Star Bulk Carriers' (SBLK) CEO Petros Pappas on Q2 2014 Results - Earnings Call Transcript

| About: Star Bulk (SBLK)

Star Bulk Carriers Corp. (NASDAQ:SBLK)

Q2 2014 Results Earnings Conference Call

August 20, 2014 11:00 AM ET


Nicolas Bornozis - IR Advisor, President of Capital Link

Petros Pappas - Chief Executive Officer

Hamish Norton - President

Simos Spyrou - Co-Chief Financial Officer

Christos Begleris - Co-Chief Financial Officer

Nicos Rescos - Chief Operating Officer


Ben Nolan - Stifel

Jon Chappell - Evercore

Fotis Giannakoulis - Morgan Stanley

Jonas Kraft - Pareto Securities


Thank you for standing by, ladies and gentlemen and welcome to the Star Bulk Conference Call on the Second Quarter 2014 Financial Results. 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 the conference is being recorded today Wednesday, August 20 of 2014. And we now pass the floor to Nicolas Bornozis, President of Capital Link, Investor Relations Advisor to Star Bulk. Please go ahead.

Nicolas Bornozis

Thank you very much and welcome to everyone to our conference call today. We have with us Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; and Mr. Simos Spyrou and Mr. Christos Begleris, Co-Chief Financial Officers of the company.

Before I turn the floor over to Mr. Pappas I would like to mention that concurrently with the conference call there is also a live webcast which can be accessed at and we strongly advice that you go to the webcast as well as we have a slide presentation that we will follow during the conference call.

And with that I will turn the floor over to Mr. Petros Pappas. Please go ahead, sir.

Petros Pappas

Thank you, Nicolas. I am Petros Pappas, the Chief Executive Officer of Star Bulk Carriers. And I would like to welcome you to the Star Bulk Carriers conference call discussing second quarter and first half of 2014 financial results as well as the recently announced 34 vessel fleet acquisition from Excel Maritime Carriers Limited.

Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on slide number two of our presentation. Ladies and gentlemen we are very excited to announce the agreement to acquire fleet of 34 second hand vessels from Excel Maritime Carriers Limited. This transaction doubles our fleet on the water, offers great participation in the expected trades markets tightening and cements Start Bulk’s position as the largest U.S. listed dry bulk company as measured by the cargo carrying capacity of our vessels.

Star Bulk took an opportunity to acquire a well maintained mostly Japanese built fleet. As you can see on slide number three, the total consideration of $634.9 million for the acquisition will be paid with a $231 million bridge loan provided by Oaktree and Angelo Gordon, a $24.9 million of senior secured debt financing, $32.5 million of cash, $29.9 million of Star Bulk shares. We believe, this represents an attractive purchase price given A, recent decline in Panamax/ Kamsarmax values down 20% since April and 25% versus the historical average and B, since April the cost of acquiring this fleet of 34 vessels has also declined by 15%. Post acquisition, Star Bulk will have the largest in the water fleet by deadweight of all U.S. listed drybulk companies. The company will almost double its current vessels in the water from 3.5 million deadweight to 6.6 million deadweight. This enlarged fleet in the water will enable us to take advantage of the expected freight tightening in the last quarter of 2014 and 2015.

Additionally, this transaction will enhance the liquidity of our stock due to the larger market capitalization and the increased free float available. Finally, our company will also benefit from this enlarged fleet on the cost side through increased economies of scale which will come above from managing a larger fleet with many sister ships.

Let me now pass the floor to our President, Hamish Norton who will drive you through the details of this transaction. Hamish, the floor is yours.

Hamish Norton

Thank you, Petros. Please turn to slide number four for a brief review of the deal dynamics of this transaction. We’ve acquired the fleet from Excel Maritime Holding Company LLC which is affiliated with Oaktree Capital Management and Angelo Gordon & Company. The vessel purchase agreement was negotiated by our management together with the transaction committee consisting of disinterested directors of Star Bulk. It has been approved by the transaction committee and the disinterested members of our Board of Directors.

And on slide four, you can see a table with our new increasingly diverse shareholder base after this transaction. You’ll notice that Oaktree Capital Management’s ownership will be reduced from 61.3% to 57.3%. The Pappas Family & Affiliates ownership will be reduced from 12.6% to 9.3% and Monarch Alternative Capital shareholding as a percentage will fall from 7.4% to 5.4%. And we'd like to welcome Angelo Gordon & Co who will become one our largest shareholders, holding 7.8% of our shares.

Turning to slide number five, th8s has some details on the acquired fleet. We’re purchasing a diversified fleet consisting of six Capesize ships, 14 Kamsarmax, 12 Panamax and two Handymax vessels.

We're firm believers in the prospects of the Capesize market and through this transaction, we're able to increase our exposure to the Capes. Three vessels, three Capesize vessels have above market time charters with a major European utility company with an average duration of a year and an average net PCE rate of $26,070. And the remaining three Capes will trade in the spot market to take advantage of the continued favorable iron ore dynamics in 2015.

The Capesize vessels represent approximately 32% of the purchase price for the fleet and have an average age of 10 years by December 2014. 42% of our purchase price has been invested in 14 Tsuneishi built Kamsarmax vessels which will increase our exposure at a dynamic segment that we like and we're not heavily exposed to. The fact that this is a group of sister ships will also provide us with significant operational and technical benefit.

Finally, we're also acquiring 12 Panamax and Handymax vessels which represent the remaining 22% of the purchase price. We believe that older 90s built Panamax vessels have an embedded optionality, since they can provide us with cash flow in a prompt market upturn, but they can also become potential sale candidate, if we feel that it is an opportunity time to sell them in the sale and purchase market.

Turning to slide six. The graph illustrates our pro forma fleet which will be well balanced and diversified across all size segments. You can see how the acquired fleet complements our existing fleet and sizes where we had little exposure. We believe that this will enable us to better service our customers’ needs commercially. Excluding the 90s built Panamaxes, the average age of the fully delivered fleet in June 2016 will be 6.3 years. And it's worth mentioning that in terms of deadweight tons over 60% of our fleet at that time will be Capesize and Newcastlemax vessels with 39 fresh vessels in operation on a fully delivered basis. Newcastlemax vessels by the way are slightly larger Capesize vessels which are optimized for carrying iron ore. Our Newcastlemax was carrying between 208,000 and 209,000 tons of cargo.

In slide number seven, you can see our growth by number of ships and deadweight tons. In December 2014 when we expect to have taken delivery of all 34 vessels of the acquired fleet Star Bulk will own 69 ships in the water, up from the 33 currently. By fourth quarter 2015, when we will have taken delivery of almost all of our eco-newbuild orders, we will own and operate 97 vessels followed by our full fleet of a 103 ships which will be attained in the second quarter of 2016.

Turning to slide number eight of the presentation, it highlights this last point, with on the water fleet of 6.6 million deadweight tons as of December 2014, and the total owned fleet of 11.9 million deadweight tons on a fully delivered basis, we are by far the largest US listed drybulk company by deadweight tons.

From a strategic standpoint, we want to stress the counter-cyclical nature of this acquisition. As you can see on slide nine, the purchase of the Kamsarmax and Panamax vessels was made at historically low prices. This is a very attractive acquisition based both on year-to-date prices as well as prices over the last 12 years as you can see from the graph. Panamax prices are at their lowest level in 2014 with the 21% decrease from their April 2014 peak.

And also looking at the supply side, we’re optimistic that given that the Panamax and Kamsarmax vessels have the lowest order book of all major dry bulk vessel classes, currently standing at approximately 19% of the fleet in those size classes.

Moreover, we see recent encouraging signs of increasing scrapping in the Panamax sector. I would like now to pass the floor to one of our Co-Chief Financial Officers, Christos Begleris who will walk you through our second quarter financial statements.

Christos Begleris

Thank you, Hamish. Let us now turn to slide number 11 of the presentation for a preview of our second quarter 2014 financial highlights in comparison to last year.

In the three months ended June 30, 2014 net revenues amounted to 21.1 million versus 17.1 million during the same period of 2013. Net revenues represent our total revenues adjusted for non-cash items less voyage expenses. The reason we refer to our net revenues is because this figure nets out any difference in revenue recognition between voyage charter and time charters and therefore it’s directly comparable to other [periods]. About 75% of this increase in attributed to the increase of the average number of vessels to 17 in the second quarter of 2014 from 13.1 vessels in the second quarter of 2013. The remaining 25% of the increase is attributed to the increase in the revenues from the management of third party vessels.

Note that the majority of the revenues from the management of third party vessels was being generated from Oceanbulk’s vessels which as of July 11 became owned vessels and thus we will not be getting management fees going forward.

Adjusted EBITDA for the second quarter of 2014 was at 9.6 million, increased by 14.2% versus last year’s respective figure. Excluding non-cash items and once expenses related to the Star Bulk-Oceanbulk merger our adjusted net income for the second quarter amounting to 2.8 million increased by 9.8% versus last year's respective figure.

Our time charter equivalent rate during this quarter was $14,018 per day compared to $14,273 last year. Our average daily operating expenses were $5,208 per vessel compared to $5,664 during the same period last year representing an 8% reduction. The adjusted net income of 2.8 million represents adjusted EPS of $0.10 per share.

Kindly turn now to slide number 12, for a review of our cash flow generation during the second quarter 2014. On March 31, 2014, our total cash balance, including restricted and pledged cash stood at 53.5 million. During the same quarter 2014, we generated 8.9 million cash from operations while we had 0.65 million of cash outflow from investing activities.

Our debt repayment requirements were 5.99 million from the second quarter of 2014 thus leading to a fleet free cash flow of 2.24 million on an adjusted recurring basis. So the low freight environment, our fleet has been cash flow positive in the second quarter of 2014.

And now we'll pass the floor to my Co-Chief Financial Officer Simos Spyrou to continue with our balance sheet, our capital expenditure and leverage profile.

Simos Spyrou

Thank you, Christos. Let us now move to slide number 13 to discuss our balance sheet and leverage profile. Following the closing of the merger between Star Bulk and Oceanbulk which was transformational for the company, it does not make sense to present here Star Bulk’s balance sheet data as of June 30th. Instead of that, we prefer to refer to the current figures pro forma for the merger with Oceanbulk.

Currently our total debt stands at 491.1 million, and our total cap position at 134.4 million. Consequently, our net debt is 356.7 million. Furthermore, the market value of our 33 vessels fleet underwater stands currently at 911 million.

In addition, our 36 new building vessels currently worth $1.76 billion, bringing our fully delivered fleet value close to $2.67 billion.

Going forward as you can see from the bottom graph, our principle repayments so far this year stands at 19 million while our remaining scheduled principle repayments for 2014 and 2015 stand at 19 million and 57 million respectively.

I would like to provide now a brief corporate update on our recent operational and financing activities as presented on slide number 14. On July 22nd, we took delivery of our first eco Capesize vessel built in JMU (inaudible) which is currently employed in the spot market. Another Capesize, the Big fleet is currently undergoing a schedule periodic dry dock.

On the financing side, we continue to obtain financing for our new buildings and within July we have signed committed term sheet for three vessels, two Ultramax and one Capesize vessel at very competitive terms.

Overall, our cost of debt financing has been reduced by 50 basis points to 75 basis points, as a direct result of the improving financing market as well as the increased size of the company following the merger with Oceanbulk.

Moving now to slide number 15, you can see that our newbuildings CapEx funding is mostly addressed. The total contracted value of our 36 vessels on order stands at $1.56 billion. We have paid so far to $224.5 million in the form of advanced payments for these vessels. We have committed debt financing of $562.7 million, while we are currently on the final stages of negotiating with lenders another $414.8 million of debt financing.

Assuming 60% debt financing for the non-finance newbuilding vessels on their constructed value, we estimate another $95.6 million of debt financing. Subtracting the debt financing from the contracted value of the newbuilding vessels leaves an equity CapEx figure of $258.6 million.

Adjusting for our cash on hand and the working capital requirements leaves an equity CapEx gap slightly north of the $140 million which is a figure that we feel comfortable given the size, the visibility and the shareholder base of this company.

Let me now pass the floor back to Petros to give you an update on the market.

Petros Pappas

Thank you, Simos. Let us now turn to slide 17 to summarize the drybulk trade demand dynamics. As most of you know, iron ore and coal are the two most important commodities for drybulk shipping, accounting for more than half of the seaborne drybulk trade.

On the top right graph, you can see how Chinese crude steel production and Chinese iron ore imports have evolved in the last nine years. During the first half of 2014, Chinese iron ore imports have increased by 19% on the back of strong steel production growth and increased domestic to imported iron ore substitution, which we believe will continue in the next years.

Chinese domestic iron ore is of very low quality compared to international commercial mining standards due to its low ferrous content. A large part of Chinese iron ore production is non-competitive with high-cost breakeven, above $100 per ton due to small production scale, low quality of iron ore reserves and long distance from Chinese steel mills. On the other hand, the major international iron ore exporters comprising mainly of Vale, Rio Tinto, BHP Billiton and Potash Corp enjoy low breakeven price levels due to large scale of operations and high quality of iron ore reserves.

Furthermore, substantial additional mining capacity of minimum 400 million metric tons per annum is expected to come on line until 2016, mainly by these companies. Vale alone has lined up an investment of 19 million metric tons per annum, additional iron ore mining capacity to come on line in early 2016, a truly significant amount for a single project.

So, overall, it is apparent that the international iron ore market will see substantial additional supply coming in from the producers that have the ability of predatory pricing in order to capture more international market share. This is expected to drive international iron ore price to lower levels with the majority of small private Chinese producers are not competitive. Therefore, we believe that the substitution of the expensive Chinese iron ore production with imported iron ore can provide a significant support to iron ore trade even with zero steel production growth.

Regarding the coal trade, Chinese coal trade has evolved tremendously for the last eight years. China’s increased energy needs have turned the country from a traditional coal exporter to the single biggest coal importer in the world in half a decade. From significant coal trade surpluses up until 2005, China had a coal trade deficit of around 300 million tons during 2013. What is even more impressive is that coal imports represent only around 7.5 of total Chinese coal consumption. Recent measures against the (inaudible) are expected to affect domestic coal production and poor quality imports.

Despite the recent slowdown in imports during the first half of 2014, we remain confident that imports will produce strong ton miles growth during the medium term due to substitution of poor quality short distance imports with high quality long hauls and move away from Indonesia and towards Australia and the Atlantic.

Another major importer of coal is India which lack material reserves to satisfy its huge consumption needs. As you can see from the bottom left graph, Indian coal inventories have decreased from about 20 million tonnes during March 2014 to 9.5 million tonnes during the first week of August. At the same time, thermal power generation annual growth in India has accelerated about 12% during the last quarter.

Going forward, according to Clarksons, India is expected to reach 195 million tonnes per annum in coal imports in 2014, an increase of about 10% versus 2013 levels.

Moving to slide 18, we will provide an update on the grain trade. Grain trade is expected to improve during the following months due to increased U.S. and Canada crop yields and exports which will provide an uplift in Panamax and Supermax freight rates. Grain is a commodity that is carried mostly by Panamax and Supermax vessels and according to Clarksons world grain exports are expected to increase by 3% this crop season versus 2013 levels.

During the second half of 2014, we might experience a combination of healthy U.S. exports, delayed South American exports and possibly of last of Ukrainian [resin] exports ahead of a potential political tension escalation. If such a scenario plays out, the Panamax and Supermax will enjoy figure in market during the same period, which will significantly boost vessel demand.

Please look to slide 19 for an update on a supply side. Total vessel deliveries decreased significantly in 2013. As you can see on the top right hand graph, deliveries in the periods 2008 to 2012 compared from (inaudible) at an average fleet rate of around 30%. The expected figures for 2015 was close to 40% and we expect some level to continue to exist going forward in reduced levels.

Overall as you can see from the top right graph, putting the forward schedule to deliveries into historical context, clearly demonstrates that the work has passed for the drybulk industry. The nominal order book stands at approximately 21% of the fleet, substantially lower from the peak of 80% in 2008. On the bottom right hand of the graph, we also provide the order book for the remainder of 2014, 2015, 2016 and 2017 broken down in vessel classes. At this point in time we can simply say that the order book for 2015 is fixed while for 2016 capacity in the first year yards is becoming more and more limited.

We see limited risk in all the big in second and third year changes yards due to the current pricing environment as well as the scarcity for bank financing for such low quality vessels.

Finally, what is important and encouraging is the fact that bulk carrier demolition following a brief pause during first half of 2014 has showed some initial signs of revival. 2013 scrapping activity of 22.2 million deadweight tonnes was very close to the second highest all-time level of 23.2 million deadweight tonnes in 2011.

Going forward and given the firming of freight market, we expect the scrapping activity to be reduced, but still be present since 9% of the fleet is above 20 years of age. During the first 7.5 months of 2014, scrapping activity reached 10.1 million deadweight tons following towards about 15 million tons of scrapping this year or about 2% of the existing fleet.

Therefore a number, we see a number of positive converging factors. We see second half 2014 an increased iron ore trade, we see a strong U.S. grain crops and falling prices which will encourage trade. Hydropower generation in China falls as of September and therefore there would be higher needs for coal imports from longer distances. We see record low Indian coal stockpiles. We see bauxite reserves in China depleting and we see slowing drybulk growth. All these factors we expect will lead to a much stronger second half of 2014.

Having said that, I will now pass the floor back to Hamish for an update on our company.

Hamish Norton

Thank you Petros. So, turning to slide 21, I should say that although the acquired fleet in this transaction does not consist of the eco-vessels, we want to take this opportunity to convey our continued eco focus in the company and our belief in the advantages of next generation vessels.

As you can see from slide 21, more than 57% of the value of the combined fleet is accounted for by fuel-efficient eco vessels. Now eco-ship fuel savings are relatively more important for larger ships. For a Capesize eco-ship that lays in speeds of 12.5 knots the bunker fuel savings can be upto 25% compared to a non-eco-ship of similar size. The savings percentage gradually decreases as we move to smaller size ships for which it’s somewhat less important.

Now an important parameter for the fleet acquisition was the purchase price of these non-eco vessels compared to the alternative of ordering eco-newbuildings at quality yards. The average cost per vessel for the acquisition fleet comes at approximately $18.6 million per ship versus current prices of $33 million and $62 million for new Japanese built eco-Kamsarmax and Capesize vessels respectively. We view this as an attractive trade-off of price versus the fuel savings.

Furthermore, even though the eco-ships provide downside protection during a low freight market, we believe that the acquired non-eco vessels will provide greater operating leverage in a rising freight market compared to the somewhat more expensive eco-fleet. Importantly, the vast majority of the acquired fleet has been eco-modified for reduced fuel and lubricant consumptions, they’re also capable of super slow steaming due to the engine (inaudible) base has been equipped with. These enhancements together with other modifications we will be making in the future to all of our non-eco vessels will help us to improve efficiency as much as possible.

On slide 22, we have an overview of our fleet employment, currently including the acquisition of the new fleet we’ve secured approximately 20% of our remaining available days in 2014 and know that this depends somewhat on the exact dates at which the acquired vessels come in to our fleet so it really is an estimate. In 2015 we’ve secured about 8% of the remaining available days and that’s somewhat more certain and 2% in 2016. Overall as of today our total contracted revenue amounts to approximately 83.3 million. As we stated before our commercial strategy mostly focuses on short-term time charter employment, maintaining exposure to a long-term recovery in freight rates. This allows us to retain our upside potential in affirming freight market as we expect to achieve higher recharter rates for our vessels as we move towards the last quarter of this year.

On slide 23 we presents Star Bulk’s operating leverage after the acquisition of the 34 vessel fleet which provides Star Bulk with significant earnings and cash flow upside in what we believe to be an improving market environment. Star Bulk has a large fleet with spot exposure providing for significant upside as the market rises, a highly efficient cost structure, and eco friendly vessels that improved cash flow in all market conditions.

On a fully delivered basis, assuming the charters in place today we have about 37,000 spot days per year. As you can imagine, each dollar swing in spot rate has a material impact on our cash flow. For example $1,000 a day increase in cape rates combined with a $400 a day increase in Panamax and Supermax rates would translate into an increase in EBITDA of approximately $23 million in 2017 assuming no further long-term charters.

On slide 24, we try to evaluate our operational performance over the last five years, as a general comment our cost cutting efforts in our operating and G&A has played an important role in our financial and operating performance in this challenging market environment. This of course has been achieved without compromising our high quality in operational standards. In the top right graph you can see the evolution of our average daily operating expenses. Since 2009, our daily operating expenses have been reduced from $6,903 a day to $5,208 in the second quarter of 2014, a 24.5% cumulative reduction.

On the bottom graph, you can see a projection of our G&A expenses with the evolution of our fleet. We expect that following the acquisition of Oceanbulk and this new fleet, our daily cash G&A expenses per vessel will move below thousand dollars per vessel, per day for a full operational year.

This is one area where we clearly expect to benefit from economies of scale and the projected cost synergies with our cash G&A expenses developing from a $1,402 per ship, per day for 3 to 17 vessels to approximately $980 per ship, per day for a fleet of 67 vessels. Moving forward, we expect the expanded the size of our operating fleet on a fully delivered basis to least with among the lowest overhead per ship among our peer group.

Let's now turn to slide number 25 for a presentation of our superior commercial performance. As you can see from the slide, we've consistently outperformed the relevant indices for our Capesize and Supermax vessels respectively.

And now let me pass the floor back to Petros for his closing remarks.

Petros Pappas

Thank you, Hamish. Before we close this presentation and pass the floor back for audience for any questions that you might have, let me walk you through a summary of our strategy going forward as presented on slide 26. On the chartering side, we will continue this bulk employment of our fleet as we expect the trade market to improve in the months to come. We are presently well positioned to capitalize on increases in demand for drybulk shipping. We intend to employ our vessels in an active and sophisticated manner tailored to the fuel efficiency of its vessel. In particular, our eco newbuilding vessels are ideal for employment on a voyage basis while our older vessels maybe more appropriate for short or medium term charters. As we see the market sentiment improving, we aim to start picking some of these vessels on medium to long term charters.

Furthermore, as we have already demonstrated, we will keep on monitoring the market for further acquisition opportunities and further consolidate the industry. And we intend to continue to opportunistically acquire high quality fleets and vessels at attractive prices.

We aim at maintaining a young average age for our fleet going forward and may opportunistically dispose some of our older assets depending on the market conditions and overall commercial prospects. We will also continue to improve the performance of our fleet through modifications and enhancements that increase efficiency.

The above will be facilitated by the combined 120 years of shipping industry experience that we have as a management team. Our relationship with charterers, shipyards, ship brokers, banking suppliers et cetera have developed across several shipping cycles, and we believe they give us a significant advantage.

On the operational side, we view that the new and large Star Bulk will serve as a highly efficient platform which would strive for the lowest operating expenses and corporate overhead amongst our peer group in the years to come.

We are investing in a sophisticated vessel monitoring department that will help us have real time feedback on the performance of vessels, higher maintenance including consumption of fuel and lubricants in order to be as efficient as possible and minimize the daily operating cost of our vessels.

Finally, we plan to maintain a healthy balance sheet with through the moderate use of leverage, while we'll enjoy reduced cost of financing through our greater access to equity and debt capital markets.

Overall, we believe Star Bulk has set of characteristics that place us among the most promising companies in the drybulk industry. And with the delivery of our newbuilding vessels, we aim to become the lowest cost operator in the peer group, without compromising our already existing quality standards.

Closing, I would like to thank our shareholders for the ongoing support and loyalty. And we assure them that we will continue our efforts to ensure the company’s long-term success and enhance shareholder value. Without taking any more of your time, I will now pass the floor over to the operator. In case, you have any questions, we will be happy to answer them.

Question-and-Answer Session

Thank you very much indeed, sir. (Operator Instructions). Your first question from Stifel comes from the line of Ben Nolan. Your line is now open.

Ben Nolan - Stifel

Thanks a lot. And you guys certainly knew how to keep us busy during the sum. Incidentally August was supposed to be vacation time in Greece, but I guess not this year for you guys. My first question has to do I guess with how to think about the employment for these vessels away from as it relates Excel vessels away from the three that were mentioned on -- that are operating on longer term contract. Is it fair to assume that the balance are all short-term in the spot market?

Petros Pappas

Hi, Ben. Yes, that’s true. They are in the spot market. And they will continue being in the spot market because we’re looking at market environment that is going to be going up in the next few months. Therefore, for now will stay spot. In case the market improves substantially and as our analysis department tells us that usually second halves of years are stronger than the first halves because there is more trade in deadweight tons, we will wait for such time to come and depending, we will probably fix part of the fleet for short-term periods. We are positive about the future. So, what we aim to do is to look into seasonality as well. So, the way we will be fixing will probably be at the time that the market is strong and for periods until the market will be strong once again. So we think like 2014, second half 2014 is going to be strong, maybe second half 2015 will be even stronger and we will have a chartering strategy that will follow our analysis of the market condition.

Ben Nolan - Stifel

Okay, great. That’s very helpful. And then, so staying on the acquisition for a moment, I was just curious, are any of the shareholders, selling shareholders here or I guess acquiring shareholders, the Oaktree and Angelo Gordon specifically and then even going a little bit further back to the previous transaction, is there a lock up at all on their ability to be able to dispose off any of those shares?

Hamish Norton

It’s Hamish Norton. There is no specific lock up agreements for the shareholders that we are taking on but as a practical matter, there is a -- there are pretty strong limits on how much selling can take pace quickly. First of all, Oaktree will remain an affiliate of the company and will be bound by affiliate volume limitations. Second, the shares are not being given out to Excel in a lump. We are buying the vessels one by one as the vessels reach discharge force where it is convenient to buy the vessels and the shares are being issued to Excel as we buy vessels. So as a practical matter, the shares will be flowing out to Excel more or less evenly through the end of the year. And it’s going to be a while before Excel can distribute any of those shares to its shareholders which would then allow further sale.

Ben Nolan - Stifel

Okay, that’s helpful. And sort of along with that I guess from a modeling perspective, you sort of assume that the vessels will be coming on line over the course of the remainder of the year rather than sort of a single drop date, is that correct?

Hamish Norton

I think you can assume for practical purposes that we will take on two to three vessels a week.

Ben Nolan - Stifel


Hamish Norton

Possibly more than that in exceptional weeks, but we will almost certainly have all the vessels by the end of the year.

Ben Nolan - Stifel

Okay, that’s helpful. And then stepping away from that for a moment to the CapEx program. Obviously and you laid out there pretty nicely about 140, I guess $142 million of remaining CapEx. How do you think about, how you guys thinking about funding that, is that something you feel like you can handle organically through the cash flows of the company or would you possibly be looking to the equity markets or some other form of capital markets to bridge that gap?

Christos Begleris

Sure, this is Christos. First of all, we should mention that effectively the excel transaction helps us in this funding gap in that we have taken very low leverage which we will refinance the portion of the bridge facility we're taking from Angelo Gordon with conservative leverage, but which will give us extra cash which will go towards this funding gap. These gives us time the luxury of time in order for us to figure out what is the best strategy to top either debt or equity capital market in order to fund the remaining gap together with operational cash flow.

Ben Nolan - Stifel

Okay. So when you are thinking about just sort of looking at those numbers, when thinking about the like target debt, does that include the refinancing of the bridge amount or is that separate?

Christos Begleris

It does.

Ben Nolan - Stifel


Christos Begleris

It definitely does. It's on the bridge loan. And we expect to be overall a very good (inaudible) levels.

Ben Nolan - Stifel

Okay. Alright, well that's helpful and I'm sure there is other people who would like to ask questions as well. So I’ll turn it over to them, but congratulation obviously the market I think this is a good acquisition as do I.

Hamish Norton

Thank you, Ben.


Thank you very much indeed, sir. Now, from Evercore your next question comes from the line of Jon Chappell. Your line is now open.

Jon Chappell - Evercore

Thank you. Good evening, guys. I wanted to ask about the maintenance of the ships. Obviously these are coming from a company that was in chapter 11. What kind of inspections that you do on vessels? And when you think about being delivered to the ideal ports that Hamish mentioned, do you foresee being able to employ them immediately or is there some kind of modifications or updated maintenance that would need to take place?

Nicos Rescos

Yes. This is Nicos Rescos. We have done ample inspection of about a third of fleet as per our due diligence and we have completed class record review for every single vessel and we feel reasonably confident on the condition of every vessel across the fleet.

We believe we're going to be taking delivery of vessels as Hamish mentioned earlier during this quarter if there discharge ports or during the balancing of vessel between locations and there will be close coordination between the sellers and the buyers of the vessel to make things move along as swiftly as possible given enough notice to plan the next employment.

We believe having about two weeks of a notice for our delivery of vessel gives us ample time to fix the next employment.

Jon Chappell - Evercore

Okay. And then you’ve acquired 11 1990s built ships in addition to the 2 that Star Bulk already had in mid-90s builds and Capes. Obviously that doesn't lineup with the eco strategy. I understand the leverage that they provide to the upside once and if the upside occurs, how are thinking about the timing of maybe of disposing those, the way I understand that they are relatively debt free so those could also help funding the equity gap that you have for the new building commitments?

Hamish Norton

Yes, Jonathan it's Hamish Norton. Indeed, look we're thinking about those vessels as you say possibly as a way to help pay for our new buildings if we see an opportunistic time to dispose them. And the vessels obviously give us a lot of operating leverage on the upside and of course the best time to dispose such vessels is when they have their highest cash flow. So it's a tricky decision, but we're certainly thinking about it along the line as you have suggested.

Jon Chappell - Evercore

Okay. And then the last one, obviously as a very senior management team in place, what's the infrastructure in kind of the next level, whether it's technical or chartering to take on this 100 plus vessel on fleet? And then also you've mentioned you are still looking for more acquisitions or consolidation would you have to add considerably more personnel to add more ships above and beyond the 103?

Petros Pappas

Yes, certainly we will need more personnel. But Star was already, we follow a strategy where we have the capacity to always take in some extra vessels. So, after a certain number of vessels we could have done immediately without needing any additional support. But we've been sourcing people from the market and we have been very proactive on this, we will be, we are able to take delivery of vessels within the four month period ahead of us without facing any personnel or space problem.

Hamish Norton

And just to add to that, I think it's fair to say that Star is just about the most dynamic company at this point, and the most dynamic shipping company based in Athens and we get resumes from a lot of very good people and it appears that we have our pick of the best people.

Jon Chappell - Evercore

Okay. Thanks Hamish, thanks Petros.


Thank you very much. Now from Morgan Stanley you have a question from the line of Fotis Giannakoulis. Your line is now open.

Fotis Giannakoulis - Morgan Stanley

Yes, hello guys and congratulations for this major expansion. I would like to ask how did this deal came what was the rationale behind the Oaktree and Angelo Gordon decision to rollover the fleet into Star Bulk? And the reason I am asking is that the as far as I know that the Oaktree has a major stake in more shipping companies, are there thoughts for further expansion and further consolidation of previously troubled drybulk companies?

Hamish Norton

In terms of other Oaktree affiliated shipping companies, we have no intention of pursuing any acquisition of any other Oaktree affiliated shipping companies. And I don’t think that that situation is likely to change.

Fotis Giannakoulis - Morgan Stanley

That was very clear. Are you happy with the size of this fleet, do you think that the 100 vessels is -- or around 100 vessels is your ultimate target or if you wish to further expand and make an even larger company than what you are here?

Petros Pappas

Fotis, we are here to expand when we see the opportunity for aggressive acquisitions. It is not the number of the vessels it is the organization of the company and I think we can handle more vessels in [Mid-B] but only if it is going to be good deals. I think we are in a continuous search for deals and we have, for many years we have a commercial department both on chartering and S&P that is extremely experienced and has been as I said markets forever and also because we are becoming bigger in size people come to us for deals first then they would go to anybody else. So that gives us the opportunity to have a first hand view about deals and therefore when the opportunity arises we will go for it.

Fotis Giannakoulis - Morgan Stanley

Thank you, Petros. And regarding this latest acquisition the first look that I had was that the price was quite attractive, you mentioned earlier that assets values in last three months have declined, but I want to ask how did you make the valuation, how did you agree on this particular price was that a broker valuation and did that include any discount to the market value or it was what the brokers gave?

Hamish Norton

It’s Hamish Norton, it was basically we use three brokers and took the average of their appraisals on both sides and it was pretty much that simple.

Fotis Giannakoulis - Morgan Stanley

Okay, thank you. And my last question is about the (inaudible) you mentioned that you have a gap of around $140 million. What is the ultimate goal of leverage and particularly where do you see your breakeven developing, both your EPS breakeven and also the cash flow breakeven including every payments of your debt?

Simos Spyrou

Well, Fotis, we are trying to be conservative on our leverage. And as you can see right now, we are in the low-50s in terms of -- on asset cover ratio for our on the water fleet. And we even with the 60% financing that we are targeting for the newbuildings on the contracted values, this is about -- we’ll bring that contracted fee on the water fleet at around 50% of loan to value on a fully delivered basis. In the future, we aim to reduce further the leverage of the fleet to reduce the breakeven point of the company. And this is our goal going forward.

Fotis Giannakoulis - Morgan Stanley

The reason I’m asking is I’m trying to understand the equity that you are planning to raise is going to match your funding gap or the goal is to have additional equity that will make the amortization of the debt lower. And in relation to that if you can answer in terms of next couple of years’ goal. Is intention to be become a dividend playing company when you have all your newbuildings or your focus is going to continue to be growth?

Hamish Norton

Okay. So, look, in terms of the long term focus, when the newbuilding schedule and the markets permit, we would intend to pay a dividend. And we think that that’s an appropriate thing to do when we’re not investing all of our cash in the newbuilding program and we'll manage our leverage consistent with being able to pay a dividend.

Fotis Giannakoulis - Morgan Stanley

Okay. And in terms of how much equity you're planning to raise; is this going to be just funding gap or you think of more might be also an alternative?

Petros Pappas

Well, as we have said during the presentation for this, the funding gap that we have relative to the size of the company and our shareholders backing the company is relatively small and we feel comfortable.

Now, on (inaudible) of equity that we might be raising in the future, we cannot comment on that. It really depends on the cash flow generation of the fleet and on the market. So basically, if we see the significant market upturn in the fourth quarter of the year and the cash flow generation permits -- is healthy, this will reduce further upon gap and our equity needs. We will value add that on that time. But you have to take into account that the Excel fleet acquisition actually gives us the luxury of tying before tapping the debt or equity capital markets.

Fotis Giannakoulis - Morgan Stanley

That's clear and thank you very much.


Thank you very much indeed, sir. We now have a question from Pareto Securities from the line of Jonas Kraft. Your line is now open.

Jonas Kraft - Pareto Securities

Hello gentlemen, how are you? One last question from me, I mean most of my questions have already been answered. But on a relative basis, you now have increased your exposure to medium sized vessels especially carrying coal. Would you see you are more positive on the fundamentals of these vessels compared to the iron ore trading Capes or is this more of an asset?

Petros Pappas

Jonas we are positive about both. There are different stories, we said the story about the iron ore and you are not asking for that. Regarding the coal you also have to look into the supply situation. Coal carrying vessels up till now have in the last year and half have been the supply has been pretty high, but if you look at the statistics going forward, it's much lower than before. So on the supply side and because we feel we bought at the absolute bottom of the present market, we feel good about that.

Now on the demand side, we see a strong India coming forward. And there will definitely be major needs for coal imports there, which will also, will lead to congestion. Now regarding China, China is a more difficult equation to solve, because on the one hand they are trying to cut down on coal consumption, but on the other hand they’re closing down a big part of their small and inefficient coal mines and also they’re going towards importing higher quality coal, that doesn’t exist in Indonesia. They would have to source it from elsewhere. So, on the one hand we will see an effort to rely less on coal consumption. On the other hand however it will be more ton miles because of sourcing higher quality coal and it will also be substitution of local production.

So, overall we believe that we will still be seeing an increase in coal demand. And of course there is also grain, we expect to see, we see very low prices in grains and therefore we will see extra trade we believe. So, we are -- a combination of buying this coal and grain vessels ship and the prospects we see we think they’re going to be doing well going forward.

Jonas Kraft - Pareto Securities

Thank you very much. That definitely answers my question.


Thank you very much indeed. And as there are no further questions, we now pass the floor back for closing remarks.

Nicolas Bornozis

Well thank you very much for attending our presentation. We will try to do better and better going forward and to support at least of our investors in our company and you will see the results going forward. Thank you very much.


And with many thanks to all our speakers today, that does conclude our conference. Thank you for participating. You may now all disconnect. Thank you gentlemen.

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