Star Bulk Carriers Corp. (SBLK) Q2 2018 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call for second quarter 2018 financial results. We have with us Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Simos Spyrou and Mr. Christos Begleris, Co-Chief Financial Officers 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. And we now pass the floor to one of your speakers, Mr. Pappas. Please go ahead.

Thank you, operator. I am Petros Pappas, Chief Executive Officer of Star Bulk Carriers, and I would like to welcome you to the Star Bulk Carriers’ conference call regarding our financial results for the second quarter 2018. Before we begin, I kindly ask you to take a moment to read the safe harbor statement on Slide number 2 of our presentation. Let us now turn to Slide number 3 of the presentation for a summary of our second quarter 2018 financial highlights. In the three months ending June 30, 2018, TCE revenues amounting to $90 million, 47.3% higher than the $61.1 million for the same period in 2017. Adjusted EBITDA for the second quarter 2018 was $52 million versus $25.7 million in the second quarter 2017. Adjusted net income for the second quarter amounted to $13.4 million or $0.21 gain per share versus $7.6 million adjusted net loss or $0.12 loss per share in Q2 2017. Our Time Charter Equivalent Rate during this quarter was $15,567 per day compared to $9,747 per day in the same quarter last year. Our average daily operating expenses were $3,996 per vessel per day. We're pleased to have recently closed all three announced acquisitions, adding 34 high-quality vessels with an average age of 5.2 years and average size of the 119,000 dwt. We are taking over this fleet in an opportune time for the dry bulk market when rates and asset values are strengthening. I will now pass the floor to our Co-CFO, Christos Begleris, for an update on our operational performance for the quarter.

Thank you, Petros. Slide 4 summarizes the cash movements during the second quarter. The improving dry bulk markets enabled us to generate strong free cash flow of US$25 million from our vessels on the water during the quarter. After including debt proceeds, CapEx payments and cash repayments, we arrived at a cash balance of $240 million at the end of the second quarter, one of the highest in our industry, our most dry bulk peers. Slide 5 highlights Star Bulk's strong liquidity position. We are focused on maintaining competitive cash breakeven levels. Our lean cost structure enables us to deleverage our balance sheet and create value for our shareholders. On the right hand side, we provided breakdown of the net debt positon of Star Bulk, which is currently at $1.26 billion. Star Bulk has zero equity CapEx for the three Newcastlemax vessels we have acquired from Oceanbulk Container Carriers, as there is committed financings in place for the remaining CapEx payments for these vessels. We expect to take delivery of these Newcastlemaxes during the first half of 2019. Please turn to Slide 6, where we summarized our operational performance for the second quarter of 2018. The combination of our in-house management and the scale of our group provide us significant cost and quality benefits. OpEx was at $3,996 per vessel per day for the quarter, in line with our performance over the previous quarters. Net cash G&A expenses were $1,072 per vessel per day for the quarter. Our low-cost structure is complimented by excellent ship management capabilities as Star Bulk is ranked in the top five amongst managers evaluated by Rightship. We are very focused on having the high standards of vessels safety and maintenance to meet the requirements of our strictest and most demanding clients. Slide 7 shows that Star Bulk is one of the lowest cost operators amongst U.S.-listed dry bulk peers, based on latest publicly available information. Star Bulk is one of the leaders in cost efficiencies with OpEx approximately 15% below the industry average. Notwithstanding the above, we always continued paying a lot of attention on the condition of our vessels in order to remain at the top of the list of our commercial partners. In Slide 8, we are providing an update of our fleet employments with 32 vessels medium- to long-term charters of up to 12 months. In terms of visibility for the next quarter, we have covered 60% of our available base, at average rates of $13,900 per vessel per day, which is above our long-term breakeven levels, including repayment of principle debt. I will now pass the floor back to Petros for a market update and his closing remarks.

Thank you, Christos. Please turn to Slide 9 for a brief update on supply. During the first half of 2018, a total of 15.4 million deadweight has been delivered and 2.2 million deadweight was sent to demolition for a 13.2 million deadweight of net inflow. Our net demolition space has slowed down significantly in 2018, following the freight market improvement. Deliveries also stand at the lowest level since 2008. During the same period, a total of 12.5 million deadweight has been reported by Clarksons as firm orders and up an additional 6.9 million deadweight have been identified as LOIs or options. The total dry bulk order book currently stands between 9.8% and 12% of the fleet. Depending on the percentage of LOIs and options that will ultimately materialize. Following three years of minimal contracting, dry bulk deliveries are bound to correct to new historical lows over the next 18 months. As a result, during 2018 and 2019, net fleet growth is expected to stabilize between 2% and 2.5% per annum, depending on the rate of demolition. Furthermore, it is also worth noting that bulk recalls are currently approximately 50% higher than last year at $450 per ton and changing slow stemming and thus providing support to a higher freight environment. Let's now turn Slide 10 for a brief update of demand. During the second quarter of 2018, dry bulk trade activity experienced a healthy rebound from the seasonally slow Q1, although some disruptions continued to take place. Brazil iron ore exports increased by 3.1% during the year in the second quarter, up from minus 7.5% during the third quarter, despite political unrest and truckers’ strikes. The new Vale SD11 mine and healthy demand for high-quality ore from China are expected to support the iron ore market. Strong steel prices and profit margins have supported the 6.6% year-on-year increase in global steel production during Q2 as well as 9.1% increase in crude steel output by China. On this note, May in particular registered a record high crude steel output figure in China, leading to a double-digit growth of 12% year-on-year. China's environmental restrictions have also led to a 38% decline of domestic iron ore production during the first half of 2018, supporting inputs of higher quality iron ore sourced from survey [ph] of far origins. China's upper-end crude steel consumption is estimated to have increased by 9% during the first half of the year, while steel inventories have experienced a fast decline during Q2, indicating healthy demands. At the same time, international steel prices have received strong upward pressures reaching multiyear highs at the end of Q2 due to significantly lower exports of Chinese steel and the U.S. imposition of steel tariffs. China coal imports increased 9.2% during the first half of 2018 on the back of a 7.8% thermal electricity growth, flat hydropower generation growth and a 0.07% decline in domestic production of coal. At the same time, vessel tracking data suggests that the India coal imports have increased 9% during the first half of 2018, while India coal stocks continue to stand at relatively low levels. Overall in 2018, coal imports into Asian countries are expected to expand, especially in view of above-average temperatures through the summer with Atlantic coal exports expected to support ton-miles. As far as the grains trade is concerned, strong growth of Brazilian coast grain and soybean exports are expected to support trade. The imposition of the 25% tariff on the U.S. soybeans by China has a potential to affect soybean trade flows over the next year. It is worth noting that U.S. soybean prices have corrected by more than 10% over the last six months and could be incentivize an increase of Latin American and European imports. As per Clarkson’s latest report, during full year 2018, total dry bulk tons are projected to grow by approximately 2.6% while ton-miles are expected to expand by 3.3%. However, the second half is expected to grow at a faster pace than the trends with strong export growth of Brazil iron ore, U.S., Columbia and Australia coal, and West Africa bauxite. As a result, we expect demand growth to outpace fleet growth during full 2018 and 2019 on the back of healthy ton-miles and supply constraints. Finishing my presentation, let me just highlight once again that the most important factor for market balance is owner’s ordering discipline. As we lay the foundation for sustainable recovery until environmental regulations gradually come into force, these environmental regulations will thereafter not only contribute the transition towards a cleaner environment but they may also assist shipping in reducing vessel supply and lead us to potentially even better markets as of 2020 onwards. Without taking any more of your time, I will now pass the floor over to the operator to answer any questions you may have.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We will now take your first question. Please go ahead. Your line is no open.

Hi, this is Chris Snyder on for Amit. My first question is on the cash profile. With the company working its way out of the cash flow suite and rates inflecting higher, can you just talk about how you prioritize the use of future cash flow?

It’s Hamish Norton. So, we are going to be reducing out debt over time. We intend also to be a dividend payer. And in terms of the priority between reducing debt and paying dividends, that’s going to depend on the details of the market situation we find ourselves in next year and the following year.

And also, are you guys open to more ship-for-share deals? Or are you currently just in dejection mode as you take on all these vessels? And just following up to that, are there more of these opportunities out there?

We always look for opportunities like that. We are certainly open to more opportunities to do deals as attractive as the ones we’ve just closed, and only time will tell if those deals are available.

And then just real quickly on the booking data. You only booked 45% of cape days while the smaller segment has around 70% booking. That clearly weighed on the blended Q3 booking number. Was this done on purpose? Or was it just the result of the longer voyages and lumpy booking nature of the capesize fleet?

Chris, everything we do is on purpose finally. Yes, it was done on purpose. We felt that the cape market was going to be stronger the second half of year for the reasons that we have already laid out. And therefore, we tried to cover more of our smaller fleet rather than the bigger fleet because I think there earlier the bigger fleet is not affected really - the iron ore is not affected by the potential at trade war. So we thought about it looked -- second half look good and we covered more on the smaller size exactly for that reason.

We will now take our next question. Please go ahead. Your line is open.

This is Herman from Clarksons Platou. You have recently touched on the factors -- I mean looking at the second half of the year, one the one hand you have, I guess, already rates thus far approaching the peaks levels seen last year on the case. And obviously, this season iron ore exports out of Brazil and so on kind of points a very nice picture on the case. On the other hand, you have on the soybean exports the Latin American sees some kind of ebbing out as the U.S. is supposed to replace it, which kind of obviously in light of the tariffs and everything creates. So an uncertainty on the smaller segments. But I guess you just said that you have taken up into account when you have fixed vessels for the second half of the year. But could you give some more -- obviously it’s a guess of everyone, but a clarity on how you think about the impact of what potentially weak exports bulk of the U.S. in the second half of the year?

We should look at the bigger picture, Herman. There could be positives and negative out of this. It’s very difficult for anybody to figure it out. Like for example, China just had this 25% tax on LNG imports from the U.S. Right? So this potentially could be good for us because maybe China, who was willing towards LNG consumption in the long term, maybe they will at least in the short term growing more coal as a consequence of that. Now regarding grains, it is also possible that the U.S. may export, for example, to Brazil and then Brazil exports bigger percentage of their grains to China and the Far East in general. So I think it’s so complicated. Here it’s difficult to tell. I think the major burden of all this is the physiological one. And of course, we all hope that this doesn’t get to become a real all-out war, because then it’s anybody's guess. But for the time being, as you said, we are playing it a little bit safe for now. And I’m just answering as far as the trade war is concern, because otherwise and in general our strategy, our commercial strategy, has been for a number of years and will remain to be so that we try to have our fleet spot during Q3 and the beginning of Q4 every year so that then we can cover a percentage of that fleet through Q1 at least, if possible Q2 as well. So -- I mean this -- because of -- I mean, the first half of the year is the slow part of the year; and therefore, a very simple strategy - fixing when the market is strong, hopefully getting through the weak part of the year after.

In particular for example on the soybean, were you -- if I can just say about the tariffs creates a layer of call it infrastructure, call it complexity that weighs around that and it doesn’t necessarily mean the full-out loss of the U.S. export [Indiscernible]. It just means the redistribution of space that didn’t hit the words?

Yes, redistribution of space. Now whether we will lose some ton-miles because the U.S. may not send their product to China and will send more of it to Europe, that’s possible. But again, as I said that counterbalancing thing would be that the U.S. exports to South America and then South America exports more of its own product to the China. So it’s very difficult to do this calculation. But exactly for that reason we are more covered on the smaller sizes.

But I guess, at the end of the day there’s no real way for trying out to replace U.S. as an importer. So at the end of the day they need to kind of have the redistribution of trade if they’re going to continue to consume soybeans, I guess, right?

Yes, and it’s also possible that at the end of the day China will still have to import from the U.S. some part of their -- because I am not sure they’ll find all the soybean they need from other sources.

And I guess it’s more of a modeling question, but this quarter started to fix at a negative number of $1.6 million. And I fully appreciate that you made more than the last quarter. But for modeling purposes, what kind of range -- how should we model the quarter-to-quarter volatility of Star Logistics?

How do we balance the volatility of Star Logistics?

Like how should we model the -- should we just assume that you’ve now reached -- I think in the second quarter you had about 12 vessels…

Herman, this is Hamish. Can you repeat the question please, because I am not sure I understood? What number do you mentioned about Star Logistics?

If you take your revenue and you SFA earnings, then you get call it the Star Logistics revenue and you compare that to the chartering cost, the export you have done…

Heyman, you have -- there’re other lines below the revenue. So Star Logistics is a business actually which is hedged and you should also see the result of the SFAs portfolio and their bunch of hedging portfolio. So Star Logistics on their own made a net profit of about $0.5 million on this quarter. So the result that you see on the SFA is basically a primarily due to the second quarter results of Star Logistics. So net-net on the bottom line, Star Log was by about $0.5 million. This is because when we fix some volumes, we basically cover -- hedge of the bunkers which drop it down.

So we need to hedge it as soon as we fix the voyage to make sure that there’re no loss there. And we also take SFA positions against the position of the voyage itself. When we take vessels on time charter, we do the same thing and we expect to see profits from the optional period.

So obviously without giving daily update on the expeditions result, like what kind of range should we assume as a average net vessels from Star Logistics taking into account for all the hedging and so on going forward?

Hopefully it's going to be generating a small profit compared to the overall numbers of Star Bulk.

We will now take our next question. Please go ahead. And your line is now open.

This is Chris Robertson on for Randy. I had a question -- actually string of questions related to the scrubbers that are on order. So if you could give us some details on kind of the CapEx requirement, expected downtimes, financing arrangements that you may be in discussions for the supplier and the timeline for delivery and installation?

Chris, it’s Hamish Norton. So we have not, as you know, commented on most of those questions on. And we probably will be giving a more full view as to what we think about all those subjects when we finally figured it out ourselves. But clearly there is going to be some downtime. We don't think there's going to be a lot of downtime, but there is going to be some downtime for the ships on which we installed scrubbers in 2019 primarily, although some in 2018. And in terms of financing, we are looking at a lot of different options. But I think you can be pretty confident and we have no current intention of issuing any equity to pay for scrubbers. But in terms of how we are going to finance them apart from that, that's still in flux. And what else were you asking about?

The supplier?

We haven't commented on who is our supplier or suppliers, and we probably will not.

Okay. It’s kind of a follow-up to your comment and Hamish in terms of downtime in '19, primarily in '18. Could you comment on how many of those days would coincide with already scheduled dry docks versus just of one-offs?

Well, there's probably extra downtime for the ships on which we install scrubbers, call it 5% for those ships sailing days over 2019 primarily, but -- so it’s not a big effect, frankly?

If you take into account the number of vessels that will have normal dry docks at the same time; and of course that’s when we will install scrubbers on the vessels and dry docks will install scrubbers at the same time obviously. So if you take that into account, it’s probably a bit below 5%, like 4% or 3.5% somewhat.

I mean, you are a better men than we are if you can project charter rates to within 5%.

No, no, I am talking about time basically. I am talking about…….

No, no, I understand, but it’s equivalent in a effect to projecting in charter rates to that precision.

Thank’s, Hamish. And then kind of a return question to the Star Logistics. Is there a similar number of chartering days going into Q3? How should we think about that going forward?

Yes, it’s about the same level of days for Q3, yes.

And then last question from me and kind of talked about this earlier. But in terms of expected use of cash, how much cash do you want to keep on the balance sheet comfortably going forward?

That will depend a lot on our outlook on the market. And I think if the market does what we hope it will do, you’ll see us both reducing debt over time and paying some dividend in the near future. So…

So in other words, there's no minimum amount necessarily, it's market dependent and you'll evaluate the situation for either accelerating debt repayments or dividend as the market….

Were both.

Contractually, we are obliged by our lenders to have about 500,000 per vessel. Therefore, right now what’s 105 vessels that we have in our fleet that effectively corresponds to $52.5 million, obviously we’ll try and keep more cash than that in order to have some buffer. But as Hami said, the exact level of cash depends on market’s outlook as well as the overall level of our debt within the company.

Thank you. [Operator Instructions] We’ll now take our next question from the line of Erik Halvorsen from Pareto Securities.

A bit one more high-level question, if I may, because I am a bit surprised and pleasantly surprised by the last quarter relatively slow pace on newbuild orders in the space and I just wanted to hear your thoughts about why that is. Is it higher yard prices? Is it lack of financing? Is it more uncertainty about the market? Is it that we finally lesson the less? Or what do you think about that and how do you see this continue? How aggressive are the yards at the moment?

Did you say pleasantly or unpleasantly?

I’m pleasantly surprised by the relatively lack of new billing orders. I mean, it exceed the [indiscernible] to less shipping, but it sort feels a bit like it.

There’s a few reasons for that. I think that -- for example, on the bigger vessels may be some people got a little bit worried about Vale orders. So one has to do the calculations and see where this is a risk for big vessels are not going forward. And other reason is that prices are going up. Especially now that there are no tier or there are very few tier 2 vessels left, so you had to buy Tier 3, which adds a few million on the vessels. Then the third reason is the environmental regulations and people not being certain of where all this is going. So I think that in times of uncertainty people hold back. I think that’s probably the main reason. Also, like for example if you want wider vessels for in Japan, you will need to go through 2021. That's three years from now. And in China probably well into 2020. So I mean this is 2.5 and 3.5 years from now and its undependable that’s under a climate of uncertainty people will sit back and wait to see how things evolve. But we are very happy about it. And also the market was a bit slow at the beginning of this year, and that’s I think also helps.

But -- I mean given Q1 now and then the start of Q3, did you expect this silence in terms of ordering. I mean, it always happens, so we are just waiting for it that are you.

Well, I don’t know I was expecting. I was definitely praying for it.

We have no further questions at this time. Please continue.

Nothing else to add, operator. Thank you very much for listening to us. And have a good summer to everybody.

So, ladies and gentlemen, that does concludes your presentation for today. Thank you all for participating. You may now disconnect.