Genco Shipping & Trading Ltd (GNK) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited first quarter 2013 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.

Today inform everyone, today's conference is being recorded and is now being webcast at the Company's website, www.gencoshipping.com. We will conduct a question and answer session after the opening remarks. Instructions will follow at that time. A replay of the conference will be accessible at any time during the next two weeks by dialing 888-203-1112 or 719-457-0820 and entering the pass code 6968395. At this time, I will turn the conference over to the Company. Please go ahead.

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 others words and terms of similar meaning in connection with a 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, materials related to this call posted on the Company's website, and the Company's filings in - with the Securities and Exchange Commission, including, without limitation, the Company's annual report on Form 10-K for the year ended December 31, 2012, and the Company's subsequent reports filed with the SEC. At this time, I would like to introduce Gerry Buchanan, the President of Genco Shipping & Trading.

Good morning, and welcome to Genco's first quarter 2013 conference call. With me today is Peter Georgiopoulos, our Chairman, and John Wobensmith, our Chief Financial Officer. I will begin today's call by discussing our first quarter highlights, as outlined on slide three of the presentation. I will then turn the call over to John for your financial results for the first three month period ended 31st of March 2013. Following this, I will discuss the industry's fundamentals, and then, John, Peter, and I will then be happy to take your questions.

During the first quarter, Genco continued to utilize its modern and versatile fleet to provide multinational charters with high quality tonnage. We remain committed to effectively managing the Company through the current drybulk shipping cycle and providing safe and reliable service for our leading customers.

Turning to slide five, Genco recorded a net loss of $48.2 million, or $1.12 basic and diluted loss per share, for the three months ended March 31, 2013. Genco's cash position, excluding Baltic Trading Limited, was $64.2 million.

During the first quarter, we maintained our focus on [signing] vessels to short-term or spot market related contracts with credit worthy counterparties, such as Cargill International, Pacific Basin Chartering, Lauritzen Bulkers [A/S]. Preserving the ability to take advantage of a rising freight environment, consistent with this objective, we employed several vessels on contracts that provide Genco with the option to convert the fixed rate time charters when the market conditions improve.

Turning to slide six, we provide a summary of our fleet. Genco's leading industry brand is predicted on growing - owning and operating a large, high quality fleet that spans across the drybulk sector. Excluding Baltic Trading's fleet, we currently own a fleet of drybulk vessels, consisting of nine capesize, eight panamax, 17 supramax, six handymax, and 13 handysize vessels, with a total carrying capacity of approximately 3,810,000 deadweight. Importantly, the average age of our diversified fleet is eight years, enabling Genco to continue to deliver superior customer service and capitalize on the long-term demand for the global transportation of essential bulk commodities. I'll now turn the call over to John.

Thank you, Gerry. Turning to slide eight, I will begin by providing an overview of our financial results for the first quarter ended March 31, 2013. Please note that we are reporting our financials on a consolidated basis, as a result of our 24.78% equity ownership in Baltic Trading.

For the three months ended March 31, 2013, we recorded total revenues of $40.5 million. This compares to revenues for the first quarter of 2012 of $59.8 million. The decrease in total revenues for the first quarter of 2013, compared to the prior year period, is due to lower charter rates achieved by the majority of our vessels.

The operating loss for the quarter ended March 31, 2013, was $30.5 million. This compares to an operating loss for the first quarter ended March 31, 2012, of $12.5 million.

Interest expense for the three months ended March 31, 2013, was $21.3 million as compared to $23.7 million for the three months ended March 31, 2012.

The Company recorded a net loss for the first quarter of 2013 of $48.2 million, or $1.12 basic and diluted loss per share. This compares to a net loss of $33.1 million, or $0.87 basic and diluted loss per share, for the first quarter of 2012.

For the three months ended March 31, 2013, Genco recorded income tax expense of $224,000. This compares to income tax expense for the first quarter of 2012 of $271,000. This income tax expense includes federal, state, and local income taxes on net income earned by Genco Management USA Limited, one of our wholly-owned subsidiaries, and relates to income generated for the technical and commercial management of vessels for Baltic Trading Limited, sale and purchase fees payable to us by Baltic Trading Limited, if any, and service revenue from the technical management of vessels owned by Maritime Equity Partners.

Next, on slide nine, you will see the income statement effects for Baltic Trading's consolidation with Genco Shipping & Trading Limited. This will provide you with a more detailed breakdown of the financial performance of the two separate companies.

Key consolidated balance sheet and other items as presented in slide ten include the following - our cash position, including restricted cash, with $65.2 million, as of March 31, 2013. Excluding the consolidation of Baltic Trading, Genco's cash position was $64.2 million. Our total assets, as of March 31, 2013, were $2.8 billion, consisting primarily of our current fleet, cash, and cash equivalents.

Current liabilities, as of March 31, 2013, were $1.5 billion as compared to $25.7 million for March 31, 2012, due to the reclassification of our long-term financing arrangements as short-term in our consolidated balance sheet as of March 31, 2013. This takes into consideration the current weakness in the drybulk industry, as it could affect our compliance of certain terms under our three credit facilities. Our EBITDA for the three months ended March 31, 2013, was $7.7 million.

Moving to slide 11, our utilization rate for both the first quarter of 2013 and first quarter of 2012 was 99.3%. Our time charter equivalent rate for the first quarter of 2013 was $6,963 per day. This compares to $10,480 per day recorded in the first quarter of 2012. The decrease in TCE rates resulted from lower charter rate achieved in the first quarter of 2013 versus the same period last year for the majority of the vessels in our fleet.

For the first quarter of 2013, our daily vessel operating expenses were $4,860 per vessel per day versus $4,933 per vessel per day for the first quarter of 2012. The decrease in daily vessel operating expenses for the first quarter of 2013, compared to the prior year period, is primarily due to lower maintenance related expenses.

As we have stated in the past, we believe daily vessel operating expenses are best measured, for comparative purposes, over a 12 month period in order to take into account all the expenses that each vessel in our fleet will incur over a full year of operation. While daily vessel operating expenses for the first quarter of 2013 were below budget, we expect our full year 2013 daily vessel operating expense to be $5,250 per vessel per day on an average weighted basis of 53 vessels in our fleet, excluding the vessels owned by Baltic Trading Limited.

On slide 12, we present our anticipated breakeven expense levels for the second quarter of 2013. Our status as one of the lowest cost operators in the industry, which is reflected in the Company's low breakeven levels, enhances Genco's abilities to operate in an uncertain rate environment. We expect our daily vessel operating expenses for the second quarter of 2013 to be $5,250 per vessel per day on a weighted basis of an average number of 53 vessels. We expect our daily vessel - our daily free cash flow expense rate to be $10,432 for the second quarter of 2013 and our daily net income expense rate for Genco Consolidated to be $16,773. I will now turn this call back to Gerry to discuss the industry fundamentals.

Okay. Thanks, John. I'll start with slide 14, which points to the drybulk indices. Represented on this slide is the overall drybulk index. During the first quarter of 2013, the BDI was trading slightly higher than its December lows, as the onset of the South American grain season led to higher fixtures for panamax and supramax vessels.

Despite the gradual advance experienced throughout most of the quarter, the BDI remained at relatively low levels, primarily due to the vessel supply related matters, such as a front loaded order book and a large amount of existing tonnage currently on the water. Seasonality also played a role, as short-term weather related disruptions occurred in both Brazil and Australia, and the Chinese New Year in February led to a mid-quarter lull in fixture activity.

Additionally, strikes by the Columbian miners negatively impacted in the market, resulting in quarter one thermal coal exports recording the country's lowest quarterly level since 2006. According to [FSY], the largest decline in export volume focused on capesize cargo, specifically in Columbian coal and Brazilian iron ore. The combined quarter on quarter decrease was more than 30%, amounting to 36.4 million tons of less volumes.

On slide 15, we summarize recent developments in the drybulk market - freight market, beginning with the supply site fundamentals. Since last July, the rate of new building vessel deliveries slowed considerably. This trend continued into the first quarter of 2013, as deliveries were down 30%, year on year. Included in that figure was the lowest January delivery total since 2010.

Assisting to offset the deliveries to date has been firm scrapping levels. Although vessel demolition hasn't been as robust as the record setting year of 2012, it is still on pace to be a significantly strong year for scrapping on a tonnage basis. Scrapping during the first quarter of 2013 has predominantly led to the slide by the capesize sector, which accounted for [3.2 million] of the 7.5 million deadweight scrap. The other sectors have lagged to date, as the short-term market outlook for them has improved, and the [ownings] remained at healthier levels.

The nearly 50% rise in capesize demolition, year on year, has been primarily fueled by ships built in the 1990s, as 16 of the 23 capesize scrap were built in that decade. We believe this to be a significant trend, moving forward, as 20% of the capesize fleet was built during that period, and 14% of the capesize fleet was built in 1995 or earlier.

Fewer deliveries, combined with steady vessel demolition, have led to 37% decline of net additions in the first quarter of 2013 versus the same period of 2012. Along with slower fleet growth in the capesize sector, the handysize fleet experienced a contraction first quarter by 13 vessels, largely because of the older age of that fleet, combined with a relatively small order book.

Overall, the drybulk order book, as a percentage of the fleet, has fallen to 18%, its lowest level in eight years. Slippage of the new building order book continues at a fairly constant rate, as well as approximately 30% not delivering in 2012 and an estimated 36% not delivering through the first quarter of 2013. The combination of a smaller order book, a higher slippage rate, firm scrapping levels, and slowing deliveries should help to enhance the supply side fundamentals of the drybulk market going forward.

On the demand front, Chinese thermal coal derived electricity production remains robust, leading to a 30% increase in coal imports in quarter one, year on year. Strong thermal coal shipments have continued into the current quarter. The ongoing maintenance of the Daqin Railway has resulted in a draw down in stockpiles at China's largest coal port, Qinhuangdao, below the critical mark of 7 million tons, to 5.5 million tons. According to Commodore Research, an additional 5 million to 7 million tons of domestic that won't be railed can possibly be imported during the maintenance period.

Panamax and Supramax vessels are likely to be securing most of these cargoes, which, in the near-term, could provide support to those sectors' earnings. However, now that the South American grain season fixture volume has lightly peaked, those potential earnings may be limited or possibly offset by fewer grain cargoes.

Chinese steel production through the first quarter grew 9.1%, year over year, which, in turn, led to a decrease in iron ore inventories and the rise in steel stockpiles. Since the end of March, however, steel stockpiles have declined for five consecutive weeks, as steel consumption seasonally increases during this time of year. Although steel production has been robust, it has not been translated higher ore imports into China, as imports of the commodity are down 1%, year on year.

Consequently, inventories at Chinese ports have been drawn down and are at their lowest levels since April 2010. According to OCAP Shipping, the average iron ore stocks at China's large and medium size steel mills, through mid April, stood at 14 days. Historically, the lowest level of inventory these mills could stand was 11 days.

Iron ore prices peaked earlier in the year at $159 per ton and have since retreated to a range of $134 to $140 per ton. Although the [arbitage] opportunity between international and Chinese domestic ore at these price levels is minimal, the spread could widen with the onset of higher iron ore capacity expected to come on-stream through the end of the year.

Turning to slide 16, we believe that a number of short and long-term catalysts will impact the drybulk market. As previously mentioned, Brazilian iron ore exports during quarter one 2013 were lower, year on year, limiting ton mile demand growth in the capesize sector. According to RS Platou, over the last five years, the second half of the year has seen considerably higher shipments, when compared to the first half. In fact, in every year since 2009, there has been a 20% jump in Brazil's iron ore exports in the second half versus the first half.

Seaborne trade may also be positively affected by planned volume expansion, as iron ore miners plan to increase production and advance into higher capacity port facilities over the next few years. As previously mentioned, higher imported volumes could further induce a price arbitrage between domestic and imported iron ore prices, thereby enhancing ton miles in the long run.

Construction on China's stimulus projects approved last year could potentially support higher needs for steel as 2013 progresses. On the supply side, as volatility in charter rates continues and scrap steel prices remain high, scrapping of additional vessels could continue in 2013, following the trends of the prior two years.

2011 and 2012 were record years for vessel deliveries. As the weight of the order book lessens and more new building vessels either get delayed or canceled, the supply growth experienced over the past few years will likely slow down, allowing demand to catch up.

On slide 17, we talk more about the demand site fundamentals. Global steel production set a record in March, underpinned by new highs reached in China and India, as well as strong Japanese output. Although the Indian Supreme Court has permitted certain iron ores mines in Karnataka to resume operations, rather than increasing exports, most of the ore is expected to go towards domestic steel production, which could help sustain high production levels and facilitate growth.

The World Steel Association expects Indian steel demand to grow by 5.9% in 2013 and advance another 7% in 2014, as the attempt to narrow the fiscal deficit and improve foreign direct investment.

In China, as urban population continues to expand in the years to come, steel consumption is expected to keep increasing, as Chinese urban households have a much higher steel intensity than rural households. In line with urbanization, China has made a significant effort to enhance the country's transportation network.

The National Development and Reform Commission recently announced that 42 new transport hubs will be built by the end of 2015, with at least one hub located in every Chinese province, municipality, and autonomous region. The NDRC is also focused on stimulating growth in the northeast region and announced that considerably more funding will be provided to the country's aging cities.

Moving on to slide 18, on the left side of the page, we show the expansion plans of key iron ore producers, as recently revised by the respect of companies. The combined expansion plans for 27 - 2017 aggregate to 400 million tons per annum, or approximately 36% of the 2012 seaborne ore trade. Most of the projected growth in iron ore export capacity in 2013 is expected to come from Australia. Rio Tinto's expansion helped the company produce its highest first quarter volume ever and are forecasting an expansion to 290 million tons per annum by the end of quarter three in 2013 from 237 million tons per annum currently.

Another Australian miner, Fortescue, is planning on a 50% rise in production capacity this year to boost Australian ore availability further. As a result of these expansion projects, Australia's Bureau of Resources and Energy Economics forecasts an increase in iron ore exports of 14% in 2013. Due to low-grade domestic ore, as well as marginal growth in the Brazilian exports and limited Indian export availability, China is expected to continue to source a significant portion of its imported ore from Australia.

On the coal side, ICAP Shipping forecasts Indian thermal coal exports to grow by approximately 11% per year through 2015, as domestic coal supplies continue to fall short of demand. India's coal demand is estimated to rise to 1.1 billion tons by 2017, a 370 million ton increase from last year's levels. Of this increase, not all of it is expected to be met by domestic production, leaving a gap for potential growth imports.

On slide 19, we discuss the supply side fundamentals, which remain uncertain. The remaining order book for 2013 currently stands at approximately 70.9 million deadweight. Combined with our year-to-year deliveries and expected slippage in cancellation of vessel orders, net fleet growth appears to set - to come off the high experienced levels of the prior two years.

With regard to scrapping, we believe it will continue to play a significant role throughout the remainder of the year, especially if volatility in the freight rate environment persists at 15% of the world fleet is over 20 year - at 20 years or older. I've illustrated on the graph at the bottom right of page, 2011 and 2012 were record years for scrapping, with 23.2 million deadweight and 33.7 million deadweight scrapped, respectively.

Year-to-year, approximately 9 million deadweight has been scrapped in 2013, which, combined with a slower pace of deliveries, led to average net additions easing to 42 vessels per month in quarter one 2013, compared to 67 vessels per month in the prior year period.

Lastly, we note that although there is still an oversupply of vessels in the drybulk market, a more manageable order book and fewer deliveries, along with projected demand growth, are encouraging towards reestablishing a more balanced long-term supply and demand equation. This concludes our presentation, and we'd now be happy to take your questions.

Thank you, sir. (Operator Instructions). Doug Mavrinac, Jefferies & Company.

Great. Thank you. Good morning, guys. I just have a few questions for you this morning, with the first couple being more market related since, obviously, the market affects all. And you touched on it a little bit in your comments, Gerry, in that there was a real divergence during the first quarter.

You had Chinese banks making more new loans in the first quarter than since any point since 2010. You had Chinese steel production setting records in January and February and global steel production setting a record in March, yet, capesize spot fixture activity was down 20% to 30% during the quarter.

My question is was the activity down because of - how much of the outages were iron ore related versus coal related, I guess, first? And then, second, can we also ascribe some of the weakness in chartering activities to the old game of some of the Chinese iron ore importers just kind of trying to gain the market?

I think that's - well, this is Peter. I think that's what it is. Again, we've said this on other calls, that if you thought about it, if you were the only buyer of a commodity, what would you do? You'd buy when you needed it. If the price was down, you'd sort of stock up on it.

You'd use your inventories, watch the price come back down again, and then, buy it again, as opposed to consistently buy and keep the price at a relatively high level. So, we've seen that, and I think what helps you get to that answer is sort of the points you laid out that you had increased levels of production, yet the rates were down, but if you look at the inventories, the inventories are way down.

Right.

So you think that's what's going on, and we believe that, over the next couple of months or next - definitely, the next couple of quarters, you should see the restocking take place, as we've seen exactly what should happen. Iron ore prices have come down.

Right, right.

Yes, and the other thing, Doug, is that all the mining companies have projected iron ore prices somewhere around $120 in the second half of the year.

Yes.

So, I mean, that's widely available information, and obviously, the Chinese see that, and so, why would you stock up right now? Why not wait for that price to come down, as Peter said?

Right. Yes, because it seems like we've seen this game before. I mean - and we know that it can't last forever, because if you look at iron ore inventories, we're at a multiyear low right now. And yet, also, from a more macro standpoint, their PMI is barely above 50, so they can't really lay off the throttle. And so, it's - like I said, it seems like we've seen it before, but I just wanted, kind of, your opinion on that.

You're right.

Perfect, perfect. Thank you. And then, my second question is kind of dovetailing off of that and also in Gerry's comments. We know that there's a - literally tons of new iron ore production capacity coming on line, later this year and next, to satisfy that rising demand and to help facilitate the restocking. I guess my question is do you guys have a feel for whenever we should start seeing some of those volumes hitting the market, whether it's late 2Q, 3Q, or is it just kind of more of a second half type of a thing?

I'd say it's more third quarter. You have a lot coming on from Rio in the third quarter, and Fortescue, I think, is spread out between the third and fourth quarter.

Got you, got you, got you. Okay. And then, just one final market related question, and it has more to do with the supply side and not deliveries, because we know what those are, and we know the order book is fictitious. But when we look at kind of shipyard capacity, how would you describe kind of how shipyard capacity has been trending? Has it been increasing, has it been decreasing, has it been the same? In terms of available capacity, which direction is that headed?

In China, we've seen shipyard capacity decrease by about 40% over the last few years.

Got you, got you, got you. Okay, that's helpful, Peter. And then, just two final questions that are more Genco specific. One, people, during the quarter, have talked about some debt trading hands, and I know that you probably can't comment on that, confirm that, or what have you. But, just, my question is from a big picture standpoint. I guess - have you had conversations, perhaps, with people during the quarter that would have been involved in such a thing? And then, second, if so, how would you describe the tone of those conversations?

Yes. I mean, Doug, certainly, there's probably been somewhere around little less than $300 million of debt that's traded, and I would say, one, we've had conversations with all the lenders that are in the bank group now.

Yes.

We've obviously started talking about how we're going to address the beginning of 2014 and the amortization and the covenants that come back into play.

Yes.

I think it's very difficult - it's still at an early stage, so it's very difficult to comment on anything specific.

Yes.

The one thing I would say is that the two banks that sold are out of shipping.

Yes.

They're liquidating their portfolios, and we are - I think we're in a better situation, because we have now some funds that own the debt that are commercial, and we actually can speak to them and see what the next move is.

Got you. All right. That's actually very helpful, John. And then, just final question, as it relates to Genco, but also, Baltic, as well - obviously, people have been talking a lot about some of that Genco debt and whatnot. My question is just for clarification. No matter what happens to Genco, one way or the other, there's no real ramifications for Baltic, correct?

Correct.

Okay. That's -

Baltic is its own, completely separate company.

Got you, got you. I thought so, Peter. I just wanted to make sure. That's actually all I had. Thank you for the time, guys.

Thanks.

Thanks, Doug.

Christian Wetherbee, Citi.

Good morning. This is actually Seth Lowery, in for Chris. I guess, if I could follow up on the potential to, I guess, restructure your debt and covenants with the banks. I guess - can you comment on just how the discussions are going? Could we potentially see a deal like we saw in the last, where it's a bit of a extension of debt amortization and relaxation of the covenants? Or, given the - you mentioned more commercial players coming into your syndicate. Could we see some more creative options on the table, whatever that may be - hybrid securities - whatever your comments are?

Yes. Seth, as I said before, it's just too early to comment at this stage.

Okay. Fair enough. I guess, if I could just switch gears, then -- I guess, as you look out over the next six months, I know you mentioned some short-term supply disruptions, and there's some potential in - I guess, in the back half to have an improving freight market. I guess, how do you view your ability to generate cash in the back half of the year? Is there a point which you think that that - you might be able to start building cash, or does it feel like it's maybe more a potential for 2014?

I mean, look, I - it's obviously very rate driven. The operating expense side and the G&A - I think everybody knows what - or has a good idea what those numbers are going to be. It's tough to tell. I mean, we do think you're going to see a pickup, particularly in the capesize sector, in the fourth quarter, both from a seasonality standpoint, but also, better dynamics on the supply and demand side, with a more meaningful recovery going into 2014. I think it's hard to give guidance right now as to cash flows going forward.

Okay. All right, thanks. We'll turn it over.

Thanks, Seth.

(Operator Instructions). Michael Webber, Wells Fargo.

Hey, good morning, guys. How are you?

Morning, Mike.

Hey, so, just a handful of questions here. I'll skip kind of talking about the debt reclass, but maybe, if I just kind of try to get at the kind of collateral value and kind of ex your stake in Jinhui and ex Baltic, maybe just kind of just focusing on the steel, and this is for Peter or John or whomever would like to answer. Just - where would you peg the market value for your - at - just your steel values today?

No one's going to answer that question. Sorry.

Okay. All right. Fair enough. It looks like - in just looking, I think, John, you mentioned lower maintenance expense during 2012 - or, excuse me, 2013. The special survey number for 2014 is a pretty decent sized number, of which, on a relative basis, I think, $14 million to $15 million. I'm just curious - a) how firm is that number? Can any of that be pushed back? And, just maybe, outside of even covenants - just from a cash perspective, does that change the calculus of what you guys are looking at, in terms of liquidity relief, kind of, beyond just kind of changing your amort schedule?

No. I mean, listen, I don't think too much can be pushed. Those are the numbers for '14. We may or may not bring some - a little bit of that forward into '13. We'll have to see, but, as of right now, the numbers in the press release are what we expect, and just like every quarter, we're obviously paying a close bit of attention to our liquidity positions.

Yes.

There's not much else to say about it. But, I mean, I - the - as I said, the numbers in the press release we're comfortable with, and that's what's scheduled right now.

Got you. All right. No, that's helpful. And, I guess, along the lines of those numbers, I guess the reclass of debt kind of, I guess, augmented the way we could look at some of this stuff, and I'm sure this'll come out in the K, but do you get a sense of what your cash conversion cycle did in the first quarter? I can't really get at it with the long-term debt kind of piled in there now.

I'm not sure if I fully understand your question.

Has you cash conversion cycle started to expand?

No. No.

No. Okay. All right. I think that's all I have. I appreciate the time, guys.

Okay. Thank you.

Ladies and gentlemen, that concludes today's question and answer session, and this concludes the Genco Shipping & Trading Limited conference call. Thank you, and have a nice day.