Star Bulk Carriers Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

Key Takeaways

  • In Q2 2023 Star Bulk reported $44 million net income ($49 million adjusted, $0.47 per share) and $96 million adjusted EBITDA, while declaring a $0.40/share dividend and repurchasing 439,000 shares for $6.1 million.
  • Sale of five 2012-built Supramax vessels generated a 4.6x cash multiple, ~42% IRR and $20 million accounting gain, contributing to H1 net equity proceeds of $153.1 million (of which $140 million remain).
  • The balance sheet remains robust with $457 million cash, $1.19 billion debt, nine unlevered vessels post-transactions and fleet scrap value exceeding $800 million.
  • Capital expenditures for the next 12 months include ~$33.6 million of drydocks and $9.6 million of vessel upgrades (960 off-hire days), with 21 energy-saving retrofits completed, 12 more planned and carbon capture trials achieving up to 30% CO₂ reduction.
  • Industry fundamentals are supportive: net fleet growth is only 1.6% YTD, record-low orderbook (7.4% of fleet), EEXI/CII regulations encouraging slow steaming, and forecast drybulk trade growth of 2.7% in 2023 driven by Chinese imports and strong coal and grain demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Star Bulk Carriers Q2 2023
00:00 / 00:00

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 Second Quarter 2023 Financial Results. We have with us Mr. Opetros Tapas, Chief Executive Officer Mr. Hamish Norton, President Mr. Simos Spiro and Mr.

Operator

Christos Peguares, Co Chief Financial Officers Mr. Nikos Resco, Chief Operating Officer and Ms. Charis On Kan Tonaki, 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

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. Begleres. Thank you.

Operator

Please go ahead.

Speaker 1

Thank you, operator. I am Christos Begleres, Co, Chief Financial Officer of Star Bulk Cayers, and I would like to welcome you to our conference call regarding our financial results for the Q2 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 2nd 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 number 3 of the presentation for a summary of our Q2 2023 highlights.

Speaker 1

Net income for the Q2 amounted to $44,000,000 and adjusted net income amounted to $49,000,000 or $0.47 Per share adjusted earnings. Adjusted EBITDA was $96,000,000 for the quarter. For the Q2, as per our existing dividend policy, we declared a dividend per share of $0.40 payable on or about September 7, 2023. During this quarter, we bought back 307,000 439,000 shares at a cost of $6,100,000 Since 2021, dividend distributions and 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.

Speaker 1

Our combined daily OpEx And net cash G and A expenses per vessel per day amounted to 5,824. Therefore, our TCE less OpEx and G and A is approximately $10,000 per vessel day. Looking towards fleet renewal, we have agreed the sale of 5 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 $20,000,000 in total.

Speaker 1

Looking at the first half of twenty twenty three, we have sold 7 vessels and received interim proceeds from 1 vessel for total net equity proceeds of $153,100,000 Out of these, We have already used $13,100,000 for share buyback for total remaining net sales proceeds of $140,000,000 This additional $140,000,000 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 Q2. We started the quarter with 254,600,000 In cash and generated positive cash flow from operating activities of 96,900,000 After including debt proceeds and repayments, CapEx payments for energy saving devices and ballast water treatment system installments, The Q1 dividend payment and share repurchases were light at the cash and cash equivalent balance of $310,000,000 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.

Speaker 1

Our total cash today stands at 457,000,000 form a for the delivery of our 2 remaining Sugamax vessels. Meanwhile, our total debt stands at approximately 1,190,000,000 The scrap value of our fleet is more than $800,000,000 based on scrap price of $400 per light debt weight 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 receive a dividend is set at 409,000,000 We have a positive 3rd working capital of $64,000,000 and mark to market of derivatives of $18,000,000 as of June 30, 2023. Following the completion of the refinancings performed during 20222023 In the sale of the 5 Supermax vessels, we will have 9 unlevered vessels. Our next 12 months amortization is $177,000,000 I will now pass the floor to our COO, Nikos Rescos, to provide an update on our operational performance.

Speaker 1

Thank you, Christophe. Please turn to Slide 6, where we provide an operational update. Operating expenses excluding non recurring expenses were $4,770 for Q3 2022. Net cash G and A expense were $1.51 per vessel per day for the same period. In addition, we continue to rate at the top amongst our listed peers in terms of rideshare sales this quarter.

Speaker 1

Slide 7 provides fleet upgrades and some guidance around our future drydock and vessel efficiency upgrade expenses and a relevant total of hire days. Our expected drydock expense for the next 12 months It's estimated at $33,600,000 for the dry docking of 37 vessels. We have another $9,600,000 towards our vessel upgrade CapEx. In total, we expect to have approximately 960 off hire days for the same period. In line with the excite and CRI regulations, we will continue investing and upgrading our fleet further with energy saving devices And latest operational technology 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.

Speaker 1

Regarding our ESD 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 based on current estimates around drydock and retrofit planning, vessel employment and load capacity. During the second quarter, We have successfully concluded the onboard testing of carbon capture technology with the capabilities to retain up to 30% in net CO2 emissions. We'll 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 roughly and within the scope of our cargo and credit scheme. Finally, we're actively working with demand, Supply and bunkering of carbon neutral fuels, together with the safety considerations and vessel design development, will have particular focus on clean ammonia and in line with developing work taking place under the Iron Ore Consortium and the Green Corridors initiative.

Speaker 1

I will now pass the floor to our CFO, Harris Latavomaki, for an ESG update.

Speaker 2

Thank you, Miklos. Please turn to Slide 8, where we highlight our continued leadership on the ESP front. Tagalog remains committed to transparent reporting. For the first time, we have completed the measurement of the company's COVID-nineteen emissions, which will be reported publicly in our upcoming ESG report. We have also submitted Starbucks PreSonier for the company's participation in the 2023 cargo disclosure project for a 3rd year NABO.

Speaker 2

All of the increased decarbonization ambitions Agreed for the industry during MCCIET and in view of the inclusion of shipping into the EUV cash, We are enhancing our strategic planning to comply with greenhouse gas emission reduction regulations, both at international and European level. On the societal front, we have created the 1st company blood bank through blood donations of our employees, And we are committed to supporting people with disabilities as well as contributions related to education and health increase. During Q2 2023, all our company employees attended compensatory 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. As we are increasing the company's ESG commitments, The startup call of Business Conduct and its relevant policies include the recent growing health and health in compliance with the U.

Speaker 2

S. Global CapEx Principles and the new global reporting initiative standards. I will now pass the floor to our CEO, Petros Pappas, for the market update and his closing remarks.

Speaker 3

Thank you, Harris. Please turn to Slide 9 for a brief update of supply. During the first half of twenty twenty three, a total of $18,600,000 deadweight was delivered And $2,600,000 deadweight was sent to demolition for a net fleet growth of $16,000,000 deadweight or 1.6% Year to date and 2.9 percent 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 CPR capacity Until late 2025 have helped keep new orders under control.

Speaker 3

The order book stands close Record low levels of 7.4 percent of the fleet with $14,400,000 deadweight reported as firm orders between January June. Furthermore, vessels above 20 years of age Stand at 8.1 percent of the fleet, while scrap prices have stabilized at elevated levels And should make demolition of overage and fuel inefficient tonnage 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 have 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 As a result of the above trends, net supply growth is unlikely to exceed 2% per annum during 'twenty four and 'twenty five.

Speaker 3

Let's now turn to Slide 10 for a brief update of demand. According to Clarksons, total drybulk trade during 20 23 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 twenty twenty three, 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 miner 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 drybulk commodities is very strong as import volumes increased by 15% year on year during the first half of twenty twenty three.

Speaker 3

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 2024. Iron ore trade is expected expand by 2.5% in tons as well as in ton miles during 2023. China steel production Increased by 2.2% year on year during the first half of twenty twenty three, 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 2 year low, providing a positive indicator for imports.

Speaker 3

Steel production from the rest of the world declined by 6.2% over this period, affected by high energy costs and weak steel margins. But during June, output increased on a year on year basis for the first time since January 'twenty two. 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 percent in tons and 6.4% in ton miles during 2023. Local focus on energy securities has upgraded the outlook of coal trade for the next few years, While the reshuffling of European and Russian trade is benefiting ton miles.

Speaker 3

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 Q4 of 2020 has been lifted and is already providing support Capesize Nanomics vessels. Greed 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 freight was affected from poor crop conditions in Argentina and high U. S.

Speaker 3

Prices. On the other hand, Brazil experienced a record soybean export season and had a strong corn crop that is expected to more than The loss of Ukrainian cargoes following the closure of the Black Sea Grain Corridor last month. Moreover, Our long Chinese demand and increased focus on food security are expected to inflate grain trade over the next years And the recent question of grain prices provides a positive indicator for grain volumes during the second half. Minor about 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.

Speaker 3

The war in Ukraine disrupted EU fertilizer and steel production and created Atlantic shortages that inflated the backhaul trades during the first half. Moreover, expanding West African bauxite exports Continued to generate strong term adds for Capesize vessels with year to date exports up by a 3rd%. Finally, the long term prospects of the drybulk market remain positive given the record low order book, New environmental regulations and large infrastructure investment needs for the world's green transition. Star Bulk is well positioned to discover fitted and diverse fleet to take advantage of recovery in freight rates and remains focused on actively managing this 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

Thank you. The floor is now open for questions. Today's first question is coming from Amit Mehrotra of Deutsche Bank. Please go ahead.

Speaker 4

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

Speaker 1

Hi, Keith.

Speaker 4

Hi. I just wanted to start on The updated dry docking schedule looks like it ticked up since the last earnings call by a few 100 days. So I just wanted to Jerilyn, to add a bit, is that pulling forward some 2024 drydocking that was scheduled or is that due to just Maybe longer time periods for installation of equipment, so just trying to get an idea of why it's gone up. Thank you, Chris.

Speaker 1

This is Nikos. We're basically accelerating some of the vessels into this quarter, and we're basically installing ESD devices a bit earlier due to the lower margins that are kicking for 2024. So it's basically more ships run and more days on specific dry books.

Speaker 4

Okay. Yes, got it. That's good.

Speaker 3

This is related to the use of proceeds from the vessel sales. So I wanted

Speaker 4

to ask about, I Looking at the net share count from the beginning of the year through the end of the quarter, it looks like net 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. So 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 Do you use some of the proceeds from the vessel sales to more aggressively repurchase shares to offset any issuances remaining under the comp program?

Speaker 5

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

Speaker 1

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

Speaker 6

be issued in November.

Speaker 5

It will be issued okay. So there will be some shares, usually, November, roughly how much.

Speaker 1

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

Speaker 5

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

Speaker 6

Okay.

Speaker 1

The shares outstanding today is 100 $183,510 and fully diluted With the additional shares remaining, it's going to be $103,000,000 $398,510,000 So it's Approximately $210,000 remaining.

Speaker 4

Okay. Last question for me is more market oriented. 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 kind of global GDP improving from here. What region or what sector do you think will have more of an immediate impact in terms of recovery?

Operator

Well,

Speaker 3

Chris, first of all, The reason behind the market falling to the levels that we're seeing today, I think, is The congestion plus the reduction of congestion plus the increase in deadweight It was not covered by the reduction in the speed and the additional ton miles of That we that were produced during the first half of the year. So That actually ended up in being slightly negative. And I think this is one of the reasons So we saw a slow market. Also let's not forget that usually during the first half of the year, We see less trade in the second half of the year, and I think that our statistical analysis over the years Shows that 46% of the first half of trade is done during the first half and 54% during the second half. So I think this is the reason why we didn't see a stronger market up to now.

Speaker 3

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. And particularly grain trade, we believe is going to turn around and be much stronger during the second half.

Speaker 3

And 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. So these things are going to turn around. And We think that China is going to exert a stronger effort on the infrastructure side, and 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.

Speaker 3

We think that the top mile inefficiencies will remain because even if the war stops, I don't think that Russia will start trading with Europe right away or with the West in general. We see a low iron ore inventory in China. And Generally, as we don't see more negatives coming up, but we see more positives. So we have faith in the market for the remainder of the year and for 2024.

Speaker 4

Yes, 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. Thank you.

Operator

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

Speaker 7

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 $13,000,000 since receiving the proceeds of the sales.

Speaker 7

And just wanted to ask kind of given where things are at the moment, given your outlook and where the stock price is, That $140,000,000 if I recall that remains, what's your thought about how much of that you kind of thinking you'd like to utilize towards the buyback Versus, say, debt repayment?

Speaker 5

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

Speaker 4

Okay. And is there any

Speaker 7

I guess, there isn't really a preference at the moment, although I could sense perhaps you did spend $13,000,000 So maybe There is a good amount of interest to buy the stock.

Speaker 5

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

Speaker 4

Okay. And you would be

Speaker 7

willing to do that With the cash proceeds you've received irrespective of where the valuation is on the stock?

Speaker 5

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

Speaker 4

Yes. Okay. And then Hamish,

Speaker 7

you didn't mention 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?

Speaker 5

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

Operator

The next question is coming from Nathan Howell of Bank of America.

Speaker 6

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 that's more coming from lane dislocation or just a general expectation of macro recovery. And has the team seen any lanes being dislocated following the Biloxi Corridor closure? And any noticeable call outs there?

Speaker 6

Thanks.

Speaker 3

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

Speaker 6

I see. So a combination of like a broader GDP view as well as just ton miles? Yes. Okay. And as my follow-up, I hate to be hitting the point Again, but on the $140,000,000 proceeds, in terms of your capital view, I think there were mentions of Hamish brought up fleet renewal as a potential use of proceeds.

Speaker 6

Just 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 there been any updates In terms of opportunity availability in the secondhand markets, just maybe expand a little bit on

Speaker 5

that. Well, I think this is something we're looking into. And

Speaker 1

When we

Speaker 5

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 the use of that $140,000,000 at the moment. But at some point in the not too distant future, we will probably decide what to do

Speaker 1

with it. Yes. It's Christos. Yes. And just to add to that, this is Christos.

Speaker 1

We're always open to also buy vessels using our shares Issue that net asset value as we have done in the past. Now that's not the use of cash, but it's definitely 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.

Speaker 6

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

Speaker 5

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

Operator

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

Speaker 3

No further comments, operator. Have a nice orchestration, everybody. And thank you very much.

Operator

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.

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