Star Bulk Carriers - Earnings Call - Q2 2020
August 6, 2020
Transcript
Operator (participant)
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.
To ask a question, you will need to press star and one on your telephone keypad and wait for your name to be announced, and I should 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.
Christos Begleris (Co-CFO)
It's actually Christos Begleris, Co-CFO of Star Bulk Carriers Corp., and 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 cost 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 3 months ending June 30, 2020, TC 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, 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 continued 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 debts 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 break-even cost is at $11,300 per day, including scrubber cost and debt service.
For the remainder of 2020, we have hedged the differential between HFO and VLSFO for 71,000 tons in the paper market 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 notional debt at an average fixed interest rate of 0.46% for an average maturity period of close to 4 years. I will now pass the floor to our COO, Nicos Rescos, for an update on our operational performance.
Nicos Rescos (COO)
Thank you, Christos. Please turn to slide 6, where we summarize our operational performance. OPEX was at $4,027 per vessel per day for the second quarter of 2020 versus $3,939 per vessel per day for Q2 2019. Net cost G&A expenses were at $1,428 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 amongst the top 5 ship managers evaluated by RightShip. We're 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.
Petros Pappas (CEO)
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 newbuilding order book has been reduced to a record low level of 7% of the fleet. Year to date, the dry bulks steaming speed is estimated at 11.4 knots, down by just 0.4% to last year.
However, a notable increase has been observed over the past month amid 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 dock trade during 2020 is estimated to decline by 4.5%, with COVID-19 the key factor behind the slump.
With early second half having already shown signs of significant improvement, the projected decline is estimated to have concentrated on the first half of the year. A 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 during 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 on the back of their production guidance of a minimum of 310 million tons, implying a 44% increase in export volumes to the first half of 2020.
Supportive to iron ore trade is the fact that China's crude steel and pig iron production have 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 continued to underperform by 11.8% during the first half, with most of the declines concentrated on the second quarter.
Crude trade during 2020 is projected to decline by 7.9% in tons and 8.8% in ton miles as the coronavirus has trimmed 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%, and 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 t per ton, but $28 per tons. But 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 they 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 on the back of a sharp increase in Latin America's soybean exports and the expected recovery in U.S. exports. China's grains demand is already emerging higher after the lockdowns, with the country's pig population recovering following the African swine fever. The Phase One trade deal is expected to weigh positively 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 will continue to generate ton miles for Capesize vessels. It is worth noting that Clarksons forecasts minor bulk 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, and barring any new black swan occurrences and/or a major return of the coronavirus without a vaccine, or a potential resurgence of the U.S.-China trade war, the appropriate conditions are lining up for a strong drybulk market.
We're 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.
Operator (participant)
Thank you, sir. Ladies and gentlemen, once again, if you do wish to ask a question, please press Star and One on your telephone keypad and wait for your name to be announced. If you wish to cancel the request, please press Star two. Thank you. And your first question comes from the line of Amit Mehrotra of Deutsche Bank. Please ask your question.
Petros Pappas (CEO)
Amit, we cannot hear you.
Nicos Rescos (COO)
Yeah.
Operator (participant)
Hello, sir. Could you please ask your question?
Amit Mehrotra (Managing Director)
Yeah. Can you guys hear me now?
Petros Pappas (CEO)
Yes. [crosstalk]
Nicos Rescos (COO)
Yeah. Yes. We can hear you.
Amit Mehrotra (Managing Director)
Oh, yeah. I'm sorry about that. My headset must not be working. Anyways, 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 will unwind as we think about the back half.
Simos Spyrou (Co-CFO)
Hi, Amit. This is Simos. I assume it's 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 [crosstalk] we reported in May.
Amit Mehrotra (Managing Director)
No. No. No. Not really. I mean, the net income, if you add back depreciation, was still negative $9 million in the quarter, but you reported a positive operating cash balance of $23 million. [crosstalk] So the implication is that you had a big working capital benefit.
Simos Spyrou (Co-CFO)
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 million, $6.5 million versus the previous quarter. And this has assisted in increasing the cash balance at the end of the quarter.
Amit Mehrotra (Managing Director)
Right. And so are those payables that you stretched, or?
Simos Spyrou (Co-CFO)
Exactly.
Amit Mehrotra (Managing Director)
Do those unwind? I'm just trying to understand. I mean, cash flow is really important right now. This is why it's a little bit of a nitty-gritty question. But do you expect that to unwind over the next six months, or is this kind of performance [crosstalk] achievable?
Simos Spyrou (Co-CFO)
We are managing the payables. It's not when you have ample cash, it's not necessary to continue stretching the payables. So right now, we reported $154 million of cash as of yesterday. We are projecting to be, with the additional refinancings, close to $230 million-$235 million end of the year. So if there is no need to stretch payables, we are not going to continue with this aging. It was primarily during the second quarter when we hit the bottom of our free cash.
Amit Mehrotra (Managing Director)
Right. [crosstalk]
Simos Spyrou (Co-CFO)
And just to add to that, Amit, we started from a very low balance on working capital. So it was effectively a low-hanging fruit for us in order to manage cash. And the figure that we have stretched it to is not an exuberant figure. Therefore, we feel quite comfortable with where we are today.
Amit Mehrotra (Managing Director)
Yeah. Yeah. And 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 to the sale-leaseback, which are obviously more relevant. I mean, the market has rebounded a lot. You guys have gotten good coverage. I always think about sale-leasebacks a little bit more of an expensive form of effectively debt financing. Was that just a reflection of just how below the market was prior to kind of the mid-June inflection, and you guys wanted to really protect yourself, or?
Petros Pappas (CEO)
Amit. [crosstalk]
Amit Mehrotra (Managing Director)
Yeah.
Petros Pappas (CEO)
I mean, Christos and Simos will explain, but these sale-leasebacks were not expensive.
Simos Spyrou (Co-CFO)
Yeah. And let me expand on that. Basically, Amit, if you compare the interest cost on the debt that we are refinancing, if you compare the old interest cost 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 here 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, which is extra proceeds for the company.
But at the same time, we are lowering the interest cost, and we are also having, we have negotiated a much better amortization profile for the new debt that we are taking over. And as a result, our annual overall interest service cost, including the debt principal repayment, is actually reduced by $10 million.
Amit Mehrotra (Managing Director)
Yeah. Okay. Yeah. That's helpful.
Petros Pappas (CEO)
Yeah.
Amit Mehrotra (Managing Director)
That's great. That's great. So the last very couple of quick questions, and then I'll let go of what somebody else asked. 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. And 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?
Simos Spyrou (Co-CFO)
I mean, on a net leverage basis, our LTV doesn't change, right, because we are effectively adding cash as well as debt. [crosstalk]
Amit Mehrotra (Managing Director)
I'm talking about the asset values declining, possibly, where the asset values are today.
Simos Spyrou (Co-CFO)
I mean, we have not historically provided valuations of our fleet, and we want to maintain doing so, if you don't mind.
Amit Mehrotra (Managing Director)
Okay. Okay. That's it. That's fine, guys.
Simos Spyrou (Co-CFO)
But leverage, I'll just say that leverage with the new debt, effectively, with the new debt levels is in the 60s on gross leverage compared to the valuations that we receive today.
Amit Mehrotra (Managing Director)
So it would be low 60s on a net basis?
Petros Pappas (CEO)
No. Gross. Gross. Lower than that, net.
Amit Mehrotra (Managing Director)
So net LTV will be with a 5 handle?
Petros Pappas (CEO)
Probably.
Amit Mehrotra (Managing Director)
Okay. All right. Thank you, guys. Appreciate it.
Petros Pappas (CEO)
Yeah.
Operator (participant)
Thank you. Your next question comes from the line of Ben Nolan. Please ask your question.
J Mintzmyer (Founder)
Hi. This is Tucker Long for Ben Nolan. I had a couple of questions. First, given the weak market, are you guys considering any consolidation opportunities? I know you have in the past, and just wanted to get your color on your thoughts on that.
Petros Pappas (CEO)
Yeah, 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, and we would be very interested in consolidation opportunities that fit with our operations, that did not increase our leverage.
We're not going to buy fleets 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, and if we have an opportunity to do that, we will look at it very seriously. We would intend to make acquisitions in the dry bulk shipping market and not get into other markets at this time.
J Mintzmyer (Founder)
Yeah. That makes sense, and then just a quick follow-up, a modeling question. With the refis and interest hedge, would you say the interest expense this quarter is kind of a more normalized level going forward, or will the price tick back up moving forward?
Petros Pappas (CEO)
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.
Simos Spyrou (Co-CFO)
Yeah. So interest basically increases, given the larger debt amount, by approximately $2.5 million per year. But the debt service overall, given much lower amortization, is lower by $10 million a year.
J Mintzmyer (Founder)
Okay. Perfect. That makes sense, and that's all for me. Thank you.
Petros Pappas (CEO)
Thank you.
Operator (participant)
Thank you. And your next question comes from the line of Randy Giveans of Jefferies. Please ask your question.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
Howdy, gentlemen. How's it going?
Nicos Rescos (COO)
Hi, Randy.
Simos Spyrou (Co-CFO)
Hi, Randy.
Petros Pappas (CEO)
Hey, hey.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
All right. Can you provide a breakdown of the 3Q20 quarter-to-date rates by asset class? Also, looking further ahead, clearly, iron ore trade is very strong with Brazil ramping up. Are you positioning your fleet to have more exposure to the Atlantic Basin as a result? And how do you compare the kind of strong iron ore market with the more tempered outlook for coal?
Petros Pappas (CEO)
Hi, Randy. It's Petros. So Q3 coverage for per asset class, is that the question?
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
Yes. That's the first part.
Petros Pappas (CEO)
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 side and less on the Cape. On the Cape, we are as spot as we can be because we're very positive about the next two quarters.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
Okay. And then to the second part in terms of positioning in the Atlantic and then iron ore versus coal?
Petros Pappas (CEO)
This is a more complicated question. It has a lot to do with whether the vessels are AMSA-fitted or not, meaning whether they can go to Australia or not. What is happening right now is that there is almost nowhere to disembark your crew, 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'll tell you later.
This means that there are not enough vessels potentially, or there won't be enough vessels to trade, and especially in Australia. This could get rates up in the Pacific. Vessels that cannot disembark crew and, by definition, cannot trade into Australia will have to start ballasting towards South Africa or Brazil, etc. That could actually lower, I mean, make the market in the Atlantic easier for charters than the Pacific.
We will see how it goes, so we don't have a definite plan of sending our vessels towards the Atlantic or the Pacific. We think that the Pacific will strengthen substantially going forward.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
Got it. All right. Last question. Looking at your hedges, you have 1,000 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? And 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?
Simos Spyrou (Co-CFO)
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 the beginning of 2020, effectively. And to your second question, we have averaged at a fixed base interest rate of 0.458. So it's 45.8 basis points for a notional of 1 billion and 11 million, which is about 67% of our current bank debt.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
For what length?
Simos Spyrou (Co-CFO)
The average weighted average maturity is four years.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
Right. And I guess inclusive of the margin, what's that weighted average interest rate?
Simos Spyrou (Co-CFO)
So our average margin right now across the fleet is at a bit below 2.5. Therefore, the all-in interest cost is slightly lower than 3%.
Randy Giveans (SVP and Group Head of Energy Maritime Shipping Equity Research)
Perfect. That is it for me. Thanks again, and I will talk soon.
Simos Spyrou (Co-CFO)
Thank you, Randy.
Petros Pappas (CEO)
Thank you.
Operator (participant)
Thank you. And your next question comes from the line of J Mintzmyer of Value Investor's Edge. Please ask your question.
J Mintzmyer (Founder)
Good morning. Good afternoon, gentlemen. Thanks for taking my questions.
Petros Pappas (CEO)
Good morning, Jay.
J Mintzmyer (Founder)
So the first question I have following up there with Randy's good questions, looking at your LIBOR swaps, very impressive. I don't think anyone can deny that. You did 66%. Is that sort of the max theoretical cap based on maturities and structure, or is there a window to sort of fix the rest of that at these record low rates?
Petros Pappas (CEO)
We could fix more, but if you fix everything and then you find yourself in a situation where you can pay down debt, you can get overswapped, and so we have to keep that in mind.
J Mintzmyer (Founder)
Certainly makes sense. So it sounds like a reasonable theoretical cap there. You did some sale leasebacks to open up liquidity, and I think that makes a lot of sense as we have a $100 million current account deficit heading into the next year. But it looks like you've bridged most of that gap with the leasebacks. I think now you have 36 total, if I'm counting. Please correct me if that's wrong.
That's about a third of the fleet. What is sort of the reasonable level at which you would say, "That's the most leasebacks we could do"? Is it half the fleet? Is it 2/3 the fleet? What's sort of the cap?
Petros Pappas (CEO)
I mean, look, basically, we have, after all of the existing refinancing transactions closed, we have projected so much cash that we probably don't need any more. 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.
Simos Spyrou (Co-CFO)
And if I may add, J Mintzmyer, I mean, 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 a much, much more competitive cost.
However, we will not put all our eggs in one basket because we are effectively forging here relationships with all the major Western shipping banks that are active right now, some American shipping banks like Citigroup, and then Chinese, both leading institutions as well as banks, which are major providers of capital, then Japanese sale and leaseback houses as well as banks, and then Taiwanese banks as well. So that is why we cast a wide net as far as our financiers are concerned.
Because in times like this, which is a very difficult time to be talking about new ship financings, it really helps to have very good relationships across a wide spectrum of financiers.
J Mintzmyer (Founder)
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 industries. So I'm glad you're not following that path. Final question, kind of a repeater of what Randy was getting at. Capesize, look, we had a spike in June, but it was kind of short-lived.
Were you 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?
Petros Pappas (CEO)
Hi, Jay. 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, then, 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're seeing in the market, like we have to deviate to ports and disembark the crew and wait for days sometimes. Right now, there are almost 70 bulkers in Manila waiting to disembark the crew. With all that, the additional tons and the inefficiency in the market, we believe that, and more bulk side from West Africa, we believe we will be seeing a very strong market. So we will keep the fleet spot.
J Mintzmyer (Founder)
Excellent. Thank you very much for the good guidance and answers.
Petros Pappas (CEO)
Thank you.
Operator (participant)
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.
Petros Pappas (CEO)
Nothing more to add, Operator. Thank you very much, and have a nice August to everyone that goes on vacation, and stay safe.
Operator (participant)
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.