Star Bulk Carriers Corp
NASDAQ:SBLK
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Star Bulk Carriers Corp
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Thank you for standing by ladies and gentlemen and welcome to the Star Bulk Carriers Conference Call Fourth Quarter 2017 Financial Results. We have with us today Mr. Petros Pappas, Chief Executive Officer; Mr. Hamish Norton, President; Mr. Simos Spyrou and Mr. Christos Begleris, Co-Chief Financial Officers of the company. [Operator Instructions] I must advise you the call is being recorded today. I would now like to pass the floor to your first speaker today, Mr. Pappas. Please go ahead.
Thank you, operator. I am Petros Pappas, Chief Executive Officer of Star Bulk Carriers and I would like to welcome you to the Star Bulk Carriers conference call regarding our financial results for the fourth quarter and full year 2017. Before we begin, I kindly ask you to take a moment to read the Safe Harbor statement on Slide number 2 of our presentation.
Let us now turn to Slide number 3 of the presentation for a summary of our fourth quarter 2017 financial highlights. In the three months ending December 31, 2017, net revenues adjusted for non-cash items, less voyage expenses amounted to $92.5 million, 81.6% more than the $50.9 million for the same period in 2016. Adjusted EBITDA for the fourth quarter 2016 was $55.7 million, significantly higher than the $15.5 million in the fourth quarter 2016.
We are happy to report an adjusted net income for the fourth quarter of $21.5 million or $0.34 gain per share versus $16.6 million adjusted net loss or $0.29 loss per share in quarter four 2016. Our time charter equivalent rate during this quarter was $13,860 per day, compared to $8,186 per day in the same quarter last year. Our average daily operating expenses were $3,850 per vessel per day, a decrease of 4.9% compared to the Q4 2016 figure of $4,047 per vessel per day.
Given the improving freight market and Star Bulk's strong liquidity position, we have terminated the amortization holiday we had agreed with our banks six months ahead of schedule. The strong cash flow generation during Q4 2017 enabled us to further reduce the company's leverage by repaying $35.6 million as part of the existing cash sweep mechanism in early February this year.
Finally, on the financing side, we are happy to announce our agreement with two major financial institutions to refinance the facilities with current outstanding balances of $34.7 million and $27.5 million. These facilities were maturing in October and December 2018 respectively. I will now pass the floor to our Co-CFO Christos Begleris for an update on our operational performance for the quarter.
Thank you, Petros. Slide 4 summarizes the cash breach of the fourth quarter. The improving dry bulk market enabled us to generate strong free cash flow of $39.2 million from our vessels on the water during the quarter. After including net payments of $16.9 million of cash flow from investing in remaining financing activities and other minor items, we arrived at the cash balance of $257.9 million at the end of the fourth quarter.
Slide 5 reviews Star Bulk's strong liquidity position. Our all-in cash breakeven including OpEx, corporate overhead debt principal and lease payments, interest and dry-dock provision, is approximately $11,500 per day per vessel which is below the current one year TC rates for key vessel classes as reported Clarkson.
On the right hand side we provide recent balance sheet information on our cash and debt positions. As of February 27, 2018, and after having repaid $35.6 million towards deferred debt, our total cash balance stood at $251.8 million. Total debt as of the same date stood at $1,029.1 million. The remaining CapEx on the two Newcastlemax vessels that we are due to take delivery of is $74.3 million all of which is due in early Q2 of 2018 when we will be taking delivery of the vessels. We will be drawing upon $70 million of debt for these two vessels that would leave around $4 million of cash required to take delivery of the vessels.
Finally, on the bottom right hand side of the Slide, you can see the evolution of our adjusted EBITDA which has been growing continuously as the market has been improving from the historical lows of Q1 2016. We aim to continue keeping our costs low in order to be able to increase our profitability as charter rates continue to improve. In Slide 6 we are providing an update on our fleet employment with 30 vessels in medium to long-term charters of up to 12 months.
In terms of fleet coverage for Q1 2018, we have covered 86% of our available days at average rates of approximately $12,700 per vessel per day, which is above our long-term breakeven levels including debt principle service. Star Logistics contributed during Q4 approximately $4 million of revenues with another $4 million of expenses split amongst chartering hire and voyage expenses, causing any material effect on our bottom line. As we continue growing this business, we expect these revenues and expenses to also increase over time, as well as experience high volatility with a mark to market of our [SSA] [ph] positions.
Please turn to Slide 7 where we summarize our operational performance for Q4 and full year 2017. We have continued keeping our OpEx at very competitive levels at $3,906 per vessel per day for 2017. Our net cash G&A expenses per vessel per day were $1,094 per vessel per day for 2017. Star Bulk is consistently ranked in the top three of the managers evaluated by Rightship. We are focused on having the highest standards of vessels safety and maintenance to meet the requirements of our strictest and most demanding clients. We believe that the combination of our in-house management abilities and the scale of the group provide significant advantages in terms of cost and quality that our shareholders can enjoy.
Slide 8 shows that Star Bulk is one of the lowest cost operators amongst U.S. listed dry bulk peers based on latest publicly available information. Star Bulk is one of the leaders in cost efficiencies amongst the industry with OpEx approximately 16% below the peer average. Notwithstanding the above, we always continue paying a lot of attention on the condition of our vessels in order to remain at the top of the list of our commercial partners. I will now pass the floor back to Petros for a market update and his closing remarks.
Thank you, Christos. Please turn to Slide 9 for a brief update of supply. The dry bulk fleet expanded by 2.9% during 2017. This is up from 2.2% growth in 2016 as the freight market improvement resulted in lower demolition activity. A total of 38.4 million dead weight was delivered and 14.5 million dead weight was send to demolition for a 23.9 million dead weight net inflow.
During the same period a total of 36.3 million dead weight was reported by Clarksons as firm orders and up an additional 20 million dead weight have been identified as LOIs or options. The dry bulk order book therefore ranges between 10% and 12% over the fleet depending on the percentage of LOIs and options that will ultimately materialize. Following three years of minimal contracting, dry bulk deliveries are bound to correct to new historical lows during the next 18 months. As a result, during 2018 and '19, net fleet growth is expected to correct and stabilize to 2.5% per annual depending on the rate of scrapping.
Let's now turn Slide 10 for a brief update up demand. As per Clarksons latest reports, during 2017 total dry bulk trade grew 4% in tons and 5.1% in ton miles. This is a significant increase compared to 2016 when tons and ton miles increased 1.6% and 2.3% respectively. International steel prices steel mill profitability reached a record high level during the fourth quarter of 2017. Strong steel profit margins throughout the year supported the 5.2% increase in global steel production and a 4.1% increase in iron/ore trade. China upper end crude steel consumption increased 10.2% during 2017 on the back of strong infrastructure investment growth. At the same time, international steel prices have received additional upward pressures from low exports of Chinese steel and production restrictions introduced this winter to fight pollution in the northern provinces.
China coal imports increased 6% during 2017 on the back of strong electricity demand growth of 6.5% and sluggish hydropower performance of 3.5%. We find very encouraging for near-term prospects that coal stocks at Chinese and Indian power plants and ports remain near historical low levels for this time of the year. Furthermore, it is worth highlighting that U.S. coal and Brazil soybean exports experienced a strong rebound and have contributed to strong ton mile generation during 2017. We expect demand growth to continue to outpace fleet growth during 2018 and '19.
Ton miles will play a key role during the next year due to scheduled expansion of Brazil iron ore and West Africa bauxite exports and healthy demand for grains, soybeans and minor bulks from the Pacific to continue. There is however a fragile balance which may tilt against us if ship owners embark in massive newbuilding ordering. We therefore highlight once again that the most important factor for market balance is on ordering discipline. This will lay the foundation for a sustainable recovery until environmental regulations gradually come into force. These environmental regulations will thereafter not only contribute to transition towards a cleaner environment but it may also assist shipping in reducing vessel supply and lead us to potentially even better markets as of 2020 onwards.
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 Instructions] The first question today comes from Magnus Fyhr from Seaport Global. Please go ahead.
Just a question on, with market improving so quickly in the fourth quarter and most companies have gone from losses to profitability. Just curious to see on your capital allocation going forward, if there is some flexibility there maybe or thoughts on paying down debt to remove some of the covenants to start paying a dividend.
Magnus, hi. It's Hamish Norton. So, yes, certainly for the near term we are going to be using free cash to pay down debt but over the longer term we certainly aim to pay a consistent high level of dividends once our debt is low on us to make a dividend policy like that prudent. We all recognize the value of dividends and we are shareholders. So we look forward to that day.
All right. Good to hear. And just before you get there, I mean is there much CapEx or have you laid out the CapEx required for capital upgrades to your water ballast treatment systems over the next three years that you can share with us.
Well, certainly first of all we have budgeted for all the required upgrades and I should emphasize that we have no intention nor do we see the need to issue any equity to pay for these upgrades. So that’s something that you shouldn’t have to worry about.
Okay. Just lastly on, generally the outlook you laid out, a good review of the market here. But as always, curious to see the how the crystal ball is looking for Petros here for the rest of the year. If he could share with us what his expectations are for rates by the end of the year.
You need numbers, Magnus?
Well, you have done such a good job in the prior calls so I figured I would just them.
Well, don’t hold me to them. In general, we are positive about the future like as long as supply and demand are favorable, there is going to be more demand than supply, we believe that 2018 and '19 are going to be positive years. And thereafter we think we will have more positive years if we don’t over order and because of the effect of the environmental regulations. Now coming to this year, we see that there is, the coal stocks of China and India are on the very low side. We see that Latin America has strong grain crops coming. We see more ton miles out of iron-ore in Brazil and bauxite from Africa. So overall we are positive about this year and we think we will see better rates. Now a wild guess would be that we should probably have on the [capes] [ph] above high teens, maybe 20s, for the whole year. And between, I would say on the Kamsarmax level, probably just below mid-teens and above the $1000 below that for Ultramaxes and then of course there are other types of vessels but these are the main ones.
So I think that we should be there. Let's say 13, 14 -- 13, 13.5, 14, 14.5 and about 20 for these three types, give or take. But I would not rule out an even stronger market if all things fall into place.
Thank you very much. The next question today comes from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead.
Congrats for the great quarter. Petros, I want to ask, what is your view about the extension of the steel cost in China. How do they impact, positively or negatively the flows for iron/ore?
You mean in the province of, what is it -- I don’t remember. The province of Tangshan, is that the one?
Tangshan, correct. Yes.
You never ask me the questions, Fotis.
That’s what the [indiscernible] one, steel prices are going higher.
Yes, they are going higher. But it is -- well, basically what they did was they have this 50% ban on steel mill production for the first two quarters of this year and now they are talking about extending it for a quarter or so. Is that what it is? I don’t know. I mean this could be potentially compensated by other areas. It cannot be very positive, especially if you combined it with the fact that we have very high iron/ore stocks in China at this point. But I would not say that at the end of the day it is extremely worrisome. I think it could put a dent on demand but not a huge one, and in any case we are calculating an increasing demand of -- between world demand of between 3%, 3.5%. And perhaps in ton miles 4%, which is a bit lower than last year. Of course, also supply will be lower than last year. So that’s why you see us on the positive side.
Thank you, Petros. Given the fact that supply is so low this year, it seems that it's a consensus among analysts and investors that market is going to be better in terms of rates. Have you seen this view and as a concern from the charterer side? Are they willing to come up and increase their portfolio of chartered tonnage providing period contracts either for a year or for even longer periods.
I haven't seen for longer periods that much. But it needs two to tango and I don’t think owners would want to get a long term charter at this point in time because we are by nature bullish people, and we think that next year is going to be better than this year. So I think on the other side, there is not much appetite for long-term charters. Also on the first of January 2020, we are getting into the sulfur era and there one should cater in the charter parties how this is going to be legally dealt with. Changing from fuel oil to diesel oil, but that would be a long discussion. So in my view, there is not going to be a lot of long-term charters on the one hand. On the other hand, if I was a charterer, I would want longer-term charters right now because things actually do look better and we do see some major houses coming in and asking for period charters. So if, for example, people like Cargill will come and ask you and give you rates that are much stronger than the spot market, that’s telling.
Thank you, Petros. Can you -- you have quite young fleet but there are still very few vessels which are mid-age vessels. How does fuel consumption compares of this couple of older vessels versus the majority of your fleet and I am asking relative to the new regulations. The low sulfur regulations. What kind of differential do these young vessels have versus the old vessels in terms of time charter equivalent.
Well, you are talking about eco versus non-eco, I would say, because there is older vessels, especially Japanese made, that have very competitive consumptions. Now eco versus non-eco is a difference of about 15% to 20% between consumptions but the way that older vessels or non-eco vessels would counter that would be by slow steaming. And you talked about the older vessels basically only regarding the consumption, right. Not about their earning capacity or anything.
Well, I think Fotis was asking is there a difference in time charter rates that you see between older and newer vessels.
Well, I mean right now you see that Kamsarmaxes would make between 14%, 14.5%. Ultramaxes would make between 13%, 13.5%. And Supramaxes, older Supramaxes would make like 10.5% or 11%. So you see a difference between the older Supramax and the Ultramax. But that is not just due to the age, it's also due to the differentiating size and to the vessel being more modern. So if the Ultramax -- the Supramax makes 11%, it's going to have $1,000 difference. One thing you have to take into account, however, is how much it costs to buy each vessel. So the Ultramax that makes $13,500 and costs let's say $25 million, versus the 15-year old Supramax that makes $11,000 and it costs $10 million or $12 million. You may get a better return on your Supramax at the end of the day comparatively than on your Ultramax.
Thank you, Petros and Hamish. One last question, more modeling question. You had a very steep decline in your G&A expenses and I see also that your overall expenses are quite low. Is it sustainable, what shall we model for expenses?
Our goal for -- hi, this is Christos. Basically our goal for OpEx would be to contain them hopefully at levels below 4,000 per day. And given synergies and better processes in our organization, hopefully this will be achievable. On the G&A side, you may see a slight increase given that the dollar has depreciation versus the euro compared to last year levels. Therefore the last figure that we reported was around $1,090 per vessel per day. You may see these going slightly up in the next few quarters due to the FX.
Thank you very much. And the next question today comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.
Hi, this is Chris Snyder on for Amit. My first question was kind of around the chartering strategy. We have seen time charter rates move higher, particularly the Cape size, which it seems like on a one year now right around $20,000, which is kind of right in line with what you guys expect the market to be for the full year. So I was just wondering, are you -- does that interest you in that you guys would kind of go in and lock in that $20,000 rate and kind of maybe take some risk of the table. It would be interesting to hear your thoughts on that.
Hi, Chris. Thank you for the question. Our strategy in general and we did the same thing last year, is to cover Q1 as much as we can. And then of course when you cover Q1 you also -- that spills over to Q2 because you give the charterers optionality. So we cover Q1 and a lot of Q2 and we like to have our vessels opening up between May and September because then we can do the same thing going forward and cover, again the same year, the quarters that we are more worried about. As I have said in the past, Q1 and Q2 usually see 46% of the trade, of the yearly trade and then Q3 and Q4 see 54% on average. That’s our calculations up to now for the last several years.
So let's not forget that we are now getting through Q1 which is supposed to be the weakest quarter and therefore it is possible that we may see higher rates going forward. We do have some cover, not a lot of cover for the second half of the year. We have some distant cover for Q2 and we are almost 90% covered for this quarter. We are not very worried about where rates are going to go so we think that downside is little but we would not want to miss out on a very strong upside, and with some exceptions because there is sometimes that some vessels can be fixed at extremely high rates because the charger is in difficult position or the vessel is in a good position itself. And then in such cases we may fixed for longer period but definitely we would try to stay much more spot from now on then we are up to now.
Okay. Makes sense, thank you for that. My next question is kind of around scrubbers. I know you guys have talked a lot about this topic. And obviously the math on the Cape size fleet, the return and everything looks very attractive. But I was wondering how you guys think about scrubbers with the smaller size vessel which are obviously consuming less fuel. And kind of how do you think the market, that segment of the market will play out as it relates to scrubbers.
Well, you know we anticipate that very very few people will install scrubbers on smaller ships. I mean, frankly, we don’t think that too many scrubbers will get installed on any of the dry bulk fleet. And we expect basically that most of the dry bulk fleet are going to use low sulfur fuel of some sort or another. And that’s going to be a good thing for everybody because as fuel prices increase for the fleet, basically the fleet tends to slow down and by slowing down it effectively reduces its total carrying capacity. It's just like having scrapping and it drives charter rates higher. So, frankly, we think it's a win-win.
Okay. Thank you for that. And just last real quick on the chartered in fleet. I know you guys did 197 days in Q4 which is up pretty considerably. Can you provide any guidance on what that looks today for 2018, the chartering days.
The chartering days are primarily due to our subsidiary Star Logistics, which is basically a vessel operator that books cargoes and charters in ships to move those cargoes. And occasionally it will charter in a Star Bulk ship in which case we report that on a consolidated basis as a voyage charter. But we are trying to grow that business. We have a lot of hopes for the profitability and the future of that business. Basically breakeven today. So we hope that those chartering days grow but in every case those ships that are chartered in are chartered in against a contract to move freight. We are not taking market risk.
Thank you very much. The next question today comes from the line of Herman Hildan from Clarksons. Please go ahead.
I think everyone really agrees with your outlook on the dry bulk market and I will just say over the last two years, it's astonishing how transformational your balance sheet has been and deleveraging of the balance sheet, now joined by a very strong cash flow in the fourth quarter. I am just kind of curious, if you could kind of layout based on your base case scenario for the next couple of years. How do you think Star Bulk will change. Obviously at some point you are going to introduce dividends and one question is, kind of how do you weight buybacks versus dividends and also how you see like how important is it for Star Bulk to continue to grow your fleet versus kind of repaying shareholders for the long term that they have been through.
Okay. So let's start with buybacks versus dividends. In principle, buybacks are really good if you are trading below your, let's say, net asset value by a substantial amount and you can buy the shares back as you substantial discount in net asset value. And in theory, that should improve the net asset value per share of the company and drive the share price up. But there is one problem in practice which is that at least today no dry bulk company is really big enough to satisfy the needs of the institutional investment community and every time a shipping company makes a substantial share buyback, that shrinks the market cap and the public float even further. So I think we are probably not, at last for the near term, going to be looking at share buybacks just because we think it's very helpful to the investment community to see the market caps get larger. And I think your second question was about acquisitions?
Yes. Kind of like the past year going down. Like how this [part] [ph] will look couple of years from now.
Yes. Look, I mean we certainly aim to acquire attractive fleets using our shares, obviously together with appropriate leverage. So we can take advantage of the benefits of scale. We think scale is going to be increasingly important in this business.
So is there kind of -- if you look on, obviously you saw very strong, call it asset prices, with very strong second hand values, 2016 and also into 2017, and new you start to see newbuild prices move. What particular part of the different segments in dry bulk do you see the best opportunity today.
We favor the bigger vessels in general. We favor the bigger vessels like the Cape sizes, but we also favor the bigger vessels within each size. So we think that future is in like more on Newcastlemax then on the smaller sizes. More on the Kamsarmax then on the Panamax. Well, that’s obvious, actually, and the Ultramax going forward. And I think those sizes will increase further. Then if you look at where prices went during the last year or so, you will see that prices of second hand older vessels actually moved up quicker than the younger vessels. This always happens actually probably because there cheaper end is more biased for them because they can afford them, especially when we are in an era where lending is not as abundant as it used to be.
But we are still pretty far away from where prices were in 2014. We see upsides on almost every type of vessels. I would say perhaps more upside on the Cape size and more upside on quality vessels rather I would look for more upside on the Japanese vessels, for example, than second tier Chinese. So there we are. We don’t intend to order any vessels or anything like that. So we are not really looking at the newbuilding sector.
Yes. I mean it's still quite surprising to look on total shipping orders last year for all segments above 20,000 dead weight. There was 955 ships ordered, the second lowest number of ships ordered in 20 years. The lowest [listed of] in '16. And despite that fact you are kind of starting to see newbuild prices moving up, so what's your kind of take on that. Could you assume that it's quite far away from having pricing pressure...
Well, the fact that prices are going up on the newbuilding partly is due to demand but also the newbuildings are more costly new. I mean building a tier three vessel versus a tier two, probably costs between $2 million and $4 million more in the new engines that the vessels are equipped with and in additional still on the vessels. And I think that one of the reasons, not the whole reason, is that people order actually. After what you said, people order and now the order book is between 10% and 12%. This is -- it was like 7%, like 8-9 months ago. So there has been ordering and the reason for that was because people probably tried to order the last tier two vessels that were available. And they were cheaper than the tier 3. Now we will see what happens from here on. Personally I think that there is going to be newbuilding, there is no question there is going to be newbuilding orders. I do not think we will see what we saw in 2013 where I think 120 million tons were ordered within a year. I don’t think we will see that because there is not enough loans and shipbuilding capacity has gone down by 30%. People realize that they shouldn’t be ordering in tier 2, tier 3 shipyards. There is not as much [indiscernible] around as it used to be. People have burned their fingers. So I think we will see newbuildings coming in but not to the tune that we saw four years ago, five years ago.
Thank you very much. [Operator Instructions] The next question comes from the line of Randy Giveans from Jefferies.
So first and foremost congrats on the first quarterly profit in quite some time. So hopefully sign of things to come going forward. Now a few quick questions. Looking at your fleet, only two newbuildings remaining and you have about like six Supramaxes over 15 years old. So do have any fleet growth or renewal plans for those vessels in 2018.
Well, you know I will let Petros give his thoughts afterwards, but we certainly are looking for attractive fleets. As I said, using our shares together with appropriate leverage to try to increase our scale and obviously one of the aspects of an attractive fleet is having an attractive age profile.
Yes. But as I said previously, I mean even this 17-year old Supramaxes, a few of those that we have like, I don’t know, five or six, they make $11,000 today. So if you take into account what their value is and what they are making, the return on investment is pretty good. So we are actually pretty happy having them. And it's also something that the asset value of increases quicker than on much newer vessels. But apart from what Hamish said on the pencil emerging with other companies or anything of the sort, we do not intend to order newbuildings going forward.
Sure. And then looking at your balance sheet, pretty big cash balance plus expecting significant free cash flow on the next, at least eight plus quarters. So expected usage of this cash during this quarter and how much cash we should like to kind of keep on the balance sheet as a buffer per say.
Well, as I said, our free cash flow for a little while anyway is going to be used to pay down debt and then we would intend to become a dividend payer. And I think we probably have a little bit of cash more than we absolutely need but that will just be used, for example, to pay for some of the required upgrades to the fleet and eventually as dividend.
Okay. So in future quarters we should expect more than the, I guess $22.6 million quarterly debt amort. So it will be accelerated repayments.
Yes.
That’s correct, Randy. I mean essentially as we have stated in our last press release before yesterday, we have approximately $100 million of deferred debt. Therefore we aim at repaying these with the free cash flow that we will be making over the next few quarters, as well as refinancing some of our facilities. So you would see that figure of deferred debt hopefully going to zero by the end of the year.
Thank you very much. There are no further questions at this stage. Please continue.
No further comments, operator. Thank you very much.
Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.