Genco Shipping & Trading Ltd (GNK) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited second-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.

To 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 passcode of 313-2802.

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 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 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 second-quarter 2013 conference call. With me today are Peter Georgiopoulos, our Chairman, and John Wobensmith, our Chief Financial Officer.

I will begin today's call by discussing our second-quarter highlights as outlined in slide 3 of the presentation. I will then turn the call over to John to review our financial results for the three-months period end at June 30, 2013.

Following this I will discuss the industry current fundamentals, John, Peter, and I will then be happy to take your questions.

During the second quarter, Genco continue to operate a large and modern drybulk fleet and the cost effect of [minor] while preserving the ability to capitalize on positive long-term industry fundamentals while providing high-quality service for our leading customers.

During the second quarter we continue to employ a majority of our vessels on short-term or spot market-related contracts with creditworthy counterparties. This opportunistic time charter approach positions Genco to benefit from a rising freight rate environment and, combined with our efficient cost structure, expand the Company's future earnings potential when the market conditions improve.

Moving to slide 6, we provide a summary of our fleet. Genco's diversified approach of owning and operating a modern high-quality fleet across the entire bulk sector strengthens the Company's ability to deliver superior customer service to multinational charters and take advantage of the long-term demand for essential commodities in China, India, and other developing countries.

Excluding Baltic Trading Fleet, we currently own a fleet of 53 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. I will 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 second quarter and six months ended June 30, 2013.

Please note that we are reporting our financials on a consolidated basis as a result of our equity ownership in Baltic Trading.

For the three and six months period ended June 30, 2013, we recorded total revenues of $45.8 million and $86.2 million, respectively. This compares with revenues for the second quarter of 2012 and six months ended June 30, 2012, of $62.9 million and $122.8 million, respectively. The decrease in total revenues for the second quarter of 2013 compared to the prior year period is primarily due to lower charter rates achieved by the majority of our vessels. The net loss attributable to Genco for the second quarter of 2013 was $45.4 million or $1.05 basic and diluted loss per share. The net loss attributable to Genco for the six months ended June 30, 2013, was $93.5 million or $2.17 basic and diluted loss per share.

This compares to a net loss attributable to Genco of $27.7 million or $0.65 basic and diluted loss per share for the second quarter of 2012, and a net loss attributable to Genco of $60.8 million or $1.50 basic and diluted loss per share for the six-month period ended June 30, 2012.

Next on slide 9, you will see the income statement effects of Baltic Trading's consolidation with Genco Shipping & Trading. 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 10 include the following -- our cash position including restricted cash was $79.7 million as of June 30, 2013. Excluding the consolidation of Baltic Trading, Genco's cash position was $56 million. Our total assets as of June 30, 2013, were $2.8 billion consisting primarily of our current fleet, cash and cash equivalents.

Current liabilities as of June 30, 2013, were $1.5 million as compared to $25.7 million for December 31, 2012, due to the reclassification of our long-term financing arrangements and short-term in our consolidated balance sheet as of March 31, 2013, as we discussed in our last earnings call.

Moving to slide 11, our utilization rate was 99.5% for the second quarter of 2013 compared to 99.6% in the year earlier period. Our time charter equivalent for the second quarter of 2013 was $7,526. This compares to $11,067 recorded in the second quarter of 2012. The decrease in time charter equivalent rates resulted from lower charter rates achieved in the second quarter of 2013 versus the same period last year for the majority of the vessels in our fleet.

For the second quarter of 2013, our daily vessel operating expenses were $4,744 per day versus $5,232 per day for the second quarter of 2012. Daily vessel operating expenses for six months ended June 30, 2013, were $4,082 per day versus $5,082 per day for the six months ended June 30, 2012. The decrease in daily vessel operating expenses for the second 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.

We are pleased that our daily vessel operating expenses have been below management's budget for each of the past four quarters. Based on estimates provided by our technical managers and management's expectations, our daily vessel operating expense budget for the second half of 2013 is $5,250 per vessel per day on an average weighted basis for the 53 vessels in our fleet, excluding vessels owned by Baltic Trading Limited.

Moving to slide 12, we present our anticipated expense levels for the third quarter of 2013. Genco's status as one of the lowest cost operators in the industry is reflected in our low breakeven levels which enhance our ability to operate in an uncertain rate environment as we remain focused on effectively managing the Company through the current drybulk shipping cycle. We expect our daily free cash flow expense rate to be $10,388 and our daily net income expense rate for Genco Consolidated to be $16,669.

I will now turn the call back to Gerry to discuss the industry fundamentals.

Thank you, John. I will start with slide 14 which points to the drybulk indices.

Represented on this slide is the overall drybulk index. During April and May, the BDI remained at similar levels to those experienced during the first quarter. We believe this was predominantly due to excess vessel supply exasperated by the frontloaded nature of the order book, lower iron ore output from Brazil and the winding down of the South American grain season.

As the second quarter progressed, the pace of newbuilding vessel deliveries continued at a downward trajectory. As fleet growth slowed and more fixture activity surfaced in the market, the BDI began to ascend. The index increased from June 6 to the end of the second quarter, reaching a 213 high of 1,179 -- a level not seen since January 2012.

On slide 15 we summarize some of the contributing factors to the rise in the BDI as well as other recent developments in the drybulk freight market.

Starting on the supply site, we have seen ongoing deceleration of newbuilding deliveries since a peak in June 2012. For the first half of 2013, deliveries were 43% lower as compared to the same period last year. Partially offsetting vessel deliveries to date has been demolition, which although has not been as robust this period compared to the record-setting year of 2012, it still actively contributes to reducing vessel supply growth. 13.2 million deadweight was scrapped through the first half of 2013, helping to lower net additions by 50% as compared to the first half of 2012.

Furthermore, although the number of newbuilding orders has increased since the beginning of the year, the overall drybulk order book as a percentage of the fleet remains at 18%, its lowest level in over eight years. Slippage continues at a fairly constant rate with approximately 28% not delivering in the first half of 2013.

On the demand front, although iron ore cargoes out of Brazil hit their seasonal lows in the first half of 2013, we believe the return of these long ton mile cargoes in the beginning of June along with a firm call in green fixtures helped improve short-term fundamentals and pushed Capesize rates above the $10,000 today.

Freight rates also found support towards the end of the second quarter as a result of higher commodity exports out of Australia. June call shipments from the three major ports of Queensland reached a record monthly total of 15.6 million tons, the second highest month after June 2010. Combined exports of coal and iron ore for the second quarter of 2013 also reached a quarterly record coming in at 234 million tons.

As discussed on previous calls, we continue to believe that the incremental capacity of iron ore from the major miners will positively affect the demand for the transportation of commodities over a five-year period. Expansion plans from the major Australian ore miners are well underway with Fortescue recording a nearly 8% production increase and Rio Tinto recording a 7% increase in the second quarter.

Iron ore inventories at Chinese ports slightly increased to 72.7 million tons, but still stand 25 million tons lower than the same time last year. Iron ore prices have recovered to $130 a ton after reaching a bottom of approximately $110 per ton in June of this year. But remain well below their annual peak of $159 per ton.

Although the arbitrage opportunity between international and Chinese domestic ore at these price levels is reduced, the spread could widen with the onset of higher iron ore capacity. Fortescue expects prices to stay in the $110 to the $130 region on the back of a stable demand from Chinese steel mills.

And lastly, we believe that as global growth prospects and sentiment in the rest of the world are beginning to improve, existing vessel availability could be absorbed by traditional raw material importers like Japan, Europe and South Korea. Indicatively, manufacturing activity in Japan expanded at its highest level in two years to a seasonally adjusted 52.3 PMI engine. At the same time, the Eurozone flash manufacturing PMI came in at 50.1, beating estimates and signaling potential growth.

Turning to slide 16, we believe that a number of short- and long-term catalysts will impact the drybulk market. The low Brazilian ore exports are down slightly year on year. Quarter two exports increased [13%] compared to quarter one. This is a trend that we feel will continue into the second half of this year.

Looking at recent historical data, Brazilian iron ore exports have risen dramatically in the second half of both 2011 and 2012, posting increases of 24% and 23% when compared to the first half of the respective years.

Construction on China's infrastructure projects could potentially support higher needs for steel. The Chinese government just raised its fixed asset investment target for railways over the next three-year period.

Overall targeted rail spending is to increase by CNY500 billion from the prior plan. The 2013 target was raised by 6% to CNY690 billion, signaling that the government is actually trying to maintain its GDP growth target of 7.5%. The majority of this increase however will be felt over the next two years as CNY460 billion has been added to planned spending for 2014 and 2015.

On the coal front, China's proposal to ban low calorific imports could result in greater ton miles as sourcing from Indonesia could be displaced by Australia and Colombia. We believe that the Indian coal trade will also be a significant capitalists moving forward. To date, India has experienced substantial increases in steaming coal imports as electricity needs arise.

Going forward, we believe that India's increased steel production could result in higher cooking coal imports due to a lack of high-quality domestic reserves.

On the supply side as volatility and charter rates continues and scrapping steel prices remain at decent levels, we believe scrapping of additional vessels will continue in 2013 following the trend of the prior two years. 2011 and 2012 were record years for vessel deliveries. As the weight of the order book lessons and more newbuilding vessels either get delayed or canceled, the supply growth experienced over the past few years could slightly slow down, allowing demand to catch up.

On slide 17, we talk more about the demand site fundamentals. Global steel production was up 2% in the first six months of the year. Leading the way in Asian steel production were China, India and Japan.

Although Chinese steel production in June was the lowest since February, CISA reported that production has rebounded in mid-July as daily steel production increased to 2.13 million tons, up slightly from the 2.08 million tons during the first 10 days of the month.

With regard to India, steelmaking capacity is targeted to rise from 80 million tons per annum to 200 million tons per annum by 2020 as more projects are geared towards expanding steel and power plants. In Japan, the lower yen has boosted export demand which has in turn lifted steel output.

Moving to slide 18, on the left of the page, we show the expansion plans of key iron ore producers as recently revised by the respective companies. The combined expansion plans through 2017 aggregate to 410 million tons per annum or approximately 37% of 2012 seaborne iron ore trade.

Most of the projected growth in iron ore export capacity in 2013 is expected to come from Australia, specifically mines at Rio Tinto, Fortescue and BHP Billiton. All three have been producing iron ore at record levels and expect to continue to ramp up mining projects as the year progresses.

As a result, Australia's Bureau of Resources and Energies Economics forecast an increase in iron ore exports of 16% in 2013 and 2014.

As more iron ore comes to the market and the price arbitrage potentially widens, Chinese domestic producers are going to have a difficult time competing internationally particularly due to their high production cost and low grade of domestic ore. Increased exports from Australia combined with reduced Indian exports and lower dependency on China's domestic supplies are expected to lead to iron ore trade growth, accounting for approximately 1/3 of the total increase in drive-up trade in 2013.

On slide 19, we discussed the trends and supply site fundamentals which remain mixed. As seen at the bottom left of the page, the remaining order book for 2013 stands at approximately 54.5 million deadweight. Of that total, however, 11.3 million deadweight or 21% on the remaining 2013 order book has a contract date before 2009 and in our opinion isn't likely to deliver.

In terms of the total order book, 18.2 million deadweight or 14% of the total order book has a contract date before 2009. Although there have been more newbuilding orders this year compared to last, the order book after 2013 is still relatively low when comparing it to the peak ordering years.

Additionally it's our view that availability for 2015 deliveries of high-quality shipyards is limited as there are few slots remaining in any of the -- for any of the current time.

This development would help put a ceiling in the order book through 2015 and limit fleet growth to just existing orders over the next two years. Although the first six months of the year the drybulk fleet has grown by 3%, a much more manageable figure than what has been experienced over the past few years, scrapping totals will likely come up short of last year's pace. However newbuilding vessel deliveries are likely to do the same leading to less overall fleet growth. A positive trend has continued in the demolition of younger tonnage, particularly in the Capesize sector.

The two vessel classes experiencing a slow fleet growth so far this year have been the Capesize and the Handysize sectors. Capesize net additions have come down 60% from last year, enabling the BCI to rally as the figure volume increased over the last two months. The Handysize fleet shrunk by nine vessels through June as older tonnage was scrapped. The supply site fundamentals for the Handysize sector remain encouraging as 20% of the fleet is over 25 years old and the current order book is only 14% of the Handysize fleet.

And lastly, we note that our low supply site fundamentals remain uncertain slowing fleet growth coupled with the projected demand growth are encouraging signs towards reestablishing a more balanced long-term and demand equation.

This concludes our presentation and we will be happy to take your questions.

(Operator Instructions). Doug Mavrinac, Jefferies.

Good morning. I have a handful of follow-up questions. First, as we have seen, the market has firmed up significantly since the second quarter. Capesize rates today are back above $12,000 per day.

As you look at the state of the market, the drybulk shipping market right now in the middle of the summer, what does it tell you about how it should respond to some of the upcoming events like increasing iron ore production capacity, this seasonal grain trade? At $12,000 a day in the middle of the summer does that tell you that the market is pretty tight and should react well or what is your take on the current state of the market?

Clearly, we usually have a lull during the summer. I think what's different this year is that I think, one, you have had a very large tailoff in newbuilding deliveries and net deliveries. That has been one positive aspect.

Also the inventory numbers at the ports in China for iron ore are actually rather low. So you are seeing mining -- or fuel companies buying ahead of what would typically be a strong late third-quarter, fourth-quarter season. So that's going on as well.

I think it actually bodes pretty well. I mean if you look at what the FFA curve is showing for fourth-quarter I think it is around $17,000 today for Capesize rates. It is encouraging. I still think we have a little ways to go, but clearly the drop off in the number of deliveries that we have seen so far this year and projected going into next year is a big factor because demand growth continues to run at 6% to 7%.

Right. And thank you for that, John. Actually that is a segue into my second question, is when we look at some of the things that are being said about the market reading the tea leaves, obviously rates are strengthening showing some resiliency and the market, FFAs are in contango showing that rates are going to be increasing into the end of the year.

Are you guys sensing any sentiment change on the part of some of the market participants like the charters that for the last four or five years have been of this mindset that the drybulk market is going to continue to languish? Now we are starting to see signs of improvement not just in rates but in other things. Have you sensed any kind of getting over the hump sentiment change for some of the guys on the other side of the negotiating table, the charterers?

Yes, definitely. I think -- look, the interesting thing is that you have been seen some three-year charters being done and concluded in the market which that part of the market has been absent for quite a while. And I think we have seen two of those done over the last couple of months.

Got you. One final question on this topic. As it relates to that sentiment change, and almost daily we are reading positive headlines about expectations for the Cape market recovering in 2014, you guys actively talk with a lot of commercial lenders, your own commercial lenders.

Would you say that those guys, too, are seeing the headlines, reading the headlines and are they believing as well that the market is on the cusp of doing better?

I don't want to speak necessarily for banks, but what we have seen is certainly more appetite to look at drybulk again from some of the existing strong lenders, some of the larger banks. Clearly though there is -- there have been a lot of banks that have just exited shipping. But yes. I think the larger banks, it seems, are more positive on drybulk.

Got you. Thank you. Couple of questions on the supply side before I turn it over. First, people earlier in the year were talking about the increase in newbuildings order activity, but as you guys pointed out the order book is still quite small.

If you had to place an order -- so my question is if you had to place an order today for a new Capesize carrier at a reputable yard, one where you are going to get a refund guarantee and all that stuff, when would you expect to most likely see that delivery?

Yes and you just hit on the key point. The reputable yard. Even in China to be at a reputable yard you are probably -- maybe end of 2015, you could get a slot. I think it is more likely early 2016.

And listen, the guys on the product carrier side, the gas carrier side, container ships, even the crude takers have helped that out by filling up slots.

Got you. That's helpful. Final question. Gerry talked about it in his industry comments. We have seen scrapping slowing this year just because the market outlook has gotten better.

But the Chinese a couple of weeks ago introduced another initiative. Not only are they trying to stimulate their economy through rail spending, but they are also trying to support some of their domestic shipowners by requiring ships, Chinese flagships that are 20 years of age or older to be scrapped.

Would that affect the global market? Or how would that affect the global market in your view if you saw a lot of older Chinese ships leaving the trade?

Yes, first of all, I am still a little fuzzy on the specifics of that. But I certainly have read the same news reports I think you are referring to. If it does, in fact, there is a subsidy program for that, keep in mind a lot of those 20-year-old ships came from the international flag fleet to begin with. So as those ships leave it stands to reason that more ships -- because obviously the Chinese domestic trade is still thriving. It seems to reason that more ships can come out of the international trade and go in 15-year-old ships and go into that Chinese domestic trade. Which would be helpful (multiple speakers).

Got you. Perfect. Great. That's all I had. Thank you for the time.

Good morning, this is Seth in for Chris. if I could start out with the strength you have seen in the period markets, should we expect you to take a more proactive approach in charting for the longer term going forward? Or do you think it still makes sense to keep things, keep charters more short-term duration and position yourself for a potential further run-up in rates as mentioned previously if we get a little bit of a seasonal uptick? Are you holding back or should we expect a bit more longer term chartering going forward?

No, we are holding back. We still think there is room going certainly going into 2014.

Probably just switch to the supply side. I think we have seen a fairly robust pace of newbuild orderings this year and it definitely seems like July was a bit of a stronger month with some carriers taking a more speculative position in purchasing tonnage.

Just curious to get your take. Do you think that is sustainable or do you think it could even increase with the uptick in rates? It just feels like the pace of new supply orders has increased and was wondering how you see that trending over the next -- through the back half of the year.

Well, listen, you are right. Obviously, going from a virtual standstill to some newbuilding orders is -- makes people stand up and take notice. But if you look at slide 19 in our presentation, the lower left, the current newbuilding order book is in there. And it basically doesn't move the needle in terms of percentages of fleet growth in 2015 and 2016.

As I said earlier, I don't think there is a lot of room to do much more until the end of 2015. I obviously think it is positive that some people are ordering and obviously have some sort of support for banks to see this. But I still think on the second-hand side there's plenty of tonnage to buy and the nice thing about buying secondhand tonnage today is that you can capture the potential upside for 2014 and 2015 which you are not going to be able to do with newbuilds.

That is a good point and maybe you could comment on that. It seems like at the beginning of the year the incremental tonnage being ordered was a bit more consolidated amongst a smaller number of carriers. Now the new orders are seemingly coming from a wider base of carriers.

What is -- what do you think the compelling reason is for the wider number of industry participants to go into the newbuild, you tonnage market instead of the sell and purchase market?

It is hard to speak. I think everybody has their own rationale as to why to go to newbuildings. Newbuildings are just like the secondhand tonnage are at historical lows from a value standpoint.

On the Capesize sector we are definitely seeing some ordering there and I think that probably has to do with the fact that there are not a lot of secondhand capes that are available for sale. So the way to get exposure to that market today is to order newbuilds. But it is hard for me to speak individually on what people are -- what their agenda is.

And lastly of follow-up. It seems like you had a bit of a boost from -- in financing cash flows during the quarter. Could you remind us what that was? I think it was like $20 million.

Yes, I assume you are referring to the offering from Baltic. I assume that's what that would be.

Yes, okay. I just wanted to make sure I wasn't missing something within the cash flow statement. Thank you. I will turn it over.

(Operator Instructions). Justin Yagerman, Deutsche Bank.

Good morning. It is actually Josh on for Justin. I guess a lot has happened since last quarter's call in the drybulk market. We saw one [fellow company fold] but investor sentiment and rates have certainly materially improved. I am seeing a lot more investment in the space. Can you maybe provide us an update with some of your conversations with your traditional or nontraditional lenders?

Well, not -- I mean at Genco we've obviously been very straightforward that we need to sit down and speak to our lenders because we are going to have some issues in the first quarter potentially with [covenant and] amortization. As I said on the last call, those conversations are ongoing. I don't really have a specific update at this point.

So that is how it is at Genco and at Baltic, you saw that we raised additional bank debt to fund two acquisitions that we have going on there.

Great. And just to clarify, the only covenant test you currently have is just a minimum cash test and you still have significant headroom there, right?

That is correct. We have a -- it is basically $39 million is the minimum cash requirement under that covenant. And we also have a debt to network test or debt to total capital test which we are also inside of.

Got it. Maybe switching to the broader market, I know this was at Baltic, but you guys acquired some Handysize ships. Could you maybe talk about the rationale with purchasing Handysizes versus the larger Capes?

I am not going to say this is necessarily as a rationale, we are positive on Capesize as well. I think we are reasonably positive again going into 2014 and 2015 on the overall market. That was a transaction that was done offmarket privately. We are pleased with it. And at Baltic we hopefully expect to take advantage of more of those types of transactions.

Got it. And one more question before I turn it over. You mentioned you have seen some fixtures for some three-year time charters. Maybe talk about what rates those were done at.

Yeah, sure. Give me one second here. Just one second, Josh.

No problem. We can take that off-line if you want.

No, that is okay. Capes, there was one done I think around [14.5] and another one done slightly higher than that, [14.750].

Great. I appreciate the time. Thanks.

And that does conclude today's Genco Shipping & Trading Limited conference call. You all have a great day.

Thank you.