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Star Bulk Carriers Corp (NASDAQ:SBLK)
Q2 2019 Earnings Call
Aug 8, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. Thank you for standing by, ladies and gentlemen, and welcome to the Star Bulk Carriers Conference Call on the second quarter 2019 financial results. We have with us 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] There will be a presentation followed by a question-and-answer Session. [Operator Instructions] We now pass the floor to one of your speakers, Mr. Begleris . Please go ahead, Sir.

Christos Begleris -- Co-Chief Financial Officer

Thank you, operator. I'm Christos Begleris Co-Chief Financial 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 second quarter of 2019. 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 second quarter 2019 financial highlights. In the three months, ending June 30, 2019 PC revenues amounted to $90.7 million, 1.2% higher than the $91.5 million for the same period in 2019. Mostly because of the high number of [Indecipherable] Adjusted EBITDA for the second quarter of 2019 was up $31.2 million versus $52 million in the second quarter of 2018. The adjusted net loss for the second quarter amounted to $20.5 million or $0.22 loss per share versus $13.4 million adjusted net income or $0.21 gain per share in the second quarter of 2018.

Our adjusted EBITDA and adjusted net income figures include an adjustment of $8.4 million for the accelerated drydocking expenses brought forward from 2020 to 2019. Our TCE rate during this quarter was at 10,549 per vessel per day. During the second quarter of 2019, our average daily operating expenses were at U.S. dollars $2,939 per vessel per day.

As of June 30th, we have installed 34 scrubber towers half of which in the Newcastlemax Capesize segment, taking advantage of the market weakness in that size during the second quarter. Overall, we have decided to accelerate to 2019, the drive up schedule for the vessels that had worked during 2020 in order to complete works concurrently with a scrubber installations and have no stoppages in 2020, thus maximizing our scrubber return.

Our underwater fleet has grown after taking delivery of our last two Newcastlemax in building vessels as well as 8 out of 11 [Indecipherable] vessels. We have agreed to sell the Star Anna and the Star Gamma, which are expected to be delivered to their new owners in the end of September and end of August respectively.

As of today, we have $94.5 million common shares outstanding after giving effect to the share buyback visions of new shares in connection with the acquisition of the eight [Indecipherable] vessels and nations of shares under our equity incentive plans. We have already drawn $34.4 million viewers. The owners of scrubber with another $115.3 million U.S. dollars in place to be drawn at the later stages during the rollout of our program.

We expect to collect approximately $20 million of equity we have to-date through these financing. Pro forma total we have to-date, stands at $135 million pro forma net debt at $1.57 billion US dollars. Please turn to Slide 4, where we summarize our operational performance. We reported a fleet wide TCE of $10,549 per vessel per day for the second quarter, which is an over performance of 4% compared to the adjusted Baltic Index. For the first half of 2019, our fleet wide performance was 21% better than the adjusted Baltic the index of $10,880 per vessel per day.

This is a result of our strong commercial platform, despite the fact that we had to reposition tornadoes [Phonetic] in the Pacific for scrubber installations in China. The Scrubber Installations program will continue affecting our TCE for the remainder of the year due to increased oversight and repositioning costs. OpEx was at $3,939 per vessel per day for the quarter and $3,977 for the six month period ending on 30th of June 2019.

The combination of our in-house management and scale of the group enable us to provide our services at some of the lowest costs in the industry, with Starbucks operating cost 16% below the industry average. This is complemented by excellent management capabilities, with Starbucks consistently ranked among the top five managers evaluated by Rightship.

In slide 5, we're providing an update of our scrubber program. We expect to have 104 of our vessels scrubber fitted by the end of 2019 with the remainder of 10 vessels falling in early 2020. By the end of August, we expect to have 58 scrubber towers installed in China as well as Europe. In order to reduce retrofitting time at the shipyard. We employ 72 specialized technicians that are deployed on border vessels and complete some of installations at sea.

Slide 6, and an overview of the total complex payments of our scrubber program. Including the debting acquisition, our total expected capex for the scrubber project is now estimated at $199 million, with approximately $150 million of secured debt financing in place with the project. As of August second, the remaining capex is at $95.5 million out of which $19.7 million is equity. We have three families and agree to collect it in the next few quarters. The graph in slide 7, illustrates the current estimated scrubber tower installation schedule broken down by vessel segment and by quarter based on expected future milestones.

As of today, we have installed 49 scrubber towers, mostly in the larger and medium sizes, with the smaller sizes falling in the latter part of 2019. Slide 8 illustrates our future drive booking schedules, estimates of expenses and 0 5 [Phonetic] for the forthcoming quarters based on the current retrofit planning, vessel employment, and yard capacity.

We provide this slide to give guidance about our future expenses relating to our accelerated driver program. These figures incorporate our current understanding of present and future CPI congestion, including some buffer, but future congestion is increasing rapidly and we cannot be certain that these figures will not increase.

Slide 9, illustrates Star Bulk's employment coverage for the third quarter of 2019. We have fixed employment for approximately 59% of the days in the third quarter of 2019, at average TCE rates of around $14,420 per day. I will now pass the floor to our CEO, Petros Papas, for a market update and his closing remarks.

Petros Alexandros Pappas -- Chief Executive Officer & Director

Thank you, Christos. Please turn to slide 10 for a brief update of supply. During the first half of 2019, a total of 18.3 million deadweight was delivered and 4.5 million deadweight was sent to demolition for a 13.8 million deadweight or 1.6% net increase in fleet size.

Demolition activity as of today stands at 6 million deadweight and has already crossed the full 2018 figure. During the same period, a total of 10.3 million deadweight has been reported by Clarksons as firm orders and an additional 2 million dead weight has been identified as allies or options. The order book currently stands between 11% and 12.5% of the fleet. The Supramax Order books stands at just 8.8% of the fleet.

The average steaming speed of the drive up fleet during the first half was 11.5 knots, down 0.2 knots to last year due to combination of low freight rates and relatively high HFO prices. At the same time, carburetor fits are accelerating and they're expected to absorb approximately 3% of the fleet during the second half of 2019, further constraining vessel supply. During 2019 and 2020, Dry Bulk fleet is projected to expand at an annual pace of approximately 2.5%. However, effective supply is unlikely to expand by more than 1.5% per annum due to the [Indecipherable] is related to scrubber installations and tank cleanings at the end of 2019 and an incentive to slow steam as of January 2020.

Let us not turn to Slide 11, for a brief update of demand. During the first half of 2019, and up until the start of the second quarter, the Dry Bulk market was negatively affected by a series of disruptions in Iron ore exports owing to Vale's Iron ore mine accident and Cyclone Veronica in Australia which came on top of that, additionally, weak seasonality.

In addition, China's coal import restrictions from Australia favored shorter coal exports from Indonesia to the detriment of larger sizes, headwinds reverse toward the end of the second quarter with -- improvements driven by larger vessel sizes, mainly on the back of a recovery of iron ore trade flows and vessel shortages in the Atlantic. The Dry Bulk market rallied significantly during July with Cape Size and Panamax Post freight rates recording the highest level since 2015 and 2010 respectively.

During the first half of 2019, Iron ore exports from Brazil declined by 10.5%, with April volumes contracting 29.1% year-on-year, the lowest monthly export figures since January 2012. Australia Iron ore exports during the first half are estimated to have declined 3% year on year. Nevertheless, steel industry fundamentals stand healthy, leading us to believe that the decline experienced our supply driven.

More specifically,[Indecipherable] iron and crude steel production increased by 9.5% during the first half and combined with a slowdown in imports, has led to a sharp destocking of Iron ore at ports. According to Clarkson's, Iron ore trade in 2019 is expected to decline by 1.8% and 3.4% in tons and ton miles respectively. China's total electricity generation during the first half increased by 10.3% year-on-year. Power generation on hydro power increased 11.2% and restricted thermal power growth 2.5%, domestic coal production increased 3.4% during the first half and coal imports increased 62.2%. China has announced restrictions on lower quality coal imports and has set as a target to keep 2019 imports at the same level to 2018. It is still too early to evaluate if the Chinese restrictions will have an impact on the shipping markets.

India and Southeast Asia countries are expected to absorb a potential surplus created from China's restrictions. Indian coal imports are estimated to have increased by approximately 19% and are projected to remain strong throughout the year. Clarkson's project Coal Trade Growth of 0.6% in tons, but minus 0.3% in ton miles respectively, its sorted differences have prevailed during the first half of 2019.

The US-China trade war has had a strong effect on soybean trade flows during the last 18 months. US soybean exports during 2018 decreased 14% in tons and 30% in ton miles with Q4, 2018 export volumes down by 40% to 2017. China soybean imports during the first half, decreased 15% as a result. Furthermore, over the last twelve months, the pig population in China has declined 25% due to the outbreak of the African swine flu.

Coals, grains and minor bulks, including bauxite, are projected to continue to grow at an annual pace of circa 4% during 2019 and 2020. Bauxite, nickel and manganese are trade volumes are projected to increase from 214 million tons during 2018 to 273 million tons during 2020 with the majority of Guinea bauxite transport -- transported on Capesize and Newcastlemax vessels to China with a positive effect on ton miles and Atlantic Capesize requirements.

According to Clarkson's, total Dry Bulk trade is a project to expand approximately 1.1% during full year 2019 and will rebound above 3% during 2020. Finally, as a general comment, we expect inflationary pressures during -- related to IMO 2020 to incentivize restocking across all Dry Bulk cargoes during the second half of 2019 In general, we remain optimistic for the end of the year and expect that the combination of lower supply and recovering demand is likely to surprise us to the upside. Without taking any more of your time, I will now pass the floor over to the operator to answer any questions you may have.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen we will now begin the Question-and-Answer Session. [Operator Instructions] We will now take our first question. Please go ahead, your line is now open.

Christopher Snyder -- Deutsche Bank AG -- Analyst

This is Chris Snyder from Deutsche Bank on from it. So the first questions on the Cape market, which seems to be driving market demand and sentiment even more than normal --you know, obviously rates spike with valley ramping and limited Atlantic supply but now we're starting to see rates pullback as supply is returning into the Atlantic. So my question is, have we hit a steady, more balanced state here in the low to mid 20,000 levels? Or do you see more downward pressure over the near term as supply continues to return into the Atlantic?

Petros Alexandros Pappas -- Chief Executive Officer & Director

Hi, Chris. Thank you for the question. We're very positive about the Capsized market, at least until the end of this year, the market got as strong as it did because there was -- there were very few capes in the Atlantic, for various reasons, like for example, that the markets were tough previously and vessels would not dare to ballast back to the Atlantic once they were in the Far East. Also, banking prices were relatively high and they were also installing scrubbers and therefore, what happened was that, as you also said, there were less vessels in the Atlantic and that led to a strong increase in the market, which pulled the whole market up.

Now there are vessels going back, as you said, and -- the situation is getting easier, perhaps. But at the same time, there are so many scrubber installations and dry docks taking place at the same time. And as the Chinese yards are very -- very busy with all these vessels, Dry Bulk times and scrubber installation times are getting longer. So, I would not be surprised to see vessels all of our companies that have not been extremely well prepared and have not fixed forwards, staying in shipyards for like 60 days. That is going to take a big percentage of the Capes out of the market for the next five months. I think there are about 60 VLOCs and about a 130 Capes that still need to install scrubbers. Hence, in our view, this market is going to be -- continued to be strong during the next five months. We saw it at 30,000 plus and now it's like low 20s. Since yesterday, the market went up by $2,000. So, in our view, it's going to be a strong market with ups and downs, but I expect them to be above $20,000 for the near future.

Christopher Snyder -- Deutsche Bank AG -- Analyst

I appreciate that color. And then just kind of following up on the Capes. So, obviously, China's steel production growing 10%, at the same time, the Iron ore imports are falling mid single-digits year-on-year dynamic, that doesn't feel like it can continue to persist. Have you seen China return to the Iron ore import market now that Iron ore prices have kind of come down, you know, pretty sharply here over the last couple of weeks?

Petros Alexandros Pappas -- Chief Executive Officer & Director

Well, China has stocks that are about between 118 million to 120 million tons, so they will have to come back into the market. As we were always saying, we believed that this slowdown in the -- in Chinese imports was more due -- was more supply driven than demand driven. So now that Brazil has increased -- has come back into the market and we have all these long haul cargoes, we believe that the market will be sustained going forward.

And I'm basically talking about the next five, six months. As of next year, we believe here that the effect of the environmental regulations is going to be relatively strong. And if, for example, vessels are obliged to burn diesel instead of fuel, which there is a difference between the two -- between $200 and $300, depending on the place and the time, if vessels all of a sudden have to burn non-stop, for fitted vessels, diesel oil at $700 per ton, it is almost certain that they will slow down their speed and as we have said before, again, a one-knot decrease in speed equals about 7% decrease in supply of vessels, which is huge.

Christopher Snyder -- Deutsche Bank AG -- Analyst

Yeah. Thank you for that. And then my second question. So the price of high sulfur fuel oil has spiked in a couple of key regions, most notably Singapore. Is this just driven by supply is starting to transition ahead of demand or is there something maybe more structural that could weigh on in other 2020 spread in scrubber economics?

Petros Alexandros Pappas -- Chief Executive Officer & Director

We think this is a temporary thing, totally temporary. There was also a very high barging for some reason, in Singapore. I think now it's normalizing. Just to give you an idea. Yesterday we bought fuel oil at I think $250 per ton in the Atlantic. So, that doesn't seem to me like it's going up.

Christopher Snyder -- Deutsche Bank AG -- Analyst

No, not at all. Well, I appreciate the time, that's it for me. Thank you.

Christos Begleris -- Co-Chief Financial Officer

Thank you.

Operator

We will now take our next question. Please go ahead. Your line is now open.

Randy Giveans -- Jefferies LLC -- Analyst

How are you gentlemen, it's Randy Giveans from Jefferies. How's it going?

Christos Begleris -- Co-Chief Financial Officer

Hi Randy.

Randy Giveans -- Jefferies LLC -- Analyst

Excellent. Quick question for me. So, first, there have obviously been some headlines and delays for scrubber retrofits recently. However, you're kind of bucking that trend, able to pull forward your dry dock and scrubber retrofit schedule. How is that possible?

Hamish Norton -- President

Well, we haven't pulled our scrubber retrofit schedule forward from what our scrubber retrofit schedule started out being. We've managed, kind of, to keep it at the same pace. What we've done basically is, as part of our scrubber retrofit program, we've pulled forward the dry docks on all those ships that we're getting scrubbers that had a dry dock scheduled in 2020. We're doing not just the scrubber retrofit in 2019, but the dry dock work in 2019. And we had arrangements with Major Shipyard Group in China. Basically, we had a contract in place for a while, that's put us in a relatively strong position as the Shipyards get more and more congested.

Petros Alexandros Pappas -- Chief Executive Officer & Director

Just to clarify, these dry docks that we're bringing forward, every five years of increase that's said with the condition in the Far East for scrubber installation.

Hamish Norton -- President

Well, you know, first of all, I think owners that have had contracts in place for a while with shipyard groups may be able to do what we're doing. If you have not had a contract in place for a while, it would be challenging. And the second question --

Petros Alexandros Pappas -- Chief Executive Officer & Director

well, the second is whether there will be longer ...

Hamish Norton -- President

Yeah. I mean, basically our estimate of the dry dock and scrubber installation schedule takes into account increasing congestion at the shipyards. And we don't think it's going to get longer. But, you, know, the reason we hedged our bets a little, is that it's hard to predict exactly how congested these shipyards can get. But I mean, we think we've put in a buffer that's sufficient for the increasing congestion that we anticipate.

Randy Giveans -- Jefferies LLC -- Analyst

Okay. That's -- that's really helpful. I guess that's it for me. Thank you guys.

Christos Begleris -- Co-Chief Financial Officer

Thank you.

Operator

Once again, [Operator Instructions] We will now take our next question. Please go ahead. Your line is now open.

J Mintzmyer -- Value Investor's Edge -- Analyst

Good morning, everyone. J Mintzmyer at Value Investor's Edge. Good quarter considering the dynamics of the market and even better fixtures for Q3. Just a bit of housekeeping, I might have missed it in the opening comments. You mentioned previously 100% scrubber installation for the fleet, but I see one 114 total scrubbers on Slide 7 versus a 118. Are there four ships that are no longer getting scrubbers or those ships that are earmarked for sale or what what's going on there?

Hamish Norton -- President

Those are four ships that are not getting scrubbers that we may sell or operate depending on the strength of the market.

J Mintzmyer -- Value Investor's Edge -- Analyst

Okay, that makes sense. Thanks, Hamish. And then, looking at your cash balances, I understand there's about $20 million positive coming back from scrubber financing a cash balance is a little low, but the current ratio looks good. What kind of cash buffer are you looking for -- for the company before you can really go heavy on either repurchases here at these prices or reinstating a dividend?

Hamish Norton -- President

You know, it's not just cash buffer, it's also market outlook. And, I think we have always stated that in a strong market, we want to be a significant dividend payer and that sentiment hasn't changed. And, let's hope for a continued strong market.

J Mintzmyer -- Value Investor's Edge -- Analyst

Yeah, excellent [Indecipherable] hat -- yes, go ahead.

Christos Begleris -- Co-Chief Financial Officer

Well, machinery purchases, we stated before that right now, given our cash balance, you may see us buyback shares utilizing proceeds from sale of vessels.

J Mintzmyer -- Value Investor's Edge -- Analyst

Yeah, that makes sense. It's just plain that arbitrage with the NAV and looking into your net asset value now, I see you guys in the mid 14s and then that's without giving you any credit for these scrubbers and also without including any sort of positive cash flow that I'm expecting the third quarter. So, definitely a huge disconnect right now in the market and the more you can act on that, the better. You have a situation here with the rates running quite healthy, keeps in the 20s and the stock is falling. So, that's a perfect opportunity take advantage of the arbitrage. Thank you, gentlemen, for your time today.

Hamish Norton -- President

Thank you.

Operator

[Operator Instructions] We have no further questions at this time. Please continue.

Petros Alexandros Pappas -- Chief Executive Officer & Director

Thank you very much, operator. Thank you, everybody. We have nothing else to add. Have a nice summer vacation, everyone.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Christos Begleris -- Co-Chief Financial Officer

Petros Alexandros Pappas -- Chief Executive Officer & Director

Hamish Norton -- President

Christopher Snyder -- Deutsche Bank AG -- Analyst

Randy Giveans -- Jefferies LLC -- Analyst

J Mintzmyer -- Value Investor's Edge -- Analyst

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