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Star Bulk Carriers Corp. (NASDAQ:SBLK)

Q2 2010 Earnings Call Transcript

August 11, 2010 8:30 am ET

Executives

Akis Tsirigakis - Chairman and CEO

George Syllantavos - CFO

Analysts

George Pickral - Stephens Inc.

Natasha Boyden - Cantor Fitzgerald

Robert MacKenzie - FBR Capital Markets

Otto Roethenmund - Internation Capital

Operator

Welcome to the Star Bulk conference call on the second quarter 2010 financial results. We have with us Mr. Akis Tsirigakis, Chairman and Chief Executive Officer; and Mr. George Syllantavos, Chief Financial Officer of the company. (Operator instructions)

We now pass the floor to one of your speakers today, Mr. Akis Tsirigakis.

Akis Tsirigakis

Good morning, ladies and gentlemen, and welcome to the Star Bulk conference call. I am Akis Tsirigakis, the Chief Executive Officer of Star Bulk. And with me today is George Syllantavos, our Chief Financial Officer.

Before we begin with our slide presentation, I kindly ask you to take a moment to read the Safe Harbor statement on Slide 2. I would like now to take the time and use this introduction to make a few brief points before I commence with the proper presentation.

We continue to believe that we are one of the most undervalued companies in the dry bulk sector. It is a very volatile dry bulk market. Star Bulk remains financially strong with modest leverage, substantial charter coverage, ample liquidity and positive cash flows. We also continue to maintain and excellent relationship with our lenders.

Our reduction of operating cost campaign continues to show tangible results in both G&A and operating expenses quarter-after-quarter. This was achieved while the quality of our operations was enhanced and our utilization rate substantially increased.

Our company has emerged from the challenging times of the past 18 months stronger and leaner with significant achievements, which include the sale of its costliest tonnage, the acquisition of three modern Capesize vessels without diluting the shareholder base, having repaid organically a major portion of its debt, being in full compliance with its original loan covenants and its in-house vessel management producing stellar results.

Our commitment towards enhancing our operations on all fronts is on course. And we are keeping focus on reducing our operating costs further. We are also pleased to be able to declare our fifth consecutive quarterly dividend for the second quarter of 2010 of $0.05 per share.

Turning to Slide 3 of the presentation, we will discuss our second quarter and first half ended June 30, 2010, financial highlights. For the second quarter of 2010, gross revenues amounted to $30 million and net income amounted to $6 million. Excluding non-cash items, our net income for the second quarter 2010 as adjusted amounted to $7.2 million.

Adjusted EBITDA for the second quarter 2010 was $20 million, while average daily operating expenses were $5,269 per day per vessel. The Time Charter Equivalent for the second quarter of 2010 was $28,640 per day. The adjusted net income of $7.2 million represents $0.12 earnings per share basic and diluted, which is above Bloomberg consensus of $0.06 per share.

For the first six months ended June 30, 2010, gross revenues amounted to $59.3 million, and net loss amounted to $27 million which includes a non-cash impairment charge of $33 million due to the sale of the Star Beta. Excluding non-cash items, our net income for the first half of 2010 as adjusted amounted to $8 million.

Adjusted EBITDA for the first half of 2010 was $33.8 million, while the average daily operating expenses were $5,473 per day per vessel. The Time Charter Equivalent for the first half of 2010 was $27,291 per day. The adjusted net income of $8 million represents $0.13 earnings per share basic and diluted.

Now turning to Slide 4, we would like to provide an update of our company's recent developments. For the quarter ended June 30, 2010, we declared our fifth consecutive dividend of $0.05 as of yesterday's market close. This reflects a 7% annualized yield.

We are also pleased to announce that we have secured a $26 million loan for the Star Aurora at favorable financing cost and terms. I would like to remind our investors that we acquired the Star Aurora in February 2010 for approximately $42.5 million from a third party and chartered the vessel to Rio Tinto for about three years at a gross daily rate of $37,500.

We are especially satisfied to see our senior debt lenders demonstrate their continued support of our acquisition plans and their confidence in Star Bulk as we continue our growth strategy.

Also in early 2010, we delivered the previously Capesize vessel, Star Beta to her new owners. Last but not least, we have received $2 million as part of our claim for the vessel Star Epsilon.

Our next slide, we illustrate Star Bulk's growth overview. As you can see, in the two graphs of Slide 5, Star Bulk has managed to organically grow its original fleet of eight vessels and just under 700,000 deadweight to 13 vessels of over 1.4 million tons within four years. This means that including our current contract, our fleet growth is 111% in terms of deadweight and 63% in terms of vessels.

It is worth noting that in the process of growing our fleet, we have also been renewing it. During this period we have sold three of our older ships and bought seven younger vessels, while we have also contracted two newbuild in Capesize vessels.

On Slide 6, we depict the results of our operating cost reduction campaign; this was achieved while enhancing our quality as measured by objective metrics such as significantly improved fleet utilization, exceptional port state control vehicles and quality certifications. As you can see in the two graphs, our operating expenses or OpEx as we call it has steadily decreased, importantly on a per vessel per day basis.

Clearly, our efforts towards operating cost reductions have played an important role in our improved financial performance. We are confident that our in-house technical management will continue to be instrumental in our quality objectives while further optimizing our vessel operating cost.

Please turn to Slide 7 for some selected financial data.

On this slide, we selected some key points to display why we continue to believe that our company enjoys a very comfortable financial position. Our market capitalization is currently $174 million as of yesterday market close. We estimate the charter free value of our fleet to be currently around $370 million and the charter adjusted to be about $360 million. This includes the down payment for the Star Aurora and the two newbuildings.

Our senior debt currently stands at about $201 million and our current cash position is approximately $54 million. I would like to remind you that we have no exposure to interest rates loss and have therefore taken the full benefit of the prevailing low interest rates. I should point out after having saved $22 million for the third installment of the two newbuilding capesize vessel that Star Bulk maintains a net debt to total asset ratio of 21%, which is considered conservative.

Going forward and excluding future loans related to the financing of the two building capes and Star Aurora, the remaining principal repayment for 2010 is $19 million out of a total of $65 million for the year. For 2011, it's $30 million and roughly $25 million annually thereafter. I want to reiterate to our shareholders that Star Bulk is not affected by the Greek debt crisis or by the Greek austerity measures taken.

Slide 8 illustrates the fleet employment chart and counter parties which is also available on our website. I won't go into further detail as it is significantly self explanatory.

Moving to Slide 9 now, the graph shows our contracted operating base as well as our revenue visibility. Our long-term coverage continues to provide us with stable and visible cash flows in the current volatile market. Daily volatility of the respective dry bulk industries do not currently affect our current revenue generation. Our contracted coverage is now 98% for 2010 and 64% for 2011.

We now turn to Slide 10. We provide an overview of our counterparties being first-class charters for our holders' excellent counterparty risk profile. If you now turn to Slide 11, you will see graphically that Star Bulk's high contract coverage is in fact one of the highest in the industry.

Now, Mr. George Syllantavos, our CFO, will discuss our financials.

George Syllantavos

Thank you, Akis, and good morning to everyone. Let us now move to Slide 13 for a review of our balance sheet as of June 30, 2010. Current assets were $45.9 million, our fixed assets amounted to $620.7 million and total assets amounted to $694 million. Current liabilities were $52.3 million, while non-current liabilities amounted to $173.2 million and stockholders equity was $468.6 million. Total liabilities amounted to $694 million.

Now we turn to Slide 14 to discuss the first half ended June 30, 2010 income statement. First half results include non-cash items amounting to $35 million as depicted in the middle column, and the adjusted figures exclude these non-cash items. For the first half ended June 30, 2010, total revenues amounted to $59.3 million, and our operating loss amounted to $24.2 million.

The net loss for the first half 2010 was $27 million, representing a $0.44 loss per share calculated on 61,052,850 weighted average number of shares, basic and diluted. Excluding non-cash items, net income for the first half 2010 would amount to $8 million or $0.13 earnings per share basic and diluted.

Now turning to Slide 15 for the second quarter ended June 30, 2010. Total revenues amounted to $30 million, and our operating income amounted to $7.3 million. Non-cash items amounted to $1.2 million which is depicted in the middle column again and the adjusted figures exclude these non-cash items.

The net income for the second quarter 2010 was $6 million, representing $0.10 earnings per share calculated on 61,055,907 shares and 61,191,174 shares weighted average number of shares basic and diluted respectively. Excluding non-cash items, net income for the second quarter 2010 would amount to $7.2 million or $0.12 earnings per share basic and diluted.

Now I would like to pass the floor back to Akis for the continuation of the Q2 presentation.

Akis Tsirigakis

Thank you, George. I'd like to make some market related comments now. Please turn to Slide 17 for an update on the vessel supply situation.

As we mentioned in our previous earnings presentation, only 63% of the original 2009 order book was actually delivered, with the remaining 37% either delayed or canceled.

During the first half of 2010, only 30% of the 2010 order book has been delivered. These numbers point towards the similar performance with last year in terms of slippage. Congestion at iron ore ports has been easing in the last couple of months. However, we must point out as a major contribution to the recent software rates has been from the slow down of iron ore import in China in an effort to reduce the historically high iron ore prices.

This is something that we'll inevitably lead to stockpiles being reduced from their present levels, and imports are due to resume within the next few months. The resilience in the vessel values especially in the Capesize sector compared with a time charter aid underlines the market's confidence.

Please turn now to Slide 18. As you can see from the left graph, the Chinese purchasing manager's index or PMI is following the 2005 to 2007 median reading quite closely, which shows a seasonal low in July. This is an encouraging sign judging from the performance of the Chinese economy and its demand for raw materials during that period.

This seams to totally disprove the recent rumors about the Chinese economy slowing. Also, I would like to remind you that the Chinese economy had been surprising on the upside for many years, and even when the PMI reading was far below 50, which is considered the threshold that separates positive from negative readings, China showed exceptional strength in terms of industrial production and economic activity in general.

On the right graph, you can see the European PMIs continue to imply a strong recovery despite the sovereign debt issues. We believe that continued strength in the European economy will help restore the market's optimists and support global economic growth.

Please now turn to slide 19, the final slide of our presentation. As you can see there, on the top right graph, spot iron ore prices have been on the rise the last month or so, a fact that indicates higher demand levels. This comes after a significant drop caused by Chinese iron ore production which was at quite a high level.

It is worth mentioning that for the last three months or so, Brazilian iron ore has been cheaper than both Australian and Indian for a typical Chinese steel mill, and I refer to delivered iron ore price. Meanwhile, while iron ore exports have been in a sustained upward trend since early 2009, in the event the situation persists we see a significant potential for increased ton mile demand, especially for Capes.

Having said that, it remains of course a challenge to predict where demand will match the new vessel deliveries.

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

Question-and-Answer Session

Operator

We'll now begin the question and answer session. (Operator Instructions) From Stephens Inc., you have a question from George Pickral.

George Pickral - Stephens Inc.

George, question for you on the drydocking expense. You beat our estimate by $1.5 million. Was there a situation where drydockings were delayed, and that will show up in Q3, or was something else going on there?

George Syllantavos

As we have said, we have a drydocking of Star Sigma which is a Capesize vessel which we estimate is going to cost us about $2.5 million or so. As you know that the estimate was that the vessel would enter the drydock in such a bit as for the course of that drydock to be split between Q2 and Q3 by about $1 million or so per quarter or something like that.

Now, as you saw, there are some costs, about $0.5 of costs related to Sigma already on Q2. However, the vessel entered drydock a little later than anticipated, because it delivered its cargo in China about a couple of weeks after it was originally anticipated four, five months ago. Therefore a bigger portion of that expense will show in Q3 versus what was originally planned for Q2, and that's the differential there.

George Pickral - Stephens Inc.

And what exactly in July was the Star Beta delivered?

George Syllantavos

It was delivered at about July third or fourth. I mean, the very beginning of the month.

George Pickral - Stephens Inc.

And then lastly, George, sorry if I missed this in the comments, the $2 million claim for the Star Epsilon, can you talk about that?

George Syllantavos

Yes. As you remember, we have this case about the Star Epsilon. The actual claim is in two parts; one part is the unpaid hire from the charterer until the time of repudiation of charter. And the rest, the second part of the claim is for damages for that case.

Now what we've received, we've received. I mean the arbitration is proceeding, and the first item that has been resolved is the portion for the unpaid hire upto the time of charter repudiation, and we have this monies as receivables, and now we have received this money, so instead of receivables they increased our cost.

So it's just that we got resolution on the first portion of the case, which is proceeding further.

George Pickral - Stephens Inc.

And Akis, if I could ask one more question to you. You mentioned that you're underlevered versus your peers. Given where vessel values stand today, would you consider levering up a little bit more and getting into the market and growing your fleet in the near term where you would take delivery of a vessel today as opposed to the end of 2011 when you take in the two (new ones).

Akis Tsirigakis

The vessels that we are taking the delivery of, meaning the two new buildings, as well as the secondhand vessel, of course, we are putting a debt on the vessels as well to the tune of about 60% give or take for each vessel. So yes, we will be taking some partial loan; although, in general, you might consider the whole thing as a deleveraging exercise, because in the past, we had a higher leverage within that.

Operator

Now from Cantor Fitzgerald, you have a question from Natasha Boyden.

Natasha Boyden - Cantor Fitzgerald

Just want to follow up actually on George's question. You've done a lot of work in renewing your Cape fleet right now. So are you done for the time being, or do you feel that there are more acquisitions out there that could be attractive, given where values are and where your level of leverage is?

Akis Tsirigakis

We do not have definite plans of specific vessels. We do believe, however, that there are opportunities coming up, and more so as time progresses. We hope we'll be in good shape. And we are confident we'll be in good shape to take advantage of them because we have a pretty good relationship with banks if we need to jump on an opportunity. But we do not have specific vessels in mind, although we are growth minded.

Natasha Boyden - Cantor Fitzgerald

And then on the more micro level, what was the $1.2 million vessel impairment loss due to?

George Syllantavos

It was a part of the prior, I mean that are certain costs that are part of the sale of the vessel and it was, as we return the big impairment loss of $33 million in the previous quarter for the big bulk of the Star Beta related. So this is the remainder to the charge of the Star Beta. So it's Star Beta related.

Natasha Boyden - Cantor Fitzgerald

And then lastly, moving to the macro side now, can you talk about the impact of the Russian ban on the grain trade and by extension the shipping industry? Are we seeing any impact right now? Is it too early? And what do you think the outcome to be there?

Akis Tsirigakis

Yes, I think it will definitely impact Supramaxes and Panamaxes mainly. Of course, it will not impact the Capes in any direct manner obviously. We do expect to see this impact, because we are entering the traditional shipment period for grains for the latter part of August and the better part of September. So I guess we're going to see this impact now. We might see imports picking up and ton miles increasing as well.

Natasha Boyden - Cantor Fitzgerald

The grain comes from further a field, is that right, in the U.S., and that's going to increase the ton mile demand? Is that what you think?

Akis Tsirigakis

That is correct, yes.

Operator

Now from FBR Capital Markets, you have a question from Robert MacKenzie.

Robert MacKenzie - FBR Capital Markets

A question for you, Akis and/or George. You guys obviously have been very successful in reducing your average daily operating expenses. How much further do you think you have left to wring out of the system through perhaps optimizing your in-house technical management? And when do you think we get to that point?

George Syllantavos

First of all, we do believe we have a little bit more room to go. Mainly, it is because we have established a new growing pool in the Philippines that is going to be producing its results as time progresses. So from, especially, the growing front which is one very large component of the total daily cost, we expect to see a little further improvement there.

Of course, therefore, we will continue on all fronts. But the largest contribution we believe will come from there. And it is an ongoing process that it is currently, as we speak, in progress. Of course, averaging out over the year is a slow process. So when you start in the beginning of the year, it's a faster thing to show. But we will be averaging down as the year progresses.

Robert MacKenzie - FBR Capital Markets

And if I can come back to the acquisition question one more time and ask it, perhaps, slightly differently. With keep rates or values if you will, continuing to fall here particularly recently, do you think now is the time to buy, or do you think you're going to get a better price by waiting a month, two months, three months? To put it another way, do you think vessel values to fall further from here?

George Syllantavos

Well, since you asked and you coupled the values with the rates, the values of the vessels have not dropped as much as the rates have in the past month or so, or a month and a half. And they haven't, because most owners are holding on to their tonnage because they do see a stronger fourth quarter.

We do share that view as well. We expect the fourth quarter will be stronger. So I do not feel that the prices will really fall so much in the fourth quarter as much as rates will improve. So it's not like opportunities will appear suddenly in the next couple of months, and unless there are one here and one there, not in any wholesale manner. I don't know if that answers your questions.

Robert MacKenzie - FBR Capital Markets

I guess my final line of questioning is around the dividend here. You're yielding about 7% right now, but with high contract coverage and low debt, what would you look for to raise the dividend, recognizing it's probably coupled with the answer to the prior questions?

George Syllantavos

That's a fair question. We do not have any plans to raise the dividend at this moment. I feel this is a quarter-by-quarter decision by the Board. But we have no such plans at the moment.

Operator

(Operator Instructions) From Internation Capital, you have a question from Otto Roethenmund.

Otto Roethenmund - Internation Capital

My question has to do with some of the claims that you guys have been pursuing in your past charters. There seems to be some rumors out there in the market that you arrested one of the (owners) of carrier vessels in South Africa to get security for a claim. Is this true? Maybe Akis can answer this?

Akis Tsirigakis

Well, this is a public record, in that court record in South Africa. So yes indeed, it is true. It was in conjunction with obtaining security for the related claim that we have.

Otto Roethenmund - Internation Capital

Do you have security for other claims that you're pursuing in your past charters? And what does this mean for Star Bulk?

Akis Tsirigakis

Well, I would not like to go into specifics for the other claims, other than say that we, in total, have security in place for the claims in slightly in excess of $50 million, while the claims are progressing, and of course they have taken their course.

I would not venture to take a view on the outcome, but the security is there at least for that portion that I mentioned.

Operator

And as there are no further questions, we now pass the floor back to Mr. Tsirigakis for closing remarks.

Akis Tsirigakis

I do not have something specific to add. I just want to thank everybody for participating on this call. I am looking forward to you join us again when we have our third quarter conference call. Again, thank you very much.

Operator

Thank you very much indeed to both our speakers. That does conclude our conference for today. Thank you for your participation. You may now all disconnect.

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Source: Star Bulk Carriers Corp. Q2 2010 Earnings Call Transcript

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