Akis Tsirigakis – President and CEO
George Syllantavos – CFO
Kevin Sterling – Stephens Inc.
Charles Rupinski – Maxim Group
Dave Robertson – [PSL Advisors]
Star Bulk Carriers Corp. (SBLK) F1Q09 Earnings Call May 28, 2009 9:00 AM ET
Welcome to the Star Bulk conference call on the first quarter 2009 financial results. We have with us Mr. Akis Tsirigakis, Chairman and Chief Executive Officer and Mr. George Syllantavos, Chief Financial Officer of the Company. (Operator instructions) We now pass the floor to one of your speakers today, Mr. Akis Tsirigakis. Please go ahead, Sir.
Thank you and good morning ladies and gentlemen. This is Akis Tsirigakis. I welcome everyone to the Star Bulk Carriers first quarter 2009 financial results. Please be advised that today’s presentation has been posted on the company’s website at www.starbulk.com where it is available to download. As a reminder, this conference is also being web cast accessible through the company’s website and the slides of the web cast presentation are user controlled. Please click on the appropriate button on your own to move to the next or to the previous slide of the web cast presentation.
If you do not have a copy of the press release or presentation, you may contact Nicolas Bornozis at Capital Link at 212-661-7566 and we will be happy to send you or fax a copy of the press release and the presentation.
I now kindly ask you to turn to slide two of the web cast presentation to view the company’s Safe Harbor statement. This conference contains certain forward-looking statements within the Safe Harbor provision of the Securities Litigation Reform Act of 1995 and investors are cautioned that such forward-looking statements involve certain risks and uncertainties which may affect the company’s business prospect and the result of its operations. Such risks are more fully discussed in the company’s filing with the Securities and Exchange Commission. I kindly suggest you take a minute to read the entire statement. I hope you have and I am now pleased to be presented with the opportunity to show the sound operation and financial status of Star Bulk Carriers.
I wish to use this introduction to make several brief overall points. We are pleased to report profitable 2009 first quarter results. We are financially sound. We have more than adequate liquidity. We have performing charters and we have strong net cash generation with substantial coverage and earnings visibility. In fact, we believe our current status to be one of the most balanced business models within our peer group when all parameters are taken into account.
Therefore, the company has been well positioned going forward to pursue growth and opportunities that are certain to arise and are already beginning to shape up in the present environment. I want to stress that our primary focus will continue to be on shareholder value.
Now if you would please turn to slide three of our presentation to discuss our first quarter March 31, 2009 financial results.
Maintaining our focus on shipping fundamentals has resulted in our sixth consecutive profitable quarter despite a volatile market. This is an achievement in the current economic environment and we look forward to expanding this record.
For the first quarter 2009 gross revenue was $45.1 million and net income was $22.5 million, an increase of approximately 34% versus the same period last year representing $0.37 earnings per share, basic and diluted. Excluding special items related to the amortization of fair value of below and above market acquired time charters, amortization of stock based compensation and mark-to-market valuation of the company’s forward freight agreement, net income for the first quarter of 2009 was $9.4 million representing $0.16 earnings per share basic and diluted.
EBITDA for the first quarter of 2009 was $40.8 million. Adjusted EBITDA for the first quarter 2009 was $27.8 million. The time charter equivalent rate for the first quarter of 2009 was $35,158 per day on average. Our CFO, George Syllantavos, will discuss our financials including details of the non-cash items expressed in more detail later on in our presentation.
Let’s now turn to slide four to review certain milestones and chartering activity. We were very active during the first quarter 2009, a period of uncertainty in the dry bulk market, implementing our proactive approach towards our charters and lenders. [Vessel] registration declared effective by the SEC earlier in 2009 for up to $250 million was not made out of necessity but as a tool to add flexibility and dry powder should suitable unit proceeds be identified. We have not used it to date. We expect to focus on taking advantage of opportunities at lower asset values in the dry bulk sector presently prevailing with the continued philosophy of maintaining moderate leverage.
At this time we do not have commitments to purchase new building vessels or similar capital expenditures that would require us to obtain additional financing. Earlier in the year we announced we are paying covenant waivers until February 2010. We believe that the successful outcome of our discussions with our lenders is a result of our excellent relationship with our lenders and our strong balance sheet.
In the first quarter 2009 we were able to further enhance the revenue visibility of our fleet by entering into new or amended employment agreements for ten of our vessels as well as into index profit sharing arrangements for three of our vessels, the Star Sigma, Star Kappa and Star Epsilon, enabling us to share into the potential market of size.
I want to add that the charter agreement for the Star Sigma, Star Kappa and Star Epsilon were extended to five years at well above current market rates as well as including profit sharing schemes. Finally, I would like to mention that we have closed all of our FFA positions which in the past were utilized as a hedge given that now presently all of our vessels are under contract.
Please now turn to slide five to review some selected financial data. We have highlighted in our previous presentations, in this slide we have selected some important key points to illustrate what we believe will be a comfortable position for our company in the present state of the market. We are pleased to report that our current cash position is in excess of $72 million. Our current net cash generation is about $108,000 daily which equates to about $20 million at the end of 2009. We therefore expect our cash position by the end of 2009 post debt repayment to accumulate to approximately $90 million.
Our senior debt currently stands at about $282 million. We have a current debt repayment of $36 million within 2009, thereby reducing our debt level to approximately $245 million by year-end 2009. We expect our principal repayment in 2010 to be $56 million and thereafter our annual debt repayment will be approximately $25 million per year.
As of January 1, 2009 our contracted revenue is $425 million. The charter free value of our fleet is currently $295 million and the charter adjusted value of our fleet is $525 million. Both values are company estimates. Our expected cash of $90 million in our balance sheet by the end of 2009 will equate to approximately 37% of our total debt at that time.
Turning to slide six, this slide demonstrates our fleet deployment chart which is also available on our website at www.starbulk.com. Therefore, I won’t go into the details as it is self-explanatory.
Now going to slide seven, this graph shows our contracted operating days and revenue visibility. As I mentioned, our long-term coverage provides us stable and visible cash flows in the current volatile market. Any volatility in today’s market as depicted in the BDI (Baltic Dry Index) currently does not affect directly our revenue generation. As of today we have secured over $425 million in contracted revenue in the time charters. 100% of our fleet operating base for 2009 are contracted under time charters and contents of [freight], 71% for 2010 and 42% for 2011.
I want to reiterate our focus on managing our counter-party exposure and along these lines we do not deploy more than two vessels per charter. Please now turn to slide eight to discuss our fleet’s time charter equivalent rate, depicted graphically. As you can see from this slide, and we believe an important indicator of strength in our company, is that the company produces average net cash per vessel, per day in excess of $9,000, above the break-even rate of $23,350 per day for 2009 or $108,000 daily for the fleet and in excess of $6,000 of net cash above the break even rate of $24,400 for 2010.
Please note that on this graph our uncontracted revenue days are estimated using current FFA rates. Please now turn to slide nine. We included this slide once again to demonstrate that the company’s assets work hardest producing more EBITDA per dollar of fleet value compared to all other shipping companies in both the dry and tanker sectors. This slide is taken from a recent Morgan Stanley report.
Now our CFO, George Syllantavos, will discuss our financials. George?
Thank you Akis. Good morning to everyone. Let us now move to slide eleven for a brief overview of the balance sheet. As of March 31, 2009 our fixed assets amounted to $805.6 million and total assets amounted to $891.5 million. Non-current liabilities amounted to $259.8 million. Stockholder’s equity was $585.9 million. Total liabilities and stockholder’s liability totaled $891.5 million. You can see on this slide how these compare favorably with the same period last year.
We can now turn to slide 12 to discuss our first quarter income statement. We include the net income numbers on this slide for non-cash adjustments. For the first quarter ended May 31, 2009 [sic] revenues amounted to $45.1 million and operating income amounted to $25.2 million. Net income for the first quarter of 2009 amounted to $22.5 million representing $0.35 earnings per share calculated on 60,390,219 weighted average number of shares basic and diluted.
These first quarter 2009 net income figures include non-cash items related to the amortization of fair value of below/above market acquired time charters of $6.4 million and a non-cash gain of $10.9 million associated with the gain on time charter agreement terminations. Expenses of $1.5 million related to the amortization of stock based compensation and an unrealized loss of $2.8 million associated with a mark-to-market valuation of the company’s forward freight agreements. Excluding these non-cash items, net income for the first quarter 2009 would be $9.4 million representing earnings per share basic and diluted of $0.16 calculated on 60,390,219 weighted average number of shares basic and diluted.
I would now like to pass the floor back to Akis for the continuation of the presentation.
Thank you George. I would like to make some comments on the general market conditions and some points on supply and demand for dry bulk shipping. Turning to slide 14, let us begin with a brief update on the supply of vessels which continues to improve. The economic crisis, in particular the lack of financing, continues to have an effect on the new building deliveries. To date, the delivery of our $5 million dead weight of all-type vessels are behind schedule and previous expectations of rapid order cancellations are becoming a reality as 28 additional vessels were cancelled in April alone.
Scrapping activity over the last six months have exceeded the cumulative scrapping level of the last six years in fact. Specifically, $9.7 million of all types of vessels representing 2.3% of the current dry bulk freighting fleet have been struck in the last six months representing 14% of the total 2009 dry bulk order book. This trend is expected to continue for the rest of 2009. We also want to add that currently 30% of the dry bulk fleet is over 20 years old which would mean scrapping activity should continue.
The two graphs below indicate the dry bulk order rate in 2012 and the breakdown of the order book by vessel type. Turning now to slide 15, this slide illustrates the purchasing manager’s index for the major global economies, which is an important leading indicator of [inaudible] and production. As you can see, PMI’s have bounced in all major economies and even though they are still below the 15 mark indicating contraction the up trend of the last few months gives us reason to be more optimistic.
Turning to slide 16, this slide illustrates China’s increase in demand for imported iron ore which reached record levels in April 2009. As you can see from the graph this huge increase was realized on the back of lower domestic iron ore production. The important point to note is China’s apparent centralized decision to increase strategic iron ore stock piles for protection against price volatility. Also, reports indicate that China has been stockpiling iron ore as a strategy in its negotiations with the major Australian and Brazilian miners. However, the pace of import growth is much faster than that of the stock piles which means demand has increased. This fact coupled with the decrease in domestic ore production that I mentioned earlier makes us feel confident about the sustainability of the higher imported volumes.
As reported, Rio Tinto has recently agreed on a 33% price cut with Nippon Steel but the Chinese steel use while continuing negotiations seems to be holding out for a bigger discount. Given the current spot levels remain a bit lower than their low new benchmark price.
Let’s turn to slide 17, which briefly looks at the production cost breakdown of the Chinese iron ore miners and the short and long-term effects of this breakdown. As the lower expected contract prices, a significant portion of Chinese mines will be uncompetitive in terms of both price and of course quality. From a long-term perspective we could say that imported iron ore is practically the only sustainable source of supply for the Chinese steel industry for quite a long-term as I said. This view is supported by the fact that for a number of years imported iron ore has been increasing its market share.
Looking at production costs and historical iron ore prices, we believe that 70-80% of Chinese iron ore mines are uneconomical or uncompetitive in the long-term. Our view is supported by recent rumors that the number of Chinese mines have suspended their operations but more importantly recent data of declining iron ore production as we saw in the previous slide.
Now turning to slide 18, as we can see in the graph Chinese steel prices are on the rise in the last few weeks. What we can also see is that rebar has out performed hot rolled coil which seems to imply a relatively greater demand in construction and infrastructure rather than other segments of industrial production. We believe that this is a sign of the Chinese stimulus package taking effect and this makes us feel more confident about the prospects of the Chinese economy as a whole.
Moving to slide 19, to reiterate what we believe to be Star Bulk’s characteristics as one of the better positioned companies in the dry bulk sector. We have a healthy balance sheet and significant net cash generation above $425 million of contracted revenue, positive net cash flows in 2009 and significant EBITDA margins.
Thank you. I will now pass the floor over to the operator and if you have any questions we would be happy to answer them. Please go ahead, operator.
(Operator Instructions) The first question comes from the line of Kevin Sterling – Stephens Inc.
Kevin Sterling – Stephens Inc.
Can you talk some about the advantages of bringing the technical management of your vessels in house? I know you recently announced that. If you could share some color with us as to maybe some of the cost savings and some of the advantages you might realize from doing that in house.
I would be glad to. Of course, my background is in technical management and I used to have for many, many years a privately owned technical management company. I would like to apply that expertise in optimizing the technical operations of the fleet in-house. However, that could not be done right off the bat since we were coming from a stock background where you are actually not having any employees at all so that was not physical at the very, very beginning of our operations about 1.5 years ago. We have said we would do this in a step-wise manner and benchmarking our costs we now think it is wise to bring the entire fleet in-house to be managed technically. That will produce some cost savings with all the manage fees of course being saved. Plus we will have better operational control and that will produce indirect additional savings.
Kevin Sterling – Stephens Inc.
Regarding your dry docking schedule I think you have one vessel scheduled for dry dock in the second quarter for 48 days and then two vessels scheduled in the third quarter just for 20 days each. Is that right? Is that all of your dry docking for 2009?
That is right. That’s all. In fact, I want to clarify something since you brought up the question. I saw some references in the press about moth-balling. This has absolutely nothing to do with dry docking which is taking a ship for regular service to the ship yard. All ships of all companies go to the ship yard every 2.5 years. If you optimize that, we try to do it more or less 50% of your fleet every year. So that is a very normal course of events that happens to all vessels of all companies. There is nothing particular to our company.
Kevin Sterling – Stephens Inc.
The case that you had in arbitration, where does the arbitration stand right now?
The arbitration is proceeding in London. All the submissions of both parties have been made. We have to wait a few months for the outcome.
We are in the discovery phase of the process where some additional documentation is submitted. It should be something that if it progresses quick enough we should have maybe something in the next quarter.
Kevin Sterling – Stephens Inc.
Moving on to kind of an industry question, what does S&P market look like these days? Kind of a follow-up, where do you see opportunity for Star Bulk? Would it be buying some new building slots or second hand vessels that are already in the water?
The S&P market, as you know the market has been improving rate wise for the last couple of weeks rather substantially but on the other side of things we haven’t seen a real material increase in vessel prices yet. There are no transactions that have really taken place to know what is happening out there. There is a supply of vessels and there has been a supply of vessels for sale for about 3-4 months now. We still think that even though rates are firming if one would look would find the vessels at these levels are a little lower level just because there are enough opportunities out there we think from shipyards that are now looking to sell certain vessels that haven’t been taken or have been cancelled by the previous owners. These shipyards have received 20-30% of the down payment and are able to let go of the ships from their docks at a little lower levels of pricing. Though there is some firming in rates we see acquisition opportunities out there that make sense.
Kevin Sterling – Stephens Inc.
If you purchased some vessels would you purchase other classes or do you plan to stick with Cape Size and Supramax vessels?
As we would likely stick with those classes. It might become the case that we may purchase a Panamax but we would likely buy a Supramax or a Cape size as a matter of first choice.
The next question comes from Charles Rupinski – Maxim Group.
Charles Rupinski – Maxim Group
One quick question on the income statement. On the time chartered re-determination fees walk me through that. That was with Kawasaki is that correct?
No. You see, this was a non-cash item. The old Kawasaki thing was a gain we reported in the last quarter. Actually what has been happening here is the following? As you know, we get a premium or a penalty depending on above or below time charter attached vessels that we had coming into the transaction last year. During the first quarter we had two instances where the vessel was taken back by us earlier. One was the Alpha which was a substantial part of that amount, about $10 million of that is the Alpha. The remainder almost $1 million is for the Theta. The way this happens is that this above and under non-cash adjustment is amortized throughout the original period of the charter. Now, if that period gets shortened or the vessel is delivered earlier that portion of that amortized amount gets credited at the time of closure of the contract because of course it doesn’t get amortized for another however many months was the original duration.
Therefore, this is the amount that we take out of our non-cash. The original non-cash would have been about $7 million. It is now about $6 million because about $10 or so million were taken out of the non-cash amount.
The next question comes from Dave Robertson – [PSL Advisors].
Dave Robertson – [PSL Advisors]
I am wondering how does one value the COA on which the Star Alpha is committed to. In other words, what is the TCE one should use in calculating a revenue base?
The COA of course we have not reported a number. We have reported of course the fact that the Alpha is committed to serving the COA. In the models we have seen people use quite a few variations usually using spot rates or FFA numbers for it. That is not I think the proper way to do it and in fact that may explain a little bit why there are some big variations in various research reports because this number comes to about $11,500 per day time charter equivalent for the Alpha. Mind you that contract, that COA, was entered into in late 2008 when the actual prevailing rates for Capes were about $8,000 so that looked like a very good deal at the time when we took that COA.
So one should be using $11,000 to $11,500 for that time charter equivalent and there is another point that should be made with the COA’s if one were to look at how steel mills and miners have been delivering cargo in the first quarter in particular. Even now. Cargos are or are not available when the ship arrives there. Usually in a COA you have a range of dates which is quite substantial. It may be 15 days range at which time the ship has no choice but wait for the cargo to be available. That does not work like an off-hire in a normal time charter. You just wait there and of course the effective rate is becoming lower. That is why we think conservative number would be close to $11,000 to $11,500.
I don’t know if that made sense.
Dave Robertson – [PSL Advisors]
Absolutely. Consensus has a big variation between analysts. How do you explain that?
In part it was because of what I said with the Star Alpha COA. If one analyst has used spot rates which are for example currently much higher than the COA number that should be applied they would arrive at a completely different number. On the other hand, if one were to exclude the outlier estimate of about $0.35 on the consensus that would have been much, much lower to about $0.17. One probably would not have taken into account that there were about $0.05 of FFA related mark-to-market losses and part of it was in fact realized which FFA’s were used as a hedge for a vessel operating in the spot market. We have since closed all the FFA’s positions because all our vessels are now under time charter contract. All those items if they were not taken into account could produce substantial variations.
There are no further questions at this time. Please continue, Sir.
Thank you. If there are no questions I want to thank everybody for participating in the call and wish everybody well. Thank you.
That does conclude our conference call today. Thank you all for participating.
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