Genco Shipping & Trading Ltd (GNK) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited second quarter 2015 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. (Operator Instructions). A replay of the conference will be accessible at any time during the next two weeks by dialing toll-free 888-203-1112 or area code 719-457-0820 and entering the passcode of 6828962.

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, 2014, and the Company's subsequent reports filed with the SEC.

At this time I would like to introduce John Wobensmith, President of Genco Shipping & Trading Limited.

Good morning. Welcome to Genco's second quarter 2015 conference call. With me today is our Chairman, Peter Georgiopoulos; and our Chief Financial Officer, Apostolos Zafolias. As outlined on slide 3 of the presentation, I will begin today's call by reviewing our second quarter highlights followed by a review of our recently completed merger with Baltic Trading Limited. We will then discuss our financial results for the quarter and the industry's current fundamentals, and finally open up the call for questions.

Beginning on slide 5, we review Genco's second quarter and year-to-date highlights. During the second quarter we continued to operate in a challenging drybulk market and recorded a net loss of $40.3 million, or $0.67 basic and diluted loss per share for the period ended June 30, 2015. During the second quarter we took several steps to enhance our liquidity position. In April we entered into a new $60 million revolving credit facility with ABN Amro. The revolving facility, which can be used for general corporate purposes including working capital and potential vessel acquisition, has a maturity date of April 7, 2020. Following a drawdown of $10 million on July 10, 2015, Genco has $35 million in borrowings outstanding under the facility.

In April we completed amendments and waivers for both Genco's $253 million and $100 million credit facilities, obtaining relief for certain cash flow measurement covenants. Additionally in July we completed amendments other each of Baltic Trading's credit facilities, obtaining relief under the collateral maintenance covenant and relevant consents for the merger. In terms of our cash position as of June 30, 2015, we had $71.7 million in cash on a consolidated basis.

Turning to slide 6 and 7, we provide an overview of our fleet. Upon the expected delivery of the two remaining Ultramax vessels, Genco's fleet will consist of 70 drybulk vessels made up of 13 Capesize, 8 Panamax, 4 Ultramax, 21 Supramax and 6 Handymax, as well as 18 Handysize vessels, with a total carrying capacity of approximately 5.2 million deadweight tons at an average age of 8.8 years. With a modern fleet, we remain in a strong position to provide leading charters with best-in-class services that meet the highest operational standards.

Moving to slide 9, I will discuss the specific details of the merger with Baltic Trading Limited, which was completed on July 17 of this year. In accordance with the terms of the merger agreement, Baltic Trading is now an indirect wholly-owned subsidiary of Genco. And Baltic Trading shareholders, other than Genco and its subsidiaries, received 0.216 shares of Genco common stock for each share of Baltic Trading common stock they owned at closing, with fractional shares settled in cash. Shares of Baltic Trading's Class B stock, all of which were owned by a subsidiary of Genco, were canceled in the merger.

Immediately following the merger, Genco shareholders owned approximately 84.5% of the combined company and Baltic Trading shareholders, other than Genco and its subsidiaries, owned approximately 15.5% of the combined company. By merging with Baltic Trading we achieved a major milestone for both companies and have significantly strengthened the combined company's prospects and our ability to deliver superior long-term value to shareholders.

Specifically as outlined on slide 10, we have increased the scale of our operating platform and believe we have created a stronger global competitor in the drybulk industry. With the expected delivery of two Ultramax newbuildings we operate a diversified fleet of 70 drybulk vessels, significantly strengthening our market presence and further enhancing our position for meeting the needs of leading multinational companies.

In addition to enhancing our commercial prospects, we believe operating under a larger platform strengthens our industry leadership and leverage with suppliers, customers, and potential sources of financings. Furthermore, we believe our simplified ownership and corporate structure positions the Company to achieve operating efficiencies and enhances our position as a leader in the drybulk shipping market. Following the merger, Genco began trading on the New York Stock Exchange under the ticker symbol GNK. We are proud to once again be listed on the New York Stock Exchange, providing shareholders with a liquid and visible market for our shares.

I will now turn the call over to Apostolos to discuss a review of our financial results for the quarter and industry fundamentals.

Thank you, John. Turning to slide 12, our financial results represented, which are shown on a consolidated basis including Baltic Trading Limited. We also present a consolidated income statement, breaking out the contribution of Baltic Trading on slide 13. Before I discuss the results, I would like to note that as of July 9, 2014, following the completion of the Company's restructuring, Genco adopted and applied Fresh-start Reporting provisions to its financial statements. The Company's assets and liabilities were recorded at their fair value as of the Fresh-start Reporting date, which differed materially from the recorded values as reflected in its historical consolidated financial statements.

As a result of the adoption of Fresh-start Reporting, the Company's consolidated balance sheets and consolidated statements of operations subsequent to July 9, 2014, will not be comparable in many respects to our consolidated balance sheets and consolidated statement of operations prior to July 9, 2014, as further discussed in our SEC filings on Forms 10-K and 10-Q.

For the second quarter and six-month period ended June 30, 2015, the Company generated revenues of $34.6 million and $69 million, respectively. This compares with revenues for the second quarter of 2014 and the six months ended June 30, 2014, of $52.4 million and $116.4 million, respectively. The decrease in revenues for the second quarter of 2015 compared to the prior year period is primarily due to lower rates achieved by the vessels in our fleet during the second quarter of 2015 versus the same period last year, partially offset by the increase in the size of our fleet following the delivery of Baltic Trading's two Ultramax newbuilding vessels.

For the second quarter of 2015, the Company recorded a net loss of $40.3 million or $0.67 basic and diluted loss per share. The net loss for the six months ended June 30, 2015 was $78.8 million or $1.30 basic and diluted loss per share. This compares to a net loss of $60.5 million or $1.39 basic and diluted loss per share for the second quarter of 2014, and a net loss of $99.6 million or $2.29 basic and diluted loss per share for the six-month period ended June 30, 2014.

Turning to slide 14, we present key balance sheet items on a consolidated basis with Baltic Trading as of June 30, 2015. Our cash position, including Baltic Trading's cash, was $71.7 million as of June 30, 2015. Our total assets were $1.7 billion, which consisted primarily of our fleet and cash. Our total debt outstanding, including Baltic Trading debt, was $448.6 million as of June 30, 2015. We note that on July 10, 2015, we drew down an additional $10 million under Genco's $60 million revolving credit facility.

As John mentioned, during the second quarter, we completed amendments and waivers for Genco's $253 million and $100 million credit facilities, obtaining relief for certain cash flow measurement covenants. In July we also completed amendments under each of Baltic Trading's credit facilities, obtaining a relief under the collateral maintenance covenants and relevant consents for the merger.

Moving to slide 15, our utilization rate was 98.2% for the second quarter of 2015 compared to 97.4% in the year earlier period. Our TCE for the second quarter of 2015 was $5,065 per vessel, per day. This compares to $8,452 per vessel, per day, recorded in the second quarter of 2014. The decrease in TCE was primarily due to lower spot rates achieved by the vessels in our fleet during the second quarter of 2015 versus the second quarter of 2014.

For the second quarter of 2015 our daily vessel operating expenses decreased to $4,836 per vessel versus $5,086 per vessel for the second quarter of 2014. The daily vessel operating expenses for the six months ended June 30, 2015, were $4,762 per vessel, per day, versus $5,171 per vessel, per day, for the six months ended June 30, 2014. DVOE decreased primarily due to lower maintenance-related expenses as well as lower expenses related to spares and stores compared to the three- and six-month periods a year ago.

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

I'll start with slide 17, which represents the Baltic Dry Index. Throughout most of the quarter, the BDI remained under sustained pressure, mainly range bound between 573 and 637. During the second quarter of 2015, excess vessel supply continued to weigh on the drybulk market. Continued de-stocking of iron ore inventories at Chinese sports and coal inventories at Chinese power plants, along with seasonally reduced iron ore exports out of Brazil, adversely affected the earnings of Capesize vessels through the majority of the second quarter.

However, during the second half of June, the BDI exceeded the 800 mark for the first time since December 2014. This positive momentum has since carried over into the start of the third quarter, as the BDI has exceeded 1,200. This rise in freight rates has been predominantly led by the Capesize sector as Capesize spot earnings have increased from a quarter two 2015 low of just under $3,000 per day in early April to surpass $19,000 a day currently.

On slide 18 we outline some of the recent market developments driving the improved freight rate environment. We believe that the two most important drivers propelling Capesize rates to current levels are, first, firm iron ore fixture activity originating in mid-June and continuing into July, which has led to the employment of idle Capesize vessels. And second, the contraction of the Capesize fleet to date, which has led to an improved supply and demand balance.

Looking at the reasons behind the increase in iron ore fixtures, we note the combination of low inventory levels during a time of increasing iron ore capacity and declining commodity prices. Iron ore inventories at Chinese ports specifically had been steadily decreasing since November of 2014 and are currently 22% below their level at this time last year, due to a combination of slower demand as well as weather-related seasonality factors at major exporting countries of Brazil and Australia.

As weather-related disruptions started subsiding and more iron ore became available in the international market, lower prices for the commodity facilitated a rise in Chinese iron ore imports. Imports during June amounted to 75 million tons, a 6% increase from the prior month. Even with this increase, however, Chinese iron ore imports are still down marginally through the first half of the year by 1%. Australia, the largest supplier of ore to China, has increased exports by 8% year on year through May of 2015, while Brazil has seen shipments rise by 7% year on year through June. Despite the year on year rise, Brazil's exports in the first half of 2015 are 11% lower than the total from the second half of 2014, which is in line with historical seasonality.

Irrespective of the increased fixture activity witnessed over the last several weeks, the price of iron ore declined dramatically since the end of June, after closing at approximately $60 per ton by the conclusion of the second quarter the price fell to as low as $44 per ton on July 8 after a one-day drop of 11%, which is the largest on record. This also marked the lowest level since daily iron ore sessions began in 2008. The following day, prices rebounded by 9.5% to $48 per ton and they currently sit at approximately $55 per ton.

In addition to the inventory drawdown, a significant portion of the pressure on iron ore prices has been due to the capacity expansion undertaken by the major iron ore miners. Key iron ore expansion plans are further detailed at the bottom left of the page. Specifically in Australia, Rio Tinto is expected to continue to ramp up capacity throughout the remainder of the year. In the Atlantic, in response to iron ore pricing conditions, Vale has decided to reduce production of low-quality ore from its mines located in the southern and southeastern system, for a total of 25 million to 30 million tons per annum. Vale did nonetheless reiterate its 2015 iron ore supply guidance of 340 million tons, which would be an increase of 3% your on year. Vale has not officially released forward production guidance for 2016 and beyond, but this is expected to be updated later this year.

Turning to slide 19, we outline China's sources of iron ore. Given the ramp up of ore production, particularly in 2014, Australia has been able to grab a significant share of the Chinese market. While output growth has slowed, the three major Australian producers -- Rio, BHP, and Fortescue -- saw production rise by 4% year on year in Q2 of 2015. Operations were impeded by weather-related issues, specifically resulting in a downward revision of Rio's estimated 2015 global shipments to 340 million tons, which takes into account 7 million tons of reduced output during the quarter.

Chinese steel output, as presented on slide 20, has come under pressure through the first six months of 2015 as production is down by 1.3% year on year due to weaker end-user demand. Lessened domestic demand has led to Chinese steel prices declining by 29% from the start of the year, tightening steel mill margins. More recently, there was a pickup in the Chinese housing sector during Q2 of 2015, which has been encouraging. After falling in 15 of the previous 16 months, China's housing sales increased year on year in every month during the second quarter.

As domestic steel consumption has wavered, Chinese mills have been able to export increased amounts of their output. Steel exports through the first six months of the year rose to 51.9 million tons compared to 40.2 million tons during the same period of last year. This increase of just under 12 million tons represents a rise of 29% and demonstrates that even after the boron-added steel export rebate was repealed, exports have been resilient.

The backdrop of slowing steel production and an effort to reduce air pollution in major cities also continues to negatively impact Chinese coal imports, as reflected on slide 21. Through June, Chinese coal imports have fallen by 60 million tons, representing a 38% decline. Year-to-date imports annualized to 201 million tons, far below the 2014 figure of 292 million tons. June imports were able to increase by 20% for May to 16.6 million tons but are still down 34% year on year. The month over month rise in imports does coincide with a rise in Chinese coal power plant stockpiles witnessed during the month, as inventories have rebounded from their four-year lows.

Chinese coal power plant stockpiles have ascended to 66 million tons after beginning June at 58.8 million tons, but still remain 14% lower year on year. While low stockpiles are encouraging, peak hydropower season is underway, possibly dampening coal import demand. While the decline of the Chinese coal trade to date has continued to negatively affect the market, India's coal demand may act as a positive catalyst going forward. Inventories have climbed to as high as 30.6 million tons from a critical level of 6.8 million tons in October 2014. As the monsoon season has begun, stockpiles could potentially get drawn down due to supply chain disruptions.

Turning to slide 22, we detail key supply supply-side fundamentals. As we have continued to stress, owners have made significant efforts in 2015 to reduce vessel supply in response to market condition. This has included substantial levels of vessel scrapping, delays in delivery of newbuilding tonnage, conversions of vessels in the order book to other maritime segments, and slower newbuilding vessel contracting. Specifically, we estimate slippage of newbuilding vessels through the first half of 2015 to be approximately 37%. These measures continue to remain positive developments to help mitigate the impact of the existing order book, which currently stands at 19% of the drybulk fleet.

So far this year, newbuilding contracting activity has slowed meaningfully. In particular, ordering during the first six months of 2015 has come to a halt, as according to Clarkson's there are only 55 drybulk vessels ordered, down 90% from the over 550 orders placed in the same period of 2014. These 55 orders made in the first half of 2015 marked the lowest half-year total since the second half of 1998. Additionally, only one Capesize vessel has been ordered so far in 2015 and none has been ordered since February. This lack of contracting has helped cause the order book as a percentage of the global fleet to fall to its lowest point since early 2013.

While the supply-side actions taken by owners have impacted all sectors within the drybulk space, they have been most evident within the Capesize sector, as shown on slide 23. In the year to date, vessel demolition has persisted at a record pace to total 20.5 million deadweight tons, or 35.6 million deadweight tons annualized, with 55% consisting of scrapped Capesize vessels. However, in June the pace of scrapping slowed to the year's lowest total to date, while newbuilding deliveries were largely in line with what has been witnessed in previous months. According to SSY, less activity in the demolition market has materialized due to the onset of the Indian monsoon season, lower scrap prices, and higher freight rates.

Despite the recent slowdown, record scrapping levels have helped to partially offset the newbuilding deliveries to date, as total fleet growth has decelerated to an annualized rate of 2% through June 2015. Already, 69 Capesizes have been scrapped this year, just shy of the record 70 vessels set in 2012. Given the young age profile of the fleet, it is important to note that the average age of Capesize vessel scrapped has declined to 21 years from 24 years in 2014.

In conclusion, we note that in regard to the industry's current supply-side fundamentals, we believe scrapping, slippage, and cancellations, or additional conversions of newbuilding contracts into other vessel types, are all essential components of reducing supply growth, which could lead to a more balanced supply and demand equation. This concludes our presentation and we would now be happy to take your questions.

(Operator Instructions). Doug Mavrinac, Jefferies.

I just had a handful of follow-up questions with a couple of market-related questions, and then a couple of Company-specific questions. First, in the market, John you alluded to the fact that Cape rates have really been rallying here with the return of some iron ore cargoes, amongst other things, after a period -- a significant period of iron ore inventory de-stocking. And you also highlighted how coal inventories at some of the Chinese power plants are down 30% from the beginning of the year. My question is, do you think we could see something similar play out over the course of the next handful of months, where the inventories have just gotten so low that you just can't keep de-stocking? At some point you have to bring more in just to sustain your current levels. So do you think the call market can actually find a bottom here because of that?

Look, Doug, we don't count Chinese coal out or Chinese imports coal out. We do think that overall, what, we are down almost 40% this year?

Right.

I think that's probably a more normalized number. I do think, just like on the iron ore side, you are going to have volatility in the coal and there most likely will be some sort of restocking that occurs in the third and fourth quarter. I just don't think it's going to be to the same extent that we've seen it in years past. But any volume increase is obviously helpful.

Well yes, and see, that's the thing that I was curious about was because even if we find a floor in the Chinese coal imports, India now imports more coking coal and thermal coal then China in both measures. So, if you get China finding a floor and India is now picking up the slack, I just wonder how that dynamic might play out. Do you think that we should continue to see India being a source of strength for coal imports based on what's going on there?

Yes, I think on the India side short-term, because of monsoon season and hydroelectric production, I think you could see a little bit of a pullback on India coal imports but medium-term, yes, I think India looks positive.

Got you, got you. Thanks, John. And then just for a couple of Company-specific questions. First, with their merger now completed, how do you guys think strategically about the combined company going forward? You are sitting with one of the strongest balance sheets of the US-listed appears. Is your mentality such that hey, look, this is a bumpy market. We need to maintain our balance sheet strength? Or do you sit there and say look, fleet growth is hardly anything, and demand can only get better from here, so maybe we should start putting that balance sheet to work? How do you balance retaining your strength with utilizing that strength?

Doug, it's a balancing act. You are correct in that the balance sheet from a leverage profile -- I think you still need to assume that we're going to have a little bit of a bumpy ride over the next 12 months. And so you need to make sure that you can withstand that. So you are going to be very concentrated on your cash flow breakeven rates. Having said that, you look at where a vessel values are and they are at historical lows. You take 15-year-old Capes even, and they are trading at 1.6 times scrap value.

And even five-year-old Capes, just sort of rough numbers, I think you need, I don't know -- $10,000, $11,000 a day over the next 15 years to break even on a cash on cash basis. So there are some compelling values out there for assets, so you also have to have somewhat of a focus on that. But again, it needs to be done with a conservative approach and paying attention to your cash flow breakeven.

Got you, got you, very helpful. And then just final question, and this is more than modeling question. When we think about the combined company and we think about the income statement, line items, et cetera, what should we think about in terms of just your typical guidance that you guys provide around OpEx per vessel per day, G&A per vessel per day? Should we think about what Genco was pre the merger? Or should we just go off of the combined figures for 2Q and extrapolate that out?

Right. So, we've actually had a lot of conversations internally about putting out breakeven numbers. And it's our intention to do that. We are still getting our hands around the combined company, meaning Genco and Baltic's budget for -- particularly for G&A, as well as making sure we are accounting for all merger-related expenses going forward. So our intention is, over the next say, 2 to 3 weeks, we will put out guidance for the rest of the year in terms of cash flow breakevens and net income breakeven.

Perfect. That will be very helpful. Thanks for the time, guys.

(Operator Instructions). And it appears that at this time there are no more questions. This concludes the Genco Shipping conference call. Thank you and have a good day.