Genco Shipping & Trading - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited Third Quarter twenty twenty Earnings Conference Call and Presentation. 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, ww.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 eight seventy two thousand four and ninety three. 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, 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 k for the year ended 12/31/2019, and the company's reports on Form 10 Q and Form eight k subsequently filed with the SEC.

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

Speaker 2

Good morning, everyone. Welcome to Genco's third quarter two thousand twenty conference call. We'll begin today's call by reviewing 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 posted on our website. During the third quarter, we witnessed an uplift in global economic activity levels, which translated into a strengthening drybulk freight rate environment despite the continued uncertainty relating to the trajectory of COVID nineteen.

Following a challenging first half of the year, Genco generated over 70% increase in our time charter equivalent rate relative to the prior quarter, enabling us to return to profitability on an adjusted basis. In line with our thesis of a second half recovery, we were able to capitalize on a strengthening freight market as we primarily employed our vessels in the spot market. In the fourth quarter today, we anticipate further improvements to our time charter equivalent rate led by our Capesize vessels at nearly $20,000 per day. As of November 4, our TCE was fixed at over $13,000 per day on a fleet wide basis for 57% of the days. While we have seen a recovery and an improvement in fundamentals, challenges relating to conducting crew rotations remain due to various port restrictions, difficulty arranging travel, and ensuring the health and well-being of our crew members.

Genco has taken proactive measures by implementing industry leading protocols, and we have successfully completed the majority of our scheduled crew rotation for the year involving over 1,600 seafarers. The health and safety of our crew remain our top priority. We thank our crews around the world for their dedication and professionalism and are committed to continue to take steps to promote their health and safety amid the global pandemic. Regarding capital allocation, our strong balance sheet along with an improving dry bulk market has enabled gen Genco to declare our fifth consecutive quarterly dividend, highlighting our focus on returning capital to shareholders. This brings the total dividends declared of 73 and a half cents per share since the 2019.

Effectively deploying our capital will remain a top priority for management. We intend to continuously evaluate our capital allocation strategy as the dry bulk market further evolves and as we seek to continue to create shareholder value. Going forward, we anticipate traditional dry bulk seasonality to play a factor during the first quarter of next year. However, we plan to book forward cargoes and select period time charters to smooth this volatility similar to what we have done in recent years. Overall for 02/2021, we believe the dry bulk outlook is favorable.

Specifically, the order book as a percentage of the fleet is at an all time low, limiting net fleet growth while while the Brazilian iron ore recovery and growth story, which has materialized since June, is expected to continue. We believe Genco is in a position of strength to benefit from its compelling fundamentals, particularly due to our ownership of both major and minor bulk vessels, our world class in house commercial operating platform, and our industry leading balance sheet. We believe the record low order book will be an important catalyst in creating a dry bulk market environment in which demand growth outpaces supply growth in the coming years, which we view as a positive driver for freight rate. I will now turn the call over to Apostolos Sifolias, our chief financial officer.

Speaker 3

Thank you, John. For the court the 2020, the company recorded a net loss of $21,100,000 or 50¢ basic and diluted loss per share. Excluding noncash vessel impairment charges of $21,900,000 and a $400,000 loss on sale of vessels, adjusted net income for the quarter was $1,200,000 or basic and diluted earnings per share of 3¢, while we generated adjusted EBITDA of $22,300,000. Genco's success capitalizing on the improved market conditions enabled us to further strengthen our balance sheet, bringing our cash position to $160,800,000 including $24,500,000 of restricted cash as of 09/30/2020. Our debt outstanding growth of deferred financing costs is $475,400,000 as of the end of the quarter, which after considering our cash position, in a net debt of $314,700,000 Furthermore, we continue to divest our older, less less fuel efficient tonnage as part of our efforts to modernize our fleet and create a more focused asset base while reducing our carbon footprint.

As part of our fleet renewal program, during the third quarter, we delivered two vessels to the respective buyers that we had agreed to sell previously. The sales of the Baltic Wind and the Baltic Breeze at 2,009 and the 2,010 built handysize vessel closed on July 7 and July 31, respectively. Additionally, in October, we delivered the Jengal Bay, a 2010 built handysize vessel, as well as the Baltic Jaguar, a 2009 boat Supramax vessel to their respective buyers. We have agreed to sell three other 53,000 deadweight ton Supramaxes, namely the Jenko Oar, Gencoe Normandy, and the Baltic Panther, which we anticipate delivering to their buyers during the 2020 and going into the 2021. The aggregate gross profit from the sale of these seven vessels amounts to $51,900,000 with associated debt of approximately $31,400,000 Our cash flow breakeven rate for the fourth quarter of this year is estimated to be approximately $12,350 per vessel per day.

Included in our breakeven rates is our q four twenty twenty BVOE budget of $4,750 per vessel per day weighted across our current fleet. While we have completed the majority of the scheduled crew rotations for our fleet to date, we expect to continue to experience increased costs and delays during the fourth quarter as a result of an emerging second wave of COVID nineteen cases around

Speaker 4

the world.

Speaker 3

Furthermore, deviation time associated with positioning our vessels to countries in which we can undertake such crew rotations due to virus travel and governmental restrictions related to COVID nineteen has resulted in days in the third quarter in which our ships have been unable to earn revenue and may continue to do so. With regard to dry docking, we anticipate approximately 94 of estimated off hire time during the fourth quarter. Lastly, I note that while we continue to position our fleet to better capture potential market improvements through the end of the year, we will have the majority of our Capesize vessels with contracts expiring in November and December, and we may elect to buy last certain of these ships to the Atlantic Basin in an effort to maximize earnings over the longer term. I will now turn the call over to Peter Allen, our dry bulk market analyst, to discuss the industry fundamentals.

Speaker 1

Thank you, Apostolos. Following the lows in May, the freight rate environment improved significantly led by the Capesize sector. Notably note notably Capesize rates have averaged over $20,000 per day since June 1, including peaks of over $30,000 experienced in July and October. This rise in Capesize rates has coincided with the meaningful uplift in Brazilian iron ore exports. From June to October, we have seen on average 10,000,000 tons more per month exported as compared to the January to May period as Vale's operations have recovered from poor weather conditions earlier in the year as well as from the 2019 Brumadinho Dam incident.

Overall, the iron ore trade continues to be driven by China as imports have risen by 11% year over year, including imports of over a 100,000,000 tons for four consecutive months, something that has only occurred three times on record prior to this year. Supporting this increased import level has been all time high steel production in China, which has increased by 5% in the year to date. China has continued to gain global market share as output in the rest of the world is down by 12%. However, production in key countries such as India has been increasing off of the lows in April as demand improves. Regarding the coal trade, as as has been widely reported, China has banned imports of coal from Australia.

We view this as a way to limit coal imports into year end due to import quotas while also political move due to the trade tensions between the two countries. We currently expect this ban to be short term in duration, possibly being lifted early next year. As a natural reaction to this step taken by China, we are seeing a diversion of cargoes from Australia to other destinations such as India, Vietnam, and Europe. In terms of minor bulks, the North American grain trade in q four remains encouraging. To date, The US has already sold over 33,000,000 tons of soybeans for the twenty twenty, twenty twenty one season as compared to only 12,000,000 tons at the same time last year.

China has been the primary driver of grain demand as the country continues to agree to large scale purchases of US agricultural products, including more than half of the reported soybean and corn sales to date. Regarding the vessel supply side, net fleet growth in the year to date is approximately 3%. Importantly, we have seen 22 VLOCs scrapped this year, fully offsetting the new building VLOCs that have been delivered. Furthermore, increased port congestion, fourteen day quarantine periods, and deviations for crew changes have led to a decline in fleet wide productivity. Lastly, we note the order book as a percentage of the fleet is approximately 6%, which marks an all time low.

This also compares to 6% of the fleet that is greater than or equal to 20 old. We believe these positive supply side dynamics provide a solid foundation for drive off 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 in the year, while the Brazilian iron ore trade continues its recovery and growth trajectory. This concludes our presentation, and we will now be happy to take your questions.

Speaker 0

Thank you. If you would like to signal for a question, you can signal by pressing the star key followed by the digit one on your telephone keypad. Keep in mind, if you're using a speakerphone, make sure the mute function has been released to allow the signal to reach our equipment. Once again, star one for questions. We'll pause for just a moment to allow everyone the opportunity to signal for Our first question comes from Liam Burke with B.

Riley.

Speaker 5

Good morning, John. Good morning, Apostolos.

Speaker 3

Good morning, Liam.

Speaker 5

John, the Capesize rates have been fairly volatile going into the end or within the third and also quarter to date in

Speaker 3

the fourth

Speaker 5

quarter. Looking into 2021 and the shift in terms of Chinese steel production, are you looking at continued volatility there? And if you are, can you do anything about it in terms of time charter?

Speaker 2

Yeah. The The Capesize market is has has always been highly volatile. So and I don't expect that to to go away. But as I look into next year, you know, we continue to see a a recovery scenario with growth on the iron ore side as Vale continues to, push up their their output. We do think the Chinese will begin to to import coal again in the beginning of the year.

It's possible that they may not be importing as much from Australia, and but then that just means they're gonna be relying on sourcing coal from from longer haul trade routes like South Africa, Colombia, and, maybe even, maybe even see some more liftings out of The US again. So I I do expect the volatility. However, you know, we expect stronger rates going into 2021 than than what we've experienced in 2020, and we also expect, the the COVID situation to, to abate. You know, we, I think India in particular was was a pretty big hit to the to the dry bulk market this year, and they are now well on their road to recovery in terms of steel production. They still obviously have high COVID cases, but from an industrial output standpoint, their steel mills are are are almost back to to full capacity or full utilization.

In terms of the the time charter market, Liam, we will continue to monitor that. You know, we we've looked at it all this year, and, it really hasn't gotten above sort of $1,415,000 dollars a day per year. And, we we think that that's, not that's not an attractive rate as as we go again into into next year with a with a really low supplier delivery schedule. But if we do see opportunities that that makes sense, we will definitely, take some of the exposure off the table, particularly in the Capesize fleet.

Speaker 5

Great. Thanks, John. And just quickly on the fleet, you're selling Supramaxes and the Handys. Your debt is amortizing steadily. You have a dividend program in place.

What about the fleet? Are there s and p opportunities there, or do you just continue to buy your time?

Speaker 2

I look. I think that, first of all, you know, the the ships that we've been been disposing of, the Handysize, in particular, have been have been part of the strategy the last few years, to exit that sector and concentrate more on the the Capesize as well as the Ultramax sector. So that, so and so we've been able to execute on that to some degree. And then the the 50 threes, which we've also been selling, you know, are are less fuel efficient. We we've been successful in operating those pretty well, and and we've been able to to get well above the, you know, the adjusted index rates on those.

We've been doing a lot of lot of steel off the East Coast into into the med, and then cement back. And that that's been a very good trade for us on the ships, and they're in this premium rates. However, again, those 50 threes have always been identified, as part of the fleet renewal program. And, you know, we finally got to a point where, in the third quarter and early fourth quarter where where values moved up quite significantly on those 50 threes off of some some pretty ridiculous numbers in terms of what people willing to pay in the summertime. So our our patient paid off on that, and and we've now been able to get get some of those some of those out the door.

And I think overall, you know, the the company is is focused on, you know, renewing the fleet, bringing the age down, and and reducing our carbon footprint and getting rid of the getting rid of the less fuel efficient vessels, which we've, again, we've been able to to execute

Speaker 4

on over the last several months.

Speaker 5

Great. Thank you, John.

Speaker 2

Okay. Thank you, Liam. Thank

Speaker 0

you. Our next question comes from Randy Giveans with Jefferies.

Speaker 4

Howdy, gentlemen. How's it going?

Speaker 2

Good morning.

Speaker 4

Morning. Morning. So, yeah, I guess a follow-up question on, the question on the Supras and Handys. You know, more recently, the sales have been Handys. This time, it looks like you're you're going to Supras.

Kinda why that switch and are the next handful of sales gonna be back to Handy or kinda either asset class? And then in terms of renewal, any interest in, like, an in block purchase of of modern secondhand Ultramaxes?

Speaker 2

So, you know, just just on the on the supers, just to put a little finer point on it, we're not necessarily selling supermaxes per se. We're we've been selling the the 50 threes in particular. Again, those have been a a focus for for a while because of, you know, their their fuel inefficiencies, their a, and, you know, we we've again been focusing on more of the the modern Ultramaxes. The and and I I think we'll continue to exit that's those those 50 threes. I think we'll have I think we'll have three left.

And then at the same time, we're gonna continue to look at, know, exiting the Handysize. But, again, our our focus is on is really in the Capesize market and the Ultramax market. It it's it's been like that since really 02/2016, 02/2017. That hasn't changed. We still believe heavily in those asset classes.

To go to to the second part of your question, we will time time will tell in terms of how we redeploy capital, but the the one comment I will make is I think there is a dislocation in terms of freight rates and values today. Meaning, I think it's a very attractive time to, to acquire particularly eco fuel efficient tonnage. So, we will, yeah, we'll continue to evaluate it. And and as I said before, you you know, we've always been very focused on, on capital allocation and and and doing it the proper way that that that brings shareholder value. And we we spend a lot of time, the management team, with the board, analyzing all of our different options, before we make decisions.

Speaker 4

Sounds good. Alright. And then switching over to kind of the iron ore trade. Obviously, Vale continues to to pump up, like, production. You know, the the sales, there's a little disconnect in the third quarter, but they expect that to ramp up as well in the fourth quarter.

Have you seen that in the last month, six weeks or so? Or and are you switching your fleet to have a little more exposure there in The Atlantic, as

Speaker 3

opposed to The Pacific?

Speaker 2

We, we have moved, I guess, a few more shifts in the know, we always try to keep a pretty balanced, approach to this. You know, there there are certainly times when Australia, you know, gets hotter than, than Brazil, and then Brazil gets hotter than Australia. So we do try to position, the fleet, you know, relatively evenly between the in between the the two basins. I I agree with you that, that Vale continues to ramp up on the, on the iron ore side. I would like to see the coal come back into the market and and provide some further support.

The good news is we've also seen, you know, iron ore going going into Japan again, as they're steel industry, you know, gets back and up and running, which which it has over the last few months. We're seeing a lot of coal going to into Southeast Asia in general, into Vietnam and The Philippines, even Pakistan, and and Turkey. So it it would be good to see the the Chinese coal come back, but, but, you know, I I again, you know, we we look at Vale. We think they've solved their logistics issues. We think they've made a lot of progress with the environmental concerns.

So we, you know, see that continuing to to ramp up as we go into to next year. And I can't stress enough, and we're talking about a 6.3% order book. It's it's at an absolute historic low, and I think the projection even for deliveries next year is maybe one and a half to 1.6 out of the existing fleet, you know, against the four to 5% demand growth projection. So that should bode well for next year.

Speaker 4

Yep. You know, we're in the same boat. No pun intended. Sounds good. We all have a good day.

Thanks again.

Speaker 2

Thank you, Randy.

Speaker 0

Thank you. We'll now pause for questions. Again, that is star one if you would like to ask a question. Again, please press star one now to join the questioning queue. At this time, there are no further questions.

This concludes the Genco Shipping and Trading Limited conference call. Thank you for joining. Have a great day.