Genco Shipping & Trading - Earnings Call - Q2 2021
August 5, 2021
Transcript
Speaker 0
Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited Second Quarter twenty twenty one 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 at 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 at any time during the next two weeks by dialing 888231112 or 7000001940057820 and entering the passcode eight million eight eighty five thousand four six. At this time, I will 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, in 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 12/31/2020, 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 Wilkinsmith, Chief Executive Officer of Genco Shipping and Trading Limited.
Speaker 2
Good morning, everyone. Welcome to Genco's second quarter twenty twenty one conference call. I will begin today's call by reviewing our year to date highlights, providing an update on the company's new comprehensive value strategy, financial results for the quarter and the industry's current fundamentals and then open the call up for questions. For additional information, please also refer to our earnings presentation posted on our website. The 2021 was a transformative period for Genco.
In April, we announced our new comprehensive value strategy centered around growth, deleveraging and dividends. Since then, we have made notable progress working towards paying our first dividend under this strategy. Highlighting our strong progress and achieving growth objectives over the last four months, we have agreed to purchase six modern fuel efficient Ultramax vessels to build out this core portion of our fleet to 15 ships. We believe that we are at a unique point in the drybulk cycle with freight rates at their highest levels in over a decade, while values which have increased year to date have lagged the upward trajectory of earnings. This creates compelling return on capital opportunities.
To capitalize this and to derisk our latest purchase of three Ultramaxes, we secured three two year charters at rates ranging from $23,375 to $25,500 per day, locking in an unlevered cash on cash return of approximately 50% over this period on those three newly acquired ships. In terms of our proactive deleveraging progress, during the 2021, we repaid $82,200,000 of debt or 18% of the beginning of the year debt balance. This included the retirement of our scrubber facility as well as the prepayment of our revolver. Financial deleveraging is a key part of our value strategy. Therefore, given the strong market, we believe it is prudent to accelerate debt repayments to further fortify our balance sheet as we position the company to distribute sizable dividends in diverse rate environments.
At the end of this year, we are targeting a net loan to value of 20%, which we are currently on track towards achieving. Ultimately, our medium term goal is to reduce our net debt position to zero through additional debt repayments over the coming years. Importantly, we have now achieved a foundational component of our corporate strategy and a key milestone towards full implementation. Specifically, are pleased to have entered into a new credit facility to complete the global refinancing of our existing credit facilities. We expect the new facility to significantly enhance our capital structure, improve key terms of our debt, reduce our cash flow breakeven rate and provide further optionality for the company.
Later in the call, Apostolos will elaborate on some of the details and features of this new credit facility. Regarding returning capital to shareholders and our current quarterly dividend for the second quarter, we increased our payout to $0.10 per share, our second consecutive quarterly increase. We have now declared a total of $0.09 $05 per share in dividends over the last eight quarters. We are pleased with the progress we are making and continue to target Q4 twenty twenty one results for our anticipated first dividend under our new corporate strategy, which would be payable in Q1 twenty twenty two. In addition to the measures taken to execute our value strategy from an earnings perspective, the second quarter was our strongest in over a decade.
Our net income of $32,000,000 and our time charter equivalent rate of $21,137 per day, both marked our highest since 2010. Additionally, our first half adjusted EBITDA was $70,900,000 and is nearly identical to our full year 2020 adjusted EBITDA of $71,800,000 Looking ahead to the third quarter, our estimates point to continued strong results with a time charter equivalent over $27,000 per day based on fixtures to date across the fleet. Moreover, we will have the majority of our Capesize vessels open for fixing in the coming weeks to take advantage of the meaningful increase in rates we have recently seen highlighting our significant operating leverage in a robust and improving drybulk market. In addition to the current firm market conditions, we view the market outlook favorably. The order book as a percentage of the fleet is at a historical low limiting net fleet growth, while unprecedented stimulus as well as the Brazilian iron ore export recovery have combined to create improving supply and demand dynamics.
Our positive market outlook together with our robust balance sheet has positioned Genco well to implement our new comprehensive value strategy as we focus on unlocking shareholder value. Not to be overshadowed by measures we have taken on the value strategy, there were several other key corporate updates that occurred in the recent months. Genco was ranked number one out of 52 public shipping companies in the Weber Research 2021 ESG scorecard. To that end, on the environmental side, we joined a working group alongside 33 other participants across the maritime value chain to study the feasibility of ammonia as an alternative fuel as part of the long term goal to decarbonize shipping. Additionally, we plan to enter into a new joint venture GS Ship Management with the Synergy Group for the technical management of our fleet.
Speaker 3
We
Speaker 4
expect the creation of this joint venture will provide a unique and transparent service to the management of our vessels and result in increased visibility and control over vessel operations, increased
Speaker 2
fleet wide fuel efficiency to lower our carbon footprint and potentially unlock further vessel operating expense savings. At this point, I will now turn the call over to Apostol Sipolias, our Chief Financial Officer.
Speaker 4
Thank you, John. For the 2021, the company recorded net income of $32,000,000 or $0.76 basic and $0.75 diluted earnings per share, A 216% year over year increase in our fleet wide TCE to $21,137 per day was a primary driver resulting in increased adjusted EBITDA of $50,200,000 During the quarter, we continued to further strengthen our balance sheet through operating cash flows from fair market conditions together with opportunistic vessel sales, bringing our cash position to $161,200,000 including $44,900,000 of restricted cash as of 06/30/2021. We also reduced our debt balance in the year to date by 18% with combination of scheduled debt amortization as well as the prepayment of our scrubber and revolving credit facilities. As a result, our debt outstanding is $367,000,000 as of the end of the second quarter, which after considering our cash position results in net debt of two zero six million dollars Genco's already low leverage position and strong freight rate environment have enabled us to enter into a new global refinancing of our debt. We appreciate the strong and ongoing support from our leading banking group.
As a
Speaker 2
key step towards implementing our comprehensive value strategy, we have entered into
Speaker 4
an agreement with our lenders for the $450,000,000 credit facility, which consists of a five year term loan together with a sizable revolver that can be used for growth. This new debt structure will provide improved capital allocation flexibility and significantly reduce our cash flow breakeven rate, which combined with the strength of our balance sheet provides a solid foundation for our value strategy and our goal to distribute sizable dividends to shareholders. The $450,000,000 credit facility provides for a $150,000,000 loan and a revolving line of up to $300,000,000 which can be used for acquisitions and general corporate purposes. Based on current market conditions and management estimates, we are targeting a year end debt balance of approximately $250,000,000 following targeted debt pay downs of approximately $117,000,000 over the second half of the year. If we make these targeted pay downs, we will have no mandatory debt amortization payments until December 2025.
Regardless of this favorable mandatory debt amortization schedule, we plan to continue to voluntarily pay down debt with a medium term objective of reducing our net debt to zero. Key terms of the new facility include competitive pricing of LIBOR plus two fifteen basis points to two seventy five basis points and we expect to be on the low end of that range after the first measurement date in relation to September 30 results. A favorable covenant package including a lower minimum liquidity covenant as compared to our existing facilities and other customary covenants including a minimum collateral maintenance covenants, minimum working capital and net debt to capitalization covenants. In addition, there are no restrictions on dividends other than customary event of default and pro form a financial covenant compliance provisions. Importantly, five of our vessels to be acquired will remain unencumbered and not pledge as collateral to this new facility.
This will provide Genco with further flexibility and optionality on a go forward basis. On Slide 17, we have provided estimated expense levels on a per vessel per day basis for you. With regard to dry docking, we anticipate two vessels to enter dry dock this quarter, resulting in approximately forty days of off hire estimated off hire during the third quarter. In terms of vessel sale and purchase activity, we anticipate taking delivery of four of the six Ultramaxes that we have agreed to acquire during the third quarter and we also completed the sale of our last 53,000 deadweight ton Supramax vessel, the Janko Lorraine in July. Furthermore, we agreed to sell the Janko Provence, 2,004 built Supramax vessel and the oldest ship in our fleet for $13,250,000 with expected delivery in the 2021.
Importantly, with this sale, we will be avoiding budgeted dry docking CapEx of approximately $800,000 in next year in 2022. I will now turn the call over to Peter Allen, our SVP of Strategy to discuss the industry fundamentals.
Speaker 1
Thank you, Apostolos. During the second quarter of this year, freight rates continued to increase the decade plus highs driven by a resurgence of global economic activity leading to augmented demand for raw materials. Spot freight rates for both Capesize and Supramax vessels currently stand at over $30,000 per day. During the first half of the year, global steel production rose by 14% year over year, supporting the iron ore trade and Capesize rates, while China's output rose by 12%, ex China has seen a notable rebound rising by 18% year over year led by India, the EU and Japan. We've also seen a recovery in the Brazilian iron ore trade, which is up by 11% year over year.
There is a highly seasonal weighting towards the second half of the year for Brazilian iron ore exports, which historically rise approximately 20% from July to December versus January to June. On the minor bulks, rates have been driven by strong grain demand from China. Additionally, we continue to see increased shipments of minor bulk commodities closely linked to global GDP growth and economic activity. Regarding the vessel supply side, net fleet growth year to date is approximately percent. The order book as a percentage of the fleet is 6%, which compares to 7% of the fleet that is greater than or equal to twenty years old.
Encouragingly, newbuilding vessel ordering has been relatively low this year despite conditions. We believe these positive supply and demand dynamics provide a solid foundation for the dry bulk market and lead to low thresholds for demand to exceed to improve fleet wide utilization and freight rates. For the balance of the year, we expect increased iron ore exports to be a catalyst for Capesize rates, while increased grain exports from the Black Sea region in August are expected to be supportive to Supramax earnings in the Atlantic Basin ahead of the North American grain season in the fourth quarter. These demand drivers are expected to be met by favorable supply side fundamentals underpinned by the historically low order book. This concludes our presentation and we would now be happy to take your questions.
Speaker 2
Thank
Speaker 5
you.
Speaker 0
We will move on to our first question from Randy Giveans of Jefferies.
Speaker 2
Good morning, Randy.
Speaker 6
Good morning. Congrats obviously on the best quarter in a decade. I'm sure I'll say the same again next quarter. But I guess two questions for me. First, you mentioned you're going to repay $117,000,000 in debt during the back half of the year.
You also have, I believe, 87,000,000 due to complete the acquisition of the four vessels.
Speaker 2
So I guess where does
Speaker 6
that put your balance sheet and your maybe financial flexibility for future acquisitions or maybe even share repurchases at
Speaker 4
this point in the next few months?
Speaker 2
I mean, we a couple of things. So the three ships that we just bought or agreed to buy which will be taking delivery between August and October. As you saw, we did derisk those purchases with time charters on three of our existing ships, two years between twenty three thousand three hundred seventy five and twenty five thousand five hundred. As I said in the opening remarks remarks that actually yields a 50% cash on cash return. So you're effectively paying off half of the purchase price over a two year period on ships that are twenty seventeen and twenty fourteen built.
So I think we've done a pretty good job of derisking and covering. We have a very large revolving credit facility in place. I think part of that was to have additional firepower for acquisition. But having said that, we're also concentrated on the value strategy and deleveraging the balance sheet. So for the time being, I think we're very happy with the acquisitions we've made Randy.
But we certainly definitely will still have cash at the end of the year after the pay downs and taking delivery of the ships. So we'll take it as it come and we're going to continue to look for opportunities. As I mentioned on the call earlier, values are still compelling from where freight rates are and where time charter rates are, again evidenced by those two year deals that we did a few weeks ago.
Speaker 6
Sure. Yes, I can see that as well. And then speaking of those charter rates that you mentioned there,
Speaker 4
you chartered out a few of
Speaker 6
those Ultramaxes, very strong rates as you mentioned, 23,000, 24,000, 25,000 for two years. I guess a few questions around that. Any additional appetite for further Ultramax charter outs? Or is there kind of a base level of spot exposure you want to have there? And then as it pertains to the Capesizes, I think you only have one charter there or maybe two.
Is the reason that charter activity and rates aren't as elevated on the Capesizes because of maybe uncertainty around Chinese steel production? And really I'm just trying to ask you about that as well. So kind of a two for one question here, because that's clearly the big concern in the market.
Speaker 2
So in terms of chartering activity, we may do a couple more on the alters, but I think you're going to see us focus more on The Capes in terms of locking up cash flows. That is the most volatile sector. And as we come closer and closer to implementing fully the value strategy, I think it makes sense to have coverage in place. Rates today in The Capes are still probably around $30,000 a day for a year and two year rates are probably 24,000 to $25,000 a day. So good healthy numbers.
Having said that, the spot market is actually quite a bit higher. My guess is as the stock market continues to hold up over the next couple of months and increase along the lines of the FFA curve, you'll see those charter rates move up further. But I think that's where you're to see us concentrate a little more on derisking and our portfolio approach and putting some more ships away under longer term charter. Got it. On That makes the steel front, in typical fashion, there is a lot of conflicting reports.
And a lot of times we see the Chinese government say things, but not necessarily execute. I do think it seems like there is definitely some curtailment on steel production. I think a lot of it centered around the Communist Party anniversary and reducing pollution particularly around Beijing. It's possible that will continue for a little while, but we don't see any fundamental shift. And I would point out that the most important thing to dry bulk shipping in terms of China is iron ore shipments.
Now granted the steel production goes into that, but the reality is Brazil is continuing to ramp up and get their logistics system back up and running after early twenty nineteen. And we expect those volumes to continue. We've seen this before where even steel production has been flat, but yet iron ore imports continue to move up. And as we're going into the second half of the year, again, typically stronger seasonally, second half of the year for valet is usually 18% to 20% higher in terms of shipments in the first half. I don't see too much of a change in that right now.
And I also think that Chinese government was trying to put some downward pressure on iron ore prices, which successful, no doubt about that. But that opens up steel margins. So it's actually better for the steel companies to see some of these lower iron ore prices. And quite frankly Vale and the Australian iron ore miners had low cash flow breakevens on iron ore production. So any these slight movements downwards are they're still producing excellent cash flow.
So a long answer to that, but reality is we continue to think the market firms coming into the third quarter here on the Capesize and the ultras for that matter.
Speaker 6
Yes. I appreciate the color and I agree. Obviously, the increasing Vale exports and really the non Chinese steel production ramping as well could offset that. Thanks again. Keep up the great work.
Speaker 2
Thank you, Randy.
Speaker 0
We'll move on to our next question from Omar of Clarkson Securities. Please go ahead. Your line is now open. Thank you. Hi, John
Speaker 3
Apostolos, Peter.
Speaker 6
Good morning.
Speaker 3
Good morning. I guess, as Randy said, congratulations on, I guess, on several fronts, the earnings and then also this refinance and the acquisitions and the new JV. I did want to ask about the $450,000,000 credit facility, which with the $300,000,000 revolver, it's a pretty decent sized revolver, I'd say. And one, I don't think I've really seen much of in the shipping space over the past several years. So I guess, kudos to you on being able to get a revolver that size.
But also wanted to ask, in terms of how the mechanics of the revolver, how does that work in terms of vessel acquisitions? We've seen it where if you have
Speaker 2
a revolver and you use
Speaker 3
it to buy ships, the revolver that portion that's been drawn converts into a term loan. Is that what's happening here or is it stay on as revolver?
Speaker 4
Thanks, Omar. No, it's a regular revolver. It does not convert into a term loan. You're able to draw and pay back and redraw. It has regular quarterly reductions of about $11,700,000 but it does not term out.
It's just a regular revolver and gives us plenty of flexibility going forward. I will also say that five of the vessels in our fleet will stay unencumbered, so that those provide additional flexibility for us in the future. And it also has an uncommitted accordion feature. So if we did want to increase the facility amount, we could do that by putting additional vessels in there.
Speaker 2
I mean, Omar, I would look at it as a holistic $450,000,000 credit facility. Yes, 300,000,000 is a revolver and 150,000,000 is a term loan, but it's really a $450,000,000 facility that as opposed to it says reduces based on a twenty year amort schedule at $11,000,000 and change per quarter. That's how I would view it.
Speaker 3
Got it. Pretty nice schedule there. And then not that you would necessarily want to do this considering you're reducing debt fairly aggressively here. But just in terms of if, let's say, all else equal, you don't have that much drawn on the facility, if you were to buy a ship for, say, 30,000,000, could that be completely fully drawn? If you were to pay $30,000,000 for a ship, could you draw down $30,000,000 to fund it?
Or does it have to adhere to some LTV covenant?
Speaker 4
LTV drawdown, but that's for the whole revolver, right?
Speaker 3
Got it. Yes. Thank you. Thanks for that. And I appreciate you kind of answering that.
And then one kind of follow-up is that Randy asked about you intend to repay $117,000,000 here during the second half, get you down to that $250,000,000 at year end. And it sounds, if I recall, Apostolus, you mentioned that you're not going to stop there at year end $250,000,000 Next year, you intend to continue paying down debt. Is there a certain level or amount of debt you intend to pay? Or you have a target of how much of that $2.50 you want to pay down next year?
Speaker 2
Great question, Omar. So we don't have a target set yet. But as we're coming into the next quarter earnings call, if you will, we if you think about it, we will have our third quarter cash flow in the bag so to speak. We will have it probably 60% of our fourth quarter fixtures done. So we will have a very good sense coming into the end of the year our cash position and how much we'll be paying ultimately down to.
Clearly, the target is $250,000,000 It would be great if we could go lower than that, but that's going to depend on freight rates. So also at that time, we're going to take a view on 2022 and we will then let the market know what we plan on repaying for debt for 2022. So it's a little bit of a let's wait, let's make sure we have as much information as possible as we head into year end and then we can set that repayment for 2022.
Speaker 3
Makes sense. And it sounds like no matter what the amount of debt outstanding at year end, if I just do a simple calculation, will be below the scrap value of the fleet.
Speaker 5
So not a bad place to be.
Speaker 2
Yes. Bases today's scrap values, yes, I would agree with that. But look, ultimately, Omar, one of the key tenants of this strategy is obviously get down to that net debt zero, because we want a rock solid low cash flow breakeven rate, so that we can continue to pay dividends throughout any type of market cycle.
Speaker 3
Yes. Well, looking forward to seeing you guys getting closer and closer to model. So, appreciate it. Thanks for answering the questions and I'll turn it over.
Speaker 2
Great. Thank you, Omar.
Speaker 0
We will now move on to our next question from James Jiang of Univest Securities. Please go ahead. Your line is now open.
Speaker 5
Good morning, everyone. It's been a while. Morning. I have a couple of quick questions. We're expecting a start of a real super cycle in the dry bulk sector in the coming year, and we're expecting that to last about two point five to three years.
My question is, are you open to chartering in vessels at current levels if if you have the same sentiment as me with the super sector coming up? Or would you like to own vessels?
Speaker 2
I think it's a little bit of both. So first of all, we definitely are in the owning vessel business and will continue to be. But as part of our particularly our minor bulk strategy, we do quite a bit of booking of forward cargoes and using other people's vessels at times to move those cargoes. So we do charter in. But those are typically for short term cargo covering where we believe we can make a profit on those liftings.
We have done some longer term charters in the sense of three to five months or four to six months. But again, that's on the usually on the back of decent backhaul cargo, so that we're covering quite a bit of that minimum period and then using it to make money on the fronthaul. What I think you're referring to is longer term charters, longer And term chartering I would say no. We view that as quite a bit more risk to do longer term charters. We have a large enough fleet where we can operate very efficiently.
And we'd rather use our minor bulk fleet trade around that with forward cargoes. And as I said on a short term basis use potentially use other vessels outside of our fleet. But long term, I would say the answer is no. We just look at that as dialing up the risk too much.
Speaker 5
Got you. Okay. The next question is on fleet expansion. So with the smaller vessels folded in, we assume that the case would be the next one that you would look at or you really more of a still a case by case basis and value?
Speaker 2
I would call it a case by case basis. We have a barbell approach where we've identified we want to continue to grow in Capes and Ultras. There have been some very compelling Ultramax transactions that we've been able to execute on, which we have quickly and definitively. The Capesize market in terms of acquiring ECO vessels, which is what we are focused on is a little more challenging in the sense that the market is not as liquid as the ECO Ultramax market. But we will definitely continue to look at that.
And if we see an opportunity, then we'll move on it.
Speaker 5
Got you. Okay. Those are all the questions I have. Thank you very much.
Speaker 4
Thank you.
Speaker 0
And it appears we have no further questions at this time. I'd like to turn the conference back for any additional or closing remarks.
Speaker 2
No. Thank you everyone for participating today. And I hope everyone has a nice day and enjoys the rest of your summer. Thank you.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.