Star Bulk Carriers Corp. (NASDAQ:SBLK) Q4 2022 Earnings Call Transcript

Star Bulk Carriers Corp. (NASDAQ:SBLK) Q4 2022 Earnings Call Transcript February 17, 2023

Operator: Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call on the Fourth Quarter 2022 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 question-and-answer session. I must advise you that this conference is being recorded today. I will now pass the floor to one of your speakers today, Mr. Spyrou, please go ahead, sir.

Simos Spyrou: Thank you, operator. I’m Simos Spyrou, Co-Chief Financial Officer of Star Bulk Carriers, and I would like to welcome you to our conference call regarding our financial results for the fourth quarter of 2022. 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 Q4 results, cost evolution during the quarter, an overview of our balance sheet, an update on banker benefit and vessel 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 fourth quarter 2022 highlights.

Net income for the quarter amounted to $86 million and adjusted net income of $93 million or $0.84 per share, adjusted earnings per share. Adjusted EBITDA was $135 million for the quarter. For the fourth quarter, as per our existing dividend policy, we declared a dividend per share of $0.60 payable on or about March 14, 2023. The graph on the bottom of the page highlights the cumulative performance over the last 12 months, which illustrates the strength of the platform in a robust drybulk market. Our last 12 months, adjusted EBITDA is $809 million and adjusted net income is $609 million. Over the same period, we have returned a cumulative dividend of $5.1 per share or $526 million to our shareholders. Since 2021, we have declared a total dividend of $9.35 per share or $961 million.

On the top right of the page, you will see our daily figures per vessel for the quarter. Our time charter equivalent rate was $19,590 per vessel per day. Our combined daily OpEx and net cash cost G&A expenses per vessel per day amounted to $5,182. Therefore, our TCE less OpEx and G&A is approximately $14,400 per day. Slide 4 graphically illustrates the cash flow bridge for Q4. We started the quarter with $393 million in cash, and generated positive cash flow for operating activities of $116 million. After including debt proceeds and repayments, CapEx payments for energy saving devices and ballast water treatment system installments and the third quarter dividend payment, we arrived at a cash balance of $286 million at the end of the quarter.

For the calculation of our dividend distribution, we have backed the debt prepayment of $44 million that we drew from January 2023 to end at an adjusted balance of $331 million. Please turn to Slide 5 where we highlight the strength of our balance sheet. Our pro forma total liquidity to-date stands at $356 million. Meanwhile, our total debt stands at $1.32 billion. Since 2022, we have completed refinancings totaling $430 million that reduced our interest costs by approximately $5.2 million per year as a result of achieving significantly lower margins. Our next 12 month amortization is $186 million. We have 13 unlevered vessels with market value of $176 million and no debt maturities until 2024. In an increasing interest rate environment, we have interest rate swaps with an outstanding notional of approximately $722 million fixed at an average rate or 46 basis points for an average remaining maturity of 1.1 years.

As of December 31, 2022, the mark-to-market value of these swaps was $33 million. I will now pass the floor to our COO, Nicos Rescos, for an update on our operational performance.

Nicos Rescos: Thank you, Spyrou. In Slide 6, we will illustrate how Star Bulk continues to benefit from a widening of the fuel spread between HSFO and VLSFO. 120 scrubber fitted vessels surpassed 131,000 operating days with the average system availability of 99.5%. At the current Hi5 spread at healthy levels, our scrubbers meaningfully contributed to our profitability. The average power fuel spread currently hovers at around $230 per ton based Singapore export prices, when we cater approximately 60% of our annual fuel demand. Indicatively, the average lifetime spread achieved in Q4 was $253 per ton and $274 dollars per ton for the full year of 2022. For restructuring purposes, on the top left of the slide, we present a sensitivity table that shows the impact that market benefit can have on our bottom-line based on consumption of approximately 700,000 tons of HSFO per annum for our scrubber-fitted vessels.

Please turn to Slide 7, where we provide the operational update. OpEx excluding non-recurring expenses was $4,205 for Q4 2022. Net cash G&A expenses were $977 per vessel per day for the same period. During calendar 2022, Star Bulk assumes management of an additional 19 vessels for third-party managers, streamlining ship management operations and costs spread. In addition, we continue to rate at the top of our listed peers in terms of Rightship safety score. Turning to Slide 8, we provide our fleet snapshot and guidance around our future drivers and vessel upgrade expenses and the relevant total off-hire days. We have completed our first quarter installation program across the fleet and in line with EEXI and CII regulations. We will continue investing in upgrading our fleet further with energy saving devices and telemetry, aimed in improving our fuel consumption and reducing our environmental footprint, further enhancing the commercial attractiveness of the cargo fleet.

Our expected project expense for calendar 2023 is estimated at $27.8 million with a dry docking of 31 vessels with $141.1 million towards our vessels upgrade CapEx. In total, we expect approximately 870 days off-hire for the same period. The above numbers are based on current estimates around dry dock and retrofit planning, vessel employment and yard capacity. I will now pass the floor to our Chief Strategy Officer, Charis Plakantonaki, for an update on our ESG efforts.

Charis Plakantonaki: Thank you, Nico. Please turn to Slide 9, where we provide an update on the ESG margins. For the second year in a row, Star Bulk has participated in the Carbon Disposal Project exceeding its score of B and improving its performance versus last year for a score of B minus. B rating continues to gain the Company’s management level, indicating a maturity of taking coordinated action and climate issues. It also plays Star Bulk above growth the industry average of C, and the global average of C which indicates Awareness Level. During 2023 Star Bulk will aim to continue improving its environmental stewardship, by measuring and reporting for the first time also its Scope 3 emissions, namely the emissions which we indirectly affects in our value chain.

On the regulatory front, Star Bulk has taken all necessary technical and operational measures to ensure compliance with the EEXI and CII targets as set by the international maritime organization, which came into force in January 2023. We continue enhancing our well-being program, on board its vessels and onshore and also making contributions towards vulnerable groups, environmental protection, education and sports. With regards to the Company’s governance, Star Bulk is deploying new systems to optimize its commercial and operational performance, and is also further strengthening its cyber security systems, processes and controls. I will now pass the floor to our CEO, Petros Pappas for a market updates and closing remarks.

Petros Pappas: Thank you, Charis. Please turn to Slide 10 for a brief update of supply. During 2022, a total of 31.2 million dwt was delivered and 4.5 million dwt was sent to demolition for a net fleet growth of 26.7 million dwt or 2.8% 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 proportion, high ship building costs and limited ship yard capacity until 2025 have helped keep new orders under control. The order book stands at rate below levels of 7.3% of the fleet with just 25.9 million dwt reported as firm orders during 2022. Furthermore, scrap prices have stabilized at elevated levels and should make the demolition of overage and fuel-efficient tonnage an attractive option during seasonal downturns on the back of the EEXI and CII regulation.

The average steaming speed of the dry bulk fleet decreased by 3.2% to 11.3 knots during the last year due to record high bunker costs and a weaker freight market. We expect oil prices and banker costs to remain inflated in the medium term, amid the sanctions on Russian oil and strong demand of energy related commodities. The situation along with a new environmental regulation will continue to incentivize slow steaming and support higher scrubber savings. Global port congestion experienced a correction during the second half of 2022. You do a gradual easing of restrictions and the strong decrease of Chinese imports during the first half. Nevertheless, global congestion remains above pre-COVID levels, especially for smaller vessel types due to changes in trading patterns related to the war and seasonal bottlenecks.

As a result of the bulk trends, growth is unlikely to exceed 2% per annum over the next three years. Let’s now turn to Slide 11 for a brief update of demand. According to Clarksons, total dry bulk trade during 2022 is estimated to have contracted by 1.9% in ton miles. Trade was affected by the war in Ukraine, weaker Chinese imports, and a slowdown of global economic activity due to surging commodity prices, inflation interest rate hikes, and a strong U.S. dollar. During 2023, dry bulk demand is projected to increase by 2% internal miles with the IMF forecast for global GDP growth presently standing at 2.9%. We believe that the relaxation of the strict zero COVID policy and reopening of the Chinese economy will have a strong positive effect for the dry bulk market with larger sizes benefiting the most during the second half of the year.

Furthermore, the shift of coal, grain, and minor bulk trade patterns to long — longer haul route due to inefficiencies related to the war in Ukraine will continue to inflate ton miles. Iron or trade contracted by 3.4% during 2022, and is projected to expand by 0.4% during 2023. China crude steel production decreased by 2% during 2022 as a strict COVID policy limited economic activity and offered no support to the property market downturn that began in 2021. Crude steel production from the rest of the world decreased by 6.5% affected by surge in energy costs and weaker steel margins following the war in Ukraine, nevertheless, China’s steel productions showed signs of stabilization during the second half, while lower domestic iron ore output and stockpiles provided positive indicator for imports point forward.

Coal trade expanded by 1.8% during 2022 and is projected to expand by 4.2% during 2023. Global focus on energy security and high gas prices have upgraded the coal trade outlook for the next few years while the suffering of European and Russian coal trade is benefiting ton miles. Coal prices increased to record high levels in 2022 due to the disruptions and inefficiencies affecting export capacity. During the last month, a resumption of Chinese coal — Australian origin is taking place marking the end of the unofficial ban that started during the fourth quarter of 2020. Grain trade contracted by 3.1% during 2022 and is projected to rebound by 5.3% during 2023. At the start of 2022, grain trade market experience the supply shock as the war abrupt how did the Ukrainian export for six months, which account for 10% of total grain trade.

From August onwards, Ukrainian export partially resumed through the Ukraine initiative at around 40% of free world levels. The outlook for 2023 is positive as results of trade route is already taking place, another exporting nations filling the gap of the lost Ukrainian supply. Furthermore, a record high Brazilian soybean crop is currently harvested while the recovery of the Chinese economy should substantial increase the demand of soybean crops. Minor bulk trade contracted by 2.1% during 2022 and is projected to expand by 1.3% during 2023. Minor bulk trade has the highest correlation to global GDP growth and the economic slowdown has affected trade volumes. Moreover, the container ship market correction is moderating support of smaller geared dry bulk vessels.

On the other hand, the war in the Ukraine disrupted European Union of fertilizing and steel production creating Atlantic shortages that should benefit bulk trade trades. Furthermore, West Africa bauxite exports continue to expand with the high base and generate strong ton miles for Capesize vessels. Finally, despite the current seasonal spot market weakness, the long term prospects of the dry bulk market remain encouraging given the 25-year low order book, the environmental regulations and the positive effect on dry bulk demand from the opening of the Chinese economy. Star Bulk is well-positioned due to its scrubber fitted in diverse fleet, take advantage of recovery in freight rates. Without taking any more time, I will now pass the floor over to the operator to answer any questions you may have.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Chris Robertson: Hi. Good morning, everyone. This is Chris Robertson on for Amit. Sorry, he’s traveling this morning. Just wanted to talk about the cash flow movement kind of expected in the coming quarter, I think, probably people are pretty hyper focused on the upcoming dividend here and then testing the bottom of seasonally weak rates. So can you talk us through about how you are thinking about kind of working capital movements? You have laid out kind of the maintenance capital and dry docking costs pretty well on Slide 8, but could you also remind us kind of the regular debt amortization expected this year as well?

Petros Pappas: Hi, Chris. So, let’s start with easy which is the debt amortization. As we said, this is approximately $190 million for 2023 for the entire year. So, it’s slightly down from what we had in 2022 due to better amortization schedules that we obtained during our refinancing. Now for the first quarter of 2023 in market that is essentially decreasing, we would expect the change in working capital to be slightly positive.

Simos Spyrou: That is to be a source of cash.

Petros Pappas: Correct.

Chris Robertson: Okay. That makes sense. Any other things that we could be aware besides kind of the ballast water system installations, dry docking, working capital, any other cash flow movements that could impact the dividend there?

Petros Pappas: We are providing the macro figures in our investor presentations. So if you go to that, on our website, you will find. It’s actually Page 8 of our investor presentation. You will find all CapEx items as well as dry dock estimates that we expect for the next few quarters.

Chris Robertson: Okay, great. Just as a follow-up. You guys had some pretty good cost control here on the OpEx front. I think last Q the non-recurring OpEx was reported around $4,700 dollars per day, now it’s down around $4,200 dollars per day. Can you talk about how you achieved the savings? And are there any cost pressures out there right now that we should be aware of that might put upward pressure back on OpEx? Or do you think you can maintain it at this new level for the coming quarters?

Nicos Rescos: Hi, Chris. This is Nicos. This is our result of our offshore auction we have taken. As we mentioned a bit earlier, it is taking in a big number of third-party managed ships and trying to streamline the cost basis. We are trying to increase our reach on getting better discounts and current inflation pressure we are getting on our spares and supplies, and that’s really the source of it.

Chris Robertson: Okay. Sorry, last question.

Simos Spyrou: Chris. This is Simos. Just to add to . I would not expect and I would not budget for 2023, the figure that you have there for Q4, 4,200, it would be a bit more conservative, and I would give a figure of around 4,500, which is in the middle between Q3 and Q4 figures for the entire 2023.