 200,000 shares.

Petros Pappas (CEO)

Okay.

Symeon Spyrou (Co-CFO)

Uh-

Petros Pappas (CEO)

That, that's it then. On the order of 200,000 shares under the comp program, less any buybacks that we might do.

Symeon Spyrou (Co-CFO)

The shares, the shares outstanding today is 100,183,510, and fully diluted, with the additional shares remaining, it's going to be 103,398,510. It's approximately 210,000 remaining.

Chris Robertson (Shipping Analyst)

Okay, thanks. Last question for me is more market-oriented. I mean, you, you extensively went into what's happening with China. I guess just looking at the rest of the world, what would be, in your mind, the most low-hanging fruit in terms of an immediate demand response other than, you know, kind of global GDP improving from here? What, what region or what, what sector do you think will have more of an immediate impact in terms of recovery?

Petros Pappas (CEO)

Well, Chris, first of all, the reason behind the market falling to the levels that we're seeing today, I think is the congestion, plus, plus the, the reduction of congestion, plus the increase in deadweight was not covered by the reduction in the speed and the additional ton-miles of the that we that were, were produced during the first half of the year. That that actually ended up in being slightly negative, and I think this is one of the reasons we saw, we saw a slow market.

Let's not forget that, usually during the first half of the year. We see less trade in the second half of the year. I think that our statistical analysis over the years shows that 46% of the first half of the trade is done during the first half and 54% during the second half. I think this is the reason why we didn't see a stronger market up to now. Going forward, I think that we've seen most of the negatives. We don't believe that congestion will fall much further than what we've seen. We think that the world economy is stabilizing and may turn around positively.

Vessel supply is not going to be very strong in the next 18 months, especially 2024 is going to be a year where rather few vessels will be delivered. Particularly grain trade, we believe is going to turn around and be much stronger during, during the second half. Because during the first half, we saw a reduction of about 4% on grain trade. We think that at the end of the year, it's going to turn positive. These, these things are going to turn around. We think that China is going to exert a stronger effort on the infrastructure side. We think that coal remains strong. We think speeds will probably remain where they are, especially as oil prices are relatively high.

We think that the weaker dollar is going to help trade because commodities are cheaper and freight is cheaper, so that induces more trade. We think that the ton-mile inefficiencies will remain because even if the war stops, I don't think that Russia will start trading with Europe right away or, or the, or with the, with the West in general. We see a low iron ore inventory in China. Generally, we don't see more negatives coming up, but we see more positives. We have faith in the market for the remainder of the year and for 2024.

Chris Robertson (Shipping Analyst)

Definitely a lot of small things that add up for some, hopefully, incremental improvement from here. Thank you for taking my questions. I'll turn it over.

Petros Pappas (CEO)

Thank you.

Operator (participant)

Thank you. The next question is coming from Omar Nokta of Jefferies. Please go ahead.

Omar Nokta (Managing Director, Senior Equity Analyst)

Thank you. Hey, guys. Good afternoon. I just wanted to follow up on the share buyback. I think you mentioned in the opening remarks that you've already spent about $13 million since receiving the proceeds of the sales. Just wanted to ask, given where things are at the moment, given your outlook and where the stock price is, that 140, if I recall, that remains, what's your thought about how much of that are you thinking you'd like to utilize towards the buyback versus, say, debt repayment?

Petros Pappas (CEO)

Well, you know, there, there are, there are more possibilities than that, right? There's, there's buyback, there's debt repayment, and then there are, you know, the, the potential of renewal of the fleet. You know, all three of those are under active consideration.

Omar Nokta (Managing Director, Senior Equity Analyst)

Okay. Is there any... I guess there isn't really a preference at the moment, although I could sense perhaps you did spend $13 million, so maybe there is a good amount of interest to buy the stock.

Petros Pappas (CEO)

Well, I, as I say, I mean, you know, we're considering all three uses, but, you know, there, there are some, there are some very interesting possibilities, that, that may arise in terms of renewing the fleet as well. That's not out of the question.

Omar Nokta (Managing Director, Senior Equity Analyst)

Okay. okay, you would be willing to do that, with the cash proceeds you've received, irrespective of where the valuation is on, on the stock?

Petros Pappas (CEO)

Well, we'll take that into account. I mean, they, you know, we're always looking out to do the best thing for the shareholders.

Omar Nokta (Managing Director, Senior Equity Analyst)

Yeah. Okay. Then, and then, Hamish, you had mentioned, another option, obviously not with the proceeds, but, you have sold the 6 ships, recently. What are you thinking about further disposals from here? anything on the horizon there?

Petros Pappas (CEO)

Well, we, we think we got an excellent price for the ships we sold. You know, if, if we can continue to get similarly good prices on ships that, you know, we are happy to sell, you know, I think we'll keep doing that.

Omar Nokta (Managing Director, Senior Equity Analyst)

Got it. Okay. Thank you. I'll pass it on.

Operator (participant)

Once again, ladies and gentlemen, if you do have a question, you may press star one on your telephone keypad at this time. The next question is coming from Nathan Howell of Bank of America. Please go ahead.

Nathan Howell (Analyst)

Hi, thanks for taking my question. I guess I just, I want to start off with maybe one on just the outlook. I think earlier, the team alluded to expectations on grain trade turning positive.... May I ask if, if that's more coming from lane dislocation or just the general expectation of macro, recovery? Has, has the team seen any, lanes being dislocated following the Black Sea corridor closure? Any, any noticeable call outs there? Thanks.

Christos Begleris (Co-CFO)

I think it's a general positive feeling in the, in the sense that the negatives have probably reached their low point, and the positives, the positives are still still around. It's a combination of macro and micro, I would say.

Nathan Howell (Analyst)

I see. A combination of like a broader GDP view as well as just ton-miles distinction?

Christos Begleris (Co-CFO)

Yeah.

Nathan Howell (Analyst)

Okay. As my follow-up, I, I hate to be hitting the point again, on the $140 million proceeds, in terms of your, your capital view, I, I think there were mentions of image product of fleet renewal as a potential use of proceeds. Wondering if maybe the team could clarify a little bit about how that would be likely expressed. Would this be through further new builds, or, has, has, has there been any updates in terms of opportunity availability in the secondhand markets? Maybe expand a little bit on that.

Hamish Norton (President)

Well, you know, I think this is something we're looking into, and, you know, when we find an excellent opportunity, whether new building or secondhand, we'll consider that along with considering debt repayment and stock buyback. We really haven't made a decision on, you know, the use of that $140 million at the moment. You know, at some point in the not too distant future, we will probably decide what to do with it.

Christos Begleris (Co-CFO)

Yeah, Christos. Yeah, just to add to that, this is Christos. We're always open to also buy vessels using our shares issued at net asset value, as we have done in the past. Now, that's not the use of cash, but, but it's definitely a, a use of our share capital in order to buy vessels and renew our fleet through such acquisitions, like the 58 vessels that we have done since 2018.

Nathan Howell (Analyst)

I see. Just to, just to clarify on the framework as to how you look at this, would it be safe to assume it's, it's kind of based on an IRR mentality in terms of what, what return looks more attractive, like in terms of how you would aim to deploy the cash?

Hamish Norton (President)

Yeah, I mean, basically, we look at the, at the rate of return on capital, you know, whether, whether that is, you know, in excess of our cost of, of capital and cost of equity is appropriate.

Nathan Howell (Analyst)

Okay. That, that's clear. Thank you so much.

Operator (participant)

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

Christos Begleris (Co-CFO)

No further comments, operator. Have a nice August vacation, everybody, and thank you very much.

Operator (participant)

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