Genco Shipping & Trading - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited Fourth Quarter twenty twenty Earnings Conference Call. 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 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 is accessible anytime during the next two weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode nine million five eighteen ninety nine. At this time, I will turn the comments 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, in 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 k subsequently filed with the SEC.

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

Speaker 2

Good morning, everyone. Welcome to Genco's fourth quarter twenty twenty conference call. I will begin today's call by reviewing our 2020 and 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 a highly challenging operating environment in 2020, our strong in house commercial platform and operations team continued to build on its track record of benchmark outperformance, while we took important steps to execute our strategic plan and effectively position Genco for the long term.

For the year, we outperformed our internal benchmarks by approximately $800 per day generating $15,000,000 of incremental EBITDA. Notably 2020 marked the third consecutive year of benchmark out performance for our minor bulk fleet. In addition, our time charter equivalent in Q4 of 13,167 was the highest Genco has achieved in two years. Our strategy of maintaining short term coverage during trough market conditions earlier in 2020 and repositioning the fleet ahead of an expected market upturn paid off with strong performance in the second half of the year. The unfortunate onset of COVID-nineteen in early twenty twenty resulted in a demand shock that significantly impacted the drybulk earnings environment, particularly during the second quarter of last year.

However, drybulk earnings were able to meaningfully recover beginning in June. The Q2 impact and the subsequent rebound in freight rates is highlighted on Slide eight of our presentation by the earnings of our Capesize vessels, which realized time charter equivalents of over $16,000 per day in each 2020 with the exception being the COVID related lows of Q2. During the 2021 today, we selectively repositioned vessels in both our major and minor bulk fleets to improve earnings over the remainder of the year. Given our opportunistic chartering strategy, we anticipate the majority of the vessels in our fleet to be open for fixing in mid March to mid April to take advantage of the meaningful increase in rates we've seen recently and the expectation of more to come. As part of the significant progress we have made renewing our fleet, we efficiently completed the vessel divestiture portion of our fleet renewal program through the sale of our 53,000 deadweight ton Supramaxes and our non core Handysize fleet while expanding in the core Ultramax sector.

In December, we announced the acquisition of three modern fuel efficient Ultramax vessels in exchange for six older non core Handysize vessels. This transaction, is structured as an asset swap without additional capital required, accomplished a number of key objectives for Genco, including building scale in our core Ultramax sector to complement our in house commercial platform while divesting noncore assets. Importantly, this also reduces the average age of our fleet and eliminates nearly $4,000,000 of scheduled dry docking CapEx in 2021. Moving to capital allocation and based on our strong balance sheet combined with positive drybulk market fundamentals, Genco declared our sixth consecutive quarterly dividend highlighting our focus on returning capital to shareholders. This brings total dividends declared to $0.07 $55 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 drybulk market further improves with the goal of creating shareholder value over the long term. Regarding the liquidity of our shares, since mid December, ownership of large shareholders with Board representation has been reduced from 58% down to 32% currently. While we believe this has contributed to Genco trading at a discount to NAV and trailing stock performance compared to a number of our peers in the short term, we view this as a positive in the long term due to increased overall liquidity and free float. Looking forward, 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 unprecedented stimulus and over 5% global projected GDP growth as well as the Brazilian iron ore export recovery have combined to create improving supply and demand conditions. With the ownership of both major and minor bulk vessels, our world class in house commercial operating platform and our industry leading balance sheet, Genco is well positioned to benefit from these compelling industry fundamentals. We believe the record low order book in particular will be an important catalyst in creating a dry bulk market environment in which demand growth outpaces supply growth in the coming years, a very positive driver for freight rates. Lastly, in January, we signed the Neptune declaration on seafarer well-being and crew change to address the unprecedented crew change crisis caused by COVID nineteen. Genco has worked tirelessly to return seafarers to their home country safely and on time completing over a 100 crew rotations in 2,020 involving approximately 2,000 seafarers.

Amid the ongoing COVID nineteen pandemic, Genco continues to prioritize the health and safety of both our crew members and onshore team. We thank global seafarers for their sacrifices and commitment to professionalism during a very challenging period, and we remain committed to facilitating crew changes to help resolve this humanitarian crisis as quickly as possible. I will now turn the call over to Apostol Sifolias, our Chief Financial Officer.

Speaker 3

Thank you, John. For the 2020, the company recorded a net loss of $65,900,000 or a dollar and 57¢ basic and diluted loss per share. Excluding noncash vessel impairment charges of $74,200,000 and a $1,000,000 loss on sale of vessels, adjusted net income for the quarter was $9,300,000 or basic and diluted earnings per share of $0.22 while we generated adjusted EBITDA of $29,700,000 During Q4, the company recorded a $67,200,000 noncash impairment charge related to nine Supramax vessels in its fleet as the estimated undiscounted cash flows for each of these vessels did not exceed their net book values. These vessels are not part of our fleet renewal program, and we do not intend to sell these vessels currently. During the quarter, we continued to further strengthen our balance sheet through operating cash flow through fair market conditions together with opportunistic vessel sales, bringing our cash position to $179,700,000 including $35,500,000 of restricted cash related to vessel sales as of 12/31/2020.

Our debt outstanding across the deferred financing costs is $449,200,000 as of the end of the fourth quarter, which after considering our cash position results in a net debt of $269,500,000 As part of our fleet renewal program during the fourth quarter, we delivered four vessels to their respective buyers, including three Supramaxes and one Handysize. In q one to date, we have taken delivery of the three modern Ultramax vessels and delivered the six older Handysize vessels completing the previously announced cash neutral vessel swap transaction. Separately, we delivered three more vessels including two Supramaxes and one hand sized vessel for their new owners. Lastly, we have agreed to sell our final two fifty three thousand deadweight ton Supramaxes, the Baltic Leopard and the Jenga Lorraine, which we anticipate to deliver to the buyers by the 2021. These sales will conclude the divestiture portion of our fleet renewal program, representing the sale of older, less fuel efficient non core tonnage.

Our net income breakeven rate for the first quarter of this year is estimated to be approximately $11,350 per vessel per day. Included in our breakeven rate is our q one twenty twenty one daily vessel operating expense budget of $5,100 per vessel per day weighted across our current fleet reflect and and this reflects the greater weighting of Capesize vessels following the sales of smaller Supramax and Handysize vessels in 2020 as well as an anticipated increase due to COVID related expenses in the 2021. With regard to drydocking, we anticipate approximately twenty days of estimated off hire during the first quarter in relation to the drydocking of one of our Capesize vessels. In relation to the Capesize vessels, during the fourth quarter, we utilized a strong Pacific market to continue trading in the region with less ballasting to the Atlantic. As a result, and while we continue to position our fleet to better capture potential market improvements, we may elect to ballast certain of these vessels that have contracts expiring in the coming weeks to the Atlantic Basin.

I will now turn the call over to Peter Allen, our drybulk market analyst, to discuss the industry fundamentals.

Speaker 1

Thank you, Post Lewis. The market improvement seen during the third quarter carried over into q four with Capesize rates reaching 2020 high in October at nearly $35,000. Following the lows during the 2020, since June, we have now had a strong drybulk market for nine consecutive months with the Baltic Capesize Index averaging over $18,000 per day and the Baltic Supramax Index averaging $10,500 per day over that time. In 2021 to date, the Capesize rate improvement that materialized in mid December continued through the January with Capesize rates reaching their highest point for the first quarter since 2014. More recently Capesize rates have experienced a pullback due to typical seasonal factors that come into play during Q1, including weather related disruptions impacting cargo availability and the front loaded nature of the new building order book.

Encouragingly, Brazilian iron ore exports are on stronger footing so far this year as compared to last with January exports having risen by 8% year over year. Continued recovery in growth Brazilian iron ore exports are expected as Vale is targeting run rates of three fifty million tonnes per annum and 400,000,000 tonnes per annum at the 2021 respectively as compared to three twenty million tons seen at the 2020. Last year, China's iron ore imports grew by nearly 10% year over year to a record 1,200,000,000 tons propelled by all time high steel production. In 2021, we anticipate continued strong demand by China, while demand for iron ore in the rest of the world is expected to recover together with steel production following the COVID related declines of last year. On the minor bulk, Supramax earnings have risen in a counter seasonal fashion, currently a level not seen since 02/2010.

This has been driven by strong grain exports from The US to China as well as increased shipments from of minor bulk commodities closely linked to global GDP growth. China's demand for grain has been led by a recovery from the swine fever outbreak in 2018 and 2019 as well as continued inventory building. Significant volumes of front haul fixtures booked from the Atlantic to the Pacific Basin have resulted in a tight supply picture in various Atlantic regions, which has further supported freight rates. Regarding the supply side, net fleet growth in 2020 was 3.8%, with the forecast for 2021 at approximately 2%. The order book as a percentage of the fleet is now below 6%, which marks an all time low.

This also compares to 6% 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. For this year and next, we view the supply and demand trend as favorable as global trade flows further improve while the Brazilian iron ore trade continues its recovery and growth trajectory. This concludes our presentation, and we would now be happy to take your questions.

Speaker 0

Thank you. And if you would like to signal for a question, you could 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. And we'll go ahead and take our first question from Omar Nokta from Clarksons Plateau Securities. Please go ahead.

Speaker 4

Hi there. Thank you. Hi, guys. Wanted to Good morning. Good morning.

Yeah. I just wanted to check-in with you some interesting commentary on the fleet renewal program, which has obviously been ongoing for several quarters now. You mentioned that the fleet divestiture portion of the program is now complete, and I take that as simply now you're just not planning on further sales here for the near term. And I guess also the write down on the supra is just more accounting, as opposed to precursor to some further sales?

Speaker 2

Yeah. Yes, Omar. That no more vessel sales plans. The vessels that were originally identified in the fleet renewal program were the, on the divestiture side were the 50 threes, and then the Handysides, all that is complete. So at this point, the, the sales or divestiture program is, is is over and done with.

In terms of the impairments, yeah. That that was, that was a noncash accounting, and, we have no plans to to sell any of those vessels.

Speaker 4

Got it. Thanks, John. And then as you obviously think about the fleet, you you discussed a much more positive outlook. We've seen that much stronger dry bulk market so far this year. How do you feel about acquisitions going forward?

You did the swap to the three Ultramaxes. Do you see yourself becoming much more acquisitive? And based off of that question, you know, when you when you think about the major versus the minor bulk segments, do you go after one particular vessel segment, or do you wanna maintain kind of similar ratios of ownership?

Speaker 2

So I look. In general, there there's a lot of leverage capital allocation. Right? There's there's vessel acquisitions. There's, what what you're doing on the, on on the dividend side going forward.

These are all conversations that that we actively have, with with, with the management team as as well as the board. I still think right now, vessel values have they've moved up a little bit, but they still do not match, the underlying fundamentals on freight rates. And what I mean by that is they're below. Freight rates are well ahead of vessel value. So I still think it's a very good time to be in growth mode, if you will.

Vessel values, albeit are in sort of the they're still in the lower quartile if you look at it from average historical period. So I still think it's a good time. And I don't think we're anywhere near mid cycle rate. So, I can't stress enough. I think asset values have a ways to go.

So I think it's, I think there are good opportunities out there right now. In terms of what, you know, what we we we believe very strongly in, you know, in our in our barbell approach and and focusing on the Capesize segment as well as the the Ultramax segment. Look. You you you whenever you're looking at things, you you always look at the individual transaction at the time. We have, I would say, in general, with the with the vessel sales, we're we've switched switched our our weight, if you will, a little more towards the Capesize sector.

So, you know, you you may see us if I if I was to to look at it today, I I would say maybe we would balance out more with Ultramaxes, but we haven't made any decision on on on on what to go after quite yet.

Speaker 4

Thanks, John. And I do agree you. It does feel, you

Speaker 2

know, very, very early innings still. Exactly.

Speaker 4

And then just to yeah. And then just a follow-up maybe, and I'll pass it on. You know, in terms of the ships, as you know, obviously, at an interesting point in time with regards to, you know, the fleet dynamics and and and and fleet characteristics. When you when you are thinking of an acquisition, is there in terms of age and, you know, carbon footprint, do you wanna continue to evolve and stick with the modern vessels as, you know, similar to the Ultramax that you acquired, that basically check the right boxes when it comes to the carbon and and the green transition? Or do you feel like there are are opportunities to kinda be be a bit more opportunistic with with older tonnage?

Speaker 2

No. I I think if you look at what we've done, you know, we the the 50 threes are a prime example. So those are those are somewhat older vessels, and they were pretty high in the fuel consumption side, which is why they were identified as as sales candidates. Going forward, we, you know, we we we believe very much in in reducing our carbon footprint. So I I think you're gonna see us focus more on, you know, eco type vessels, you know, 2015 and and and newer, for for a couple reasons.

One, we obviously believe very strongly in demand outstripping supply and freight rates and vessel values continuing to move up. You so we think there's some good opportunities in that twenty fifteen and newer vessel class and and and continuing to have a lot of operating leverage. But then you can still, you know, you can still go after, fuel efficient ships and, and reduce your carbon footprint, which is also a major focal point for us.

Speaker 4

Yep. That makes sense. Very good, John. Well well, thanks, and, yeah, looking forward to seeing how things, play out here, going forward. I'll turn it over.

Speaker 2

Thanks, Omar.

Speaker 0

And we'll go ahead and take our next question from Randy Giveans from Jefferies. Please go ahead.

Speaker 1

Howdy, gentlemen. How's it going?

Speaker 2

Good morning, Randy.

Speaker 5

Morning. Yeah. So congrats, obviously, on the third consecutive year here of outperforming the benchmark indices. So clearly, the platform is working. Now as it relates to the $800 a day and and 15,000,000 in incremental earnings, What is maybe the driving force of this?

You know, you mentioned the indices or scrubber adjusted for the case sizes. Your ultras don't have scrubbers and aren't necessarily the newest ships out there. So how is your business model or chartering strategy resulting in these outsized returns?

Speaker 2

Right. So, so on the capes, you know, as you pointed out, we're we're benchmarking against a a a Platts scrubber index. So we're we're taking out, the benefits of the scrubber and looking purely at what the commercial team can, can do with the vessel. And, you know, I I think in the in the Capesize sector, you know, quite quite a few things. One of which I mentioned is, you know, when we had the, when we had the downturn in the second quarter due to, the COVID nineteen pandemic, we, you know, because of the strong balance sheet, we did not have to go into panic mode, if you will, and fix at very low rates.

We had a lot of confidence that the second half of the year would recover. And so we were able to be spot and take advantage of that recovery that happened in the second half. So that, from a strategy standpoint, was one of the big things. But also just in the if you go a little more granular, you know, we we have relationships with with all the iron ore majors. We are going direct to the iron ore majors.

So we're able to, you know, capture margins, that that are higher than if you remember what you know, years ago when we were just a tonnage provider. So taking that middleman out has been, has been very helpful in trading directly on a voyage basis with iron ore majors. That's what's driven the capes. On the on the minor bulks, I would say, it's a similar setup in that we're dealing directly with cargo owners. If you look at Jesper Christiansen and his team have added 150 new customers, over the last three years, which is pretty incredible.

And all of that is, again, direct business. But what we're also able to do in the minor box is a lot more trading where we're able to book forward cargoes and either use our own ships to move those vessels or or charter in, someone else's vessel to be more efficient and, and make money on an arbitrage trade. So a lot more things you you certainly can do in the minor because of triangulation and all the different cargoes, but the ability to book forward cargoes and and and have arbitrage opportunities. So a a little a long answer, but we hopefully, all understandable.

Speaker 5

Yeah. No. A lot a lot of reasons behind the outperformance, understandably. Alright. And then looking at your, you know, kind of vessel acquisition potential.

Right? Any, you know, appetite for ships for shares transactions like we've seen some of your peers do recently?

Speaker 2

Yeah. I I I, I I would say, in general, that would be part of the thing that you would look at under on when we're, you know, again, looking at capital allocation, and and I can't stress enough. I think that's that's one of the more important, things in the shipping industry is is, you know, the decisions you're making on the capital front. But, you know, we also wanna make sure that we're doing, you know, NAV transactions. So, you know, that that that would be a pretty big tenant, to accomplish that.

Speaker 5

Yeah. That's fair. And I guess, briefly, if you can just touch on you know, you you mentioned you have a lot of vessels coming available in Brazil in mid March, mid April. How are you seeing that Capesize market, developing here in the coming weeks? Obviously, it's underperforming Panamaxes currently, and that's kind of in the teeth of Chinese New Year.

But where is that market looking like, here in the next few weeks and months?

Speaker 2

Yeah. Look. I I think over the next couple weeks, we're still gonna be, you know, probably right around where we are today, in the low teens. I think you have to look at the fact that Brazil is still in a rainy season. They're still undergoing maintenance on the mining side.

That should all, you know, from a from a seasonal standpoint, should all fix itself or or get back to to normal run rates is probably the better way to put it, you know, by mid to late March. So, you know, I I I think things start to move up as we get towards the March and early April. And if you look at what is, you know, from again, from a seasonal standpoint, look look what's going on in China. Construction usually starts to pick up as we get into April. Maybe I'm answering your question a little too much here, but you still have low iron ore inventories.

You've got a very high price of iron ore. You've got steel production continuing in China and steel inventories below where they normally would be this time of year. So the steel is being consumed. So I think there's a lot of factors that from a seasonal standpoint and then from just demand outstripping supply growth this year, you know, we should start to get into this as we get into April. That's on the case, but I would also tell you we have a major piece of minor bulk fleet also coming open in sort of early April to mid April.

And we think the Atlantic is gonna continue to to be very strong. And so we're gonna have probably about 75% of our minor bulk fleet positioned in that basin and and able to take advantage of it.

Speaker 5

Perfect. Well, yeah, that covers it for me. Thanks so much.

Speaker 2

Okay, Randy. Take care of yourself.

Speaker 0

And we'll go ahead and take our next question from Liam Burke from B. Riley. Please go ahead.

Speaker 6

Thank you. Good morning, John. Good morning, Apostolos.

Speaker 2

Good morning, Liam. Good morning.

Speaker 6

John, as you look at your debt amortization schedule, you're comfortably doing it in a rising rate environment. Your cash flow is strong. Is there any need to, accelerate the pay down, or is that in your thought process on the capital allocation side?

Speaker 2

No. I don't I don't I'll I'll turn this back over to Folkes just for a second, but but my view is no. We we look. We we we are paying off debt as scheduled, and, leverage is coming down, you know, rather quick about it's already at a pretty low level, but it's coming down rather quickly even off of that. And I'll let Apostol address this.

I actually think there are some opportunities to, to refinance that debt this year and and make it even more attractive. But, Apostles, you wanna you wanna address that real quick?

Speaker 3

Yeah. Sure. Thanks, John. I I I mean, I echo what John said. Look.

Our net debt position is up $270,000,000. Clearly, a leading position in the industry and and and a very strong balance sheet. That coupled with our liquidity position, I think, would give us the the the potential to to drive our breakeven levels further down. And we could either do it sort of under the existing facility, but we could also refinance those facilities, which we believe could save upwards of a thousand dollars per per vessel per day going forward.

Speaker 6

And typically, this is a quarter where with Lunar New Year, things are awfully slow, and it looks like a stronger than normal seasonally slow quarter. Is there anything in there that's that much unusual? You highlighted the fact that inventories on iron ore inventories are low in China. But is there anything else in there that would account for that?

Speaker 2

Yeah. I mean, look. I I think, I think we're all aware that there was not nearly the amount of, shutdowns and travel that took place in China over Lunar New Year. I I think a lot of factories, they may have closed for a very short period of time, but then got up and running quickly again. Looking at steel production, the steel production numbers, continue to be higher than than what we saw last year.

So I I I don't think they're I think that's part of it. I also would tell you in the, in in the minor bulks and the and the grain trades, you know, we're we're obviously seeing, the result of of falling in trade tensions with with China buying a lot of soybean and corn from The US. So we haven't seen that over the last couple years. And and I, you know, I think that has that sounds that's twofold. Right?

It's it's the falling in trade tensions, but it's also the recovery in in China's hog population from, coming off the back of, swine flu. And and we're expecting a very strong Southern Hemisphere, season led by Brazil on the soybean front. So, yeah, I mean, I I'm we're we're pretty positive across all vessel classes, for for 2021. And and I think you'll you'll start to see capes, move up pretty significantly as we get into the early part of second quarter.

Speaker 6

Great. Thank you, John. Thank you, Postgres.

Speaker 2

Thanks, Liam.

Speaker 0

And with that, we have no further questions. That does conclude our question and answer session for today. And with that, that also does conclude our conference call. Thank you all for your participation. You may all