Star Bulk Carriers Corp (SBLK) 2017 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call, Fourth Quarter 2017 Financial Results. We have with us today Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Simos Spyrou; and Mr. Christos Begleris, Co-Chief Financial Officers of the Company. (Operator Instructions) I must advise you the call is being recorded today. I would now like to pass the floor to your first speaker today, Mr. Pappas. Please go ahead.

Thank you, Operator. I'm Petros Pappas, Chief Executive Officer of Star Bulk Carriers, and I would like to welcome you to the Star Bulk Carriers' conference call regarding our financial results for the fourth quarter and full year 2017.

Before we begin, I kindly ask you to take a moment to read the safe harbor statement on Slide #2 of our presentation.

Let us now turn to Slide #3 of the presentation for a summary of our fourth quarter 2017 financial highlights.

In the 3 months ending December 31, 2017, net revenues, adjusted for own cash items, less voyage expenses, amounted to $92.5 million, 81.6% more than the $50.9 million for the same period in 2016.

Adjusted EBITDA for the fourth quarter 2016 was $55.7 million, significantly higher than the $15.5 million in the fourth quarter 2016. We're happy to report an adjusted net income for the fourth quarter of $21.5 million, or $0.34 gain per share, versus $16.6 million, adjusted net loss, or $0.29 loss per share in quarter 4, 2016. Our Time Charter Equivalent Rate during this quarter was $13,860 per day, compared to $8,186 per day in the same quarter last year.

Our average daily operating expenses were $3,850 per vessel per day, a decrease of 4.9% compared to the Q4 2016 figure of $4,047 per vessel per day.

Given the improving freight market and Star Bulk's strong liquidity position, we have terminated the amortization holiday we had agreed with our banks 6 months ahead of schedule. The strong cash flow generation during Q4 2017 enabled us to further reduce the company's leverage by repaying $35.6 million as part of the existing cash sweep mechanism in early February this year.

Finally, on the financing side, we are happy to announce our agreement with 2 major financial institutions to refinance 2 facilities with current outstanding balances of $34.7 million and $27.5 million. These facilities will mature in October and December 2018, respectively. I will now pass the floor to our Co-CFO, Christos Begleris, for an update on our operational performance for the quarter.

Thank you, Petros. Slide 4 summarizes the cash reach of the fourth quarter. The improving drive of market enabled us to generate strong free cash flow of $39.2 million from our vessels on the water during the quarter. After including net payments of $16.9 million of cash flow from investing and remaining financing activities, in the other minor items, we arrive at the cash balance of $257.9 million at the end of the fourth quarter.

Slide 5 reviews Star Bulk's strong liquidity position. Our all-in cash breakeven, including OpEx, corporate overhead, debt principal and lease payments, interest and drydock provision is approximately $11,500 per day per vessel, which is below the current one year TC rates for key vessel classes as reported by Clarksons. On the right-hand side, we provide recent balancing information on our cash and debt positions.

As of February 27, 2018, and after having repaid $35.6 million towards deferred debts, our total cash balance stood at $251.8 million. Total debt as of the same day stood at $1.0291 billion. The remaining CapEx on the 2 new Castlemax vessels that we are due to take delivery of is $74.3 million, all of which is due in early Q2 of 2018, when we will be taking delivery of the vessels. We will be drawing upon $70 million of debt for these 2 vessels that we leave around $4 million of cash required to take delivery of the vessels. Finally, on the bottom right-hand side of the slide, you can see the evolution of our adjusted EBITDA, which has been growing continuously as the market has been improving from the historical lows of Q1 2016. We aim to continue keeping our costs low in order to be able to increase our profitability as charter rates continue to improve.

In Slide 6, we are providing an update on our fleet employments, with 30 vessels in medium to long-term charters of up to 12 months. In terms of fleet coverage for Q1 2018, we have covered 86% of our available days at the average rates of approximately $12,700 per vessel per day, which is above our long-term breakeven levels, including debt principal service. Star Logistics contributing during Q4, approximately $4 million of revenues, with another $4 million of expenses split amongst charter-in-hire and voyage expenses, causing any material effect on our bottom line. As we continue growing this business, we expect this revenues and expenses to also increase over time as well as experience high volatility with a mark-to-market of our FSA positions.

Please turn to Slide 7, where we summarize our operational performance for Q4 and full year 2017. We have continued keeping our OpEx at very competitive levels, at $3,906 per vessel per day for 2017. Our net cash G&A expenses per vessel per day were $1,094 per vessel per day for 2017. Star Bulk is consistently ranked in the top 3 of the managers evaluated by Rightship. We are focused on having the highest standards of vessel safety and maintenance to meet the requirements of our steepest and most demanding clients. We believe that the combination of our in-house management abilities and the scale of the group provide a significant advantages in terms of cost and quality that our shareholders can enjoy.

Slide 8 shows that Star Bulk is one of the lowest cost operators amongst U.S.- listed driver peers based on latest publicly available information. Star Bulk is one of the leaders in cost efficiencies among the industry with OpEx approximately 16% below the peer average. Notwithstanding the above, we always continue paying a lot of attention on the condition of our vessels in order to remain on the top of the list of our commercial partners. I will now pass the floor back to Petros for a market update and his closing remarks.

Thank you, Christos. Please turn to Slide 9 for a brief update of supply. The dry bulk fleet expanded by 2.9% during 2017, which is up from 2.2% growth in 2016 as the freight market improvement resulted in lower demolition activity. A total of $38.4 million deadweight was delivered and $14.5 million deadweight was sent to demolition for a $23.9 million deadweight net inflow.

During the same period, the total of $36.2 million deadweight was reported by Clarksons as term orders and up to an additional $20 million deadweight have been identified as LOIs or auctions. The dry bulk order book, therefore, ranges between 10% and 12% of the fleet, depending on the percentage of LOIs and options that will, ultimately, materialize. Following 3 years of minimal contracting, dry bulk deliveries are bound to correct to new historical lows during the next 18 months. As a result, during 2018 and in '19, net fleet growth is expected to correct and stabilize to 2% to 2.5% per annum, depending on the rate of scrapping.

Let's now turn to Slide 10 for a brief update of demand. As per Clarksons' latest report, during 2017, total dry bulk trade grew 4% in tons and 5.1% in ton-miles. This is a significant increase compared to 2016 when tons and ton-miles increased 1.6% and 2.3% respectively. International fuel prices and steel mill profitability reached the record high levels during the fourth quarter of 2017.

Strong steel profit margins throughout the year supported the 5.2% increase in global steel production and a 4.1% increase in iron ore trade. China operant group steel consumption increased 10.2% during 2017 on the back of strong infrastructure investment growth. At the same time, international steel prices have received additional upward pressures from lower exports of Chinese steel and production restrictions introduced these winter to fight pollution in the northern provinces. China coal imports increased 6% during 2017 on the back of strong electricity demand growth of 6.5% and sluggish hydropower performance of 3.5%. We find very encouraging for near-term prospects that gold stocks at Chinese and Indian power plants and ports remain near historical low levels for this time of the year. Furthermore, it is worth highlighting that U.S. coal and Brazil soyabean exports experienced a strong rebound and have contributed to strong ton-mile generation during 2017. We expect demand growth to continue to outpace split growth during 2018 and '19. Ton-miles will play key role during the next years due to scheduled expansion of Brazil iron ore and West Africa bauxite exports and healthy demand for grains, soyabeans and minor bulks from the Pacific to continue. There is, however, a fragile balance, which may tilt against us, if shipowners embark in massive new building ordering. We, therefore, highlight, once again, that the most important factor for market balance is owners or their indiscipline. This will lay the foundation for a sustainable recovery until environmental regulations gradually come into force. These environmental regulations will, thereafter, not only contribute to transition towards a cleaner environment, but may also assist shipping introducing vessel supply and lead us to potentially even better markets as of 2020 onwards. 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 Instructions) The first question today comes from line of Magnus Fyhr from Seaport Global.

Just a question on -- with market improving so quickly here in the fourth quarter and I mean, most companies have gone from losses to profitability. Just -- I'm curious to see on your capital allocation going forward, if there is some flexibility there, maybe or thoughts on paying down debt to remove some of the covenants to start paying in dividends?

Magnus, it's Hamish Norton. So yes, certainly, for the near term, we're going to be using free cash to pay down debt, but over the longer term, we certainly aim to pay a consistent high level of dividends, once our debt is low enough to make a dividend policy like that prudent. We all recognize the value of dividends and we're all shareholders. So we look forward to that day.

All right. Good to hear. And just -- before you get there, I mean, is there much CapEx? Or have you laid out the CapEx required for capital upgrades here, what about treatment systems over the next 3 years that you can share with us?

Well, certainly, first of all we budgeted for all the required upgrades and I should emphasize that we have no intention, nor do we see the need to issue any equity to pay for these upgrades. So that's something that you shouldn't have to worry about.

Okay. Just lastly, on generally, the outlook, you laid out a good review of the market here, but as always, curious to see the -- how the crystal ball is looking for Petros here for the rest of the year, if you could share with us what your expectations are for rates by the end of the year?

You need numbers, Magnus?

Well, you've done such a good job in the prior calls, I figured, I just use them.

We'll, don't hold me to them. In general, we are positive about the future, like, as long as supply and demand are favorable, there is going to be more demand than supply. We believe that 2018 and '19 are going to be positive years, and thereafter, we think we'll have more positive years if we don't over order and because of the effect of the environmental regulations.

Now coming to this year, we see that there is -- the coal stocks of China and India are on the low -- on the very low side. We see that Latin America has strong grain crops coming. We see more ton-miles out of iron ore in Brazil and bauxite from Africa. So overall, we are positive about this year, and we think we'll see better rates.

Now -- I mean, a wild guess would be that we should probably have (technical difficulty) on the caps above high-teens, maybe 20s, for the whole year, and between -- I would say, on the Kamsarmax level, probably just below mid-teens, and above $1,000 below that for Ultramaxes. And then, of course, there are other types of vessels but these are the 3 main ones. So I think that we should be there, let's say, $13,000, $14,000, $13,000, $13,500, $14,000 $14,500, and about $20,000 for these 3 types, give or take. But I wouldn't -- I would not rule out an even stronger market if all things fall into place.

The next question today comes from the line of Fotis Giannakoulis from Morgan Stanley.

Petros, I want to ask what is your view about extension of the steel case in China. How do they impact, positively or negatively, the flows for iron ore?

You mean, in the province of, what is it, Tang -- I don't remember. The province of Tangshan, is that the one?

Yes, Tangshan, correct, yes.

You never ask me these questions, Fotis.

That's still an easy one. The steel prices are going higher.

Yes, they're going higher. But it is -- well basically, they -- what they did was, they had -- they have this fixed percent ban on steel mill production for the first 2 quarters of this year. And now they're talking about extending it for a quarter or so, is that what it is? I don't know, I mean, this could be potentially compensated by other areas. It cannot be -- it cannot be very positive, especially, if you combine it with the fact that we have very high iron ore stocks in China at this point. But I would not say that at the end of the day, it is extremely worrisome. I think it could put a dent on demand, but not the huge one. And in any case, we are calculating an increasing demand of between -- oil demand of between 3% and 3.5%, and perhaps, in ton-miles, 4%, which is a bit lower than last year. Of course, also, supply will be lower than last year, so that's why you see us on the positive side.

Petros, given the target supply is so low this year, it seems that it's a consensus among analyst and investors that the market is going to be better in terms of rates. Have you seen this as a view and as a concern from the charterer side? Are they willing to come up and increase their portfolio, over chartered owners providing period contracts, either for a year or for even longer periods?

I haven't seen for longer periods that much. But it needs two to tango, and I don't think owners would want to get a long-term charter at this point in time, because we are, by nature, bullish people, and we think that next year is going to be better than this year. So I think on the other side, there's no -- not much appetite for long-term charters. Also, on the 1st of January 2020, we're getting into the sulfur era, and there -- one should cater in the chartered parties. How this is going to be legally dealt with, changing from fuel oil to diesel oil, but that would be a long discussion. So in my view, there's not going to be a lot of a long-term charters, on the one hand. On the other hand, if I was a charterer, I would want longer-time charters right now, because things actually do look better and we do see some major houses coming in and asking for period charters. So I mean, when if, for example, people like cargo will come and ask you and give you rates that are much stronger than the spot market, that's telling.

Petros, can you -- you have a fleet, quite young fleet, but there are still very few vessels, which are mid-aged vessels. How does the fuel consumption compare over this couple of older vessels versus the majority of your fleet? And I'm asking relative to the new regulations, the low-sulfur regulations. What kind of differential do this -- the young vessels cover versus the old vessels in terms of Time Charter Equivalent?

Well you're talking about the eco versus non-eco, I would say, because there is vessel -- older vessels, especially Japanese-made, that have very competitive consumptions. Now eco versus non-eco, there is a difference of about 15% to 20% between consumptions. But the way that older vessels or non-eco vessels would counter that would be by slow steaming. And you talked about other -- you talked about the other vessels, basically, only regarding the consumption, right? Not about their earning capacity or anything?

Well, I think what Fotis was asking, is there a difference in time charter rates that you see between older and newer vessels?

Well, yes. I mean, right now, you see that Kamsarmaxes would make between $14,000, $14,500. Ultramaxes would make between $13,000, $13,500, and Supramaxes, older Supramaxes, would make, like, $10,500 or $11,000. So you see a difference between the older Ultramax -- Supramax and the Ultramax. But that is not just due to the age. It's also due to the difference in size and to the vessel being more modern. So if the older (technical difficulty) half and the Supramax makes $11,000, it's $2,500 difference. One thing you have to take into account, however, is how much it costs to buy its vessel, so the Ultramax that makes $13,500, and costs, let's say, $25 million, versus the 15-year-old Supramax that makes $11,000 and makes -- and it cost $10 million or $12 million. You make it a better return on your Supramax at the end of the day, comparatively than on your Ultramax.

Petros, and Hamish, one last question, more modeling question. You had a very steep decline in your G&A expenses and I see also, that your overall expenses are quite low. (technical difficulty) sustainable, what shall we model for expenses?

Our goal for the height is 3 stores. Basically, our goal for OpEx would be to contain them, hopefully, at levels below $4,000 per day. And given synergies and better processes in our organization, hopefully, this will be achievable. On the G&A side, you may see a slight increase, given that the dollar has depreciated versus the euro compared to last year levels. Therefore, I mean, the last year that we reported was around $1,090 per vessel per day, you may see this going slightly up in the next few quarters due to the FX.

And the next question today comes from the line of Amit Mehrotra from Deutsche Bank.

This is Chris Snyder on for Amit. My first question was kind of around the charter-in strategy. We've seen time charter rates move higher, particularly, the Capesize, which are -- it seems like on a one year now, right around $20,000, which is kind of right in line with what you guys expect the market to be for the full year. So I was just wondering, are you -- does that interest you and that you guys would kind of go in and lock in that $20,000 rate, kind of, mean, you take some risk off the table. Interested to hear your thoughts on that?

Our strategy -- Chris, thank you for the question. Our strategy, in general, and within the same thing last year is to cover Q1 as much as we can and then, of course, when you cover Q1, you also -- that spills over to Q2 because you give the charters optionality. So we cover Q1 and a lot of Q2 and we like to have our vessels opening up between May and September, because then, we can do the same thing going forward and cover, again, the same year, the quarters that we are more worried about. As I said in the past, Q1 and Q2 usually see 46% of the trade, of the yearly trade, and then Q3 and Q4 see 54%, on average, that's our calculations up to now for the last several years.

So let's not forget that we are now getting through Q1, which is supposedly the weakest quarter, and therefore, it is possible, but we may see higher rates going forward. We do have some cover, not a lot of cover for the rest -- for the second half of the year. We have some distant cover for Q2 and we're almost 90% covered for this quarter. We are not very worried about where rates are going to go, so we think that downside is little, but we would not want to miss out on a very strong upside. Therefore -- and with some exceptions, because at sometimes that some vessels can be fixed at extremely higher rates because the charter is in difficulty -- difficult position or the vessels in a good position itself, and in such cases, we may fix for longer period, but definitely, we would try to stay much more spots from now on than we are up to now.

Makes sense, thank you for that. Then my next question, it's kind of around scrubbers. I know you guys have talked a lot about this topic, and obviously, the math on the Capesize fleet, the return and everything looks very attractive, but I was wondering how you guys think about scrubbers with the smaller-size vessels, which are, obviously, consuming less fuel, and kind of, how do you think the market -- that segment of the market will play out as it relates to scrubbers?

We anticipate that very, very few people will install scrubbers on smaller ships. I mean, frankly, we don't think that too many scrubbers will get installed on any of the dry bulk fleet.

And we expect, basically, that most of the dry bulk fleet are going to use low sulfur fuel of some sort or another, and that's going to be a good thing for everybody. Because as fuel prices increase for the fleet, basically, the fleet tends to slow down, and by slowing down, it effectively reduces its total carrying capacity. It's just like having scrapping, and it drives charter rate higher. So frankly, we think it's a win-win.

Okay. And just last, real quick on the charter and fleet. I know you guys did a 197 days in Q4, which is up pretty considerably. Can you pry the -- any guidance on what that looks today for 2018, the charter-in days?

The charter-in days are primarily due to our subsidiary Star Logistics, which is basically a vessel operator that books cargoes and charters and ships to move those cargoes. And occasionally, it will charter in a Star Bulk ship, in which case, we report that on a consolidated basis as a voyage charter. But we are trying to grow that business. We have a lot of hopes for the profitability in the future of that business, basically, breakeven today. So we hope that those charter-in days grow. But in every case, those ships that are chartered in, are charted in against a contract to move freight. We're not taking market risk.

The next question today comes from the line of Herman Hildan from Clarksons.

I think everyone really agrees with your outlook on the dry bulk market and I'll just -- I think, over the last 2 years, it's astonishing how transformational year, balance sheet has been and the deleveraging of the balance sheet, and all grown by very excellent cash flows in the fourth quarter. I'm just kind of curious if you can, kind of, lay out, based on their base case scenario for the next couple of years. How do you think Star Bulk will change? You, obviously, at some point, you're going to introduce dividends. And one question is, kind of, how do you weigh buybacks versus dividends and also how do you see, like -- how important is it for Star Bulk to continue to grow your fleet versus, kind of, repaying shareholders for the long-term that have been through?

Okay. So let's start with buybacks versus dividends. In principle, buybacks are really good if you're trading below your, let's say, net asset value by a substantial amount and you can buy the shares back as a substantial discount and net asset value. And in theory, that should improve the net asset value per share of the company and drive the share price up. But there is one problem in practice, which is that, at least today, no dry bulk company is really big enough to satisfy the needs of the institutional investing community. And every time a shipping company makes a substantial share buyback, that shrinks the market cap and the public flow even further. So I think we're probably not, at least for the near term, going to be looking at share buybacks, just because we think it's very helpful to the investing community to see the market caps get larger. And I think your second question was about acquisitions?

Yes, kind of, like, the path you're going down, like, how does Star look couple of years from now?

Yes, look, I mean, we certainly aim to acquire attractive fleets using our shares, obviously, together with appropriate leverage, so we can take advantage of the benefits of scale. We think scale is going to be increasingly important in this business.

So is there, kind of, then if you look on, obviously what you've -- you saw a very strong, call it, asset [participation] second on values, 2016 and also into 2017, and now you've started to see neither prices move, what particular part of the different segments that drive what you see the best opportunity today?

We favor the bigger vessels, in general. We favor the bigger vessels like the Capesizes, but we also favor the bigger vessels within its size. So we think the future is in, like, more on Newcastlemax than on the smaller sizes, more on the Kamsarmax than on the Panamax, well, that's obvious, actually, and the Ultramax going forward. And I think those sizes will increase further. Then, if you look at where prices went during the last year or so, you will see that prices of secondhand older vessels actually moved up quicker than the younger vessels, and this always happens, actually, probably because they are cheaper, and there's more buyers for them, because they can afford them, especially when we are in an era where lending is not as abundant as it used to be. But we're still pretty far away from where prices were in 2014. I mean, I -- we see upside on almost every type of vessel. I would say, perhaps, more upside on the Capesize and more upside on quality vessels, rather -- I would look for more upside on Japanese vessels, for example, than second-tier Chinese. So we don't intend to order any vessels or anything like that, so we're not really looking at the new building sector.

Yes, but I mean, it's still quite surprising to look on top of the shipping orders last year for all segments above 25 (inaudible) , there was 955 ships ordered, the second lowest number of ships ordered in 20 years that was listed off in '16. And despite that fact, you're, kind of, starting to see needle prices moving up. What's your, kind of, take on that, because you will assume that yachts are quite far away from having pricing pressure, right? Or pricing (inaudible).

The fact that prices are going up on the new building is partly due to a demand, but also, the new buildings are more costly now. You -- I mean building a Tier 3 vessel versus a Tier 2 probably cost between $2 million and $4 million more in the new engines that the vessels are equipped with and in additional still on the vessels. And I think that one of the reasons, not all of the -- not the whole reason is that people ordered, actually -- people -- after what you said, people ordered. And now the order book is at between 10% and 12%. This is -- it was like 7%, like, 8, 9 months ago. So there's been ordering. And the reason for that was because people probably tried to order the last Tier 2 vessels that were available, and they were cheaper than the Tier 3. Now we will see what happens from here on. Personally, I think that there is going to be new building. There is no question. There's going to be a new building orders. I do not think we will see what we saw in 2013, where, I don't -- I think, 130 million tons were ordered within a year. I don't think we'll see that, because there's not enough loan, since ship building capacity has gone down by 30%. People realize that there's soon be ordering in a Tier 2, Tier 3 shipyards. There's not as much cash around as there used to be. People have burned their fingers. So I think we'll see new buildings coming in but not to the tune that we saw 4 years ago, 5 years ago.

(Operator Instructions) The next question comes from the line of Randy Giveans from Jefferies.

Now few quick questions. Looking at your fleet, only 2 new buildings remaining and you have about, I guess, 6 Supramaxes over 15 years old. So do you have any fleet growth or renewal plans for those vessels in 2018?

Well, yes. I'll let Petros give his thoughts afterwards. But we certainly are looking for attractive fleets, as I said, using our shares together with appropriate leverage to try to increase our scale, and obviously, one of the aspects of an attractive fleet is having an attractive age profile, but...

Yes, but as I said previously, I mean, even these 17-year-old Supramaxes, a few of those that we have, like, I don't know, 5 or 6, they make $11,000 day, so if you take into account what their value is, and what they're making, the return on investment is pretty good. So we're actually pretty happy having them, and it's also something that the asset value of increases quicker than on much newer vessels. But apart from what Hamish said on, potentially, merging with other companies or anything of the sort, I -- we do not intend to order new buildings going forward.

Sure, and then looking at your balance sheet, previous cash balance plus expecting significant free cash flow in the next, at least, 8-plus quarters. So expected usage of this cash during those quarters, and how much cash would you like to, kind of, keep on the balance sheet as a buffer, per se?

Well as I said, our free cash flow, for a little while, anyway, is going to be used to pay down debt, and then we would intend to become a dividend payer. And I think we probably have a little bit of cash more than we absolutely need, but that will just be used, for example, to pay some of the required upgrades to the fleet, and eventually, as dividends.

Okay so in future quarters, we should expect more than the, I guess, $22.6 million quarterly debt amort via accelerated repayment?

Yes, that's correct, Randy. I mean, essentially, as we have stated in our last press release before yesterday, we have approximately $100 million of deferred debt. Therefore, we aim at repaying this with the free cash flow that we will be making over the next few quarters as well as refinancing some of our facilities. So you will see that figure of deferred debt, hopefully going to 0 by the end of the year.

There are no further questions at this stage. Please continue.

No further comments, Operator. Thank you very much.

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.

Thank you.