Star Bulk Carriers Corp. (SBLK) Q2 2012 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Conference Call on the Second Quarter 2012 Financial Results. We have with us Mr. Spyros Capralos, President and Chief Executive Officer; and Mr. Simos Spyrou, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, August 29, 2012. We now pass the floor to one of our speaker today Mr. Spyros Capralos. Please go ahead sir.

Thank you, operator. I’m Spyros Capralos, President and Chief Executive Officer of Star Bulk Carriers, and I would like to welcome you to the Star Bulk Carriers’ first half and second quarter 2012 financial results conference call. Along with me today to discuss our financial results is our CFO, Mr. Simos Spyrou. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on slide number two of our presentation. Let us now turn to slide number three of the presentation for a preview of our second quarter 2012 financial highlights in comparison to last year. In the three months ended June 30, 2012, gross revenues amounted to $21.8 million, representing a 4% reduction versus the same period of 2011. General and administrative expenses were reduced by 25% to $2.1 million in Q2 2012 versus $2.9 million in Q2 2011. Overall, during the second quarter of 2012, the company had a net loss of $4.6 million compared to a net income of $1.7 million in Q2 2011. Excluding non-cash items, our net loss for the second quarter amounted to $2.9 million compared to an adjusted net income of $2.3 million in Q2 2011. Adjusted EBITDA for the second quarter of 2012 was $8.4 million compared to $15.1 million last year. Our time charter equivalent during this quarter was $14,628 per day compared to $18,664 last year, representing mainly the low freight rate environment and as well as the lost off-hire due to the grounding of the Star Polaris. Our average daily operating expenses were $5,241 per vessel, 11% lower than the same period last year despite the fact that our average vessel size increased by 39% due to the higher number of Capes in our fleet. The adjusted net loss of $2.7 million represents…

Thank you, Spyros. Let us now move to slide 10 for an overview of our balance sheet as of June 30, 2012. Current assets stood at $30.2 million, our fixed assets amounted to $608.2 million, and total assets amounted to $681.6 million. Current liabilities were $49 million, while non-current liabilities amounted to $204.7 million, and stockholders’ equity was $427.9 million. If we can now turn to slide 11 to discuss our second quarter 2012 income statement, I would like to point out that our results include non-cash items amounting to $1.7 million, which are depicted in the middle column, while the adjusted figures exclude them. For the second quarter of 2012, non-cash adjusted revenues amounted $23.4 million compared to $22.7 million in the same period last year. While this quarter's revenue is slightly higher than last year’s, our own fleet was significantly larger this year. Our revenue was [contained] by lower freight rates and the off-hire related to Star Polaris. Our net loss for the second quarter of 2012 amounted to $4.6 million, in particular non-cash items include a $1.6 million related to the amortization of above market acquired time charters and expenses of $71,000 relating to the amortization of stock based compensation. Excluding the non-cash items, our net loss for the second quarter of 2012 amounted to $2.9 million or $0.04 loss per share. The increase in vessel operating expenses for the three months ended June 30, 2012 versus the same period last year was due to the increased number of vessels in our fleet and the increased average vessel size. Voyage expenses increased to $5.3 million for the second quarter of 2012 from $4.4 million in the second quarter last year. During the three months ended June 30, 2012 our vessels were under two voyage charter agreements, while…

Thank you, Simos. In conclusion, we believe that Star Bulk is well positioned from a financial and operation point of view to sustain the company through the near-term challenging environment and weather the storm. On top of our high quality modern fleet, Star Bulk also has one of the most diverse group of high quality charters in the sector. As we discussed earlier in our presentation, our campaign to bring our fleets management in-house has provided tangible results as it has led to meaningful increase in our efficiency and transparency, while consistently lower operating cost. We have a moderately leveraged balance sheet as compared to our peer group, a healthy liquidity profile and an experienced and dedicated management team. Most importantly, we believe that our financial condition is stable. We currently have no capital expenditures related to new buildings, and we have $38 million of cash in the banks. From an operational perspective, our Capesize fleet is mostly covered for the next two to three years and at above market charter levels while our operating expenses are being continuously optimized. We believe we have all the elements in place to continue with our fleet growth and renewal strategy. Without taking any more of your time, I would now pass the floor over to the operator. In case you have any questions, both Simos and myself will be happy to answer them. Thank you.

(Operator Instructions) your first question today comes from the line of Natasha Boyden of Global Hunter. Please ask your question. Natasha Boyden – Global Hunter Securities, LLC: Thank you, operator. Good morning gentlemen.

Hi, Natasha. Natasha Boyden – Global Hunter Securities, LLC: Shall I talk a little bit about your balance sheet? obviously, you’ve made a lot of comments that you have – you leveraged balance sheet, and your balance sheet is in a better position than a lot of your peers. What can we expect the company to look at in terms of growth opportunity here or is deleveraging the main focus, and then following on that, what about further share buybacks given major (inaudible)?

Hello, Natasha, this is Simos. Natasha Boyden – Global Hunter Securities, LLC: Okay.

In terms of the buybacks, we have an active buyback plan of up to $3 million that is, the Monday that we’ve got from the Board, and the general mandate that has been voted by the shareholders is up to $30 million. We have spent about $900,000 up to now. And we are trying to balance between reducing our cash, which is valuable these days, and buying back shares in the market and of course, the dividend that we continue paying to the shareholders. So we try to let’s say opportunistically buying shares from the market and keeping the available cash on the balance sheet. Now, in terms of deleveraging or new acquisitions obviously, as you understand, the cash that we have is not enough to acquire new vessels even at this environment but we are trying to maintain as much as we can in order to be able to weather the storm if the values of the assets continue dropping and we have early issues with the covenants in our current bank facilities. Natasha Boyden – Global Hunter Securities, LLC: Okay, great. And then just a flip of the coin, as we do look at your fleet here, do you have any ships that you would be interested in selling given what stock prices are?

Natasha, this is Spyros now. Right now, we believe that the market is in a distressed state. And therefore, we don’t think that at these levels, we should be selling any of our vessels. Natasha Boyden – Global Hunter Securities, LLC: That makes sense.

The only vessel that we may be having an issue is the oldest Cape that we have, which is 21-year-old Cape, the Sigma, which is working right now in the spot market. And if we see any upturn in the market, yes, then we may consider selling her, otherwise we’ll use her until if we see that, we managed to get charter rates that exceed the operating expenses, otherwise we’ll end up scrapping her. Natasha Boyden – Global Hunter Securities, LLC: Okay, yeah, the signal was what I had in mind when I was asking that question, that's helpful. In terms of your chartering strategy, obviously you said on the call that you would at this point in the cycle where rates are consider putting them on short time charters on the spot market, at what point the rates have to go up enough for you to think about putting them on longer time charters?

Well, right now what we do is, we don't have this issue with the Cape as most of the Cape fleet is already in charter for throughout 2013 and 2014. For the Supramax’s, we think that the market is less volatile and at those levels we still have some – we’ll create some operating gains. The problem is that you don’t want to charter your fleet long-term at today’s low levels and then to see the market start going up that's why we’ll opportunistically use our fleet and whenever we see that there is a hike in the charter rates, then we may get into longer-term charters for the Supramax’s. Natasha Boyden – Global Hunter Securities, LLC: Great, thank you very much for your time.

Thank you, Natasha.

Thank you. Your next question comes from the line of Chris Snyder of Sidoti & Company. Please ask your question. Chris Snyder – Sidoti & Company: Good morning guys.

Good morning, how are you? Chris Snyder – Sidoti & Company: Great, how are you? So first, the Chinese iron imports have been definitely slowing and I know with the expansion plans they have, they obviously have to resume again at some point, (inaudible) when do you think they will start importing again at high levels?

The reduction in commodity prices overall, we think that will make China and everybody else, but primarily China start importing again at increased levels with iron ore being below $100 that we haven’t seen for a long time. We think that China will start importing, because mainly the cost of producing is much higher than what would be the cost of importing, and therefore we think that it really make sense for them to start importing than producing locally. And that could change dramatically the market in favor at least for the Capesize fleet. Chris Snyder – Sidoti & Company: Okay, yeah. And when you guys referenced a voyage contract agreements on the two vessels, is that basically was spot market contract – in terms of stock market contract?

Yes, that is correct. Chris Snyder – Sidoti & Company: Okay. And I know, lot of your contracts were above market rates for a pretty good (inaudible) 2014 and beyond. Are there any of those companies that you guys are worried about or being able to build the contracts or you pretty confident in all of that?

Well, as you can see on the charters that we have, first of all they are all first top class charters, and we don’t see anybody not being able to fulfill the contracts, especially because when we say about top mining companies remain really the top mining companies of this world, and therefore the [credit] raising in such that does not create any issues regarding fulfilling the contracts. Chris Snyder – Sidoti & Company: Okay. Thanks a lot. Thanks a lot guys. That’s it from me.

Thank you, Chris.

Thank you. Your next question comes from the line of (inaudible). Please ask your question.

Good afternoon gentlemen, how are you?

Good afternoon.

So, I have a few questions for you. Number one with Polaris, is there any risk of losing the charter because of these operational issues and these unforeseen actions?

With Polaris, the biggest loss that we are having is that we do not get paid right now for – the vessel is out of employment. We do not foresee of losing the charter, as charter contract, it says that we may lose the charter only if it is at negligence from the side of the owners, something that was not happened and…

Okay.

The engine failure has to do with the manufacturer in terms of the warranty of the manufacturer.

Do you expect to receive basically 100% recovery on both the loss hire and also cost of repair?

This is not for the loss of hire, because we are not insured on the loss of hire, but we're going to get 100% from the warranty of the shipyard who constructed this new building. And if we don't get 100% from them, then the insurance company will cover the rest minus the deductible that we have which is great if not that meaningful amount.

No, what are the impacts, the few global impacts I wanted to speak to you about. Number one, a lot of these major miners are cutting their capacity plans going forward, so how does that affect the expectations you have of the future supply demand. Does it already incorporate these developments, I guess in the last few weeks and months, these announcements have been made, how does that impact you?

Well, it's normal that mining companies may stop their investment programs in view of the falling commodity prices. On the other hand, we expect at those levels that China will start importing even more. Therefore, I don’t think that it can be sustainable do have such low prices. In the short term, I think that the increase of demand from China will boost the imports of – and therefore it will be very positive for the Capesize vessel. If it remains in the longer term, then yes we’d expect a slow down in the activity, but that would take a long time and because the production cost in China is much bigger than what is – as international prices, we expect that we'll see increase demand and (inaudible) from local production to inputs.

Are you seeing also an increase in or at least the belief or expectation of increases in ton miles in thermal coal from the U.S. over to Asia especially with the drop in the coal demand in the U.S.?

Well, that’s exactly what we start seeing and over here there is a much more decreased exports from the U.S. to China. We'd have not experienced it because we have not done it with our own vessels, because our Capes are already in the long-term charter to some of the big mining companies, but that’s what we hear around in the market.

And what about…

Unfortunately, this has not been reflected yet in the charter rates that Capesize vessels are getting.

Okay, that’s a good positive in the future, I guess. Now what about drought impacts in the U.S. on the Supramax, because I’ve been hearing, I believe DS Norden just mentioned, but they see potential drop in supra rates, because of this drought. What do you feel about that?

It could be, but I cannot really assess the impact of the drought in the worldwide production of…

Okay, okay. And I just wanted to see if you incorporated that into your view. Now, a couple more questions, I think, as you know – as a long-term shareholder, we have a lot of respects for how efficiently you have operated the company, there is no issues with operational management. I think one big issue that, I brought up in the past is the capital management, and a few issues as earlier caller mentioned about share buybacks versus dividend payment, which creates the most value for shareholders. I think clearly with the share price where it is now. I think even the more simplistic and obviously, which show that using cash for share buybacks would be much better or even better using conserving cash, especially if shipping market stays weak like this going forward. I think one big concern I have with the shareholders that it doesn’t make sense to use money to pay dividends right now. It’s not a good use of capital, and I think it might in danger that the balance sheet going forward and I love you points about that. And the second issue I have is one – the big reason we believe that the stock price has fallen so far away from the value of even the current very, very depressed (inaudible). The assets is because there is a great fear among minority shareholders that there is going to be big dilution coming in. I think if you can – with the fears of that – that you will see an immediate impact to the share price possibly even to the point were the NASDAQ delisting issue its no longer relevant. So I – could you answer those two or at least address those two issues. Again number one dividends in the phase of the current market and number two, this over hang of this fear of a dilution.

I’ll try, even though they are quite difficult issue, on the one hand we have shareholders who value that we continue paying them a dividend every quarter and this total dividend that we are paying this quarter is about $1.2 million because we have approximately 80 million shares for – at $0.015 per share makes $1.2 million. And for many of our retail shareholders, it’s very important to receive this dividend which today is quite substantial compared to what they get in the market or which has a yield close to double-digit yield. On the other hand, we understand that you say from your side the much better use of our cash to keep the cash and buyback shares, but the same thing couldn’t be done by some of the shareholders who can use the dividends they get to buy some more shares from their side, but we will consider further. We decided in our Board meeting today to extend and to pay dividend again for this quarter, but we’ll rethink about it to remain in future. Every time we’ll give a serious thought to what is best for the shareholders of the company and that's what we decide. Right now the most important thing is to make sure that we are back into the NASDAQ requirements then to go back to the rules of NASDAQ that our stocks would be trading above $1 and therefore we have next week, next Friday, 10 days from today our AGM, and we hope that most of our shareholders will vote in favor of proceeding to the reverse stock split has we have proposed to the shareholders, we do not have the specific reverse stock split number, but we've said it's going to be either for 1 to 5 or up to 1 to 15, so we don't know exactly at what level we should do it. So we believe that we should be back to the normal NASDAQ rules.

The dilution…

Regarding dilution, of course what we’ll try to do is always keep the auctions open and to have every shareholder have the possibility to keep and maintain his position without diluting scheme whatever we do. We will not surprise anybody by overnight offering.

Okay, great. And since you mentioned – one of the fears realized last year when the offering took place, I guess with insiders. And one issue that I think, will you give an updated shareholder list, because there was a pretty sizable offering last time, we’d like to know who was involved in it, and what parties were involved, and I think that’s the current shareholder list doesn’t seem to update all holdings of possibly the Chairman and also his entities, related parties, et cetera. So if we can have that as soon as possible, I’d really appreciate that.

No, we take a note on that, and we’ll come back for you on this.

Okay, great. And last point, I’d like to make is, I think its very impressive how your operational efficiency keeps improving, and I think you guys are doing a fantastic job and charming market, so confidence in the management does not – in anyway stress at this time. Thank you very much.

Thank you very much for making of these positive comments on the management. And I’ll pass your comments to the rest of the board.

Thanks, well I’ll see you at the meeting sir, thank you.

See you at the meeting, yes. Next week.

(Operator Instructions) There are no further questions at this time, please continue.

Well, thank you, all for taking the time to join us today, for our earnings conference call. Our company is focused on future profitability and growth and to continue to rewarding our shareholders well with the dividend, our 2012 third quarter results has schedule for November, for the time being, thank you very much, and we hope that all of you will both in favor in our AGM for next week. Thank you.

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