Star Bulk Carriers Corp (SBLK) 2010 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk conference call on its third-quarter 2010 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 on a listen-only mode. (Operator Instructions). I must invite you that this conference is being recorded today, Thursday, November 18, 2010. We now pass the floor to one of your speakers today, Mr. Akis Tsirigakis. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen, and welcome to the Star Bulk Carriers conference call to discuss our third quarter and nine months ended September 30, 2010 financial results. 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 reminded that we publicly released our financial results last night, November 17, after the market closed in New York, where it's available to download along with today's presentation on the Star Bulk Carriers website, which is www.StarBulk.com. If you do not have a copy of the press release or presentation, you may contact Capital Link, our investor relations advisor, at 212-661-7566, and they will be happy to fax or e-mail a copy to you.

This conference is also being webcast, and it is user-controlled and can be accessed through Star Bulk's website.

Before we begin, I kindly ask you to take a moment to read the safe Harbor statement on slide number 2 of the presentation.

While you do that and before we commence the earnings presentation, I would like to take the time and use this introduction to make a few brief points about Star Bulk.

Star Bulk remains financially strong with modest leverage, substantial charter coverage, ample liquidity, positive cash flows, and pays meaningful dividends. We have an excellent relationship with our lenders and we have -- we are one of the first companies that meets its original loan covenants. The reduction of our operating cost campaign continues to show tangible results quarter after quarter. The reduction has been achieved while the quality of our operation was enhanced and our utilization rate has substantially increased.

Here, I should mention that this quarter's G&A increase has a one-off expense related to professional fees. We have been successfully leveraging balance and experience in the shipping industry over the past few years, as the Company has been able to meet the challenges in both the credit and drydock market, and produce results that have strengthened the Company.

Apart from operating expenses reduction, highlights over the past few years include our capesize newbuilding, both of them actually, which were contracted at the lowest price levels prevalent since 2004; expanded and renewed our fleets through the sale of two of our oldest vessels; and the acquisition of three modern capesize vessels. All of these were achieved without diluting our shareholders.

Also, we repaid organically a major portion of our debt. We have been in full compliance with the original loan covenants. We have monetized a substantial portion of our commercial claims, and the in-house management continues to produce impressive results.

Finally, we are also pleased to declare our sixth consecutive quarterly dividend for the third quarter of 2010 or $0.05 per share.

Please turn to slide number 3 of the presentation to discuss some important financial data.

On this slide, we present certain key data to illustrate why we continue to believe that while Star Bulk continues to enjoy a very comfortable financial position, it remains substantially undervalued. As of November 17, 2010, our minimal total contracted revenue is $200 million, and our market capitalization stands at $184 million. We estimate the charter-free value of our fleet to be about $390 million and our charter-adjusted value to be about $420 million.

These estimates include the down payments for the (inaudible) [house] numbers 63 and 64.

Our senior debt currently stands at about $210 million, and our current cash position is approximately $41 million. According to the Company's net asset value or NAV as we call it, amounts to $251 million, or $4.03 per share, dollars per share that is, based on our charter and asset fleet valuation.

Based on a share price of $2.96 of yesterday's close, our price to NAV ratio stands at 73%, indicating plenty of room for price appreciation from the current heavily discounted levels.

I would like to reiterate that we have resisted exposure to interest-rate swaps and have, therefore, taken the full benefit of the prevailing low interest rates. I should point out that after having paid $43 billion of the first three installments of the two newbuilding capesize vessels and $63 million to our banks in principal repayment, Star Bulk has managed to grow organically while significantly reducing its leverage. The Company currently maintains a net debt to total asset ratio of 24%, which is considered conservative.

Going forward, the remaining principal repayment for 2010 is $5 billion, out of a total of $68 million for the year. Principal repayment for 2011 goes down to $35 million.

Please turn to slide 4 to discuss our third-quarter and nine months ended September 30, 2010, financial highlights.

For the third quarter of 2010, gross revenue amounted to $29.9 million and net income amounted to $1.2 million. Excluding non-cash items, our net income for the third quarter 2010 amounted to $3.7 million. Adjusted EBITDA for the third quarter 2010 was $16.6 million, while average daily operating expenses were $5,503 per day per vessel.

The Time Charter Equivalent for the third quarter of 2010 was $26,146 per day. The adjusted net income of $3.7 million represents $0.06 earnings per share basic and diluted which is above Bloomberg consensus. For the first nine months ended September 30, 2010, gross revenues amounted to $89.1 million. Net loss was $25.8 million, which includes a non-cash impairment charge of $35 million due to the sale of the Star Beta. Excluding non-cash items, our net income for the first nine months of 2010 as adjusted amounted to $13.2 million.

Adjusted EBITDA for the first nine months of 2010 was $52.2 million, while the average daily operating expenses were $5,482 per day per vessel.

The Time Charter Equivalent for the first nine months of 2010 was $26,937 per day. The adjusted net income of $13.3 million represents $0.22 earnings per share basic and diluted.

Turning to slide number 5, we would like to provide an update of our Company's recent developments.

For the quarter ended September 30, 2010, we declared our sixth consecutive dividend of $0.05 per share. As of market close on November 17, this reflects approximately a 7% annualized yield. I would like to remind our investors that Star Bulk is one of the very few companies in the dry bulk industry that has stood by its dividend-paying policy by paying dividends in 10 out of the 12 quarters since inception three years ago, despite the financial environment.

We recently announced that we have collected $24.3 million or approximately $0.39 per Star Bulk share outstanding, as settlement of the Star Epsilon claim. This event brings closure to a cumbersome legal case r could have resulted in a prolonged legal process before arriving at the final, unappealable, uncollectible award. The amount collected represents a major portion of the quantum of the claim originally pursued.

We received commitment letters for the financing of our two newbuilding capesize vessels. Subject to final loan terms, we have now fulfilled all equity payment obligations for the financing of the two capes. We have received an upfront unconditional payment of $5 million in return for a 45% share in the future proceeds of certain existing commercial claims.

In September 2010, we took delivery of the capsized vessel, Star Aurora. The acquisition was announced on February 2010 for approximately $42.5 million from a third party. And the vessel commenced a three-year time charter with Rio Tinto at the gross billing rate of $27,500 per day.

Also, in early 2010, we delivered the previously sold capsized vessel, Star Beta, to her new owners.

Turning to slide number 6, we would like to point out in the slide our consistency in rewarding our shareholders through steady dividend payments. As you can see in the graph, only four out of 11 dry bulk companies distribute dividends to their shareholders with Star Bulk one of the highest on a dividend yield basis.

In slide number 7, we illustrate the performance of Star Bulk's shares versus its peers since the beginning of 2010. Star Bulk's stock has, by far, outperformed its peers not only as a group, but also on an individual basis. Specifically, as of November 17, our performance stood at 8.4%.

We still believe that Star Bulk represents an excellent opportunity for the value investor at current rating levels with a good entry point as Star Bulk trades at a significant discount [rate] NAV. We strongly believe Star Bulk's shares have excellent upside potential.

Moving to slide 8, here, we illustrate Star Bulk's growth overview. As you can see in the two graphs, Star Bulk has managed to organically grow its original fleet of eight vessels at just under 700,000 ton deadweight to 13 vessels and over 1.2 million tons within four years of going public.

This means that including our current new building contracts, we have achieved fleet growth of 86% in terms of deadweight tons and 63% in terms of vessels.

As we like to underline this growth was achieved without dilution. While it is also worth noting that in the process of growing our fleet, we have also been renewing it.

During this period, we have sold three of our older ships and bought six younger vessels while we have also contracted two newbuilding capesize vessels to be delivered in 2011. We are currently in an excellent position to further grow our fleet with cash on hand and debt. Our focus will remain on fleet renewal, which has been an integral part of our growth strategy from the beginning.

On slide number 9, we depict the results of our operating cost-reduction campaign. This was achieved while enhancing our quality as measured by objective metrics, such as significantly improved fleet utilization, an exceptional port state control record and quality certifications.

As you can see in the two graphs, our operating expenses, or OpEx as we call it, has steadily decreased, importantly, on a per vessel, per day basis. Our effort towards operating cost reductions have played an important role in our improved financial performance. We are confident that our in-house technical management will continue to be instrumental in our quality objectives while further optimizing our vessel operating costs.

Going to slide 10, illustrates the fleet employment chart and counterparties, which would also post in a transparent manner on our website. I won't go into further detail as I believe it is self explanatory.

Moving to slide 11, the graph shows our contracted operating days as well as our revenue visibility. Our long-term coverage continues to provide us with stable and visible cash flows in the current volatile market. It is important to reiterate that the daily volatility of the dry bulk indices do not have an effect on our current revenue generation. Our contracted coverage is now 100% for 2010 and 63% for 2011.

We are in constant dialogue with our counterparties as we have committed to recharter the vessels whose contracts expire in 2011.

If you now turn to slide 12, we provide an overview of our counterparties who are first-class charters while affording an excellent counterparty risk profile.

George Syllantavos, our CFO, will now discuss our financials. George?

Thank you, Akis, and good morning to everyone. Let us now turn to slide 14 for a review of our balance sheet.

As of September 30, 2010, current assets were $25.2 million, our fixed assets amounted to $666 million and total assets amounted to $714.5 million. Current liabilities were $66.9 million while noncurrent liabilities amounted to $180.3 million, and stockholders' equity was $467.3 million. Total liabilities amounted of course to $714.5 million.

Please turn to slide 15 to discuss the nine months ended September 30, 2010, income statement. The results include non-cash items amounting to $39.2 million, as depicted in the middle column, and the adjusted figures exclude these non-cash items.

For the first nine months ended September 30, 2010, total revenues amounted to $89.1 million and our operating loss amounted to $21.7 million. The net loss for the nine months ended September 30, 2010, was $25.8 million, representing $0.42 loss per share calculated on 61,260,641 weighted average number of shares basic and diluted.

Excluding non-cash items, net income for the nine months ended September 30, 2010, would amount to $13.3 million or $0.22 per share basic and diluted.

Turning to slide 16, for the third quarter ended September 30, 2010, total revenues amounted to $29.9 million and our operating income amounted to $2.5 million. Non-cash items amounted to $2.5 million, which is depicted in the middle column again, and the adjusted figures include these noncash items.

The net income for the third quarter 2010 was $1.2 million, representing $0.02 earnings per share calculated on 61,669,446 shares and 62,072,050 shares weighted average number of shares basic and diluted, respectively.

Excluding non-cash items, net income for the third quarter 2010 would amount to $3.7 million or $0.06 earnings per share basic and diluted. I would like to pass the call back to Akis for a continuation of the third-quarter presentation.

Thank you, George. I would like to end our presentation with a few market-related comments.

On slide 18, we provide the supply update. According to Clarksons, in the first nine months of 2010, about 50% of the planned deliveries have not hit the water. This is a similar trend with last year's 37% of non-deliveries for 2009. Brokers expect similar non-delivery levels for 2011. Port congestion outside iron ore ports in Australia and Brazil currently stand at quite low levels, providing upside as congestion effectively takes tonnage out of the system.

Please go to slide 19. What we would like to underline in this slide is our firm belief that future iron ore trade growth will be robust -- I would correct. We expect that Chinese iron ore imports will continue growing rapidly as demand for the important material emanates from a structural characteristic of China's geology, poor quality of domestic iron ore reserves. As a result of the extra processes that the mine material has to go through in order to become commercial, its production cost is significantly elevated. In fact, any additional iron ore mine that comes online in China has probably a production cost well above $120 per ton.

As you can see in the top right graph, the production cost curve is very steep beyond 300 million tons of domestic production, whereas China needs in excess of 1 billion tons. The situation will be exacerbated with any appreciation of the Chinese yuan against the dollar.

This makes us feel very confident about future iron ore demand. DnB Nor expects 2015 iron ore trade to have doubled that of 2009 as shown in the bottom right graph. Therefore, the excess demand will have to be transported from far-away places, increasing ton miles quite more rapidly than actual quantity increases.

Regarding India, although India is currently a major iron ore exporter, we do not expect significant export growth going forward as India is developing -- is a developing economy, and they have plans to preserve the iron ore for their own needs. Thus, China's iron ore imports from India will have to result from elsewhere, likely much further away.

A similar picture is developing for coal, which I would like to show on slide 20. On the top graph, you can see China coal imports rising constantly in recent months. China's government plans to shut down around 150 million tons of coal capacity within 2011 for safety and other concerns. Even though these might look small compared to China's 3.5 billion tons of annual coal production capacity, such a volume of additional cargo demand would have a very positive effect on trade rates. We're further optimistic on Chinese coal imports because of the government's plan to consolidate the coal mining industry. We believe that during this consolidation period, there will be room for additional coal input.

Another bullish point in future coal demand is India, which is building a number of power plants and ports on the coast line. Naturally, these will be fueled by imported coal. Because India is expected to grow rapidly in the coming years, we expect Indian coal imports to grow rapidly as well. Furthermore, India's still future production growth is expected to result in significant coking or metallurgical coal imports.

We will now expect about 90 million tons of additional coal exports in 2011 while total seaborne coal trade is expected to reach 935 million tons, according to the same report.

Finally, I would like to end the presentation with some news coming from the US. The second quantitative easing back of $600 billion, which was recently announced, will surely support global growth. Economists argue that most of this money will end up being invested in emerging economies due to a lack of opportunities in the developed ones.

I will not take any more of your time. Thank you, and I will now pass the floor over to the operator. If you have any questions, both myself and George will be happy to answer them. Operator?

(Operator Instructions). Noah Parquette, Cantor Fitzgerald.

Thank you. On expansion, you talked a little bit about your bullish outlook for the iron ore sector and coal. And when you look at your two vessel classes, would you have a preference towards investing in either one, I mean in capes or versus the supramaxes?

Let me answer that in a twofold manner. You might have seen that we have actually invested within 2010 in capesizes and expect delivery at least of the two newbuilding ones in 2011. So we have significant growth on the larger vessel category. That said, I would envisage further growth to probably come in a smaller category segment such as supramaxes or even [that] panamax.

Okay; that makes sense. Great. The Star Epsilon, I think -- has that been redelivered yet? Or what are your plans for chartering that ship?

We're looking to charter the ship. She is going to be finishing it by the end of the year. And, we should be looking to charter her as we speak. We're in the market to charter her.

Okay. What are you seeing in terms of periods from charter? Do you go greater than one year? Or what's your preference?

We would likely go for a year, possibly two. More likely one than two.

Okay. I wanted to ask about the $5 million upfront payment you got from selling 45% of the claim proceeds. What's the book value for those insurance claims? And this is separate from the $24 million you got on the Star Epsilon, right?

No, this is separate from the $24 million which is attributed shortly to Star Epsilon. However, at this moment, and because this involves arbitrations that are confidential, I would not like to go into numbers and specific situations because we are bound by arbitration proceedings, as you understand.

In any case, these claims that -- I'm sure you've seen that we have pushed forward with trying to handle and settle all our claims, which have been significant baggage from the past. And, so we are trying to monetize them. I wouldn't like though to get into specifics for those ones, and I have to point out that the market in general, neither analysts or investors value these claims in their valuation of the company in any case, so it's an additional benefit. So I can't really expand on the details about that now at this point.

Okay. That's understandable. Can you just say though if the party you sold the 45% stake to, is that an unaffiliated third party?

It's an unaffiliated third party who -- yes. It's an unaffiliated third party, yes.

Great. And then just one quick housekeeping -- what's the book value of the progress payments you've made under [Hugos]?

Say that again because I didn't hear you now; excuse me.

Oh, the progress payments you've made on your newbuilds, what was that (multiple speakers) quarter?

Progress payments, we have now paid to our newbuildings, 40% of the value of those contracts, which amounts roughly to $43 million.

Okay. Great. Thank you very much.

I would like to add to that the remaining, we expect to pay out of the loans that we plan to get. So we do not have any capital expenditure really remaining on those newbuilds.

Mike Rindos, Rodman & Renshaw.

I wanted to follow up on I guess the prior questioner's question regarding that $5 million of other income. Can you give me a little bit of the background of how that was originally booked and its sort of accounting history? So I'm guessing that that was booked as revenue at some point and charged off as a bad debt, and now it's coming back around. Is that right?

No, no. Mike, as I said before, I can't give you much more information about that. However, those claims do not have an accounting history in there. They are not -- they don't have those damages there -- that those claims are for damages and they are not shown as receivables in our financials. So, as I said before, it's an additional bonus to the actual operation.

Okay. So it was never booked as revenue in the past?

That's right.

So this is the claim against damage to the vessels over time?

We cannot tell you what is -- you read our prior filings and you can figure out what these claims are about. We cannot give any -- we are bound by confidentiality from the arbitration proceedings in London, so we can't really go much into it.

However, it is a correct statement as you said that these have not been booked as revenue in our financials at all, ever.

Okay. And just on the bookings for 2011, looking at I guess 63% coverage, is that 63% as of September 30? Or is that a more recent date? And after that, can you just give us a sense as your comfort level will -- coverage for 2011 at this point in time?

It is, as of today, it is 63%, as of today for 2011, the coverage.

And for September 30, because we didn't fix any additionally (multiple speakers).

Exactly. And as soon as we find employment for the Star Epsilon, as I mentioned to the previous question, or possibly to the newbuilding number two, that might increase significantly as well.

Okay, thank you.

Doug Garber, FBR Capital Markets.

My first question was about growth next year. It seems like you have a little bit more free cash flow to work with. Where are your priorities in terms of a dividend increase versus adding additional vessels? And what are your thoughts on the share repurchase?

Okay. You might know that we are share repurchase minded people or management. We have had a kind of a restriction because of the waivers we've had the previous year paying for 2010. However, I would point out that our dividend is quite healthy and -- meaning our cash flows really support it; and it is also at very good levels. We do not have any plans at this time to increase it, and I would not like to venture on that at this time. Is that answering the question?

It does. I just had one follow-up. Is there a target cash flow payout for the dividend? Do you target a dividend yield and you are happy at 7%? How should we think about that going forward? Is it 20%, 30% of cash flow?

We have for some consecutive quarters now, six quarters, we have been paying $0.05 per share. And, in kind of hard number, not necessarily connected to a percentage of our free cash flow.

Okay. And I wanted to jump back to the covenant compliance. I understand your loan to value -- you are in compliance with them, but it's the waiver period still goes through February, and you will have full flexibility after that period?

Yes, our covenants are -- the waivers for the covenants are expiring, and we will not need any further waivers. We do meet our original covenants. And after that, we are free to make our own decision making. That is correct.

Okay. And the last question I have is on the second cape, the newbuilding. What are the different options you're looking at in terms of duration of contract for that that you can share with us at this time?

Well, we would prefer a little shorter than a longer period, like a three- to five-year period, not a ten-year period.

Okay; that's helpful, guys. I appreciate it. I will turn it back.

[John Cruise], Adirondack Asset Management.

I actually had -- I had a question regarding NAV. Could Mr. Syllantavos please elaborate how the figure of $4.03 was derived?

Yes. As you know, we receive valuations from brokers for our fleet at the end of every quarter. So, at this juncture, our current fleet, the fleet that's in the water, has about $365 million of adjusted value, meaning, actual vessel value and about $30 million of certain adjustments in there. So, if you add to that number down payments for the cape newbuildings of $43 million, the appreciation of all those newbuildings of about $11 million, and the cash of about $41 million, you come to a number of $460 million, $461 million. Subtracting about $210 million for debt, you have a net equity value of $251 million. You Just divide that by 62.2 million of outstanding shares and you come to this $4.03 number. So, it's actually derived from our -- the valuations of the vessels and of down payments and the value of those vessels and their cash position.

Okay, great. Do you also -- you mentioned an increase in G&A due to one-off professional fees expense. Can you please clarify what that might be?

Yes, that was mainly legal fees that we paid while we were exploring a possible transaction, but we were contemplating at the time midsummer, and that is related to that.

Okay, great. Thank you very much.

(Operator Instructions). There are no further questions at this time. I would now like to hand back for any closing comments.

Thank you, operator. I want to thank everyone for participating on this call. I'm looking forward to you joining us again when we have our fourth-quarter conference call. Again, thank you very much.

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.