Star Bulk Carriers Corp (SBLK) 2011 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk conference call on the second-quarter 2011 financial results. We have with us Mr. Spyros Capralos, President 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. (Operator Instructions).

I must advise you that this conference is being recorded today, Wednesday, August 10, 2011. We now pass the floor to one of your speakers today, Mr. Spyros Capralos. Please go ahead, sir.

Thank you, Operator, good afternoon or good morning, ladies and gentlemen. I am Spyros Capralos, the President and Chief Executive Officer of Star Bulk Carriers, and I would like to welcome you to the Star Bulk Carriers second-quarter and first-half 2011 financial results conference call. Along with me today to discuss our financial results is our CFO, George Syllantavos.

Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on slide number 2 of our presentation. Since you are quick readers, let us now turn to slide number 3 of the presentation to first discuss our balance sheet, which we like to highlight because we believe it is one of the healthiest in the drybulk industry.

As of this Monday, August 8, our senior debt stood at $257 million. The senior debt figure includes both the $31 million loan facility of ABN Amro for the acquisition of Star Big and Star Mega, as well as approximately $43 million debt for the Credit Agricole loan facility for the financing of the two new buildings. The Company is in full compliance with bank covenants for all our loan facilities.

Important to mention is that we have zero CapEx commitments for the two Cape new buildings, with $21 million available from the Credit Agricole loan facility. On the other hand, the CapEx remaining for the Star Mega is $7 million. I would like to note that we expect to take delivery of Star Mega within next week.

Our principal repayment commitments for this year are down substantially compared to last year, since our loan repayment schedules were intentionally designed to be frontloaded. Specifically, as you can see in the graph, during 2010 our principal repayments stood at $68 million, while our remaining repayment commitments for 2011 stand at around $15 million from $37 million at the beginning of the year, $38 million for 2012, and $36 million for 2013.

This loan repayment schedule includes the undrawn portions of both the ABN Amro regarding Star Mega and the Credit Agricole loan regarding the two new buildings. I would like to inform my investors that our current cash position stands at $52 million.

Lastly, I would like to reiterate that Star Bulk has resisted exposure to interest-rate swaps, and we are taking the full benefit of the prevailing low interest rates as all of our loans are on a floating rate basis.

Please turn to slide 4 to discuss our first-half and second-quarter 2011 financial highlights. For the first half of 2011, gross revenue amounted to $52.2 million and net income amounted to $3.4 million. Excluding non-cash items, our net income for the first half of 2011 amounted to $3.6 million. Adjusted EBITDA for the first half of 2011 was $29 million, while average daily operating expenses were $5,360 per vessel.

The time charter equivalent in the first half of 2011 was $20,943 per day. The adjusted net income of $3.6 million represents $0.06 earnings per share basic and diluted. In the second quarter of this year, gross revenue amounted to $22.7 million and net income amounted to $1.7 million.

Excluding non-cash items, our net income for the second quarter of 2011 amounted to $2.2 million. Adjusted EBITDA for the second quarter of 2011 was $15.1 million, while average daily operating expenses were $5,547 per vessel. The time charter equivalent was $18,664 per day. The adjusted net income of $2.2 million represents $0.03 earnings per share basic and diluted, which is $0.09 above Bloomberg consensus.

Turning to slide number 5, would like to point out in this slide that since reinstating -- reinstituting the dividend in the second quarter of 2009, we have rewarded shareholders with nine consecutive quarterly dividends. Our dividends represent a meaningful yield, which currently is the highest within the drybulk universe, exceeding 14% on an annualized basis calculated as of yesterday's close.

As you can see on the graph, only 4 out of the 10 US listed drybulk peers have distributed dividends to their shareholders in 2011, again, with Star Bulk having the highest yield. I would like to remind our investors that Star Bulk is one of the few companies in the drybulk industry that has consistently paid dividends since inception.

Slide 6 illustrates our modern fleet of drybulk vessels, consisting of 12 drybulk carriers with two fully-funded Capesize new buildings on their way to being delivered in the fourth quarter of 2011. And with the addition of the Star Mega to our fleet within next week, we will have increased our operating fleet by 75% in terms of cargo carrying capacity from the beginning of this year.

As you can see on the graph on the lower left-hand side, we have managed to grow our fleet from the beginning of 2011, from 900,000 tons to just above 1.6 million deadweight tons by the end of the year. Our fleet growth will result in an increase in our ownership days, with visible revenue in a weak freight market.

It is also worth noting that in the process of growing our fleet, we have also been renewing it. Since our inception, we have sold three of our older vessels while acquiring eight younger vessels. As a result, we expect our fleet's average age to be 10.6 years in December of 2011, once both our new buildings have been delivered, only two months older than a year ago.

Please turn to slide 7 for an overview of our fleet employment and our counterparties. Currently, we have secured 84% of our operating days in 2011, 41% in 2012, and 33% in 2013, with most of the open days in the Supramax category. Specifically, our time charter coverage in the Capesize sector is 92% for 2011, 71% for 2012, and 62% for 2013. With the only [unfixed] Cape being the Star Ypsilon, whose contract is expected to expire this October, and the second new building for which we plan to secure employment closer to its delivery.

Both for those two Capes as well as for our six Supramax vessels, we aim to opportunistically recharge those ladies as the freight rate environment improves.

Our total contracted revenue amounts to approximately $235 million, while it is worth noting the quarterly profile of our charters with companies like Rio Tinto and Cargill are among our counterparties.

Please turn to the next slide, number 8, for an overview of our management and operations structure. Star Bulk is one of the very few companies in the drybulk sector that have fully integrated in-house commercial and technical management capabilities and 100% owned by the public company subsidiary. This integrated structure offers a number of advantages like increased operational flexibility, high standard quality control and maintenance which leads to increased utilization and, in turn, increased profitability; while at the same time reducing our operating expenses.

We are able to achieve all of the above while being totally transparent, since we have practically eliminated any related party management transactions.

If you now turn to slide 9 for a brief description of the acquisition of the two second-half Capesize bulk carriers we announced in May for approximately $51.5 million. The Star Mega and Star Big are two Capesize vessels with above-market long-term charters attached to them with a leading international mining company, which is considered a financially secure industrial counterparty.

These vessels were acquired at a discount of more than 15% to the average charter adjusted broker appraisals we received at the time. This by itself would imply that this is an accretive acquisition. However, you will see the transactions project accretiveness on an earnings per share and on a cash flow basis in the next slide.

It is worth pointing out that the above-market time charter contracts are expected to contribute a minimum of $65 million in gross revenues. Further, we secured the $31 million financing for the two vessels through ABN Amro at attractive terms.

I would like to also add that as part of this deal, we obtained a management contract of an unaffiliated Supramax vessel which produces a daily management fee of $750. We are seeking further vessel acquisitions that will be accretive to shareholder value like the Star Mega and the Star Big, and are open to obtaining additional management contracts.

Please turn to slide 10 for an overview of our recent secondary offering. On July 19, Star Bulk announced that it has successfully priced its underrated public equity offering of 16.7 million common shares at $1.80 per share. Insiders participated in this offering by buying 4.9 million shares or approximately 30% of the offering.

The gross proceeds from this offering amounted to approximately $30 million and will be utilized partly in our recent secondhand acquisitions and partly for general corporate purposes. The addition of these two secondhand Capesize vessels to our fleet increases our fleet carrying capacity by approximately 20%, and more importantly our contracted revenue by 38%.

Overall, we expect these acquisitions to increase our quarterly earnings per share and cash flow per share by approximately $0.02 for at least the next 12 quarters. It goes without saying that the addition of these vessels and their long-term time charter to the Company has significantly increased our forward coverage, some of it displayed in more detail in the table on the bottom of the slide. These two time charters expire in 2014 and 2015, which increases our fixed revenue during a challenging period.

Before I turn the floor to George, I would like to add that we are very pleased to have successfully concluded this offering, especially following the recent events in the global capital markets and exchanges. It is my belief that the proceeds from the offering will reinforce the Company's balance sheet and substantially increase its ability to transform shocks from this uncertain and volatile global environment into opportunities for growth.

And now, I will ask Mr. George Syllantavos, our CFO, to discuss on the financials and give you an update on the market developments. Thank you.

Thank you, Spyros, and good morning to everyone. Let us now move to slide 12 for an overview of our balance sheet as of June 31, 2011. Current assets were at $18.8 million. Our fixed assets amounted to $669 million, and total assets amounted to $711 million. Current liabilities were at $39.5 million, while noncurrent liabilities amounted to $185.9 million, and stockholders' equity was at $485.9 million.

If we can now turn to slide 13 to discuss our second-quarter 2011 income statement, I would like to point out that our second-quarter 2011 results include non-cash items amounting to $515,000, which is depicted in the middle column, and the adjusted figures exclude those non-cash items.

For the second quarter of 2011, total revenues amounted to $22.7 million, while our operating income amounted to $2.4 million. I would like to point out that our voyage expenses were up $3.3 million higher than the same period of last year, mainly due to expenses related to a shipment under a contract of affreightment.

The net income for the second quarter of 2011 was $1.7 million or $0.03 per share basic and diluted. Excluding non-cash items, net income for that second-quarter 2011 amounted to a gain of $2.2 million or $0.03 per share basic and diluted.

Before we turn to the industry overview section of the presentation, please turn to slide 14 where we have a cash breakeven analysis for the year 2011. As you can see, the 2011 secured revenues cover about 91% of our cash flow for the year, which includes G&A expenses, operating expenses, dry docking costs, debt and interest payments and, of course, the dividend payment.

In order for the remaining 9% of the additional revenue to be covered by the unfixed 16% of our 2011 operating days, we need to achieve an average gross time charter rate of approximately $14,000 per day, which is certainly an achievable number.

I would like to turn our attention to the drybulk markets now, and please turn to slide 16 for an update of the drybulk demand first. The factor leading to weakness in the freight market is not driven by lack of demand but mainly from oversupply. Chinese and Indian coal imports as indicated on the top two graphs are experiencing impressive compound annual growth rates since 2003, with a strong demand in both markets expected to continue for the foreseeable future, driven mainly by demand in power generation.

On the bottom of the slide, you can see that the Chinese iron ore demand and steel production is also experiencing impressive growth rates since 2003, with 20% compounded annual growth rates in the iron ore trade. Brokers and market participants expect this trend to extend in the long-term, although we may continue to experience periods of weakness due to increased volatility and uncertainty in the global economy.

Overall, we remain optimistic about the long-term prospects of the drybulk shipping demand, based on the growth prospects of emerging economies and the fact that demand for commodities like iron ore and coal are more dependent on domestic growth drivers like infrastructure and urbanization rather than export related ones.

Turning to an update on the supply side on page 17, drybulk vessel deliveries during the first half of 2011 continued at a high pace with a large order book still remaining to be delivered for the remainder of the year 2011 and 2012. As you can see on the top of the bottom right-hand graph, even if we were to apply a 30% slippage rate which is one that we experienced in 2010, the large order book is still expected to have a negative impact on the drybulk sector for the next 12 months or so, but that cannot certainly last forever.

What is important is the fact that drybulk carrier demolitions through July 2011 is already higher than those of 2010, and even more than double that of the years past, supported by weak freight markets and high steel prices. If the current scrapping rate continues, scrapping could hit an all-time record of the over 24 million deadweight tons within the year 2011.

Scrapping acts like a pressure valve in the supply/demand equilibrium. A pickup in scrapping could slow down the fleet's net growth rate, which will effectively provide some relief to rate pressures. Having said that, I would like now to pass the floor back to Spyros for his closing remarks.

Thank you, George. In conclusion, as you can see on slide 19, we believe that we are well positioned from a financial and operational point of view to not only sustain the Company but also take advantage of the current distress in the drybulk market. On top of our high-quality, modern fleet and strong time charter coverage, Star Bulk also has one of the most diverse group of high-quality charters in the sector.

Our campaign to bring our fleet's management in-house has already provided tangible results, as it has led to a meaningful increase in our efficiency and transparency, while significantly lowering our daily vessel operating costs over the past year. We have more direct balance sheet leverage, a strong liquidity profile, and an experienced and dedicated ownership and management team.

Without taking any more of your time, 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 Instructions). James Woods, FBR & Co.

Oh, hi there. Sorry about that. This is James; I am dialing in for Rob MacKenzie today. I had a couple quick ones for you. I wanted to know, could you guys handicap for me the probability that the current rate of scrapping continues, say, into or through 2012 when we are still going to be seeing that heavy drybulk order book?

Well, we left our crystal ball at home today, but really I mean we can really not give any guarantees on that. It just shows that since the beginning of the year, we have seen a rapid pace of scrapping. And this time around it has been a little bit different because it has been mainly focusing on the drybulk sector and mainly on the bigger sizes, the Panamaxes and the Capes, which is something that is welcome because that's the sizes where we seem to have the biggest issues with supply.

That was -- we saw that in the first quarter. Steel prices remained firm during this period, and this obviously has helped because the obvious decision of a ship owner is to either go into and put the monies on the (inaudible) special (inaudible) of the vessel and to continue operating it. And certainly the rate environment does not help that, vis-a-vis paying the cost for dry docking.

So right now and it seems that the foreseeable future -- and the foreseeable future, I mean until the end of the year -- I think the situation would be as such and that trend seems to be continuing. It's kind of difficult, though, to make some commitments for 2012 on that.

No, understood, understood. I guess my next question is you guys obviously are fairly well contracted, but you do have a couple vessels that are going to be rolling off towards the end of this year. How do you think about your chartering strategy in the midst of a challenging environment for day rates? Does it change the way you think about how, when and at what price you charter your vessels?

We have a fleet that is composed between Capesize and Supramaxes. We see the biggest challenges coming on the Capesize sector, whereas we presented we are nearly fully fixed for 2011, with 92% utilization. We have 71% charter coverage for 2012, and 62% for 2013, which means that for those difficult years we think that for the Capesizes we are doing quite well.

On the Supramaxes, we feel that there is not going to be so much pressure and, therefore, think that we are looking at opportunistically fixing those whenever we have opportunities in the market; something that we have done recently with one of our vessels, the Star Gamma, and that we intend to do whenever we find good charters and good fixtures.

Okay. Now, I would agree with you on the small vessels versus large vessels dynamics that you just mentioned, which I guess sort of leads into my third question which is you guys talk about coal and iron ore imports but not as much about the minor bulks which would be carried, I guess, mostly by the Supramax and smaller vessels.

Could you talk a little bit about what you see unfolding in demand for the minor bulks, if you guys have any insight into that?

Well, we see some similar trends there, especially on the grain side of things. The Supramaxes are more a vessel type of vessel, serving a more diverse selection of commodities there. What we are doing here with focusing on iron ore and coal is that those are the main commodities of the infrastructure play, and the infrastructure play is the main driver which carries the world and the world economies, and it just supports the drybulk trade mostly.

The diverse and minor bulks have a growth trend, especially as I said on the grain side of the business, but it does not seem to be that prominent as the iron ore and coal trades. So by those vessels being more versatile and serving a wider array of customers there, and by the economies of scale moving from the former Handymaxes into the Supramax type of sector and the puzzle is getting bigger.

That sector seems to be earning kind of a stable type of level on the 13,000 to 14,500 type of level, which has been the level since the beginning of the year. And that's why Spyros says that we don't feel that that is the subsector that gets the pressure. Therefore, we can be a little bit more flexible with our chartering strategy there.

Okay. That sounds good to me. I appreciate your time this morning, guys. Thank you, and I'll turn it back.

Thank you so much.

Natasha Boyden, Cantor Fitzgerald.

Thank you, Operator. Good morning, gentlemen. How do you guys think about balancing growth versus shareholder return in this market? I mean specifically, would you consider raising your dividend or do you believe now is the time to focus on fleet growth and renewal?

Well, that's a (inaudible) philosophical question, but I think we have strong signs that in reality, growth in dividend these days does not provide the type of valuation push that it used to. The circumstances in the markets are kind of different to what they were a year or two years ago.

Therefore, we feel that we provide a dividend which provides a healthy return to investors. And we have always thought that our two components to return on investors, dividend being one and, of course, appreciation of the share price has been another through growing the Company. That second part hasn't worked out either because of the volatility and the kind of pressures of the overall market takes.

But we feel that the dividend is very handsome and substantial dividend at this point, and the rest of the funds for now have to go and focus on growth really.

Okay. And when you look at focusing on growth, what are you really seeing in terms of liquidity in the market; I mean specifically, the secondhand market? Are there more vessels moving at somewhat lower prices, or are you still seeing sellers hesitant to sell?

Well, we have seen lower price, no doubt about it, but we don't know how much more the prices will go down. But also what we are seeing is that there are some and we are being presented some interesting opportunities from distressed assets that are in the hands of banks. We are looking to find good operators to buy those assets.

And that's also one of the reasons that we proceeded and we did our secondary offering, our follow-on offering, in the market to raise cash and to be moderately leveraged to take advantage of those opportunities. I think that we are looking out to accretive deals, both on the earnings as well as the cash flow, something that will benefit shareholders in the end.

Okay, great. Just moving to another topic completely. You still have a couple of charters that are pretty rich right now. And I'm just wondering if you have seen any news from any of your current charterers to try and renegotiate any of those contracts that you currently have.

No, we haven't had anything like that, and we are very happy for that.

Okay, that's good. And then just lastly, George, maybe you could just let us know what was the settlement of the claim that gave you $5.1 million on recurring revenue?

Well, the $5.1 million is comprised of two numbers. It's comprised of a $4.9 million number that is in reference to the settlement of the claim we had in relation to the Star Beta in Oldendorff, and that we have disclosed in the 20-F, the information about it. And it's the share that was coming to us from the agreements that we had there.

The rest $0.25 million was from a Holland Machinery claim which was an old claim over two years ago, but it was a regular shipping Holland Machinery claim. So two components there.

Okay. Do you have any other claims outstanding right now?

Well, we have the claims for, as you remember, that we have with Ishtar for the Star Epsilon and the Star Kappa, which is still ongoing in arbitration.

Okay, great. That's very helpful. Thank you very much, gentlemen.

Michael Pak, Clarksons Capital Markets.

Good afternoon, gentlemen. Just a couple questions here. One, on the two Capes that are coming up for renewal or that you need to fix, what are you thinking about in terms of any opportunities for profit sharing? Are you going to plan to trade them on spot, or would you even consider laying them up if the market takes another step down?

Well, that is a wide selection of alternatives there, Michael, but really I think you're talking about the Star Ypsilon, which comes up for renewal in October. I mean, we have been starting looking. Of course, you should be more actively locating in September when this thing is closer to its end and when charters are more willing to do stuff.

So the same thing we are going to do with the new building as we come closer to its delivery, and we will be looking to do something there. It's not always what you want is what the charters are willing to do, also. So you are not alone out there.

And right now, there is no real appetite for a very long-term fixing, especially for the older vessel. But as we move here within the next month, we will be fixing here and we will make that announcement.

Great, great. My other question involves the dividend and how you guys think about it. I mean right now, the yield is pretty healthy. You have good relationships with your banks. You're covenant compliant, as you stated.

How do you think about the dividend going forward as the market is in its depressed state? Would you consider from a cash flow management perspective perhaps ratcheting the dividend down or -- I'd like to just get your -- sort of your thinking on it.

Our thinking now is to keep the dividend as is because we have made a decision along those lines, and it is what it is. Of course, we think it's healthy and maybe a little too healthy. And as I said earlier in answering a similar question, it doesn't really mirror the type of valuation for the Company stock that we would like. However, it is what it is now, and it's actually something we talk to all the time, but this is a level that we are committed for now.

Great, I appreciate the time, guys.

(Operator Instructions) We have no further questions at this time, sir.

Okay. Then if we have no more questions, then we would like to conclude this presentation. Thank you very much for your attention, and we look forward to have good results in the future again, and have you all at our conference calls. Thank you and enjoy your summer vacation for the ones who have not been there.

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