Star Bulk Carriers Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 17, 2023

There are 8 speakers on the call.

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call on the First Quarter 2023 Financial Results. We have with us Mr. Petros Pappas, Chief Executive Officer Mr. Hamish Norton, President Mr. Simos Spyrou and Mr.

Operator

Christos Begleres, Co Chief Financial Officer Mr. Nikos Rescos, Chief Operating Officer and Ms. Charis Lakhanathan, Chief Strategy Officer for 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

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 to one of our speakers for today, Mr. Spyrou. Please go ahead, sir.

Speaker 1

Thank you,

Speaker 2

operator. I'm Simos Biru, Co Chief Financial Officer of Sabal Carriers, And I would like to welcome you to our conference call regarding our financial results for the Q1 of 2023. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on Slide number 2 of our presentation. In today's presentation, we will go through our Q1 results, cash evolution during the quarter, An update of our balance sheet, an overview of interest rate risk management, the banker benefit and vessel operations, the latest from the ESG front and our views on the industry fundamentals before opening up for questions. Let us now turn to slide number 3 of the presentation for a summary of our Q1 2023 highlights.

Speaker 2

For the Q1 of 2023, the company reported the following: Adjusted EBITDA was at $85,000,000 for the quarter. For the Q1, As per our existing dividend policy, we declared a dividend per share of $0.35 payable on or about June 27, 2023. During this quarter, we have bought back 531,223 Shares at a cost of $11,260,000 Since 2021, Dividend distributions and share buybacks are over $1,000,000,000 On May 16, 2023, Our Board of Directors canceled the previous share repurchase program under which $8,500,000 was still outstanding and authorize the new share repurchase plan of up to an aggregate of 50,000,000 On the top right of the page, you will see our daily figures per vessel for the quarter. Our time charter equivalent rate was at $14,199 per day per vessel. Our combined daily OpEx and net cash G and A Expenses per vessel per day amounted to $5,755 Therefore, our TCE less OpEx and G and A is about $8,444 per day per vessel.

Speaker 2

Looking towards fleet renewal, we have agreed to charter in 7 high specification, The latest generation scrubber fitted eco vessels. We have added a table at the bottom of the page with an overview. We have entered into the long term charter in agreements for 4 Kamsarmax newbuildings and 2 Ultramax newbuildings, which are expected to be delivered during 2024 with a minimum duration of 7 years. In addition, in November 2021, we took delivery of the Capesize vessel, Satsibumi, under a long term charter contract for a period up to November 2028. Slide 4 graphically illustrates the changes in the company's cash balance during the Q1.

Speaker 2

We started the quarter with $330,500,000 in cash adjusted for the refinancings and generated positive cash flow from operating activities of $83,200,000 After including debt proceeds and repayments, CapEx payments for energy saving devices and ballast water treatment systems, the Q4 dividend payment and share repurchases, We arrived at a cash balance of $305,900,000 at the end of the Q1, which implies a dividend payment of $0.35 per share to the shareholders of record of June 7, 2023. Please turn now to Slide 5, where we highlight the strength of our balance sheet. Our pro form a total liquidity today stands at 375,000,000 Meanwhile, our total debt stands at $1,230,000,000 Net sale proceeds from the 3 vessels stands at $75,500,000 after debt repayment and will be excluded from the cards that can be distributed as dividend and will be kept for general corporate purposes. Note

Speaker 1

that the

Speaker 2

$11,200,000 that have been spent On the buyback during the previous couple of months, we'll be deducted from these $75,500,000 proceeds. We have a positive trade working capital of $79,500,000 and a mark to market of the derivatives of $21,900,000 as of March 31, 2023. Given current market conditions, we expect that the trade working capital will grow further in the course of the Q2 of the year. Our next 12 months amortization is at $177,000,000 In Slide 6, We present an overview of our risk management on the debt side. Given the increasing interest rate environment we are in, We have focused on reducing leverage and managing interest expense in order to ensure the lowest possible finance cost compared to peers.

Speaker 2

Since 2022, we have completed refinancings totaling $525,000,000 that reduced our interest costs by approximately $7,000,000 per annum as a result of achieving significantly lower margins. In 2020, we proactively hedged the base rate for a significant part of our senior debt at an average rate of 45 basis points. The current outstanding notional is approximately $637,000,000 for an average remaining maturity of 1 year. Total realized gains from these activities are $11,600,000 as of March 31, 2023. And as of the same date, the mark to market Of the remaining position of the swaps was at 26,000,000 The cumulative effect of this decision is depicted in the graphs at the bottom of the page, where one can see that Star Bulk has reduced its average interest rate and currently has a lower average interest cost among its listed peers.

Speaker 2

I will now pass the floor To our COO, Nikos Rescos, for an update on our operational performance.

Speaker 1

Thank you, Simo. In Slide 7, we illustrate how Faroe continues to benefit from the fuel spread between HSFO and LSO. Our 118 scrubber fitted vessels have surpassed 177,000 operating days with an average system availability of 99.5 With the current Hi Fi spread, our scrubbers minimum will continue to our profitability. The spread secured during the Q1 $5 per tonne and currently hovers at around $122 per tonne, based Singapore spot prices, where we cater for approximately 60% of our annual fuel demand. Indicatively, our average high five spreads since Inceptions, down at $117 per tonne.

Speaker 1

For illustrative purposes, on the top right of the slide, we present a sensitivity table that shows the impact the bunker benefit can have on our bottom line based on consumption of approximately 605,000 tons of Oasis Epoca Rano to our Swadgrip Investment. Please turn to Slide 8, where we provide an operational update. Operating expenses, excluding nonrecurring expenses, were $4,696 for Q1 2023. Net cash G and A expenses were $10.59 per vessel per day for the same period. In addition, we continue to rate at the top among FALISA's peers in terms of the large shift basis points.

Speaker 1

Slide 9 provides a fleet update and some guidance around our future drydock and vessel efficiency on board expenses and our Erivedax total off hire days. During the Q1, we took advantage of the increase in vessel values and agreed to opportunistically sell 2 2011 built Capesize vessels, the Sao Paulo Realis and the Sao Paulois. We have further disagreement on the constructive total loss of As part of our strategy towards fleet renewal and improving the overall fleet fuel efficiency, we secured several long term chartering latest generation eco vessel We have by now completed our Power's Water Installation Program across the fleet and in line with the EXI and CII regulations, we will continue investing And upgrading our fleet further with energy saving devices, telemetry and other technologies, all main in improving our fuel consumption and reducing our environmental footprint together with enhancing the commercial attractiveness of the DARPA fleet. Our expected weather expense for the 9 months to remain on 2023 is estimated at 23,700,000 For the dry docking of 28 vessels, we are $109,000,000 towards our vessel upgrade CapEx. In total, We expect to have approximately 700 and 75 days for the same period.

Speaker 1

The above numbers are based on current estimates around driver of the metropolitan planning, special employment and yard capacity. I will now pass the floor to our Chief Strategy Officer, Tyus Lagard and Nike, Prahimi at Zia Point.

Speaker 3

Thank you, Nico. Along with our ongoing efforts to continue to improve the energy efficiency of our fleet, we have now completed the 1st disability study with the iron ore consortium of pre COVID-nineteen. The strategy assessed the potential for the demand, supply and bunkering of Trina Molomea With the iron ore trade between West Australia and Sapiens and concluding the development in the depth of the fuel supply would allow both carriers, parflechelon ammonia, to be deployed on this trade by 2028 and with 5% adoption by 2,030. Key prerequisites for the quarter remain the acceptance of ammonia as a safe marine fuel, the development of suitable engines, poised support and continued collaboration through the value chain. Following to the Grim Corridor project, We continue our research and development efforts on different preintuator technologies, including onboard cargo capture and storage.

Speaker 3

We remain focused on the well-being of our people, having completed a comprehensive employee survey to offset our company's strengths I will now turn the floor to our CEO, Pedro Spada for a market update and his closing remarks.

Speaker 4

Thank you, Harris. Please turn to Slide 11 for a brief update of supply. During the 1st 4 months of 2023, A total of $12,700,000 deadweight was delivered and $1,900,000 deadweight was set to demolition for a net fleet growth of $10,800,000 deadweight or 2.9% year on year. 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 has decreased on a record low of 6.9% of the fleet, with just $6,300,000 deadweight reported as fairmodels between January April.

Speaker 4

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 or overage and fuel inefficient tonnage an attractive option during seasonal downturns over the next years. The average steaming speed of the drybulk fleet decreased Record low levels of 11.05 knots during Q1 and over the last month Has rebounded to 11.3 knots as spot freight rates improved and bunker prices moved lower. Nevertheless, streaming speeds still stand below last year's levels, and we expect that the EEXI CII regulations We continue to incentivize low demand. During the last 12 months, global pork congestion experienced a strong correction from rig Record highs that have gradually inflated active supply and has put downward pressures on earnings. Having said that, Changes in trading patterns and inefficiencies related to the war have normalized congestion slightly above pre COVID levels.

Speaker 4

As a result of the above trends, net fleet growth is unlikely to exceed 2% According to Clarksons, total dry bulk trade during 2023 is projected to expand by 1.8% in tons and 2.5% in ton miles. During the Q1 of 2023, total drybulk volumes increased by 4% year on year on the back of the reopening of the Chinese economy and stronghold exports from Indonesia. Commodities demand from the rest of the world has been affected by the ongoing effects of the war in Ukraine, Surging energy costs, hitting industrial profitability and aggressive monetary tightening from Central Banks to fight inflation. The IMF is projecting global GDP growth to slow down to 2.8% in 2023 and to recover to 3% in 2024. Global trade is projected to expand at Healthy levels over the next quarters as China is at an early stage of the reopening from COVID-nineteen And each column is expected to accelerate from 3% in 2022 to 5.6% in 2023 with support from infrastructure stimulus and a gradual recovery of the housing market.

Speaker 4

Concurrently, the considerable correction of energy prices Over the last 12 months is easing inflationary pressures generated by energy costs, A condition that should inflate demand of raw materials amid increased manufacturing activity. Iron ore trade is expected to expand by 1.8% in tons and 2.2% in ton miles during 2023. China's steel production increased by 7.4% year over year during the Q1 following the total lift of the Fleet COVID policy in December. At the same time, domestic iron ore output contracted by 5.5%, While stockpiles have decreased to a 2 year low, providing a positive indicator for imports going forward, Steel production from the rest of the world declined by 11.3% during Q1, affected by weak profit margins, leading to strong demand from Chinese steel exports. Vale's sales underperformed during Q1, but the company expects to offset the effect that Q1 had on its annual guidance in inflated volumes over the next quarters.

Speaker 4

Coal trade is expected to expand by 2.9% in tons and 4.4% in ton miles during 2023. Global Focus on Energy Security has upgraded the coal trade outlook for the next few years, while the reshuffling of European and Russian coal trade is benefiting ton miles. During the Q1, China and India imported record high volumes, Despite recording strong increases in the cemented coal production, while the unofficial ban by China On Australian coal that started during the Q4 of 2020 has been lifted and is expected to benefit Capesize vessels. Drainage trade is expected to expand by 3.2% in tons and 4% in ton miles during 2023. During Q1, volumes were down year over year despite strong soybean export from Brazil.

Speaker 4

Nevertheless, The supply outlook for grain is positive due to good crop conditions, which have put downward pressures on prices and indicated stronger trade for the rest of the year. Mine orebulk trade is expected to expand by 0.8% in tons and 1.4% in Tom Hiles during 2023. As a sub sector has the highest correlation to global GDP growth and has been affected by the global slowdown that took place during the second half of twenty twenty two. The war in Ukraine disrupted European Union fertilizer and steel production and has created Atlantic shortages that are inflating Moreover, West Africa bauxite exports continue to expand at a high price pace and generate strong 4 miles for Capesize vessels. Finally, the long term prospects of the drybulk market remain Given the record low order book, environmental regulations and large infrastructure investment needs for the world's green transition, Star Bulk is well positioned to do its scrubber, fitted and diverse fleet to take advantage of recovery in freight rates.

Speaker 4

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

Operator

you. Thank you. Our first question is from Amit Mehrotra with Deutsche Bank. Please proceed with your question. Hey, good morning, everybody.

Operator

This is Chris on for Amit. Thanks for taking our questions.

Speaker 4

Hi, Chris.

Speaker 1

Hi. This might be a

Operator

question for Nikos. This is related to the slow steaming in the fleet.

Speaker 4

So I know the fleet

Speaker 5

has slowed down and you guys mentioned

Speaker 1

in the prepared remarks So

Speaker 5

a little bit of an uptick here. But given the ESI regulations or the CII in particular, What do you think the upper limit is in terms of the fleet kind of speeding back up here versus is there any additional downside you see this year or Should

Operator

we just be thinking about it in terms of the fleet not slowing speeding up as much as it could?

Speaker 1

Thank you, Chris. Well, at the moment, the fleet is bidding at around 11.5 knots. We feel that as the regulation tightens towards 2026 with an annual increase of about 2%, We don't see the speed increasing substantially to the contrary. There will be some impact on the CII rating on every vessel. So we believe that over the next few years, we should see a slowing down of the spill of the fleet.

Speaker 1

If you add on top of that the fact that there is a lot of idling taking place on a big portion of the fleet, which is the smaller ships, That's going to be a heavier impact on CII. So we cannot see much flexibility on

Speaker 4

Chris, it's Petros. Actually, I think it's actually below even 11.5 percent, I think it's 11.3 percent or so. And if I remember well over the last years, we have not seen Speeds go much above 11.5 anyway. So I would say that the risk is on the downside. I think that In the future, we will see vessels actually slowing down.

Speaker 4

Okay. Yes, I got it. That's pretty succinct, Petros. Thank you for that.

Operator

Just turning to China for

Speaker 5

a moment, we saw some increased steel production in the Q1. There's been some inventory drawdowns Since that time, but with the proposed production curves there for the year, do you think there's further room for Additional inventory drawdowns like we saw at the very low levels in 2020? Or do you think that the drawdowns are kind of stabilizing And we'll see a restocking cycle in the next few quarters.

Speaker 4

Well, we are seeing iron ore Stocks down to 126,000,000 tons, if I'm not wrong, which is the law for the last at least 2 years. And we therefore expect that We will see more imports in the second half of the year and more so from Brazil, which has not Yet performed up to its expectations as far as exports are concerned, which will actually Increase ton miles. So we are positive about iron ore trade during the second half. And then I think that China will increase its efforts On the infrastructure level, and I've also seen that new floor space has Gone down a lot. So I would expect that as China as the efforts to Strengthening economy continues.

Speaker 4

I think that we will see support

Speaker 1

both from

Speaker 4

the private and the public sector over there.

Speaker 5

Okay, got you. Last question for me. You guys gave quarter to date rate guidance on the bookings, but just any color around the second half Of the current quarter, since we're already more than halfway through, we've seen some a little bit of slowing or deceleration of the economic Any thoughts around how rates might perform for the rest of 2Q?

Speaker 4

Well,

Speaker 2

as I said before,

Speaker 4

I think that China will actually increase its effort to support this economy. And I think that as oil prices and energy prices are going down, I think the world In general, we'll also improve as far as GDPs are concerned. So I think it's not going to just be China. I think we will see a better economic situation going forward. And especially, of course, as interest rates are will stop in the rise and May start even falling later on in the year.

Speaker 5

All right. Yes. Thank you very much for the

Operator

time, guys. I'll turn it over.

Speaker 4

Thank you, Chris.

Operator

Thank you. Our next question is from Omar Naksa with Jefferies. Please proceed with your question.

Speaker 6

Thank you. Hey, guys. Good afternoon. I just wanted to ask Mark out. Hi, there.

Speaker 6

Just Obviously, the charter ends are definitely new developments and pretty significant. I just wanted to ask about that and how they work. And maybe first off, are these are they bareboat leases or are they just regular in charters? And then also, just in terms of bending against new buildings, are these new orders that have been placed? Or were these ships already under construction and have been chartered accordingly?

Speaker 4

Omar, hi, Spetros. These vessels actually were ordered Already were being ordered, and we're doing these deals for four reasons. First of all, we think the rates we have fixed them are good. So we expect to make profits. Secondly, it's the way it is a way to modernize our fleet.

Speaker 6

3rd,

Speaker 4

As nobody knows when the new generation vessels will be in and when there's going to be The right infrastructure and ample fuels to fuel those vessels, This we consider to be a bridge between now and that time. And of course, let's not forget that these vessels come at no capital costs. Also, those vessels have scrubbers and they offer us optionality. So we have them for 7 years plus options. So, I think only good things come out of these vessels.

Speaker 6

And I think that there's more to come as well. Okay. More potential chart trends as what you've reported?

Speaker 4

Yes. Okay.

Speaker 6

Great. And then I guess, yes, you mentioned the four reasons. And I guess, I wanted to ask, Also, we've seen in terms of asset values just a continuous move higher throughout the year despite The fact that the market's been off to a softer start, at least relative to 'twenty one and 'twenty two, and so ship values are moving higher. You've seen it for Capes especially. But just wanted to ask maybe from your perspective, what's been driving the S and P market to be climbing so significantly this year?

Speaker 6

And also, so yes, one, what's maybe behind that? And is there a lot of deals being transacted? And is there more to come?

Speaker 4

Well, first of all, we ship owners, we're bullish people. There is not a lot of space in shipyards and the prices of new buildings are going up. So there is this idea that prices of new buildings will not fall. So I think This is one of the reasons why ship owners are ordering. Also, the new vessels are Much more echo than the vessels in the water and that will allow them potentially to survive for Longer periods until the 0 emission investments come in.

Speaker 4

So I think basically these are the reasons Why people are ordering and why prices are going up.

Speaker 6

Okay. And so maybe from your commentary just now, it sounds like Is more of the activity being done on the modern end of the curve? Or is there also deals being done on the 10 plus year range as well?

Speaker 4

What do you mean? You mean, are you building the very sustained year old vessels?

Speaker 6

No, sorry, just meaning in terms of the S and P activity we've been seeing is the market as you highlighted, there's Not a lot of new building slot capacity available and prices are not going to come down from the new building front. So It seems like you've had this repricing of tonnage. Is that repricing on the modern end of the age curve? Or is it also happening? Yes.

Speaker 4

Yes. There is also repricing on the existing vessels in the water, The ones that are actually echo, exactly because if you order today, you will Probably take delivery of a vessel in 2026. And therefore, we've seen that happen before. We've seen Vessels in the water actually being sold for close prices or even higher prices than new buildings.

Speaker 6

Yes. That's interesting. And I guess maybe just one final one for me. You sold those 2, Kate, at fairly good prices. Should we be thinking we'll be seeing something similar?

Speaker 6

As you mentioned earlier, You'll be adding more charter ins even though those are a bit outwards in terms of delivery. So would you be thinking you'll be adding more new buildings via charter in and maybe selling some Some of your older ships take advantage of the pricing dynamics today.

Speaker 4

Yes. Well, first of all, The prices are pretty high compared to what charter levels are. So actually, this means that people expect the market to go up. But we don't know what will happen. We are positive, but Prices are really, really very good.

Speaker 4

The 2 capes that we sold, we sold them at prices that we were very, very happy with. So I think what we will do going forward is we will sell some more vessels, Trying to improve the average age of our fleet, probably getting rid of a few older vessels And chartered in newbuildingtonnage. That will improve the age profile And we'll do all the good things that I told you earlier, plus it will strengthen our war chest In case we will want in the future and especially if there are new technologies that Really cut down on the consumption of vessels, perhaps we would want to also order new buildings, not right now, but It won't happen in the future.

Speaker 1

And Robert, this is Christos.

Speaker 2

Just to add, given also the Large discounts to NAV and trading performance lately are

Speaker 1

selling vessels, a few vessels and especially the inefficient ones, as Pedro mentioned, is supported.

Speaker 4

Yes, that makes sense.

Speaker 6

Thanks, Christos. Very helpful and thanks, Petros, for the overview. I'll turn it over.

Operator

Our next question is from Ben Nolan with Stifel. Please proceed with your question.

Speaker 6

Guys, thanks for taking my questions. If I could start, I wanted to follow on with some of the charter ends. I just had a few other questions about those. First of all, do they include purchase options at the end? Secondly, how should we think about what your, let's say, annual cost once all 7 are operating Would look like and was curious if these were related party transactions or not?

Speaker 7

So, Ben, we can't comment, Fortunately, on the details of those charters, you can see what we're able to comment on in our financial statements in the footnotes. And Then as far as related party transactions, Seemar, I don't they're not

Speaker 2

we do not have anything.

Speaker 4

No, but one advantage one has when he or she has chartered a vessel in is that when you control a vessel and the time comes that the vessel the owner wants to sell the vessel, Being the charter of the vessel, you're always in a full position as far as being able to buy. You have Forward advice about it. So, it's always an advantage to have a chartered in vessel, even if you don't have a purchase option.

Speaker 6

Okay. That's helpful. I appreciate the color you were able to give there. And then for my Second question, as I was going through the release, it seemed like for the Q2, there was It's going to be a whole lot more dry docking days than what had previously been the case, unless I'm mistaken.

Speaker 4

I'm curious if you guys are

Speaker 6

bringing forward dry docks or something into the Q2?

Speaker 1

Hi, Ben. This is Nikolas. This What we're doing is we're accelerating some of the bigger ships into Q2, taking advantage, unfortunately, are not of the A kind of software market of the big ships and preparing for Q3 and Q4. We're doing this also to install efficiency

Speaker 4

Okay. So does that any sense as to

Speaker 6

sort of what drydocking should look like for 2024 then?

Speaker 1

We have 24 ships scheduled or 26 years for 2024. Okay.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.

Speaker 2

Well, thank you all very much for following us

Speaker 4

and have a good day. See you next time around. No more comments.

Operator

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

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Star Bulk Carriers Q1 2023
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