Genco Shipping & Trading Ltd (GNK) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading, Limited, Fourth Quarter and Full Year 2005 Earnings Conference Call and Presentation.

Before we begin, I would like to advise everyone 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. I also want to inform everyone that 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 at any time during the next two weeks until February 28, 2006, by dialing 888 286 8010 for U.S. callers and 617 801 6888 for those outside the U.S. To access the replay, please enter the passcode 21642248. At this time, I will turn the conference over to the Company. Please go ahead.

Good morning. Before we begin our presentation, I would like to take note that in this conference call, we will be making certain forward-looking statements that discuss future events and performance. These statements are subject to risk and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see the Company's press release that was issued yesterday, and materials relating to the call, posted on the Company's website and the Company's filings with the Securities and Exchange Commission, including, without limitation, the Company's registration statement on form S-1, as amended for our initial public offering, and the Company's subsequent reports on form 10Q and form 8K.

At this time, I would like to introduce Mr. Gerry Buchanan, the President of Genco Shipping & Trading.

Thank you. Good morning, and welcome to Genco's Fourth Quarter and Full-Year 2005 Conference Call. With me today on this call are John Wobensmith, our Chief Financial Officer, and Peter Georgiopoulos, our Chairman. As outlined on page three of the presentation, I will begin today's call by discussing the highlights of the quarter and year, followed by John's review of our financial results for the three months and 12-month period, ending December 31st, 2005. Following this, I will discuss the industry's current fundamentals. John, Peter, and I will then be happy to take your questions.

First, I'd like to detail Genco's Fourth Quarter and Full-Year 2005 highlights, on slide five of the presentation. We recorded net income of $15.1 million for the fourth quarter, and $54.5 million for the full year of 2005. John will discuss our fourth quarter and full-year 2005 results in more detail later on the call, but it's important to note that 2005 was truly a momentous year for Genco.

Since completing our IPO in July of 2005, we have posted strong financial results for shareholders, declared two $0.60 dividends for quarter three and quarter four of 2005, and established a solid foundation for future fleet growth and earnings growth. With the $0.60 per share dividend that we declared for the fourth quarter, Genco has now declared a $1.20 per share dividend for the two eligible quarters of 2005. Based on the closing price of Genco's common stock on Friday-- oh, sorry, on February the 13th, 2005, the fourth quarter dividend equates to a 15% annualization yield.

Our ability to provide shareholders with sizable cash dividends in 2005 in a comparatively softer rate environment than 2004 is directly related to the signing of our fleet on time charters with rates that continue to be superior to the market, as well as our ongoing focus on cost-effective operations.

Complementing our strong financial results during 2005, we also took important steps during the year to position the Company for growth, as per our strategy.

When our chairman founded Genco in November of 2004, it was with the vision to become the industry leader in terms of size and quality of the fleet. At the core of our ability to achieve this important objective is management's consolidation experience, their unique dividend ability that includes a reserve for growth, and their $450 million credit facility, of which we have $320 million of availability as of December the 31st, 2005.

Following the closing our credit facility, we acquired and subsequently took delivery of the Genco Muse, a 48,900 deadweight Handymax vessel. With the addition of the Genco Muse to our fleet, on October 14 of 2005, Genco has enhanced its earning potential and has now acquired a successfully integrated, 17 vessels into its fleet in just 15 months. Later on the call, John will discuss the consolidation strategy in more detail.

At this time, I'd like to turn to slide six and provide an overview of Genco's fleet. A moment ago, I mentioned that our strategic focus is building both a sizable and quality fleet. The average age of our fleet is 8.5 years versus the industry average of 16. Going forward, we will continue to focus on maintaining a modern fleet. By securing 77% of our fleet's 2006 operating days and contracts, at favorable rates, with world-class charters, we have also made significant progress providing shareholders with a stable revenue stream for 2006.

In the short term, our strategic decision to trade two of our vessels, the Genco Leader and the Genco Trader, on the spot market, also provides Genco with upside potential to any increases in the spot market. During the fourth quarter, the Genco Trader entered the Balmarine Pool, a spot pool of approximately 45 vessels, in an effort to optimize its earning potential. We've been very pleased with the performance of the Genco Trader and as a result, we entered the Genco Leader in the pool on February the 8, 2006. I would like to now turn the call over to John.

Thank you, Gerry, and good morning everyone. I will begin my remarks by directing you to slide 8, which presents our Fourth Quarter and Full-Year 2005 financial results. I'll start by clarifying for everyone that because the Company began operations on December 6th, 2004, comparable historical data from last year for these time periods is not included in our analysis.

For the fourth quarter and full year ended December 31, 2005, we recorded revenues of $33.4 million and $116.9 million, respectively. Having a large portion of our fleet locked away on time charters at above-market rates has been a prime contributor to our ability to record strong and stable revenues for the fourth quarter and the year.

Our vessels that are currently fixed under long-term charter are between 30% and 90% above the current one-year time charter market today.

Operating income for the fourth quarter and full-year period was $16.8 million and $68.7 million respectively. Our net interest expense for the fourth quarter was $1.7 million and $14.3 million for the full-year 2005 period. Included in our full-year net interest expense was a one-time non-cash deferred financing charge of $4.1 million realized in the third quarter. The charge relates to the retirement of our original credit facility.

Additionally, our interest expense for the full year reflects approximately 7 months under our original credit facility. That facility has since been retired and been replaced by our new credit facility, which is a lower interest cost at LIBOR plus 95 basis points.

As we discussed in our third quarter 2005 conference call, we entered into an interest rate swap agreement in September 2005 for the initial amount of $106.2 million, which enables the Company to manage a portion of its interest expense. The interest rate swap was executed at an effective rate of 5.435% inclusive of the margin and expires on July 29, 2015. Its fair value as of December 31, 2005 was $2.3 million. Due to the structure of the interest rate swap, we are using hedge accounting and any change in value is reflected in shareholders’ equity rather than flowing through the income statement.

Net income for the fourth quarter was $15.1 million, or $0.60 earnings per share, and for the full-year period ending December 31, 2005 was $54.5 million or $2.91 earnings per share.

Our adjusted net income for the full-year period was $58.6 million at $3.12 per share which excludes the on-time non-cash deferred financing charge of $4.1 million for the third quarter that I previously mentioned.

Moving to slide 9, looking at the major balance sheet items, you will see that we continue to have a strong cash position with low leverage. Specifically our cash position was $46.9 million at December 31, 2005 and our net debt to total capitalization ratio was 19%.

Total assets at the end of the fourth quarter were $490 million consisting primarily of our fleet of 17 vessels. We repaid $10 million of outstanding debt in the fourth quarter of 2005 bringing our long-term debt outstanding at December 31, 2005 to $130.7 million. Our EBITDA for the fourth quarter of 2005 was $23.8 million and for the 12 months of 2005 our EBITDA was $91.5 million. This represents EBITDA margins of 71% and 78% respectively.

Moving to slide 10, you will notice that utilization continues to remain high at 99.5% for the fourth quarter and 99.2% for the full 12 months of 2005 and is reflective of the Company’s strong time-charter coverage and modern fleet. Our time-charter equivalent for the fourth quarter came in at $20,725 per day versus the $20,407 per day we recorded in the 3-month period ended September 30, 2005. This is primarily due to higher charter rates received in the fourth quarter versus the third quarter of 2005 for the Genco Leader and the Genco Trader, the 2 vessels operating in the spot market. As Gerry mentioned earlier, both of these vessels have been entered into a spot pool with Balmarine.

For the fourth quarter of 2005 our daily vessel operating expenses were $3,794 per day versus $2,594 per day for the third quarter. The higher per diems in the fourth quarter are due to the timing of purchases of stores and spares for the vessels to be used during the calendar year. We believe the vessel operating expenses should be measured on a 12-month basis and compared to our 12-month budget. For the 12-month period of 2005 our vessel operating expenses were $2,805 per day which is favorable compared to our budget of $3,086 per day for 2005 and was consistent with our expectations that we detailed in an 8-K filing on January 23.

As we announced in January, we have established estimated budgeted daily vessel operating expenses for 2006 of $3,184 per day per vessel on a weighted basis for our fleet of 17 vessels. This represents a 3% increase over 2005 12-month budget. For 2006,

For 2006, ship management’s technical management fees will be $6,800 per ship per month, the same as it was for 2005.

On slide 11, we present a pro forma balance sheet to reflect the Company’s payment of its fourth quarter 2005 dividend on or around March 10, 2006 for all shareholders of record as of February 24, 2006. As you can see our pro forma cash position remains strong at $31.6 million as does on undrawn component of our revolving credit facility which is $319.3 million. Our total pro forma liquidity of $351 million combined with our pro forma net debt to total capitalization ratio of 23% positions the Company well for growth going forward.

Turning to slide 12, we have provided break-even levels for the 12-month period of 2006. We continue to have a low free cash flow break-even rate at $6,186 per day per vessel, which is reflective of our cost-efficient operations as well as the flexible terms under our credit facility, highlighted by the fact that the facility has a 6-year non-amortizing component. Our net income break-even is $10,355 per day per vessel.

Next I would briefly like to discuss our dividend policy on slide 13. As Gerry mentioned earlier in his remarks, Genco’s Board of Directors declared a $0.60 per share dividend based on our fourth quarter 2005 results. Our dividend policy, which is determined by our Board of Directors on a quarterly basis, and is calculated based on free cash flow less cash reserves for fleet maintenance, renewal and growth, and debt amortization provides significant benefits to shareholders. As we have previously stated, our target dividend is $0.54 per quarter. Our dividend not only distributes cash to shareholders, but by nature of our cash reserve policy and our substantial low-cost revolving credit facility allows for growth of the fleet without having to rely on additional equity offerings and diluting our current shareholders.

Before turning the call back to Gerry, who will discuss the current fundamentals of the industry, I note that growth remains an important component of our strategy and we continue to actively explore consolidation opportunities. We believe that management’s experience combined with our significant liquidity and unique dividend policy positions us well to take advantage of the fragmented nature of the industry and become a major consolidator of drybulk vessels.

In pursuing future growth opportunities, we will continue to be driven by the goal of creating long-term value for the Company and its shareholders. When evaluating transactions, we will seek to provide both earnings and cash flow accretions while maintaining a disciplined approach without diluting our return on total capital.

I would now like to turn the call back to Gerry.

Thank you John. I’d like to take this opportunity to spend a few moments discussing the industry fundamentals and I’ll start with slide 15, which points to the drybulk indices, the details of which will be covered in the following commentary. So moving to slide 16, the anticipated restocking of iron ore inventories expected in the last quarter of 2005 is already underway as both November and December of last year were record months of iron ore imports by China. As indicated in the graph on the bottom left, iron ore imports and steel production grew to 275 million tons of iron ore for 2005 and 350 million tons of steel produced for the same period.

By early February, iron ore stocks at port increased by 5 million tons to 37 million tons as compared to December, which suggests that January was an equally strong month of high imports. Stocks are being built up ahead of the new price regime.

The U.S. grain season has been affected by back-to-back hurricanes in the second quarter of 2005, and the USDA has indicated the latest export figures for coarse grains show a fall of 5% year-on-year. One reason for the fall-off of coarse grains export contributed to the bird flu, which gripped Asia in the last quarter of 2005. Millions of poultry were slaughtered resulting in a lower demand for feedstocks.

Going forward, we continue to believe that in addition to China, India will become a significant growth area for the drybulk market. This is due in part to the country’s large population of 1.2 billion. While India is already an importer of coal, the country’s fuel potential as it relates to the overall drybulk market is yet to be realized. The main limiting factor in India now, as in the past, is the lack of modern ports, real and broad infrastructure. However, this is changing by government decree, and perhaps the largest single project, which will benefit the drybulk market in India is the [Ustipa] port being constructed on the East Coast of [Arisa]. When completed, expected some time in 2007 or 2008, this port will be able to handle exports of iron ore as well as imports of coal.

Looking at the graph on the bottom right-hand side, we can see that the drybulk fleet has increased and scrapping has remained very low. However, in the overall order book stands at 18.5% of the world fleet and in 2006 the delivery of new vessels into the market is expected to peak, representing an increase for the year of 7%. The Panamax fleet is expected to increase by approximately 9% and the Handymax fleet by approximately 8%.

The order book is lower for 2007 and 2008 at approximately 5.5% and 5% respectively. By contrast, scrapping though expected to increase in 2006 is not expected to reach levels necessary to create a supply and demand balance.

On slide 17, we detail the long-term drybulk demand fundamentals which we believe are strong for the following reasons; increase in China’s GDP continued with a growth rate of 9.9% in 2005. Furthermore, based on steel production figures, this increase suggests that governmental attempts to slow steel production have been less than successful in 2005. As highlighted in the previous slide, iron imports for 2005 were 275 million tons and steel production was 350 million tons, some 50 million tons above expectations.

India’s GDP grew 7.5% in fiscal 2005 beating earlier estimates which forecasted a growth rate increase of 6.9%. As manufacturing demand increases in India, so will the demand for energy; currently, India’s energy demand is supplied by oil and coal.

The world’s GDP is expected to increase at the rate of 3.7%. A major driver of this growth is the Asian economies. If we look at the graph on this side we can see that the global ton-mile demand has grown steadily since the year 2000. This has been at the rate of 5.7% target from 2003 to 2004 and 4.3% target from 2004 going forward. This is mainly due to increased iron ore imports by China and Japan from Brazil; coal from Australia and Indonesia; and grain from North and South America to most Asian countries, including China. These longer haul trade routes are expected to grow with the volume demand.

What will drive the market going forward? On slide 18 we point at what we believe to be the catalysts for the industry. First, Chinese fuel production remained strong in 2005 and it is expected to continue to do so in 2006. This is expected to increase to 400 million tons despite government attempts at introducing controls. China is expected to boost its importation of iron ore by 40 to 55 million tons to meet increased steel production. This is an increase of between 15% and 20% over 2005 levels.

Over 30% of the world’s fleet is 20 years or older. Unlike tankers, bulk carriers scrapping is not mandated. It is more of an economical equation, i.e., the cost of repair to comply with requirements of a fifth or sixth special survey.

Charters are also becoming more selective, and many of them will not take vessels which are in excess of 20 years old. That’s why we believe that scrapping will become a factor in the future.

As already stated, approximately 7% of the [water] fleet will be delivered in 2006. Demand is expected to grow in 2006 by a rate in excess of 4%; however, the benefits of this in the drybulk market may be overshadowed by the supply of new tonnage into the market and the lack of tonnage being scrapped. We believe that 2006 could present opportunities for Genco as we have 77% of our available days in 2006 providing stable revenue stream along with the $351 million of liquidity for growth during periods of potentially softer asset prices.

This concludes our presentation. We’d now be happy to take your questions.

[OPERATOR INSTRUCTIONS]. Doug Mazanek, Jefferies & Company.

Congratulations on another solid quarter. I just had a few questions regarding your significant available liquidity. First, at what levels do second-hand asset prices become attractive from an acquisition standpoint for its income?

Hey Doug, it’s John Wobensmith. First of all, as you pointed out we have $351 million available liquidity today. As far as asset prices and where they need to be for us to acquire, I will tell you we look a lot more at the relationship between asset prices and time charter rates, meaning that if you take a 5-year-old ship and you look at how much you can write off in the first year with putting the ship on a one-year time charter, that number is somewhere in the high-teens to 20%. We’re not quite at that level today, but that is what we focus more on than absolute asset prices.

Okay fantastic, and then whenever – I was going to ask if you have any preference as to the different types of ships you would like to acquire; whether it’s, you prefer the outlook for the Panamax market or the Handymax or Handysize market; it sounds like it would have more to do with that relationship that you just mentioned, time-charter rates versus the second-hand ship base. Is that the case, or would strategy kind of work its way into that decision as well?

I think we’re comfortable with all 3 sectors that we’re in right now; Panamax, Handymax and Handysize. We have been looking at transactions that involve all 3 sectors, and we’ll continue to do so.

Okay, great; and then the last thing I has was I know the dividend policy is basically anything above – as long as rates are above $15,000 or so from a free cash flow break-even level, that’s sufficient to meet the minimum targeted dividend of around $0.54 per quarter. My question is if acquisitions are made, would the absolute dividend payout in dollar terms increase proportionately with that ratio?

Not necessarily; I mean what we have stated is that obviously $0.54 is our target. You pointed that our 2006 free cash flow after dividend break-even is a little above $15,000 per day. This does not include any reserves that the Board may set on a quarterly basis. However, the – if you look at the dividend number on a break-even basis, I think it’s $8,854 per day. So if we were to add 10 or 12 ships today, which we could do based on that liquidity, obviously that daily break-even number would go down. Did that answer your question?

It did; than you John.

Omar [Nofta], [Dammon Rose].

Hi, guys; you just talked about the [unintelligible] acquisitions based on the return that you can get within a year. And you talked about the 5-year Panamax or Handymax, but looking at a 10-year price, it looks like you can get maybe 24% or 25%. Would you see yourselves going into the older vessel class? I mean right now your average age is maybe 8 or 8.5 years; would you see yourself buying any old ships?

Omar I’d have to take a look at the 10-year number. That sounds a little bit on the high side but having said that, the average age of our fleet today is 8.5 years old. It’s not to say that we wouldn’t, absolutely not do a transaction that had 1 or 2 ships that were beyond that, but we’re not interested overall in diluting that number. We’d like to keep the fleet at that age of younger overall.

Okay; so would you see yourselves in the next 12 to 18 months operating a fleet of maybe 30 ships to maintain your strong dividends?

Any time we do these transactions, they’re going to be done on an opportunistic basis. I mean, it’s been made very clear that we intend on growing this Company significantly. As far as putting actual numbers where we’ll be at any given time, I hesitate to do.

Fair enough; thank you very much.

[OPERATOR INSTRUCTIONS]. Natasha Boyden, Cantor Fitzgerald.

A couple of questions; let’s start off with port congestion. It’s clearly been improving over the last several months. I wonder if you could give us an update on what you’re seeing there.

Port congestion as you know in 2004 was a major consideration. It’s fair to say that it has eased off a lot since that time, it’s not at the same levels it was back then, There are still some delays; there are predominantly delays in Australia, loading of call, and there are delays in the discharge port primarily at the INR terminals and core terminals in China. And there are still some delays experienced in Brazil, but not at the same levels we saw earlier.

Okay, so we can’t really look at that to take out some of the amount of tonnage that we had thought in 2004.

No, it’s not taking the market we though in 2004, that’s correct.

Okay, and I just wanted to go on to the scrapping that you mentioned; you said there was very, very low scrapping in 2005 and there appears to have been very little to day in ’06. Obviously, we’re not that far into it. With the number of vessels expected to enter the fleet in ’06, and even you’re saying there’s potential for vessel oversupply, doesn’t the possibility exist that your charter renewals coming up in 2006 are going to be renewed at significantly lower rates than they currently are at?

Well I think it’s very early at this point to try and predict what our charter rates are going to be renewed at as we go forward to the end of 2006 and into 2007. The first vessels that we have coming off are in August and September and these are Handysize vessels. These vessels are very much sought after, and we have talked to our charterers themselves that have the vessels at the moment. They’re very interested in keeping them as are other charterers out there.

But to go back to the scrapping question, it’s a very, very difficult thing to predict as to how many vessels are going to be scrapped. The problem is it becomes an economic equation as I said in the commentary. And it’s up to individual owners to decide if they have the charters that can sustain the repairs of these vessels to put them through the next special survey. So that’s a difficult one to predict.

Okay, well thank you very much.

And with no further questions, I’d like to turn the call over to management for closing remarks.

Okay, thank you everyone for attending the fourth quarter 2005 year-end conference call. We will end with some closing remarks.

We’ve had a strong fourth quarter 2005 despite softer freight markets. We have substantial [inaudible] coverage above market rates; we have cash dividend policy along with cash reserves intended to fund fleet replacement on future growth. We have a strong balance sheet with low leverage, and at $319 million undrawn capacity on revolver could be used primarily to fund growth and we continue to see attractive long-term drybulk industry fundamentals.

Thank you very much everyone for participating in this call.

Ladies and gentlemen we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.