Star Bulk Carriers Corp. Q2 FY2020 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call on the Second Quarter 2020 Financial Results. We have with us, Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Simos Spyrou; and Mr. Christos Begleris, Chief Financial Officer of the company; and Nicos Rescos, Chief Operating Officer. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. I must advise you, the conference is being recorded today. We now pass the floor over to your first speaker today, Mr. Pappas. Please go ahead, sir.

It's actually Christos Begleris, Co-CFO of Star Bulk Carriers Corp. I would like to welcome you to the Star Bulk Carriers' conference call regarding our financial results for the second quarter of 2020. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on Slide number 2 of our presentation. Today's presentation will focus on an overview of our second quarter results, our cash evolution during the second quarter, the liquidity enhancing measures that we are undertaking, our operational performance and the industry's fundamentals before opening up for questions. Let us now turn to Slide number 3 of the presentation for a summary of our second quarter 2020 financial highlights. In the three months ending June 30, 2020, TCE revenues amounted to $97.1 million, 4.8% higher than the $92.7 million for the same period in 2019. Adjusted EBITDA for the second quarter 2020 was $35.1 million versus $31.2 million in the second quarter 2019. Adjusted net loss for the second quarter amounted to $18.1 million or $0.19 loss per share versus $20.5 million adjusted net loss or $0.22 loss per share in the second quarter of 2019. Our time charter equivalent rate during this quarter was $9,402 per vessel per day. Total cash today stands at $154 million with total debt at approximately $1.6 billion. Slide 4 graphically illustrates the changes in the company's cash balance during the second quarter. The company started the quarter with $131.3 million in cash and generated positive cash flow from operating activities of $23.4 million. After including debt proceeds and repayments and CapEx payments for scrubbers and ballast water treatment system installments, we arrived at a cash balance of $107.6 million at the end of the second quarter. Given the current market volatility and overall uncertainty, we continue to take actions to protect the financial health of our company. Slide 5 has an overview of our liquidity enhancing measures. One of our priorities has been to increase liquidity and strengthen our balance sheet through vessel refinancings. During July, we borrowed $173 million to refinance 15 vessels from four lenders with net proceeds, after repaying outstanding debt, of $37.4 million. As of today, we have secured additional commitments from four major banks and leasing houses to refinance 16 vessels, enhancing our liquidity by an additional $75 million to the cash figure that we showed today. These transactions are expected to conclude during the second half of 2020. Our current physical coverage for Q3 is approximately 60% at $12,145 per day, which includes estimated scrubber benefits. Our all-in breakeven cost is at $11,300 per day, including scrubber cost and debt service. For the remainder of 2020, we have hedged the differential between HSFO and VLSFO for 71,000 tons in the paper markets for an average price of $232 per ton. Given the lower current market price of the differential, these hedges are well in the money, providing a significant contribution to our bottom line. In addition, we have taken advantage of the decrease in the LIBOR curve and have locked in 66% of our base rate exposure for approximately $1 billion of outstanding notion of debt at an average fixed interest rate of 0.46% for an average maturity period of close to four years. I will now pass the floor to our COO, Nicos Rescos for an update on our operational performance.

Thank you, Christos. Please turn to Slide 6 where we summarize our operational performance. OpEx was $4,027 per vessel per day for the second quarter of 2020 versus $3,939 per vessel per day for Q2 2019. Net cash G&A expenses were at $1,048 per vessel per day for the quarter, versus $1,009 per vessel per day for the second quarter of 2019. The combination of our in-house management and the scale of the group enables us to provide our services at very competitive costs complemented by excellent ship management capabilities with Star Bulk consistently ranked among the top five ship managers evaluated by Rightship. We are also currently number one amongst our listed peers in terms of Rightship rating. Our vessels have operated largely uninterrupted during the second quarter despite the COVID-19 pandemic. As of today, we have no remaining dry docking pending during 2020 for our fleet. I will now pass the floor to our CEO, Petros Pappas for a market update and his closing remarks.

Thank you, Nicos. Please turn to Slide 7 for a brief update of supply. During the first seven months of 2020, a total of 31.9 million deadweight was delivered and 9.1 million deadweight was sent to demolition for a net fleet growth of 22.8 million deadweight or 2.6%. A total of just 6.1 million deadweight has been reported by Clarksons as firm orders and the new building order book has been reduced to the record low level of 7% over the fleet. Year-to-date, the dry bulk's steaming speed is estimated at 11.4 knots down by just 0.4% compared to last year. However, a notable increase has been observed over the past month amidst the sharp rebound in freight rates. Following the peak of COVID-19 related lockdowns in April, shipyard deliveries and repairs have recently recovered to almost full capacity in Asia, while demolition activity also ramped up from June onwards. Strong inefficiencies related to crew changes and quarantines at ports have led to higher congestion and regional shortages of vessels. This is negative for operational costs and off hires, but positive for the supply of vessels as it creates major inefficiencies. Dry bulk fleet growth is projected to expand by approximately 3.3% during 2020 and under current trends could drop below 2% during 2021 to 2022. Let's now turn to Slide 8 for a brief update of demand. According to Clarksons, total dry bulk trade during 2020 is estimated to decline by 4.5% with COVID-19 being the key factor behind this slump. With the early second half showing signs of significant improvement, the projected decline is estimated to have concentrated on the first half of the year. The synchronized global economic stimulus with China leading the recovery is expected to expand trade activity during the second half of the year and into 2021. Clarksons expects dry bulk trade to rebound in 2021 by 4.7% in tons and 5.5% in ton-miles. This is versus below 2% growth in supply. Iron ore trade for the full year 2020 is projected to contract 0.4% in tons and to expand 0.3% in ton-miles. Brazil exports decreased by 10.5% in the first half of 2020, negatively impacting Capesize ton-miles. During the second half of 2020, a recovery of Vale exports is supported by their production guidance of a minimum of 310 million tons, implying a 44% increase in export volumes compared to the first half of 2020. Supportive of iron ore trade is the fact that China's crude steel and iron production has increased by 2.2% and 5.0% respectively during the first six months. May and June specifically registered record high production figures while steel mills' profitability has reached a two-year high. Iron ore inventories stand at low levels and will need to be restocked. However, steel production from the rest of the world continues to underperform, down 11.8% during the first half, with most of the declines occurring in the second quarter. Coal trade during 2020 is projected to decline by 7.9% in tons and 8.8% in ton-miles as the Coronavirus has strained import requirements while high-cost Atlantic exports into Asia have been squeezed. During the first half of 2020, China's thermal electricity consumption contracted by 0.5%, while domestic coal production and coal imports increased by 2.8% and 12.7% respectively. This combination clearly resulted in somewhat increased stocks; however, thermal electricity output increased by 6.5% year-on-year during Q2, slowing down the pace of inventory builds. International thermal coal prices trade at a strong discount to Chinese coal at about $28 per ton. However, the country's coal import restrictions policy continues to create some uncertainty. India's thermal coal inventories at power plants increased by 17 million tons since last year but have been declining steadily from record-high levels as of late. During 2020, grain and soybean trade is projected to increase by 4.6% in ton-miles due to a sharp increase in Latin America soybean exports and the expected recovery in U.S. exports. China's grain demand is already emerging higher after the lockdowns with the country's large population recovering following the African swine fever. The Phase 1 trade deal is expected to have a positive impact on U.S. soybean export volumes during Q4. Minor bulk trade during 2020 is estimated to decline by approximately 7.1%. However, West Africa bauxite exports are projected to expand by 7% and continue to generate ton-miles for Capesize vessels. It is worth noting that Clarksons forecasted minor bulks trade to experience a 7.7% recovery during 2021. Overall, with a record low order book and little environmentally-related logic to order going forward, mounting fleet operating inefficiencies, rebounding consumer requirements affecting minor bulks, increased liquidity injections in economies worldwide, and especially in infrastructure, Brazil strengthening iron ore exports, and positive grain trade markets, the supply and demand balance looks bound to tighten during the next 18 to 30 months—all barring any new major occurrences or a potential resurgence of the Coronavirus without a vaccine or a return of the US-China trade war. The appropriate conditions are lining up for a strong dry bulk market. We are positive about the future and we're positioning ourselves to take advantage of it. Without taking any more of your time, I will now pass the floor over to the operator to answer any questions you may have.

Thank you, sir. And your first question comes from the line of Amit Mehrotra of Deutsche Bank. Please ask your question.

Amit, we cannot hear you.

Hello, sir, could you please ask your question?

Can you guys hear me now?

Yes, we can hear you.

I'm sorry about that. My headset must not be working. Anyway, thanks for taking my question. I wanted to ask about the operating cash flow in the quarter. Obviously, it was nicely positive. There seems to be a big working capital benefit in the quarter. I wanted to see if you can expand on that, what actually happened and how much of that is sustainable or unwound as we think about the back half.

Hi Amit, this is Simos. I assume that your question is relating to the cash that we are reporting today versus the cash balance that we reported three months ago on the call. The $154 million versus $106 million that we have.

Not really, I mean the net income if you add back depreciation, we're still negative $9 million in the quarter but you reported a positive operating cash balance of $23 million so the implication is that you got a big working capital benefit.

Correct, so this was basically an effect of managing our working capital and our payables. We have increased our liabilities per vessel during the quarter by almost $600,000 per vessel, which is close to $6.5 million versus the previous quarter. This has assisted in increasing the cash balance at the end of the quarter.

Right. Are those other payables that you stretched?

Exactly.

Did those unwind? I'm just trying to understand cash flow is really important right now which is why it's a nitty-gritty question, but do you expect that to unwind over the next six months or is this kind of performance sustainable?

We are managing the payables. It's not when you have ample costs. It's not necessary to continue stretching the payables. So right now, we reported $154 million of cash as of yesterday. We project to be with the additional refinancings close to $230 million, $235 million by the end of the year. If there is no need to stretch payables so we are not going to continue aging them. It was primarily during the second quarter when we hit the bottom of our free cash. Amit, we started from a very low balance on working capital. So it was effectively a low-hanging fruit for us to manage cash, and the figure that we have spread to is not an exuberant figure. Therefore, we feel quite comfortable with where we are today.

I know it's a very nitty-gritty question maybe not that relevant in the grand scheme of things, but maybe we can pivot a little bit through the sale-leasebacks, which are obviously more relevant. The market has rebounded a lot. You guys have gotten good coverage. I always think about sale-leasebacks as a little bit more of an expensive form of effectively debt financing. Was that just a reflection of how below the market was prior to the mid-June inflection and you guys wanted to really protect yourself?

Amit, Christos and Simos will explain, but these sale-leasebacks were not expensive.

Let me expand on that. Basically, Amit, if you compare the interest cost on the debt that we are refinancing, if you compare all the interest costs compared to the new interest cost on the same base amount, the new interest cost is actually less than the old interest cost. So we're managing to reduce our average margins and we have much higher comparatively financed debt. Now, what is worth also saying is that we are taking, obviously, about $100 million of additional debt with these extra proceeds for the company, but at the same time, we are lowering the interest cost and we have also negotiated a much better amortization profile for the new debt that we are taking over. As a result, our annual overall interest service cost including debt principal repayment is actually reduced by $10 million.

That's helpful. That's great. But the last, very couple of quick-hit questions, and then I'll let go and let somebody else ask, but I guess the CapEx commitments really start to fall off as you progress over the next couple of quarters. So would you expect the net debt reduction to accelerate? Of course, it's going to depend on rates but in terms of the cash calls. Then, you obviously mentioned the asset values taking a potential hit under COVID. Can you talk about where you think your LTV is today based on where the appraisals are and what you see as kind of the scenario playing out and what the potential increase in that LTV will be? Thanks.

On a net leverage basis, our LTV doesn't change, right, because we are effectively adding cash.

I'm talking about the asset value declining, possibly where the asset values are today.

We have not historically provided valuations of our fleet, and we want to maintain that if you don't mind.

Okay, that's fine.

I'll just say that leverage with the new debt effectively is in the '60s on gross leverage compared to the valuations that we see today.

So, it would be low '60s on a net basis?

No, gross. Lower than that on a net basis.

So net LTV will be with a five handle.

Probably.

Okay, all right, thank you guys. I appreciate it.

Thank you. Your next question comes from the line of Ben Nolan. Please ask your question.

Hi, this is Tucker on behalf of Ben Nolan. I had a couple of questions. First, given the weak market, are you guys considering any consolidation opportunities? I know you had in the past, and just wanted to get your color on your thoughts on that.

So, I think last quarter we told people that at that time it probably was not a good time for consolidation because everybody was very uncertain as to the future, and it was difficult to basically reach an agreement with anybody on a deal, and I think that has changed. I think people are getting more comfortable with the current situation and the future, getting more comfortable with how the world will react to COVID-19. We would be very interested in consolidation opportunities that fit with our operations that do not increase our leverage. We're not going to buy fleet for cash, and what you've seen us do in the past has not been to buy fleets for cash but to use our share at net asset value. If we have an opportunity to do that, we will look at it very seriously, and we would intend to make acquisitions in the dry bulk shipping market and not get into other markets at this time.

That makes sense. Then just a quick follow-up for modeling question. With the revised interest rate hedge, would you say the interest expense this quarter is kind of a more normalized level going forward, or would that price tick back up moving forward?

I think you'll see that it ticks back up simply because we'll have more debt, but Christos and Simos maybe you want to talk about that in more detail.

Yes. So interest basically increases, given the larger debt amount, by approximately $2.5 million per year. But debt overall, given much lower amortization, is lower by $10 million a year.

Okay, perfect. That makes sense, and that's all for me. Thank you.

Thank you. Your next question comes from the line of Randy Giveans of Jefferies. Please ask your question.

How are you doing, gentlemen? How is it going? Can you provide a breakdown of the 3Q 2020 quarter-to-date rates by asset class? Also looking further ahead, clearly iron ore trade is very strong with Vale ramping up. Are you positioning your fleet to have more exposure to the Atlantic Basin as a result and how do you compare the strong iron ore market with a more tempered outlook for coal?

Hi, Randy, it's Petros. So Q3 coverage per asset class, is that the question?

Yes, that's the first part.

All right. Our coverage for Q3 is about 60% at levels of low $12,000. Now we also have a little bit of FFA coverage, which gets it to 67%, 68%, and to a bit above $12,500. Now, I don't remember by heart the coverage per sector. I think that we have more covered on the Kamsarmax sides and less on the cape. On the cape we are relatively—we are as spot as we can be because we are very positive about the next two quarters.

Okay. Then to the second part in terms of positioning in the Atlantic and then iron ore versus coal.

Well, this is a more complicated question. It has a lot to do with whether the vessels are ramp-fitted or not. Meaning, whether they can go to Australia or not. What is happening right now is that as there is almost nowhere to disembark your crews and therefore you get a lot of people on board that are over 14 months. Actually, we have done a lot of work on that, but we will tell you later. This means that there are not enough vessels potentially, or there won't be enough vessels to trade in the Pacific going forward, and especially in Australia. This could get the rates up in the Pacific. Vessels that cannot disembark crews and by definition cannot trade into Australia will have to start balancing towards South Africa or Brazil et cetera, which could actually make the market in the Atlantic easier for charters than in the Pacific. We will see how it goes. So we don't have a definite plan of repositioning our vessels towards the Atlantic or the Pacific. We think that the Pacific will strengthen substantially going forward.

Got it. All right, last question, looking at your hedges you have 71,000 metric tons remaining in the back half of 2020. You had 150,000 tons hedged as of last quarter. So does that mean you have not added any hedges for the fuel in recent months? Then on the other hedge on your interest rate hedge, which is probably more impressive and important, what is your all-in-weighted average interest rate now?

So, Randy, to your first question; the answer is, yes, affirmative. We have not added on the fuel spread hedge. It's the $14,000 per month that we have had since.

Certainly makes sense. Sounds like a reasonable theoretical caps there. You did some sale-leasebacks to open up liquidity and I think that makes a lot of sense.

We probably don't need anymore. We're in a situation where we look out as far as we can see and we don't have a cash problem at all. So I don't think we're going to be trying to do anything heroic here to add to our cash.

If I may add, J, theoretically we could finance the entire fleet with sale and leasebacks because the types that we do are much lower leverage than what traditional sale and leaseback deals have been, and at much, much more competitive costs. However, we will not put all our eggs in one basket because we are effectively forging key relationships with all the major Western shipping banks that are active right now. Some American shipping banks like Citigroup and then Chinese leasing institutions as well as banks that are major providers of capital. Then Japanese sale and leaseback houses, as well as banks, and then Taiwanese banks as well. So we think that it's wise that we cast a wide net as far as our financiers are concerned because in times like these, which is a very difficult time to be discussing new ship financings, it really helps to have excellent relationships across a wide spectrum of financiers.

Certainly makes sense and it's good to hear that you feel like your cash runway is good. We wouldn't want to see similar peers have had to do dilutive offerings or advance themselves into very speculative industry. So I'm glad you're not following that path. Final question, kind of a repeat of what Randy was getting at. The Capesize is, look, we had a spike in June, but it was kind of short-lived. Were able to—did you fix anything on that or it sounds like you stayed mostly spot, and if you stayed spot if you don't have the numbers now, is there any way you can follow up maybe later with a new slide or something to provide segment guidance for those for Q3?

Hi J, it's Petros. Yes, the intention is to stay spot. We think that the cape market will spike further during the next five months. We see Brazil exporting probably 50 million tons or 55 million tons more than the first half of the year. If that is correct and if that would be in addition to the Australian exports, that would mean that we would need 150 to 160 more Capes to do the job. If that is the case, and combined with all the inefficiencies that we are seeing in the market like we have to do deviations to ports and disembark the crews and wait for the same time—like right now there are almost 70 bulkers in Manila waiting to disembark the crews. With all that, the additional tons and the inefficiencies in the market and more bauxite from West Africa, we believe we'll be seeing a very strong market, so we will keep the fleet spot.

Excellent. Thank you very much for the good guidance and answers.

Thank you. There are no further questions at this time. Please continue. I would now like to hand the conference back over to your speakers today.

Nothing more to add, operator. Thank you very much and have a nice August to everyone that goes on vacation and stay safe.

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