Genco Shipping & Trading - Earnings Call - Q2 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Gemco Shipping and Trading Limited Second Quarter twenty twenty Earnings Conference Call and Presentation. Before we begin, please note 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 six million six hundred six thousand six twenty nine. At this time, I will turn the conference over to

Speaker 1

the

Speaker 0

company. Please go ahead.

Speaker 2

Good morning. Before we begin our presentation, 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 Robensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Speaker 1

Good morning, everyone. Welcome to Genco's second 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 refer to our earnings presentation posted on our website.

Since the onset of the pandemic, Genco has continued to prioritize the health and safety of both our crew members and our onshore team. As a result, we have undertaken a number of proactive measures specifically centered around ensuring the continuity of our business and protection of our crew while maintaining effective and safe headquarter operations. Since transitioning to a remote work environment in March, our office operations have continued as usual and we have not experienced any disruptions to date. In addition, we continue to provide customers with the high level of service and support that has become a hallmark of our operations. Our teams onshore in New York and Singapore continue to work from home while our team in Copenhagen has returned to the office.

Regarding our crew members, our focus remains on taking proactive actions to safeguard these individuals. To this end we've provided crew with the necessary PPE, limited access of shore personnel boarding vessels and have prominently posted COVID-nineteen safety instructions onboard vessels to supplement ongoing safety training. Over the last several months, the primary challenge of the industry has been executing crew rotations. Due to the COVID-nineteen pandemic, government imposed port restrictions, difficulty arranging travel and safeguarding the health of the on and off signing crew have all posted unique challenges that have prevented many ship owners from being able to undertake crew rotations in a safe and effective manner. As crew members worldwide have in many cases exceeded the duration of their contracts, there is an increased urgency to work towards completing more crew rotations in the coming months.

We have taken proactive measures by implementing industry leading protocols which have resulted in successfully completing crew rotations involving approximately 70% of our fleet in recent months. Complete space has proven extremely difficult. This is due to COVID-nineteen related restrictions worldwide and a resurgence of restrictions in certain ports around the world including Singapore and Hong Kong that had been more accommodating recently. We continue to work diligently to repatriate more of the dedicated mariners onboard our vessels. Furthermore, the global outbreak of COVID-nineteen resulted in meaningful slowdown in global economic activity levels through much of the first half of the year leading to a decline in demand for certain raw materials that our vessels transport.

Commencing in June as countries began restrictions, we have seen increased activity levels together with augmented demand for commodities that we carry translating into higher freight rates over the last two months. Despite recent market improvements, we continue to focus on preserving the strength of our balance sheet and our sizable liquidity position. As such, we closed on a $25,000,000 revolving credit facility to further supplement our already substantial cash balance. Our strong balance sheet along with an improving drybulk market has enabled Genco to declare our fourth consecutive quarterly dividend highlighting our efforts to return capital to shareholders. This brings the total dividends declared to $0.07 $15 per share since the 2019.

Going forward, effectively deploying our capital will remain a top priority and it's something that we will continuously evaluate as the drybulk market and macro events further evolve. Looking ahead to the third quarter, freight rates have experienced a meaningful uplift as highlighted in our forward pictures today, which are nearly 75% higher than our second quarter time charter equivalent rates. Our barbell approach to fleet composition consisting of owning both major and minor bulk vessels has once been proven to be a significant component of our business model as Capesize freight rates demonstrated their upsides potential crossing the $30,000 per day threshold at the June while minor bulk earnings have risen steadily to year to date highs. Going forward, we believe the outlook is favorable for the drybulk market for the balance of the year and into 2021 as the order book as a percentage of the fleet is at an all time low, limiting net fleet growth while global economic activity levels continue to recover coinciding with a seasonal uplift in cargo volumes. With our leading and sizable drybulk platform, we believe we're in a position of strength to benefit from these positive fundamentals during a time in which we have further solidified our balance sheet and continue to return capital to shareholders.

I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.

Speaker 3

Thank you, John. For the 2020, the company recorded a net loss of $18,200,000 or $0.43 basic and diluted loss per share and generated EBITDA of $2,900,000 Additionally, during the quarter, we utilized our low leverage profile to close on a $25,000,000 revolving credit facility, which is collateralized by the vessels in our $133,000,000 credit facility. This prudent step enabled us to further strengthen our already solid balance sheet, providing us with increased optionality and flexibility to adapt to rapidly changing market conditions. We drew down $24,000,000 under the revolver in June, helping bring our cash balance to $142,900,000 including approximately $15,000,000 of restricted cash as of 06/30/2020. Our debt outstanding gross deferred financing costs is $494,500,000 as of the end of the second quarter, which after considering our cash position results in a net debt position of $351,600,000 The continued support of our world class bank group during these unprecedented times highlights our confidence in our platform, team, approach to capital allocation and long term strategy.

Subsequent to the second quarter, we delivered two vessels to their respective buyers in July, The sales of the Baltic Wind and the Baltic Breeze, a 2,009 and a twenty ten built Handysize vessel closed on July 7 and July 31 respectively. Additionally, we expect the sale of the Jenko Bay, a twenty ten built handysize vessel to close during the third quarter as well. The gross proceeds for these vessels are $23,600,000 and the sale of these vessels will also result in savings of $1,400,000 in dry docking CapEx for 2020. Our cash flow breakeven rate for the third quarter of this year is estimated to be approximately $11,763 per vessel per day. Included in our breakeven rates is our Q3 twenty twenty DBOE budget figure of $4,900 per vessel per day weighted across our current fleet.

We note that during the first half of the year, our daily vessel operating expenses per day were approximately $200 lower than budget due to lower crewing and dry docking related expenses. As we complete more crew rotations in the coming months, we expect our vessel operating expenses to increase as a result, but we are maintaining our full year vessel operating expense budget of $4,590 per vessel per day as set out at the beginning of the year. Furthermore, deviation time associated with positioning our vessels to ports in which we can undertake a crew rotation due to various travel and the governmental restrictions related to COVID-nineteen have resulted in days in June 2020 and the third quarter in which our vessels have been unable to arrive in June and may continue to do so. With regard to drydocking, we anticipate approximately sixty days of estimated off hire time during the third quarter. We anticipate our second half drydocking schedule to be lighter relative to the first half as we actively manage the timing of our drydockings with a plan of taking vessels out of service during lower market periods.

Additionally, with our active commercial trading strategy currently geared towards spot market employment, together with absence of any scheduled write off within the balance of 2020 for our Capesize vessels, we believe that we are in a position to capture the strengthening market fundamentals in the second half of the year as compared to the first. We will have the majority of our Capesize vessels, with contracts expiring in August and September. Rates achieved for the unfixed portion of the quarter are susceptible to market conditions at the time, which have been volatile to date. And furthermore, we may elect to ballast certain Capesize vessels to the Atlantic in an effort to maximize earnings over the longer term. I will now turn the call over to Peter Allen, our dry bulk analyst, to discuss the industry fundamentals.

Speaker 2

Thank you, Apostolos. As highlighted in the slides in the market update section of our earnings presentation, the freight market during April and May was largely impacted by Brazilian iron ore supply constraints together with various nationwide lockdown measures taken to slow the spread of COVID-nineteen which reduced industrial activity globally. However, during June, the Baltic Dry Index significantly recovered led by Capesize spot rates which rose from a year to date low of under $2,000 per day on May 14 over $30,000 per day on June 30. The sharp rise in Capesize rates was primarily a result of several factors including a 40% increase in Brazilian iron ore exports in June versus May coincided with the push from Australian iron ore miners to hit their June 30 fiscal year end shipment targets while capturing iron ore prices of over $100 per ton. Going forward, Brazilian miner Vale reiterated its twenty twenty iron ore production guidance of three ten million to three thirty million tons stating that it will likely fall towards the lower end of this range.

This implies an uplift in iron ore production of 44% or 56,000,000 tons in the second half of the year versus the first half. Overall, the iron ore trade continues to be supported by China as imports rose by nearly 10% year over year led by a strong June which saw imports top 100,000,000 tons for only the fourth time on record. While China's steel production has been resilient rising by 1.4 through the first half of the year, steel output ex China is down by 14.3% over that period. However, output in key countries such as India has been increasing off of the April lows. In terms of minor bulks, the grain trade has remained firm largely due to a robust Brazilian grain season.

The strong South American grain trade has helped strengthen Supramax earnings which now stand at close to year to date highs. Demand drivers going forward remain peak Black Sea export season in August as well as the North American grain season in Q4. While China has purchased large amounts of agricultural products from The US in recent weeks, we note that a strong export season remains dependent on US and China trade relations. Regarding the vessel supply side, increased vessel demolitions from mid May together with increased port congestion, fourteen day quarantine period, and deviations for crew changes have led to a decline in fleet productivity. Lastly, we note the order book as a percentage of the is at approximately 7%, which marks an all time low.

This also compares to 7% of the fleet that is greater than or equal to twenty years old. We believe these positive supply side dynamics provide a solid foundation for drybulk market fundamentals. Looking ahead to 2021, we view the supply and demand trends as favorable as global trade flows further improve off of the trough levels seen earlier this year, while Vale's iron ore output is expected to continue to recover towards the company's forward expectations. As such, we anticipate demand growth to outpace supply growth next year. This concludes our presentation and we would now be happy to take your questions.

Speaker 0

We'll We'll take our first question from Randy Giveans with Jefferies.

Speaker 4

Howdy, gentlemen. How's it going?

Speaker 5

Good morning.

Speaker 4

Good morning, morning. All right. So yes, nice to see you're making progress on the Handysize sales in this, obviously, tough environment. So kudos for that. Now to that point, you sold, I guess, 24,000,000 of assets, and they have about $14,000,000 in debt, so more than $9,000,000 increase in liquidity.

You have ample cash on the balance sheet, lowest leverage ratios across dry bulk, trading at a steep discount to NAV. So all that being said, what are your plans for this cash? You know, dayrates stay relatively firm in the coming quarters, is it further debt repayments, share repurchases, secondhand acquisitions? What are your thoughts?

Speaker 1

Yes. So Randy, as you know, we have amortizing debt. So clearly, we're going to continue paying our quarterly amort, which is already in place. So there will be debt continued debt reduction. In terms of capital allocation, which is what I think you're really referring to, I would say our thoughts have not changed since last quarter in that we feel it's important to have the dividend in place.

We obviously moved it down, because of COVID-nineteen. And we'll obviously review that policy every quarter, you know, with management and at the board level. I think we're still in what I said last quarter. We're in a little bit of a wait and see. Yes, we're very positive in that we've seen third quarter rates strengthen quite significantly and we have a good forward book for third quarter.

And we're, you know, we are optimistic for the rest of the year going into next year. But we still do have the backdrop of COVID-nineteen and I think we all need to appreciate that. So from a capital allocation, I would say it's still a little bit of wait and see and we want to get a little more further on the other side of COVID-nineteen and have our thesis proved out you know, that rates are going to continue to remain firm.

Speaker 4

Sure. All right. Well, yeah, I'm just glad you didn't say new buildings, wind turbine installations. Good to hear that. Now turning to your Capesizes with scrubbers.

How have those been performing? Any plans to hedge some of your fuel needs through some spreads or some financial derivatives?

Speaker 1

No, I don't see us hedging anything. You know, keep in mind we had all of the scrubbers in place, before the end of, last year. So we were able to capture a pretty significant, part of the high premium that existed from really early November through February. So we've actually paid off if you look at the fuel differential from when they were installed, we paid off about 40% of our capital cost on that. And with the spreads around, call it, 70, know, we're that's still a 25% to 30% cash on cash.

So, while the spreads are certainly lower than what we would have anticipated, you know, and I think COVID-nineteen has a lot to do with that and the issues surrounding that, I do think the spread will move back up and I think it will get above 100. So we don't see any reason to certainly hedge at these levels and keeping in mind that we've paid off a decent chunk of the original CapEx.

Speaker 4

Sure. We have a similar view on the $100 there. Last quick question. Looking at the market, clearly iron ore trade is strong, especially with Vale ramping production, ramping exports. You mentioned that in your prepared remarks.

So I guess around that, are you positioning your fleet to have more exposure in the Atlantic Basin? And how do you compare the strong iron ore trade with the more tempered outlook for coal?

Speaker 1

So let's talk about fleet positioning for a second. So again, as you know, the second half of last year, because we were doing scrubber installations, we were pretty much forced to trade almost exclusively in the Pacific. This year, happy to be able to go back to our normal strategy of trading both in the Atlantic Basin as well as the Pacific Basin on The Cape. So that has been ongoing. I would say it's, you know, maybe it's a fiftyfifty, sixtyforty split Australia to end Brazil.

You know, don't lose sight of the fact that, Brazil is definitely, we think, going to be strong and Vale is gonna continue to ramp up. But that also does affect the Australian market. So the Australian market has been firm as well. And so you wanna have a balance between some shorter term voyages which you can do in the Pacific but also those long haul voyages, that you know, that lock away decent rates for longer periods of time. So again, it's back to our original strategy that we laid out.

And I would say it's split between the two basins.

Speaker 4

Perfect. And then quickly on coal.

Speaker 1

Yes. So on the coal side, I mean look, China is as we've always talked about is the black box in terms of putting quotas in place and then lifting quotas. You know, from what I understand there has been a positive move where they're where they're looking at these quotas more on a monthly basis rather than a yearly basis. So, it it actually should smooth it should smooth things out. But I do still believe that the Chinese are very interested in high quality coal, which which is which really leans towards imports.

So while I do see some volatility, I I don't see any, you know, medium term issue with China importing coal and they're certainly importing a lot of met coal as well. What I would focus on though is India. India has been slower to come back on the coal import side. Their inventory numbers are on the high side. Their production is still, you know, not efficient and is lagging.

But we certainly haven't seen a true recovery yet in thermal coal imports going into India. We have seen pickup of met coal. In fact, there's even been some shipments again of met coal from The US to India, which is the long haul trade and certainly what we like to see. So I you know, I'd be watching India to see when they really start to, when their inventory levels come down on the thermal coal side and they start importing in a meaningful way again. Now having said that, again, Vietnam, Philippines, Turkey, Pakistan are all growing on the thermal coal import side, Vietnam in particular.

You know, the growth numbers are actually getting to the point where they're a meaningful player in the, thermal coal market. So, you know, that area seems to be positive.

Speaker 4

Cool. Well, hey. That's it for me. Thanks again, and looking forward to the much improved 3Q results.

Speaker 1

Thank you, Randy.

Speaker 0

We'll take our next question from Omar Nokta with Clarksons, Pitou Securities.

Speaker 5

Thank you. Hey, guys. Just Good a couple of follow ups. Hey, good Good morning. Yeah, just hi, guys.

I just wanted to follow-up to some of Randy's topics and questions. Maybe the first one on capital allocation, John. You guys have about $80,000,000 of debt due over the next year. How do you think about those payments? Clearly, have a substantial cash position.

You've got a lot of cash. You've got the proceeds coming from the Handy fleet. And the third quarter, as Randy left, it's going be a very strong influx of earnings. Do you see yourselves needing to discuss deferrals with your lenders on those amortization payments? Or are you comfortable with how things are based on the cash position in the market?

Speaker 1

I don't see any need to discuss deferrals, right now. I think we have a I think we're in a very fortunate position, from a liquidity standpoint. While we certainly did not predict the second quarter volatility due to COVID-nineteen, several years ago we put into place a strategy of making sure that we had a strong balance sheet and low leverage and plenty of cash. That's obviously paid off. I think that if you I mean just to be 100% pointed, I see no reason to even think about talking to banks about deferrals right now.

I know there may be some other companies that are doing that. But I definitely don't see a need. And I think it's advantageous to continue to reduce debt and bring the leverage down.

Speaker 5

Well that's very pointed and I appreciate that. I mean it's clearly a topic of discussion last earnings season, this earnings season where a lot of companies are discussing deferrals and and whatnot. But, you know, you guys do have a lot of cash and relatively low leverage, so you're definitely in a different position. I did wanna maybe just ask also the, you know, maybe on the crew changes, separate topic. The you've done 70% or so of the of your fleet, since the pandemic began.

You know, I know that costs are gonna be going up due to the logistical complexities of getting, you know, things moving. You know, how do you think how do you think that plays out? Is this sort of, I mean, clearly, there's a lot of uncertainties with COVID nineteen and and and and the vaccine and whatnot. But how long do you think these higher costs will continue?

Speaker 3

Is this sort of something for basically the second half of the year? Do you

Speaker 5

see that slipping into next year? And then also, have you seen things saw a bit and relax where it's you know, you're able to navigate these crude changes a bit more than you were earlier on?

Speaker 1

Okay. Well, listen, on the cost side, Omar, no. It's It's the cost side, I think, is is tough to predict for next year. I I I you know, just like everyone else, I I would say, you know, the availability of a vaccine and the effectiveness of PPE and lockdowns, that's going to really determine, you know, how things are next year in terms of what jurisdictions are open. I mean keeping in mind most crew changes are done during cargo operations.

There is no deviation typically. There's no having to book extraordinary flights. That's not unfortunately the world we live in right now where most crew changes are not done right now during cargo operations. They're having to be done in an extraordinary fashion. There's some deviation that occurs because of that.

I'd say some. We're talking three to four days. So we're not talking about large blocks of time here. But it is important to watch. And flights are quite a bit more expensive.

That's where the real expense comes in from an operating expense standpoint. For Genco, if you look at we gave guidance for the third quarter to have higher operating expenses than our yearly budget, but that's on the back of not really doing any crew changes, many, in the first half. We've done a launch in the third quarter in sort of June and July. And that's how we've gotten up to 70% of the fleet which is I got to tell you it was a herculean effort to get to those numbers. And the team at Genco had to be very creative and spent a lot of late nights trying to make sure we orchestrate these crew changes in a very safe fashion.

So it's not a matter of getting, crew members on and off. It's doing it safely, and making sure you're not introducing, COVID-nineteen to the vessel with onboarding crew members. So we have quarantines in effect. We have testing in effect. So going to your and let me just to be clear on our OpEx while we expect some higher expenses in the third quarter, we do expect for the year to still be, within the budget number that we put out at beginning of the year.

Going to your second part of your question, I actually think things are getting more difficult now. There was a good window in June and July particularly with Singapore. As you know we did the first full crew change in Singapore since COVID-nineteen. And we did quite a few in Singapore. We've done some in India.

We've done some in Sri Lanka, South Korea, Hong Kong. But unfortunately I think the world is closing up again for crew changes particularly in Hong Kong which is now shut down. Singapore is effectively shut down except for some very except for emergency situations. And, you know, we're having again to assess where we're going to do things. But I can't stress it enough.

We were fortunate that we were on top of this and we really pushed out and were proactive in doing a lot of crew changes during June and July so that this will not be a factor for us right now.

Speaker 5

Got it. Thanks Sean.

Speaker 1

That's long answer. I know it was a long answer, a lot of information. But from an operation standpoint, you know, the team is just is working almost nonstop on this issue.

Speaker 5

Yes, clearly. Well done on that. And I guess it's definitely a situation that, you know, requires consistent. We'll We'll have to keep our eyes on it to see how things progress, but hopefully, it starts out easy here. You know, maybe just one more, John, to, as a follow-up.

You know, could you just mentioned, you know, the the technical side of the business. You bet has been very active and focusing on this nice and weekend. On the commercial side, the charger in, charger out business that you guys had built up, it's obviously slowed a bit this year. How do you think about that business, especially now with the market picking up? Do you see picking up that freight business a bit or keeping it where it's been at the past couple of quarters?

Speaker 1

No, I see it picking up. And quite frankly, we did a lot of forward fixtures at the very end of last year and into first quarter on the minor bulk. So, if you we haven't published these numbers, but if you look at the number of cargoes and arbitrage opportunities that we've taken advantage of, we're well ahead of even where we were last year. So while second quarter, you wouldn't be booking forward cargoes in a really down market. But, as we get into a little more into the third quarter and the fourth quarter, I definitely see us replicating what we've done in years past and moving on things.

The other interesting thing is our number of fixtures are continuing to move up and we're doing I bet we're close to 80%, 85% of our fixtures are direct voyage fixtures with customers. So that business is alive and well. And you know, we've even looked at some COA business as well particularly on the backhaul trades to lock those up so that we can take advantage of the very strong fronthaul trades. So everything is going well. And on the Capes it's been very fortunate that we've been able to take advantage of the market.

We had a we definitely had a lot of ships that were open and available to fix as rates moved up in the June. Great.

Speaker 5

Okay. Thanks, John. Thanks for that color. Very helpful. I'll leave it there.

Speaker 1

Okay. Thanks so much.

Speaker 0

This concludes the Genco Shipping and Trading Limited conference call. Thank you, and have a nice day.

Speaker 1

Thank you.