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Edited Transcript of SBLK earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Star Bulk Carriers Corp Earnings Call

ATHINA Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Star Bulk Carriers Corp earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christos Begleris

Star Bulk Carriers Corp. - Co-CFO

* Hamish Norton

Star Bulk Carriers Corp. - President

* Petros Alexandros Pappas

Star Bulk Carriers Corp. - Founder, CEO & Director

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Conference Call Participants

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* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Erik Hovi

Clarksons Platou Securities AS, Research Division - Research Analyst

* J. Mintzmyer

Value Investor's Edge - Lead Researcher

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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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) I must advise you that this conference is being recorded today. We now pass the floor to one of your speakers, Mr. Begleris. Please go ahead, sir.

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Christos Begleris, Star Bulk Carriers Corp. - Co-CFO [2]

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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 #2 of our presentation.

Let us now turn to Slide #3 of the presentation for a summary of our second quarter 2019 financial highlights. In the 3 months ending June 30, 2019, TCE revenues amounted to $92.7 million, 1.2% higher than the $91.5 million for the same period in 2019, mostly because of the high number of vessels that we currently own.

Adjusted EBITDA for the second quarter of 2019 was at $31.2 million versus $52 million in the second quarter of 2018. 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 dry docking 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 USD 3,939 per vessel per day. As of June 30, we have installed 34 scrubber towers, half of which is in Newcastlemax, Capesize segment, taking advantage of the market weakness in that site during the second quarter.

Overall, we have decided to accelerate to 2019 the dry dock schedule for the vessels that had work during 2020 in order to complete works concurrently with the scrubber installations and have no stoppages in 2020, thus maximizing our scrubber return.

Our underwater fleet has grown after taking delivery of our last 2 Newcastlemax newbuilding vessels as well as 8 out of 11 Delphin 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, the issuance of new shares in connection with the acquisition of the 8 Delphin vessels and the issuance of shares under our equity incentive plans.

We have already drawn USD 34.4 million of scrubber debt with another USD 115.3 million in place to be drawn at a later strange during the rollout of our program. We expect to collect approximately $20 million of equity we have prepaid through these financings. Pro forma total cash today stands at $135 million with pro forma net debt at USD 1.57 billion.

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 overperformance 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 index at $10,880 per vessel per day.

This is a result of our strong commercial platform despite the fact that we had to reposition tonnage 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 off-hire and repositioning costs.

OpEx was at $3,939 per vessel per day for the quarter and $3,977 for the 6-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 Star Bulk's operating cost 16% below the industry average. This is complemented by excellent ship management capabilities with Star Bulk consistently ranked amongst the top 5 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 10 vessels following 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 shipyards, we employ 72 specialized technicians that are deployed on border vessels and complete some of installations at sea.

Slide 6 has an overview of the total CapEx payments of our scrubber program. Including the Delphin acquisition, our total expected CapEx for the scrubber project is now estimated at USD 199 million with approximately $150 million of secured debt financing in place for the project. As of August 2, the remaining CapEx is at $95.5 million, out of which, $19.7 million is equity we have prefunded and will be collected 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 following in the latter part of 2019.

Slide 8 illustrates our future dry docking schedule, estimated expenses and off-hires 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 dry dock program. These figures incorporate our current understanding of present and future shipyard congestion, including some buffer. But shipyard 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 rate of around $14,420 per day.

I will now pass the floor to our CEO, Petros Pappas, for a market update and his closing remarks.

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [3]

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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 deadweight has been identified as LOIs or options. The order book currently stands between 11% and 12.5% of the fleet.

The Supramax order book stands at just 8.8% of the fleet. The average steaming speed of the dry bulk 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, scrubber retrofits are accelerating and are expected to absorb approximately 3% of the fleet during the second half of 2019, further constraining vessel supply.

During 2019 and 2020, the 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 off-hires related to scrubber installations and tank cleanings at the end of 2019 and then incentive to slow steam as of January 2020.

Let's now 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 traditionally weak seasonality.

In addition, China's coal import restrictions from Australia favored shorter coal exports from Indonesia to the detriment of larger sizes. Headwinds reversed towards 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 Capesize and Panamax spot freight rates recording the highest level since 2013 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 declines experienced are supply-driven. More specifically, [domestic] 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 Clarksons, 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 5.3% year-on-year. Power generation on hydropower increased 11.2% and restricted thermal power growth, 2.5%. Domestic coal production increased 3.4% during the first half and coal imports increased [6 -- 2.2%].

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. Clarksons project coal trade growth of 0.6% in tons but minus 0.3% in ton miles, respectively as shorter distances have prevailed during the first half of 2019.

The U.S.-China trade war has had a strong effect on soybean trade flows during the last 18 months. U.S. 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 12 months, the peak population in China has declined 25% due to the outbreak of the African swine flu.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [2]

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This is Chris Snyder from Deutsche Bank on for Amit. So the first question is on the Cape market, which seems to be driving market demand and sentiment even more than normal. Obviously, rates spike with Vale ramping and limited Atlantic supply. But now we're starting to see rates pull back 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 the supply continues to return into the Atlantic?

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [3]

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Thank you for the question. We're very positive about the Capesize markets, 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, bunker 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 market, which pulled the whole market up.

Now there are vessels going back, as we said, at -- and it -- 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, very busy with all these vessels, dry dock times and scrubber installation times are getting longer.

So I would not be surprised to see vessels of companies that have not been extremely well prepared and have not fixed forward 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 5 months. I think there are about 60 VLOCs and about 130 Capes that still need to install scrubbers.

Hence, in our view, this market is going to be -- to continue to be strong during the next 5 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.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [4]

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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, a 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 pretty sharply here over the last couple of weeks?

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [5]

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Well, China has stocks of -- that are about between 118 million to 120 million tons, so they will have come back into the market. As we were always saying, we believe that this slowdown in demand -- in Chinese imports was more due -- was more supply driven than demand driven.

So now that Brazil has increased -- is coming 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 5, 6 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's 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-scrubber-fitted vessels, diesel oil at $700 per ton, it is almost certain that they will slow down their speed. And the -- and as we have said before again, a 1-knot decrease in speed equals about 7% decrease in supply of vessels, which is huge.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [6]

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Yes. 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 the 2020 spreads and scrubber economics?

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [7]

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We think this is a temporary thing, totally temporary. There was also 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.

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Operator [8]

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We will now take our next question.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [9]

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It's Randy Giveans from Jefferies. 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?

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Hamish Norton, Star Bulk Carriers Corp. - President [10]

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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 pulled forward the dry docks on all those ships that were 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 a 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.

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [11]

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Just to clarify, these dry docks that we're bringing forward, every 5 years, we have to do 2 dry docks. And we are allowed to have the first dry dock on the second or third year. All these dry docks that are -- we're pushing forward is our -- we're due on the third year. We're doing them on the second year. And therefore, we don't lose any time on the cycle. It is just doing them earlier during the 5-year period.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [12]

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Got it. And then I think I see guidance for 114 scrubbers versus 118 vessels. Can you reconcile those 4?

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Hamish Norton, Star Bulk Carriers Corp. - President [13]

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Yes. No, that's right. That's right. There are 4 sad, forlorn vessels that will have to do without scrubbers.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [14]

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Okay. And these are all Supramax vessels?

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Hamish Norton, Star Bulk Carriers Corp. - President [15]

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Yes.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [16]

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Okay. Will you operate those without scrubbers or will you kind of get those out of the fleet?

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [17]

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We will probably sell them. Or if not, if the market is very strong, we may keep them through to next year.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [18]

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Okay. All right. Last question for me, segueing on the possible selling of ships. Star Bulk shares exceeded $11 just 2 weeks ago, back to $9.20 or so today, pretty good move today. With shares trading at a pretty steep discount to NAV and obviously, with rates in 3Q '19 and beyond looking pretty strong, are share repurchases still contingent on the sale of ships? Or would you use free cash flow as well for that?

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Hamish Norton, Star Bulk Carriers Corp. - President [19]

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I think at this point, we still don't feel like using free cash flow to buy back shares. But if we have sales of ships, we might use those proceeds to buy back shares depending on the share price. Our thinking is pretty much the same as it has been for a while on that topic.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [20]

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Got it. Yes, just to note the change with the recent pullback.

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Operator [21]

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We will now take our next question.

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Erik Hovi, Clarksons Platou Securities AS, Research Division - Research Analyst [22]

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Erik Hovi, Clarksons. So also, regarding the accelerated dry docking schedule you have. So is this something -- I guess you answered most of it already, but is it something you think that other owners are able to accomplish as well? Or is this something that only you are able to do? And for those added dry docks, do you think the installation time will increase, as you said, with the conditions in the Far East for scrubber installations?

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Hamish Norton, Star Bulk Carriers Corp. - President [23]

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Well, 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?

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Erik Hovi, Clarksons Platou Securities AS, Research Division - Research Analyst [24]

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Well, the second, whether there will be a longer -- yes, longer stock.

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Hamish Norton, Star Bulk Carriers Corp. - President [25]

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Yes. 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 the reason we hedged our bets a little bit 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.

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Operator [26]

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(Operator Instructions) We will now take our next question.

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [27]

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It's J. Mintzmyer on at Value Investor's Edge. Good quarter considering the dynamics to 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 114 total scrubbers on Slide 7 versus 118. Are there 4 ships that are no longer getting scrubbers? Or are those ships that are earmarked for sale? Or what's going on there?

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Hamish Norton, Star Bulk Carriers Corp. - President [28]

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Those are 4 ships that are not getting scrubbers that we may sell or operate depending on the strength of the market.

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [29]

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Okay. That makes sense. And then looking at your cash balances, I understand there's about $20 million deposits coming back from the scrubber financing. 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?

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Hamish Norton, Star Bulk Carriers Corp. - President [30]

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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 there and that sentiment hasn't changed. And let's hope for a continued strong market.

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [31]

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Yes. Excellent. Let's all hope for that. I -- go ahead.

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [32]

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

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [33]

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Yes. That makes sense. It's just playing that arbitrage with the NAV. And looking at 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 in the third quarter.

So definitely a huge disconnect right now in the market, and the more you can act on that, the better. You see -- 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 to take advantage of that arbitrage.

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Operator [34]

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(Operator Instructions) We have no further questions at this time. Please continue.

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Petros Alexandros Pappas, Star Bulk Carriers Corp. - Founder, CEO & Director [35]

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

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Operator [36]

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That concludes the conference for today. Thank you for participating. You may all disconnect.