Genco Shipping & Trading - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trade Limited First Quarter twenty twenty Earnings Conference Call and Presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's website, www.gencoshipping.com. We will conduct a question and answer session after the opening remarks.

Instructions will follow at that time. A replay of the conference will be accessible anytime during the next two weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode five million nine hundred eighty nine thousand two hundred twenty six. At this time, I'd like to turn the conference over to the company. Please go ahead.

Speaker 1

Good morning. Before we begin our presentation, I note that in this conference call, we will be making certain forward looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe, and other words and terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance. These forward looking statements are based on management's current expectations and observations. For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday, the materials relating to this call posted on the company's website, and the company's filings with the Securities and Exchange Commission, including, without limitation, the company's annual report on Form 10 ks for the year ended December 3139, and the company's reports on Form 10 Q and Form eight ks subsequently filed with the SEC.

At this time, I would like to introduce John Goldbensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Speaker 2

Good morning, everyone. Welcome to Genco's first quarter twenty twenty conference call. I will begin today's call by providing an update on Genco's response to COVID-nineteen. We will then review our year to date highlights, discuss our financial results for the quarter and the industry's current fundamentals before opening the call up for questions. For additional information, please also refer to our earnings presentation that is posted on our website.

Genco's main focus remains on the health and safety of both our crew members and our onshore team. As a result, we have undertaken various proactive measures as a response to the onset of COVID-nineteen specifically centered around ensuring the continuity of our business and protection of our crew while maintaining effective and safe headquarter operations. As our vessels continue to trade commodities around the world, we have worked towards preventing the spread of COVID-nineteen. As part of this effort, we have provided crew members with gloves, face masks, hand sanitizer, goggles and handheld thermometers. We also continue to monitor CDC and WHO guidelines and are limiting access of shore personnel boarding our vessels.

We have implemented industry leading protocols with regard to crew rotations, which includes PCR testing for COVID-nineteen as well as a fourteen day quarantine period prior to boarding a vessel for our crew members. Genco is performing crew changes where permissible determined by regulations of the ports and origin of our mariners. In addition to strict protocols that safeguard our crews against COVID-nineteen exposure. Our business continuity plans onshore for our three global offices in New York, Singapore and Copenhagen have allowed for an efficient transition to a remote working environment. Additionally, we have also placed a ban on all nonessential travel.

We are proud of the dedication of the entire Genco team and how they have demonstrated professionalism and a commitment to excellence during this challenging time. We sincerely thank them for their efforts. The global outbreak of COVID-nineteen has resulted in a meaningful slowdown in global economic activity levels and a decline in demand for certain other raw materials that our vessels transport. Unprecedented times like these highlight the importance of our strong balance sheet and low net leverage, which we view as key differentiators of Genco. From a financial perspective, our position remains strong as we hold $149,500,000 of cash on our balance sheet as of 03/31/2020.

While the first quarter of the year tends to be softer from an earnings perspective, the downward move in rates was accentuated this year by the onset of COVID-nineteen. In anticipation of a seasonally weaker first quarter, we booked several forward cargoes and selectively fixed short period time charters to cover this period. Additionally, our timely execution of our scrubber program of our Capesize vessels enabled us to capture fuel spreads that were at their widest in the earliest stages of compliance with IMO 2020. The combination of these factors resulted in a firm Q1 time charter equivalent rate of $9,755 per day, led by $16,660 per day on our Capesize vessels. Given the level of uncertainty in the global economy in the months ahead, which is largely tied to the trajectory of COVID-nineteen, management and the Board of Directors believe that it is prudent to protect our strong balance sheet, conserve cash and attempt to insulate the company as much as possible from these macro events at this time.

To that end, as we look to supplement our already substantial cash position, we are currently working with our existing lenders on a revolving credit facility for up to $25,000,000 At the same time, we are pleased to have declared a dividend for the 2020, highlighting our commitment to returning capital to shareholders. We view amending our first quarter dividend as a prudent action taken by management and the Board of Directors aimed at balancing preservation of the company's liquidity position with a return of cash to shareholders. We note that we have now paid and declared a total of $0.06 $95 per share to our shareholders since Q3 twenty nineteen. Effectively deploying our capital remains a top priority for us and something that we will continuously evaluate as these macro events further evolve. We believe that over the medium to long term, the outlook for the drybulk industry is favorable.

We believe supply side fundamentals are beneficial given the historically low new building order book, while on the demand side, we anticipate activity gradually recovering as nations begin to slowly lift the countrywide lockdowns. I will now turn the call over to Officer.

Speaker 3

Thank you, John. For the 2020, the company recorded a net loss of $120,400,000 or $2.87 basic and diluted loss per share. Excluding $112,800,000 in non cash vessel impairment charges and a $500,000 loss on sale of vessels, the adjusted net loss for the quarter was $7,100,000 During the first quarter, we generated adjusted EBITDA of $16,900,000 In February and March, we delivered the Genco Charger, a 2,005 built Handysize vessels and the Genco Thunder, a 2,007 built Panamax vessel to their respective buyers. With the sale of the Jenko Thunder, the company exited the Panamax sector as we continue to execute our barbell approach to fleet composition and create a more focused fleet. The debt associated with these two vessels as well as the Jenko Raptor, which was sold during 2019, amounts to $14,900,000 This amount is currently recorded on our balance sheet as restricted cash.

In February, the company determined to expand its previously announced fleet optimization and renewal plan, aimed at modernizing its fleet. The company made the strategic decision to opportunistically pursue the sale of 10 Handysize vessels that were not already part of the fleet renewal plan and are viewed as non core vessels within our fleet. Given this decision, as the estimated future undiscounted cash flows for each of these vessels did not exceed their net book values, we adjusted the value of these vessels to their respective fair market values during the first quarter and incurred a non cash impairment charge of $85,800,000 Separately, during the first quarter, we also recorded a non cash vessel impairment charge totaling $27,000,000 on four of our 55,000 deadweight ton Supramax vessels. As a result of the lower earnings environment in 2020 to date, primarily due to COVID-nineteen, we do not expect with no anticipated the estimated future undiscounted cash flows for each of these vessels to exceed their net book values over the vessels remaining useful life. As such, we adjusted the values during the first quarter.

In addition to opportunistic vessel sales drawing upon our low leverage profile, we're in the process of negotiating a revolving credit facility for up to $25,000,000 which we expect will be collateralized by the vessels in our $108,000,000 credit facility. This facility will be incremental to our already solid cash position as of 03/31/2020 of $149,500,000 including restricted cash. Our debt outstanding gross of deferred financing costs is $488,800,000 as of the end of the first quarter, which results in a net debt position of $339,300,000 Given the macroeconomic uncertainty, we believe this is a prudent step to bolster our already strong liquidity position, as we remain focused on maintaining our balance sheet strength in order to be able to continue to adapt to rapidly changing market conditions. Our cash flow breakeven rate for the second quarter of this year is estimated to be approximately $11,940 per vessel per day. Included in our breakeven rates is our 2020 BOE budget figure of $4,590 per vessel per day weighed across the current fleet.

Furthermore, we anticipate approximately one hundred and fifty days of estimated off hire time relating to vessel dry docking during the second quarter. Also, we will have the majority of our Capesize vessels with contracts expiring in May and June. Depending on market conditions, we may elect to ballast certain Capesize vessels to the Atlantic Basin in an effort to maximize earnings over the longer term. For our minor bulk fleet, we have utilized the current downturn in Supramax and hand size rates to reposition vessels throughout April and May to date to key regions ahead of a potentially improving market later in the year. I will now turn the call over to Peter Allen, our drybulk market analyst to discuss the industry fundamentals.

Speaker 1

Thank you, Apostolos. During the first quarter, the drybulk earnings environment was already trending lower in part due to Brazilian iron ore supply constraints. While the onset of COVID-nineteen further exacerbated this decline. Brazilian iron ore exports decreased by 16% year over year in the 2020, marking the lowest quarter since Q1 twenty thirteen as heavy rainfall impacted export activity. On top of this, the COVID-nineteen pandemic resulted in reduced industrial activity in China, most notably in January and February.

However, since March, the world's second largest economy and largest importer of dry bulk commodities has shown signs of improvement as various economic indicators such as fixed asset investment and industrial production rose as compared to the previous months of the year. As China's economy begins to recover, economic output in regions outside of China have declined meaningfully due to various forms of nationwide shutdowns being imposed to prevent the spread of COVID-nineteen, most notably in India, Japan, Europe and The US. While we are beginning to see a recovery in iron ore shipments together with firm grain exports, the coal trade and certain minor bulk trades are currently being impacted due to the reduction in global economic activity. Looking ahead, as countries worldwide begin to gradually recover and reopen their economies, we anticipate augmented trade flows and demand for raw materials, could support increased tribal earnings from current levels. On the supply side, earlier in the year, there was a prompt response to market conditions as demolition activity increased to 5,000,000 deadweight tons compared to 8,000,000 deadweight tons all of last year.

However, scrapping activity in the Indian Subcontinent has come to a halt amid nationwide closures due to COVID-nineteen. When scrap yards reopen, we believe there will be plenty of demolition candidates as 90 Capesizes on the water are 18 years or older, while Valley recently announced that they'll be phasing out operation of 25 older VLOC conversions. Lastly, we note that the order book as a percentage of the fleet is at approximately 8%, which marks the lowest point since mid two thousand and two. This also compares to 7% of the fleet that is greater than or equal to 20 years old. While the duration and impact of COVID-nineteen remains uncertain at the current time, we believe these positive supply side dynamics provide a solid foundation for drybulk market fundamentals going forward.

This concludes our presentation and we would now be happy to take your questions.

Speaker 0

Thank We will now take the first From Randy Giveans from Jefferies. Please go ahead.

Speaker 4

Howdy, gentlemen. Hope you're doing okay during this time.

Speaker 2

Thanks, Randy. Good morning.

Speaker 4

Good morning. So, yeah, Q2 or the second quarter, quarter to date rates relatively in line with our expectations. Capesize kind of surprised to the upside a little there. That said, how have rates in the last maybe week or so compared with these kind of quarter to date numbers? Just trying to get a sense for kind of rest of the quarter outlook or performance.

Speaker 2

So on the Capesize sector, I would say things have softened over the last seven to ten days. We do expect that probably in the next few weeks to turn back around. And as you know, we're looking towards a more favorable second half of the year. We have seen the supermax rates stabilize and start to move up slightly. But I think our view is we really need to see India open back up again on the coal import side, both thermal and met.

We need to see Colombia really gear up on the mining side again on the coal side. South Africa is showing some good signs of opening back up. But I think in general, we need to see these economies start to get back on track in the medium term. And then we should see a lift on rates. I would add in, I know I'm probably going beyond the scope of your question, but China has been recovering and their economy has been opening up.

So we definitely seen strength on the iron ore front, both out of Brazil and Australia, but it's the ancillary commodities, particularly in The Cape, as coal and bauxite that we need to see kind of in the market.

Speaker 4

Got it. Okay, that makes sense. And then looking obviously at the dividend reduction, it's certainly understandable to kind of batten down the hatches in this environment. But looking ahead, with where rates are now, where your expectations are possibly for 2Q, maybe 3Q, what should we expect for dividend? Is kind of $02 the floor with kind of upside as earnings rebound?

And then also, what are your plans for the proceeds from the sale of the vessels?

Speaker 2

So I'll take the vessels first. I mean, right now we would put that cash on the balance sheet. And in terms of dividend and capital allocation, I think it's pretty prudent to respond to your question that on a we're going to look at this quarter by quarter right now, just due to the situation as in terms of COVID-nineteen and all the closures that have taken place for some of the economies that the dry bulk depends on. I think I think it's fair to say that there's no doubt our number one priority right now is conserve cash. But we also remain committed to returning capital to shareholders.

So it's a balancing act between those two. And like I said, right now where we are, we have a positive thesis and analysis for the second half of this year going certainly going into 2021 because of the low supplies side in particular and the fact that this really has been an unprecedented demand shock, which we do believe will eventually right itself. But what we want to see is just the beginning of that thesis or that analysis to start to play out. And then you can start assessing what you're going to do in terms of staying even increasing, what have you on the dividend.

Speaker 4

Sure. As you show on slide 20, if history is a guide, we expect great improvement here in the coming months. So thanks again. Stay well.

Speaker 2

Thank you, Randy. You too. Take care of yourself.

Speaker 0

We will now take the next question from Liam Burke from B. Riley FBR. Please go ahead.

Speaker 5

Good morning, John. Good morning, Apostolos.

Speaker 4

Good morning, Liam.

Speaker 5

I know it was mentioned in your prepared statements about scrapping and how it's been held up by coronavirus and you'd expect that to continue or be stronger after the COVID-nineteen resides. But do you anticipate scrapping to accelerate to the point where it'll help you meaningfully on the supply side of the equation?

Speaker 2

Look, think there are quite a few owners that would like to be scrapping ships right now. We've seen just the beginning, there was a cape that one of our peers agreed to scrap and it looks like they have a buyer for that here in India. So you're starting to see the wheels turn again on that. Though I want to be a little cautious, really need to see India and Bangladesh in particular open up. And then and yes, I do think scrapping is going to pick up in meaningful way, particularly on the larger ships.

So these VLOCs that are old VLT conversions, they're 25 of those that really need to go. And some of the older Capes, I mean, there's still, I think Peter Allen pointed out, we still have 7% of the entire dry bulk fleet that's 18 years and older. And I don't think anything has changed in terms of IMO twenty twenty challenges for those older ships as well as the softer market right now and just the lack of availability in financing for smaller owners. So yes, we expect quite a pickup in scrap as we get into the second half of the year and India and Bangladesh open back up.

Speaker 5

And I know this is a difficult question with your priority right now to conserve cash, but you've identified your Handysize is no longer core assets. Looking at the rest of your fleet, looking past the current market, looking into a market improvement, how do you look to manage the fleet?

Speaker 2

Look, we're to continue our fleet renewal program. I think it's fair to say we're a little bit on pause. I mean, we've signed MLAs three Handysize vessels. I would say this is a very difficult market to execute sales right now. So we're not jumping in with both feet and just selling ships.

I think I mentioned on the last even the last conference call, we're very being very opportunistic about this. And this is certainly not a situation where we just want to sell vessels at any price. We want to do what's best for the company and shareholders. So I don't see us doing large scale sales right now. Hopefully, as the market comes back towards the latter part of the year, more liquidity will come back into the sale and purchase market and these countries will open up and we can have vessel inspections again and crew changes and the like.

Speaker 5

Thank you, John.

Speaker 2

Thanks, Liam.

Speaker 0

There are no further phone questions. As there are no further questions, that will conclude today's conference call. Thank you for your participation. You may now disconnect.