Star Bulk Carriers Corp (SBLK) 2008 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk conference call on the first quarter 2008 financial results. We have with us Mr. Akis Tsirigakis, Chairman and Chief Executive Officer, and Mr. George Syllantavos, Chief Financial 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, (OPERATOR INSTRUCTIONS). I must advise you that this conference is being recorded today, Thursday, June 5, 2008.

We now pass the floor to your speaker today, Mr. Akis Tsirigakis. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen, and welcome to the Star Bulk conference call. I'm Akis Tsirigakis, the Chief Executive Officer of Star Bulk Carriers. And with me today is George Syllantavos, our Chief Financial Officer.

Please be advised that today's presentation has been posted on our website as well, at www.starbulk.com, where it is available to download, if you so wish. As a reminder, this conference is also being webcast and is user controlled. To access the webcast, please refer to our earnings press release, which was disseminated last evening, for the Web address, which will direct you to the registration page. If you do not have a copy of the press release or presentation, you may contact Nicolas Bornozis of Capital Link at 212-661-7566, and he will be happy to fax or email a copy to you.

Now I kindly ask you to turn to slide two to view our Safe Harbor statement. This conference indeed contains text in the forward-looking statements within the meaning of the Safe Harbor provisions of the Securities Litigation Reform Act of 1995, and investors are cautioned that such forward-looking statements involve certain risks and uncertainties, which may affect the Company's business, prospects and results of operations, as is usual. Such risks are more fully discussed in the Company's filing with the Securities and Exchange Commission. Now, I'll pause for a second now just to allow you to read the Safe Harbor statement, if you would like to do so.

And then, before entering into the presentation, I would like to point out that we have elected proactively to treat certain matters in a specific way that affects financials. And I want to mention here the most important ones. About a month ago, we selected to change our drydocking policy to the expense method, and this had a $2.8 million affect on our net income. Moreover, since we have an agreement to sell the vessel Star Iota, we are showing the vessel as held for sale which, in itself, results in a $3.15 million decrease or $1.6 million of that being the cost of the vessel's drydock that affects financials of this quarter, of quarter one, rather than quarter two of this year. We have decided to conduct also upgrade to all the vessels of the fleet in the tune of almost $1 million, which is part of the vessel operating expenses, as I will report in a little while. And in the general and administrative expenses, half or about $1.3 million are related to the accounting treatment of incentive stock compensation.

Now if you would please turn to slide number four to view our first quarter 2008 financial highlights. As we noted in yesterday's press release, we commenced operations during the fourth quarter of 2007, specifically December 3, 2007, and we therefore were unable to present a meaningful comparison of our first quarter of 2008 versus 2007 result. For the quarter ended March 31, 2008, net income was $17.8 million, representing $0.40 earnings per share, calculated on 44,748,517 weighted average number of shares basic, and $0.36 earnings per share calculated on 49,385,962 weighted average number of shares diluted.

Our cash flow per share was $0.46 basic and $0.42 diluted. Our CFO, George Syllantavos, will provide more details on our first quarter earnings later on in this presentation.

Now, on April 16, we declared a tax dividend on our common stock of $0.35 per share for the first quarter ending March 31, 2008. This was our second consecutive quarterly dividend in the completion of the Redomiciliation merger on November 30, 2007. The dividend was payable on May 26, 2008 to shareholders of record as of May 16, 2008. Now we expect to continue to pay a quarterly dividend of $0.35 per share for the remainder of 2008, which translates to $1.40 annually.

If you turn to slide five, it provides our fleet operating performance for the first quarter of 2008. During the first quarter of 2008, we owned and operated an average of 8.1 vessels, earning an average time [slotted] equivalent rate of $63,594 per day. Ownership days were 737 days. Voyage days were 647. Available days were 662, and our total drydocking days for both vessels that were drydocked were 75. Our fleet utilization was, all told, 88%; and by excluding the date associated with drydocking, it was 98%.

During the first quarter of 2008, we elected to change our method of accounting for drydocking costs from the deferral method, as I mentioned a little earlier, under which costs associated with drydocking a ship are deferred and charged to expense over the period until a ship's next scheduled drydocking to the direct expense method, under which we will expense all drydocking costs as incurred. We view this as a preferable and more conservative method, which eliminates the subjectivity and significant amount of time that's needed to determine which costs related to drydocking activities should be deferred and amortized over a future period, and is a method we expect more shipping companies will adopt.

During the first quarter of 2008, our total costs for all vessels drydocked amounted to $2.79 million. If we had not elected to change our policy and continued to defer drydocking costs, net income for the first quarter of 2008 would have amounted to $20.63 million, representing [0.46 million freight dollars] of earnings per share, calculated on 44,748,517 weighted average number of shares basic, and $0.42 earnings per share calculated on 49,385,952 weighted average number of shares diluted. That is a difference of about $0.06 per share.

Please turn to slide six. And here we have an overview of our vessel sale and present activity. Since the completion of the Redomiciliation merger, we began taking delivery of our initial fleet of [eight] dry bulk carriers on December 3, 2007, which was immediately following the completion of the Redomiciliation merger on November 30, 2007. The aggregate purchase price of our initial fleet was [$345.3 million], which was funded by cash, stock and debt.

Since we commenced operations on December 3, 2007, we have been very active with our fleet growth strategy. And in this context, we acquired three Supramax and two Capesize vessels for an aggregate purchase price of $383.7 million. The total purchase price of our combined fleet of 13 vessels was $729 million, well below today's current charter-free market value of our vessels, which is estimated to be in excess of $1 billion.

Please turn to slide seven. As I just mentioned, and as you can see on this slide, we, so far, have achieved 63% fleet growth since we commenced operations. Not only have we taken delivery of the initial eight vessels, we acquired an additional five vessels, which brings our current fleet to 13 vessels. We also agreed to sale our oldest vessel, Star Iota, a Panamax vessel of 78,585 deadweight tons built in 1983, for $18.35 million, which we consider to be an attractive price for a 25-year-old vessel with a time charter substantially below current market levels. Through these acquisitions, we reduced the average age of the fleet to approximately 10 years and exceeded the 1 million deadweight tonnage mark or have achieved 71% growth in terms of deadweight.

In terms of our estimated 2008 EBITDA, the 63% fleet growth increases our EBITDA projections by approximately 85% from the original estimated $80 million to approximately $140 million. I would like to add that we still have the capacity and the capability, and are very active in our search for further fleet growth. I will speak about this later in this presentation, and if you would like to turn to slide eight.

This slide provides our fleet employment chart. I will not bother you with the details of it. However, with the addition of the recently acquired Star Ypsilon and Star Cosmo, and the sale of our oldest vessel, the Star Iota, our contracted fleet operating days under time charter in 2008, 2009 and 2010 will be 100%, 88% and 69%, respectively.

And now we may, please, turn to slide nine. Now, you can see that our high degree of forward coverage allows for visible and stable cash flows that protect us from any market volatility that may arise, and is able to sustain our dividend policy and enhance our growth prospects. And I would like to add to this that since we have time charter coverage, 100% for 2008, under time charter, all of the fuel costs is passed to the customer, that is, to the charterer.

Please turn to slide 10. This slide provides what we believe to be the solid fundamentals we offer for the value investor. As I previously mentioned, the cost of our fleet of 13 vessels is -- that was $729 million, which is well below the current charter-free market value of our vessels in excess of $1 billion. We have a significant potential for growth, due to our under-leveraged balance sheet, which we expect actually to be approximately 27% of our asset value. In addition, we have approximately $250 million in buying power for growth.

As mentioned, our contracted revenue for 2008, 2009 and 2010 is 100%, 88%, and 69%, respectively, which provides for a secured revenue stream and the ability to pay an attractive dividend of $0.35 quarterly or $1.40 a share annually. Our dividend payout is only 40 -- sorry, 54% of our 2008 free cash flow, which allows for additional room for organic growth. I would like to add that at yesterday's closing price of our share at $14.30, our dividend yield is approximately 10%, which serves as one of the highest in the dry bulk sector.

Based on annualized figures, we expect to generate EBITDA in 2008 of approximately $140 million, which represents an EBITDA margin of approximately 75%. Although we don't yet have the longevity to provide a proven track record, we believe that Star Bulk has one of the better fundamentals in the dry bulk sector and the ability to provide long-term shareholder value. We believe our stock represents itself with strong upside potential.

Please, if you would like to turn to slide 11. This slide provides you with an update share and warrant outstanding count. Since November 30, 2007, about 61% of the warrants have already been converted to common shares. And another 7%, approximately, have been bought back through our share and warrant repurchase program announced on January 24, 2008, thereby reducing our warrants outstanding from 20 million to 6,460,000, which has significantly reduced the perceived overhang.

At the time of the completion of the Redomiciliation merger on November 30, 2007, we had 41,563,569 shares of common stock and 20 million warrants outstanding. Since then, 12,177,927 warrants have been converted to shares of common stock, and consequently we've received to date proceeds of [$97,423,406]. We plan to use these proceeds to pay down our debt and further fleet growth.

Under the share and warrant repurchase program, I announced on January 24, 2008 we purchased 52,000 shares of common stock for $586,706 at an average price of $11.28 per share and 1,362,500 warrants for $5,474,363 at an average price of $4.02 per warrant. We paid a grand total of $6,061,069 for the repurchased securities, leaving about $43,938,931 of repurchasing capacity in Star Bulk's 50 million shares and warrant buyback program.

Our plan to enter into the repurchase program and retire a portion of our common stock and warrants only affirms our confidence in the long-term value of Star Bulk, and the testimony of our commitment to seek ways to increase shareholder value. Our current share-holding structure is 57% owned by the public; almost 19% by Star Bulk's officers and directors; and 24.4% by TMT, which includes 803,481 shares of additional stock. This is the first of two tranches we are going to issue to TMT; the first [ends] by the end of 2008, and the second in 2009.

I will now pass the floor over to our CFO, George Syllantavos, to discuss our financials. George?

Thank you, Akis. Good morning to everyone. We look at -- take a look at slide 12. It provides -- this slide provides an overview of our ability to fund future growth. Our low leverage provides us with an ability to continue to grow our fleet without the need to issue additional equity. Since we will be about -- to have about [27%] leverage and the value of assets were about [75%] debt to cap, up $14.20 a share, then we will be approximately $250 million in buying power, which means we would have the ability to acquire approximately three Capesize vessels, three or four Panamax's and five Supramax's, or a combination of these above asset categories, depending on the age profile.

If we wanted to break down these $250 million of buying power, we would say that approximately $150 million would be our additional debt capability, and about another $100 million would be attributed to warrant conversions, and $50 million being the actual warrant conversion processed as equity, and $50 million being the additional debt on that amount on a 50/50 type of split.

Going on to slide 13, we take a brief look at the balance sheet. As of March 31 of this year, our fixed assets amounted to $562.1 million and total assets amounted to $633.3 million. Our non-current liabilities amounted to $203.3 million; our stockholder's equity rose up at $422 million, and total liability stockholders equity totaled $633.3 million.

Going on to slide 14, taking a snapshot of the income statement, as of March 31, 2008, once again we commenced operations during the fourth quarter of 2007, and therefore, we are unable to present a meaningful comparison of our results between first quarter of '07 and first quarter of '08, since '07 we were still a [sell] company, Star Maritime.

For the quarter ended March 31, '08, voyage revenues amounted to $42.49 million and operating income amounted to $18.81 million. Net income for first quarter was $17.84 million, representing $0.40 on the dollar earnings per share calculated on 44,748,517 weighted average number of shares basic, and $0.36 based on the 49,385,952 weighted average number of shares diluted. The [net] income figure includes vessel impairment loss of [$303.14 million] in connection with the sale of the vessel Star Iota and the amortization of fair value of a par or below-market acquired time charters of just over $18 million.

Going on to slide 15 and looking at operating margins expected in 2008, we're planning to talk about here is Star Bulk's financials from a daily basis and annualized figures later. Based on our estimated daily breakeven analysis, our fleet-wide average net time charter equivalent rate is expected to be over $49,975 per day. We will be able to achieve higher net income in free cash flow margins based on very low cash outflows, which in our case, are approximately at the 35% level of net revenues. Looking at Star Bulk from a cash flow breakeven analysis, we expect to generate approximately [$7,527] (sic - see press release/slides) per day of costs based on the estimated TCE rate of $49,975 mentioned earlier. And our cash flow margin would be approximately 65% of $32,450.

In addition, we estimate our breakeven with a net income basis to be $19,977. Our net income margin then would be approximately almost $30,000 or 60%. In both instances, there is sufficient cash flow to support the quarterly dividend in growth and the growth potential of the Company.

Overall, let me mention that based on annualized figures, we expect to generate an EBITDA of approximately $140 million, which represents a margin of approximately 75%. Additionally, we expect that our net income and cash flow margins will be approximately 55% and 64% respectively. Roughly, that would be about $150 million of free cash flow we expect to generate on an annualized basis that would provide ample room for dividends. As indicated, we will retain approximately $52 million, $53 million of cash to grow the Company, with the remaining $62 million being left as dividend payout. This represents 54% of cash flow slated for dividends.

I would now like to pass the floor back to Akis for the conclusion of the presentation.

Well, thanks, George, and thanks to everybody for participating on this call. George and I would like to answer and we'll be glad to answer any questions that you may have. You may have noticed we have not included a market overview on the presentation, but we would not mind taking questions on that issue, as well. Go ahead.

(OPERATOR INSTRUCTIONS). Kevin Sterling, Stephens, Inc.

Good morning, Akis and George. A couple of housekeeping questions here. Let me start with the markup of your -- the markup of below-market charters. How should we think about those going forward? Will the markup be similar to what we saw in Q1 '08?

No. Let me explain how that works. At the time we acquired the fleet from TMT, as you all know, most of the vessels had time charters attached to them, which at the time, were market values. But as time went along, in the market, the time charter market that all you guys follow, has improved, these seem now to be under market charters.

Now, U.S. GAAP tackles this by calculating what amount of potential revenue vis-a-vis what the market rate would have been today to this under-market charters represent. So the analysis is made by subtracting the actual charter that the vessel has from the market value of a vessel when it was delivered to us, multiplied by the number of days that are remaining to the life of this charter. Now, this value is just over $18 million, which you will see in our financials as we go forward to be depreciated until the end of this pre-existing charters takes place.

In our financials out of this $18 million, $1.8 million of the depreciation is attributed to the depreciation of the quarter vis-a-vis this $18 million attachment and fair value of this asset.

Okay, thanks, George. That was a good explanation. What do your drydocking expenses look like going forward for the rest of this year? How many vessels are scheduled to be in drydock for the rest of '08? Maybe you can share a little color for 2009 and possibly 2010, if you have it that far out.

Okay. Let me give you an overall picture so, I mean, everybody is on the same page. As you know from our release, we already have two vessels that went into the yard. The Star Beta initially went into the yard. As you know, the Star Beta was starting at $106,000 a day charter. And instead of taking it to the yard at the end of February, we elected to take it to the yard as soon as we got delivery of it, just to take out of the way this drydocking, so she can start earning this attractive rate thereafter without any break in between.

So the Beta went in initially, then the Iota went in with a cost of about $1.6 million -- which I may say that the cost of drydocking of the Iota, even though it most -- like 95% of it took place in the second quarter, it's already accounted for in the first quarter numbers in the value, in the impairment value, on the sale of assets that we show on the financials. Therefore, this $1.6 million instead of being shown on Q2 is hitting now Q1 because of the handling of the time charter and the sale of the Iota shown in this quarter.

Now going forward, you will see that we're going to have some visits to the yard of our Supramax's, starting with the Zeta, which is currently in the yard. It's expected to end this visit next week. Then we have the Delta going into the yard in August '08. Then we have the Zeta going into the yard in November '08. And that's about the picture for '08.

Now, you wanted me to mention what is the picture for '09, so everybody has a view of things, at least with the fleet we have in our hands right now, '09 is a very light drydocking year. It just so happens that the periods fall like that. We only have -- going to have two Supramax visits for drydock next year, one being the Kappa in September and one being the recently acquired -- the Ypsilon, which is a Cape, which is going to have a visit in late August. So that's the 2008 view and 2009 picture.

Okay, thanks, George. That was very good color and looks like your drydocking expenses are going down as we progress along. Let me turn to your G&A line. How should we think about G&A going forward? Will you continue to have the non-cash expense from stock-based compensation? And I think you said it was $1.3 million in Q1, '08? Is that correct?

I'll break it down for you -- as you know, G&A, it's shown as about $2.78 million. Out of that, $1.43 million is the total stock-based compensation, which equals to roughly $0.03, $0.035 in net income. So that's what it looks like. And then there are some extraordinary costs there of about a couple of hundred thousand, and the rest is a regular G&A costs.

Now, this means that the regular G&A costs are about $1.1 million or so. You should expect that, on a quarterly basis, it should be a little bit over that just because we kept on adding some staff during Q2. So you'll see it there. As you know, we [would expect] that started operations with literally no employees -- just Akis and myself -- and once the transaction closed on December 3, we started ramping up operations. So, we kept on adding people and still would probably have another couple of people, two or three people, to go still to be fully staffed. But that's how the picture looks like.

Okay. Will we have the non-cash expense from stock-based compensation going forward?

Yes, because, as you know, there was some stock-based compensation that is related to an award to Akis and myself, which is from -- it's in the proxy, it's from the [spec], yes, it's from the transaction, yes, and then there is some additional compensation awarded to one of our Board members, Mr. Espig. So it all depends -- you know, the Akis and my compensation is vesting through a three-year period; the Espig compensation vest in a two-year period.

So it will be amortized over the periods.

It would be over that three-year period, yes.

Okay, thanks. Let me kind of switch gears here and kind of talk about your acquisition strategy. Your most recent Capesize vessel acquisition, it's an older vessel, what's your thought process behind buying older tonnage like this?

Well, it is not completely by luck that we are having the Capesizes within the '91, '93 time-built period. We kind of feel this is probably the optimal price, purchase price, without -- with a revenue earning potential as well as the expense size. If you take everything into account, I would say that the optimal age for a Cape is anywhere between nine and 14 years old.

So, that is one of the reasons we have been doing that. But you have to understand that these vessels that we bought, the contract that is being put on the vessel is paying for the vessel down to 0 -- not only just down to scrap within the period of the contract. So the contract exceeds the purchase price, so it was a no-brainer to us that this was an excellent acquisition with life remaining, of course, after the end of the contract.

It is not easy to find acquisitions like that. In fact, I would say they are more variety to be able to have a vessel of any age and put a contract on it, and the contract to have such a value vis-a-vis the purchase price, even for newer vessels or whatever.

Okay, thanks. Then kind of one last general question. Akis, you said I could ask about the fundamentals of the dry bulk industry, so let me ask a question relating to that. I'd like to get your thoughts on demand and what you're seeing out there in demand. We've all seen iron ore inventory levels at the ports, at the Chinese ports, are at pretty high levels. I'd like to get your thoughts maybe -- what we might not be able to see is the levels at the Chinese steel mills, given the infrastructure issues in China. So I'd like to kind of get your thoughts on demand.

But also maybe a little bit on supply, in particular, the new build order book. We're hearing every day anecdotes regarding cancellations, particularly at some of the greenfield yards. I'd love to have an update on the demand and supply situation.

Okay. Let me start from the easier part, which is the supply. I mean, we have a very low supply in 2008; that was a known thing from the very beginning. And not only is it low in 2008, but the first quarter of 2008 has seen a slippage of deliveries. Now, these numbers, the official numbers, have not come out yet. We have heard numbers that are definitely well above 15%. We have heard numbers approach 30%. We will need the official numbers to really take a view. But this is what we see on the supply in the immediate future and which is pretty low for 2008. It picks up on the second half of 2009 onwards.

Now I would like to spend a little time on the demand side, which is a little bit interesting as you probably have seen. Inventories have been stockpiling in China. And a great number of those stockpiles are owned by traders, by the way, not only just steel mills. Those inventories, which are not more than a couple of months inventories -- actually at less than the two months inventories -- are going to be probably run down or depleted to a great extent over the summer period, because both of the Olympics and the slowdown due to the Olympics, which was I understand, more or less centrally planned.

And the earthquake effect that has devastated a lot of infrastructure, moving that -- those stockpiles inland and so forth. And as soon as this is over, they will have to build up those stockpiles again, both because they will have been depleted but they will need especially iron ore, cement, and all these kind of things, to rebuild the country and the infrastructure destroyed by the earthquake. Combined with a northern hemisphere rain season, we expect an extremely strong fourth quarter. I'm not sure how much stronger it will be from this quarter, but my view right now, it is going to be stronger.

So all in all, we are going to see a softer summer because of the stockpile -- how this is being played. And I would like here to add an additional factor that some of you may have noticed. We just got word today that the Chinese have agreed with the steel -- with BHB and Rio Tinto on a 71% price hike. That's the info that we have. I am not -- it hasn't been cross-checked. [I believe] this is today's info. This is a little bit below our expectations or anybody's expectations, but this is also something that might affect the freight rate.

And anyway, to sum it up, we expect a flat summer; I wouldn't say necessarily softened, but it may even soften. Nobody should worry about that. I think we're going to see a very -- an extremely strong fourth quarter.

Okay, well, I really appreciate that overview. And both Akis and George, thanks so much for your time today. That's all I have.

Charles Rupinski, Maxim Group.

All my questions asked and answered, thank you.

Oh, okay, I'm glad for that.

Karthik Srinivassin, Giovine Capital.

I had a couple of questions just in terms of your fleet growth and kind of charter strategy going forward. I guess, first, in terms of the --

Karthik, I think we are losing you. You are breaking up. Can you repeat, please?

All right, can you hear me now? All right, sorry about that. I had a couple of questions just in terms of the fleet growth and kind of chartering strategy going forward, and how you guys are thinking about that. First, on the fleet growth, in terms of the vessel class that you're interested in. Lately you've seen kind of a divergence in rate. You know, the Capes have really taken on --

Excuse me? We cannot hear you, you are breaking up very much. We can only hear maybe every third word. Can you please repeat?

Sorry about that. Is this better or --?

We think so, yes.

Why don't I just take this off-line, sorry about that.

Hello?

I'll just take this off-line since you're having trouble hearing me. So, thank you.

(OPERATOR INSTRUCTIONS). There are no further questions. Sir, back to you.

Thank you very much. Should we wait no longer for Karthik? I did not understand -- maybe he wanted to have another question. If he did --

Is he calling back?

Is he calling back? Or should we close it, and if he wants, he can give us a call and we will respond any time. In fact --

He said he would take his question off-line with you, sir.

Okay, because he was breaking up and I could not really make out what he was saying. So I would like to thank everybody for participating on the call.

We believe we are well-positioned to create further value to our shareholders with the aid of a strong balance sheet and our moderate debt level. And of course, we look forward to our second quarter 2008 earnings, which will be some time in -- released some time in August 2008.

Thank you, and have a good day.

That does conclude your conference. For those of you wishing to review this conference, the replay facility may be accessed by dialing UK plus 44-1452-5500 and entering the encore number 3128607 followed by the hash or pound key. Thank you for participating. You may all disconnect.