Earnings Call Transcript - SBLK Q3 2020

Operator, Operator

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

Simos Spyrou, Co-Chief Financial Officer

Hi, everybody. This is Simos Spyrou. Thank you. I am Simos Spyrou, Co-Chief Financial Officer of Star Bulk Carriers Corp., and I would like to welcome all of you to the Star Bulk Carriers' conference call regarding our financial results for the third quarter of 2020. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on slide number two of our presentation. Today's presentation will focus on an overview of our Q3 results, our cash evolution during the quarter, our operational performance, and the industry's fundamentals, before opening up to questions. Let us now turn to slide number three of the presentation for a summary of our third quarter 2020 financial highlights. In the three months ending September 30, 2020, TCE revenues amounted to $137.8 million, 4.9% higher than the $131.3 million for the same period in 2019. Adjusted EBITDA for the third quarter 2020 was $79.7 million, versus $72.2 million in the third quarter 2019, an increase of 10.4%. Adjusted net income for the third quarter amounted to $27.3 million or $0.28 per share, versus $17.3 million adjusted net income or $0.18 per share in the third quarter of 2019. Our time charter equivalent rate during the quarter was $13,083 per vessel per day. Total cash today stands at $225 million, with total debt at approximately $1.63 billion pro forma for undrawn liquidity of our working capital facility. Our strong cash flow generation in the third quarter, in combination with our recent refinancings, have increased our liquidity significantly. Until today, we have completed eight refinancings for 30 vessels, increasing our liquidity by $107 million net of any financing fees. In addition, we have secured commitments, and we are in the process of drawing down funds from two financial institutions to refinance an additional five vessels, which after repaying outstanding debt are expected to release net proceeds of approximately $5 million, for a total combined of $113 million net of fees. Slide number four graphically illustrates the improvement in the company's cash balance during the third quarter. The company started the quarter with $107.6 million in cash and generated positive cash flow from operating activities of $57 million. After including debt proceeds from refinancings and repayments, CapEx payment for scrubbers and ballast water treatment systems, we arrived at a healthy cash balance of $222.1 million at the end of the third quarter. I will now pass the floor to our COO, Nicos Rescos, for an update on our operational performance.

Nicos Rescos, Chief Operating Officer

Thank you, Simos. Please turn to slide number five, where we summarize our operational performance. OpEx was at $4,244 per vessel per day for the third quarter of 2020. The increase was primarily due to increased forwarding logistic expenses during the quarter to service our fleet. However, we expect OpEx levels to normalize during the fourth quarter. Otherwise, our vessels have operated largely uninterrupted during the third quarter despite the COVID-19 pandemic. For the nine months of 2020, we continued having operating expenses 13% below our listed peer average. Net Cash G&A expenses were at $985 per vessel per day for the quarter. The combination of our in-house management and the expertise of the group enables us to provide our services at a very competitive cost complemented by excellent ship management capabilities. Star Bulk is consistently ranked among the top five ship managers evaluated by Rightship, and we're currently ranked as number one among our listed peers. As of today, we have no remaining drydockings pending for 2020. We are currently operating a fleet of 114 scrubber-fitted vessels that have collectively operated for more than 38,000 days. I will now pass the floor to our CEO Petros Pappas for a market update and his closing remarks.

Petros Pappas, CEO

Thank you, Nicos. Please turn to slide six for a brief update on supply. During the first 10 months of 2020, a total of 41.6 million deadweight was delivered, and 12.4 million deadweight was sent to demolition for a net fleet growth of 29.2 million deadweight or 3.3%. COVID-19 has created strong supply inefficiencies since April with quarantines and crew changes, inflating port congestion and creating short-term regional shortages of vessels. New environmental regulations concerning greenhouse gas emissions are expected to keep new building activity under control over the next few years. The order book has decreased to a record low of 6.3% of the fleet with just 9.1 million deadweight firm orders reported by Clarksons year-to-date. Furthermore, the return of Pakistani breakers after nearly two years of absence has inflated scrap prices and should make the demolition of older tonnage more attractive for ship owners. As a result, we expect net fleet growth to stay below 1.5% per annum during the next few years. Despite the strong correction in crude oil prices, the average steaming speed of the dry bulk fleet during the year was down 0.5% to approximately 11.5 knots as a result of the IMO Low Sulphur regulation and the switch to more expensive VLSFO. A recovery of crude oil prices in the medium term is expected to further incentivize slow steaming and will play a key role in freight rate levels of modern tonnage and may also increase scrubber savings. Let's now turn to slide seven for a brief update on demand. 2020 has been challenging for trade as COVID-19 has affected consumption and the supply chain of all dry bulk cargos. According to Clarksons, total dry bulk trade during 2020 is estimated to decline by 2.7% in tons and 2.3% in ton-miles. China has been the driving force of the recovery and has been importing record high volumes of iron ore, soybean, and bauxite during the last month. However, economic activity from the rest of the world remains weak with rising concerns on the impact of the second round of lockdowns, especially in Europe. On the positive note, the availability of a vaccine and the COVID-19 treatment by the end of this year supports an economic rebound during 2021 and 2022. The synchronized global economic stimulus is expected to focus on the construction sector and inflate dry bulk trade during the next years. Furthermore, Brazilian iron ore production is gradually recovering from the 2019 Brumadinho dam disaster and will inflate ton miles over the next few years. During 2021, Clarkson expects dry bulk trade to rebound 3.9% in tons and 4.4% in ton miles. Iron ore ton miles during 2020 are projected to expand by 1.7%. Despite the pandemic, China has produced record high volumes of crude steel since April and raised iron ore imports by 11% during the first 10 months of 2020. However, steel production from the rest of the world continues to underperform, with September output down 7% year-on-year. During the third quarter, Brazil iron ore exports increased 11.5% compared to last year, and hopefully, this will mark the start of a long-term upward trend. Vale has set an annual production target of 400 million by 2022 from slightly less than 320 million tons during 2020. Coal trade has been affected the most from the pandemic this year and is projected to contract 9.9% in ton miles. On top of the strong hit in global consumption, China's tension with Australia and supply disruptions in Colombia had a strong negative effect on vessel requirements, with longer business trade declining the most. During the first nine months of the year, domestic coal production in China as well as in India increased at a faster pace than thermal electricity, and the combination resulted in increased stocks and lower import requirements. Having said that, expectations of a colder than average winter due to La Nina conditions and a global investment recovery during 2021 is expected to reverse this trend, creating a favorable short-term outlook for growth rate with 2021 ton miles projected by Clarkson to rebound 4.7%. Grain and soybean trade during 2020 is projected to increase 5.6% in ton miles on the back of a sharp increase in Latin America soybean exports and a recovery of U.S. exports to China as part of a Phase 1 trade deal. Brazilian soybean export season has ended with record high volumes shipped from the country, while U.S. outstanding grain sales stand at record high levels. China's demand for grains is expected to remain strong during the next few years as the next five-year plan will focus on food security and the recovery of the hog herd from African swine fever. Minor bulk trade during 2020 is expected to decline by 3.7% in ton miles. However, West African bauxite exports continue to expand, driven by a strong project pipeline generating strong ton miles for Capesize vessels. The positive effects from the global stimulus will be felt during 2021 and 2022. Clarkson's forecast minor bulks trade to experience a 5.9% rebound during 2021. Finally, as a general comment, the supply and demand balance during the next few years looks bound to tighten and the appropriate conditions are lining up for a sustainable recovery to take place. Q1 and possibly Q2 of next year will be slower for as long as COVID-19 is prevalent, but once a vaccine and treatment are mass-produced and available, we expect markets to rebound strongly. Without taking any more of your time, I will now pass the floor over to the Operator to answer any questions you may have.

Operator, Operator

Thank you very much. Our first question for today is from Randy Giveans from Jefferies. Please go ahead.

Randy Giveans, Analyst

Gentlemen, how is it going?

Petros Pappas, CEO

Very well.

Simos Spyrou, Co-Chief Financial Officer

Good, Randy.

Randy Giveans, Analyst

Excellent, excellent. Well, I guess first question along the sale leasebacks, and the incremental liquidity from that, can you give us a weighted average interest rate for those deals, just kind of seeing what the cost of financing was? And then, secondly how does this affect the kind of dividend formula and calculation for your cash balance?

Christos Begleris, Co-Chief Financial Officer

Hi, Randy, it's Christos. So, basically the average margin of those new financings is in the high twos, it's around 275, and that's the average for the $500 million of facilities, including the $60 million that we will be drawing in the next few weeks, and effectively these refinance debt of approximately $390 million, which was priced 20 basis points higher than the new financing. So the interest cost is down on a larger amount, and then the amortization is actually quite lower on the new debt, resulting in a new sort of interest cost for the $500 million that is $10 million per year lower than what we had on the $390 million that we refinanced.

Randy Giveans, Analyst

Got it. Okay, thank you for that, and then for the dividend calculation now?

Hamish Norton, President

So the dividend calculation is based on, as you know, cash on the balance sheet relative to the number of ships we have, but a lot of the cash on the balance sheet now, and perhaps a bit more later, is going to be from refinancing existing ships at higher leverage.

Randy Giveans, Analyst

Right.

Hamish Norton, President

Where, basically, we have the option of counting that cash from refinancing to count toward the dividend or not, and to this point, we have opted to basically not count that extra cash as counting toward the dividend. It's possible that management and the Board will change its mind at some point, but I think basically the intention of that dividend provision was to take into account cash generated from operations.

Randy Giveans, Analyst

Got it. Yes, I would assume you weren't just borrowing it to pay it out in the dividend.

Hamish Norton, President

Right.

Randy Giveans, Analyst

But should we just factor that in? Going into the fourth quarter, you're expected to earn $1.6 million per vessel, and the additional cash was intended to be distributed as a dividend.

Hamish Norton, President

Correct.

Randy Giveans, Analyst

So now does that $1.6 number go up or do we just take your cash balance and reduce the excess liquidity you got from this refinancing, what's the best way to calculate it?

Hamish Norton, President

I think basically you should net off the extra cash that we've gotten from the refinancing.

Randy Giveans, Analyst

Got it.

Hamish Norton, President

At least for the time being.

Randy Giveans, Analyst

Yes, that's fair, and then I guess in terms of use of cash, is this just to build a fortress balance sheet in case there is a very soft market in '21? Are you looking at some fleet renewal, maybe some secondhand acquisitions? Like where do you see the use of cash in your fleet going forward?

Hamish Norton, President

Yes, I think for the near term you should think about this cash as cash on hand in case we have a pandemic, and last I looked, we had a pandemic. So there's more risk in the world, and that was why we wanted to refinance some of our ships to generate some more cash. Obviously, our intention is not to keep large quantities of cash on the balance sheet indefinitely. So we will be using cash for productive purposes.

Randy Giveans, Analyst

Noted. All right, well I have a few more questions, but I will hop off and let you all go. Thank you so much.

Petros Pappas, CEO

Thank you.

Operator, Operator

Our next question for today is from Ben Nolan from Stifel. Please go ahead.

Ben Nolan, Analyst

Yes, thanks. Hey, guys. Maybe following up on that last one a little bit. Obviously one of your competitors has been really busy selling assets, and at least historically speaking, they're at pretty low prices relative to, say, average modern asset values. Is that at all interesting to you? Is that something that you're looking at or are you thinking of it pretty much as similar to what you've done in the past, if you can get a ship-for-shares type of a situation then maybe you'll look at it, otherwise not?

Hamish Norton, President

I think basically, given where our share price is at this point, a ship-for-shares transaction could be quite interesting, and basically ships for cash at this point probably less so.

Ben Nolan, Analyst

Okay, and another thing, I know, and having looked through some of your previous presentations, you've been, it appears, to be pretty pleased with the CCL pool for the Capes, the Newcastlemaxes. I was curious, well first of all, assuming that that's correct, would you or how do you think about maybe deploying the Kamsarmaxes or Supramaxes or other parts of the portfolio into similar scalable arrangements?

Petros Pappas, CEO

Hi, Ben. This is Petros. Are you asking if we would establish a pool for Capes, Kamsarmaxes, or Supras?

Ben Nolan, Analyst

Well, you tell me. It seems like the CCL pool is working out for you. Is that something you would consider applying to the rest of the fleet in some way?

Petros Pappas, CEO

I believe it makes more sense to create a pool for smaller vessels. The rationale behind this is that when you have a large number of vessels spread across an ocean, there's a higher chance of being close to loading ports when new business arises. This is particularly true for smaller vessels like Supras, Ultras, and Kamsarmaxes, as opposed to Capes, which follow established routes. Consequently, the smaller vessels can leverage their flexibility to gain more advantages. Interestingly, we’ve been discussing the idea of forming a pool for these smaller sizes and believe it would be beneficial moving forward.

Ben Nolan, Analyst

Okay, interesting, and then lastly, I don't want to overdo it on the dividend question, but I do think it's important. So, should we, again the calculation has become a little bit more ambiguous?

Hamish Norton, President

Yes, I know.

Ben Nolan, Analyst

Should we assume that until the market improves, there likely won't be a need for impairments? Is that the main takeaway here?

Hamish Norton, President

That's probably the logical conclusion, yes. I mean…

Ben Nolan, Analyst

Okay, all right.

Hamish Norton, President

A market at this level could lead to a dividend eventually, but a dividend in the near term probably requires a better market.

Ben Nolan, Analyst

Right, and as part of this new…

Hamish Norton, President

That being said, we wouldn't be shocked if we see a better market next year.

Ben Nolan, Analyst

Sure, and as part of these new financings, there's no restrictions on your ability to pay or anything, that it's just a decision on your part?

Hamish Norton, President

Correct. That's correct.

Amit Mehrotra, Analyst

Thanks, Operator. Hi, everybody. Sorry, I dialed in quite late actually. So the question, forgive if this has been answered, but did you guys provide a fourth quarter bookings percentage and rate? And Christos or Simos, I think with some of the refinancing gymnastics that you guys have done, I think your breakeven has actually come down from the $11,000-plus level. If you could just give us a finer point on what the breakeven is pro forma for all that stuff that you guys have done.

Petros Pappas, CEO

Hi, Amit. This is Petros. We have booked about 65% of our Q4 at levels of about $13,500. Now, the 35% left is probably going to be lower because the market has gone down. Right now, I would say that, Ultras are at mid high nines, Panamax are around 10.5, and Capes around 13, 13.5. So I would expect that this 13,500 deadweight may go down to about what we've seen during Q3. Unless, of course, if the market moves up in the last 45 days over the quarter, which I would not rule out. As far as the breakeven, I would…

Amit Mehrotra, Analyst

Is that on a scrubbed or unscrubbed basis, the numbers that you're providing?

Petros Pappas, CEO

These are roughly on a scrubbed basis.

Amit Mehrotra, Analyst

Scrubbed basis, okay, all right, go ahead, yes.

Petros Pappas, CEO

As for our breakeven, I will let the CFO take this part of the question.

Christos Begleris, Co-Chief Financial Officer

Hi, Amit. From my side, this is Chris Begleris. So, basically, our breakeven or cash breakeven as you correctly have pointed out has actually dropped to slightly below $11,000 per day. We are at around $10,900 on a cash basis.

Amit Mehrotra, Analyst

Okay, great, and then, Hamish, I'm surprised that there's so many questions around dividends because the market is not that great right now, but I wanted to kind of use that as an opportunity to revisit the whole strategy behind the dividends. I mean, correct me if I'm wrong, but the whole kind of motive behind the dividend was to allow the equity value to trade above NAV, which will give you a currency to de-lever the balance sheet, and then you have basically a de-levered kind of dry bulk company, which obviously commensurate very low breakevens. I mean, the outlook for the market is incredibly different than when it was a year ago. It's not bad, but it's not the super cycle that we once predicted prior to the COVID crisis as it relates to IMO 2020. So in that context, I'm just wondering like does the dividend hold as much of a priority in your head or the company's mind that it did this time a year ago in the context of the outlook is better, but it's not necessarily the windfall opportunity that you guys thought it was a year ago, or all of us thought it was a year ago.

Hamish Norton, President

No, I think the dividend is just as important as it was, and frankly, I think the opportunity may be better than it was. The opportunity for 2020 was obviously that we were going to have a pretty good market without the pandemic, and we were going to have great returns on the scrubbers, which obviously was affected quite substantially by the pandemic. But going forward, we have a ridiculously low order book. We have a very tiny fleet growth expected next year well below what we expect to be the growth in the ton mile demand, and yet, who is going to be brave enough to order a ship next year, right? I mean, if you order a ship next year, you're making a bet on the political acceptability of your fueling choice, five years out from the date of order, and nobody knows there's tremendous uncertainty about what sort of ship you're supposed to order and how long that ship will be grandfathered in. So we expect frankly that the order book will remain very low, even in the face of a pretty good market, which could be a tremendous opportunity.

Amit Mehrotra, Analyst

Okay, and then just related to this scrubber, I mean, the scrubber economics are not horrible. They're okay. I mean, there's still a spread in terms of high and low sulfur fuel. Can you just baseline, where is that spread today? I think it's like $60, $70.

Hamish Norton, President

That was about $70.

Amit Mehrotra, Analyst

And obviously, all oil prices are coming back higher, jet fuel, diesel, gas, distillate demand in general should improve in a post-vaccine world. Could it be possible that like the scrubber economics become more compelling, even though they're actually pretty decent now, even at $70 spread…

Hamish Norton, President

Let's put it this way, at $70 it's a decent return on investment; at $150 or $200 or $250 it becomes better than a return on investment. What's crucial is demand for low sulfur refined products. Right now, basically since there is so little demand for jet fuel and diesel demand is somewhat suppressed, the most profitable low sulfur product of a refinery is low sulfur fuel for ships, which is very unfortunate from the point of view of the scrubber economics, but once jet fuel demand comes back and diesel demand comes back, it should be quite expensive for the refineries to produce a marginal barrel of low sulfur fuel for ships because the sulfur removal capacity at the refineries will be stretched, which is not today. So, the scrubber economics should come back faster than the increase in oil prices.

Amit Mehrotra, Analyst

Okay, that's interesting. The last question I had is for Christos and Simos. You decided to issue a press release confirming your compliance with all covenants, which makes sense given that the company's net debt is decreasing. However, this raises the question about what the covenant entails and how quickly asset values are declining compared to your ability to reduce the company's liabilities. Last quarter, you provided valuable insights into the growth in net loan-to-value ratios. I'm curious if the banks are perhaps evaluating this from an asset value perspective. It would be really helpful if you could share your thoughts on the pro forma value on a net gross basis, especially considering there seems to be a seller of assets at any price to diversify into different kinds of businesses. I would appreciate your perspective on this.

Christos Begleris, Co-Chief Financial Officer

So, there is a big buffer. The short answer, Amit, is that there is a big buffer in the value covenant that we have for our fleet. The corporate covenant that we have right now is at 70%, and that's on the basis of basically total debt over total assets including our cash. The net debt levels that we have for our fleet, which would yield sort of an equivalent ratio to the covenant, based on the values that we as of the 30th of September because essentially those covenants are tested at the last day of each quarter, yields a ratio that is in the mid 50s, and therefore, there is plenty of buffer and room even if any competitor flooded the market and the price further values by a larger extent.

Amit Mehrotra, Analyst

And, is that a value that you guys come up with, or is it an independent appraisal of the asset? Like, who comes up with what the value of the asset is at the end of the 90-day period?

Christos Begleris, Co-Chief Financial Officer

We wish we could come up with our own evaluation, but that's definitely not the case, no, basically from the pre-selected group of valuers, and it's likes of Clarksons, Braemar, etc., so the big sort of brokerage houses.

Amit Mehrotra, Analyst

Got it. Okay, that's it from me guys. Thank you for the time. Have a good night.

Christos Begleris, Co-Chief Financial Officer

Good night. Thank you.

Petros Pappas, CEO

Same to you.

Operator, Operator

Thank you very much. Ladies and gentlemen, that does conclude the call. Thank you everyone for joining. You may now disconnect.