Genco Shipping & Trading Ltd (GNK) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Genco Shipping and Trading Limited third 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 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 anytime during the next two weeks by dialing 888-203-1112 or 719-457-0820, and entering the passcode 7273462.

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'll 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," "plan," "intend," "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 31st, 2014 as amended, 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 third 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 third quarter highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals, and then open up the call for questions.

Beginning on slide 5, we review Genco's third quarter and year-to-date highlights. During the third quarter, we continued to operate in a challenging drybulk market and recorded a net loss of $66.6 million, or $0.95 basic and diluted loss per share for the period ended September 30, 2015.

We have continued to take steps to enhance our liquidity position during the third quarter and year to date. And November 4th, 2015, certain of the Company's wholly owned subsidiaries entered into a facility agreement for a secured loan facility with a term of approximately five years.

The Company expects to complete the funding of approximately $98 million under the facility on November 10th, 2015. The facility has no fixed amortization payments for the first two years, and fixed amortization payments of $2.5 million per quarter thereafter subject to prepayments based on our value-to-loan ratio. The facility is subject to customary closing documentation and conditions.

As we discussed on our second quarter call in July, we completed amendments under each of our Baltic Trading credit facilities, obtaining relief under the collateral maintenance covenant and relevant consents for the merger. Additionally, we completed our Ultramax newbuilding program by taking delivery of the Baltic Scorpion in August and the Baltic Mantis in October. Both vessels commenced [stop-market-related] time charters for 14 to 18-and-a-half months, with reputable charters upon delivery to the Company.

In terms of our cash position as of September 30, 2015 -- we had $54.5 million in cash, including restricted cash. In July, we completed our merger with Baltic Trading Limited, achieving a major milestone for both companies and strengthening the combined company's ability to deliver superior long-term value to shareholders. By merging with Baltic Trading, we have increased the scale of our operating platform and believe we have enhanced our commercial prospects as well as created a stronger global competitor in the drybulk industry.

Turning to slides 6 and 7 -- we provide an overview of our fleet. With delivery of the last two of our Ultramax newbuildings, Genco's suite consists of 70 drybulk vessels made up of 13 Cape Size, eight Panamax, four Ultramax, 21 Supramax, and six Handymax, and 18 Handysize vessels, with a total carrying capacity of approximately 5.2 million deadweight tons.

At this time, I will turn the call over to Apostolos.

Thanks, John.

Turning to slide 9, our financial results are presented, which are shown on a consolidated basis including Baltic Trading, Limited. We also present the consolidated income statement, breaking out the contribution of Baltic Trading from July 1 through July 17th, 2015 on slide 10.

Before I discuss the results, I would like to reiterate that as of July 9th, 2014, following the completion of the Company's restructuring, Genco adopted and applied fresh start accounting 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 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 statements of operations prior to July 9, 2014, as further discussed in our SEC filings on Forms 10-K and 10-Q.

For the three months ended September 30, 2015, the Company generated revenues of $50 million. This is an increase of $1.2 million compared to the three months ended September 30, 2014. The rise was primarily due to the increase in the size of our fleet following the delivery of three Ultramax newbuilding vessels, offset by lower rates achieved by the majority of the vessels in our fleets during the third quarter of 2015 versus the same period last year.

Through the first nine months of 2015, revenues decreased by $46.2 million, to $119 million, when compared to the same period of 2014 -- these lower spot market rates achieved with a majority of our vessels, partially offset by the increase in our fleet.

For the third quarter of 2015, the Company recorded a net loss of $66.6 million or $0.95 basic and diluted loss per share. Excluding the $32.5 million impairment of Jinhui Shipping & Transportation, Limited and $6.9 million of merger-related expenses including G&A, basic and diluted loss was $27.2 million or $0.39 basic and diluted loss per share. The net loss for the nine months ended September 30, 2015 was $145.4 million or $2.29 basic and diluted loss per share.

Turning to slide 11, we present key balance sheet items as of September 30, 2015. Our cash position including restricted cash was $54.5 million as of September 30, 2015. Additionally, we had availability of $22.9 million under our $60 million revolving credit facility as of the end of the third quarter.

Our total assets were $1.6 billion, which consisted primarily of our fleet and cash. Our total debt outstanding was $462.3 million as of September 30, 2015.

As John mentioned, we took steps to enhance our liquidity position. Specifically, we entered into a new credit facility under favorable terms, including a repayment structure with no fixed amortization payments for the first [two] years and fixed amortization payments of $2.5 million per quarter thereafter subject to prepayments based on our value-to-loan ratio.

Borrowings under the facility may be used for working capital purposes and bear interest at three-month LIBOR plus a margin of 6.125%. Additionally, we completed amendments under each of Baltic Trading's credit facilities, obtaining relief under the collateral maintenance covenant and relative consents for the merger during the third quarter.

Moving to slide 12 -- our utilization rate was 98.9% for the third quarter of 2015, the same as in the year-earlier period. Our TCE for the third quarter was $7,009 per vessel per day. This compares to $7,696 per vessel per day recorded in the third quarter of 2014. The decrease in TCE was primarily due to lower spot rates achieved by the vessels in our fleet, as well as an increase in volumes expenses during the third quarter of 2015 versus the third quarter of 2014.

For the third quarter of 2015, our daily vessel operating expenses were $4,997 per vessel per day, versus $4,965 per vessel per day for the third quarter of 2014. Daily vessel operating expenses for the nine months ended September 30, 2015 were $4,841 per day, versus $5,101 per day for the nine months ended September 30, 2014, due to lower insurance, stores, and maintenance-related expenses.

We believe daily vessel operating expenses are best measured, for comparative purposes, over a 12-month period in order to take into account all of the expenses that each vessel in our fleet will incur over a full year of operations.

Moving to slide 13 -- we present our estimated daily expense levels for the fourth quarter of 2015. Our daily vessel operating expense budget for the quarter is $5,320 per vessel per day. Our estimated daily expenses on a free cash flow basis are forecast to be $9,616 per vessel per day, while net income expenses are estimated to be $11,546 per vessel per day.

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

Okay. I'll start with slide 15, which represents the Baltic Dry Index. The Baltic Dry Index continued to demonstrate considerable volatility throughout the third quarter of 2015. The BDI rose by 54% from the end of the second quarter to reach a year-to-date high of 1,222 on August 5th, before falling to a low of 802 on September 15th. Within the next week, the BDI jumped 22% to hit 978 on September 21st. Cape Size freight rates witnessed the greatest fluctuation, nearly reaching the 20,000-per-day mark in early August before retreating to lower levels during the remainder of the quarter.

Turning to slide 16 -- we outlined some of the recent developments driving the volatility in freight rates. We believe the rise in Cape Size rates during July and early August was due to augmented Chinese iron ore fixture activity, particularly from the longer [ton mi origin] of Brazil. This fixture activity subsided starting in Mid-August but reemerged briefly in September.

While Chinese iron ore import volumes increased during the third quarter, shipments remained flat through the first nine months of 2015. September's imports marked the third highest iron ore import total on record. This led port stockpiles to rise to 84.5 million tons from a 2015 low of 77.2 million tons in June.

Greater imports into China were supported by firm international ore availability. Specifically during the quarter, higher Brazilian ore exports emerged, as is seasonally the case. Brazil shipped 96.2 million tons of iron ore in the third quarter of 2015, compared to 88.5 million tons the previous quarter; while the average monthly volume was 32.2 million tons from July to September, versus 28 million tons during the first half of the year.

More recently, overall iron ore fixture volume has remained low, thereby pressuring rates. This reduced activity may be contributing to iron ore prices dropping below $50 per ton after remaining mostly stable throughout the third quarter. Despite this decline in price, the major iron ore minors, as portrayed on slide 17, have continued to increase the output capacity today.

Specifically due to productivity gains, [Valley] was able to produce the most amount of ore in the company's history, while output from BHP, Rio and Fortescue increased an aggregate of 9% year on year. Of note, Brazil and Australia continue to gain Chinese iron ore market share as the reduced ore price has led to the displacement of many mine or seaborne exporters. The two currently hold 83% of the Chinese ore market, which is a rise from 77% in 2014 and 70% in 2013.

Turning to slide 18 -- we believe a significant factor imparting the lack of growth in the Chinese iron ore trade in 2015 to date is a slowdown in domestic steel production. Through the first nine months of 2015, Chinese steel output is down by 2.1% year on year, including a 3% year-on-year drop in September. An oversupply of steel, coupled with declining domestic demand, has led steel prices to fall by nearly 35% since the start of the year, shrinking the markets of steel mills.

Recently, however, with the decline in the price of iron ore, steel mills may be able to benefit due to the lower cost of raw material inputs in the production process. The increased competitiveness of Chinese steel products in terms of pricing in the international market has bolstered exports so far in 2015, leading to a sharp expansion of shipments out of China.

Steel exports through September are up by just under 30% year on year, including a record of $11.3 million tons shipped in September. Strong exports have also been a driver in reducing Chinese steel stockpiles to very low levels as destocking intensified during the third quarter.

As reflected on slide 19, Chinese coal imports continue to be negatively impacted by protectionist policies implemented by the Chinese government to aid domestic coalminers. Chinese coal imports have declined by almost 30% year on year through the first nine months of the year.

However, slower hydropower production and continued demand in China has resulted in Q3 2015 representing the most coal imported in a quarter since the fourth quarter of 2014.

Chinese coal power plant stockpiles remain 21% lower than they were a year ago at this time but have been on the rise in preparation for peak winter demand season, during with hydropower output tends to fall.

Coal inventories currently stand at 73.5 million, 18.5 million tons higher than the 2015 low recorded in May.

India's coal imports in the year to date have been able to partially offset the decline in the Chinese coal trade. However, import growth recently eased partially due to inventory destocking.

On a positive note, India's coal power plant stockpiles currently stand at the lowest point since March and are 23% below the peak in July. Furthermore, electricity output in September and October has registered sharp year-on-year increases of 11% and 9% respectively, meaningfully above the growth rate through the first eight months of the year.

We note that while the market has continued to display volatility over the past three months, a relative pickup in the Chinese housing sector, further infrastructure projects and monetary easing on the part of the Chinese government could be positive catalysts going forward. Additionally iron ore volumes from Brazil have historically increased during the fourth quarter, while the North American grain season is expected to commence as well.

Turing to slide 20 -- we detail key supply-side fundamentals. A key action undertaken by owners during the year has been the lack of newbuilding ordering that has materialized as contracting activities down 74% through the first nine months of the year, as compared to the same period of 2014.

The slowdown in ordering, as well as conversions of existing orders to other maritime segments, has resulted in the order book falling to 18% of the current fleet, which is the lowest percentage in over a decade. Of this 18%, it still remains to be seen what will actually be delivered.

Moving to slide 21 -- we note that vessel demolition activity has subsided from the firm pace established during the first half of 2015. Average monthly scrapping during the third quarter amounted to 1.2 million deadweight ton, compared to 3.4 million deadweight ton from January to June. While owners have responded to market conditions through several supply-side measures, such as limited ordering and conversions of the existing tonnage in the order book as previously mentioned -- in addition to delaying newbuilding deliveries -- vessel scrapping remains the main driver of controlling fleet growth and reining in excess supply.

Irrespective of the easing pace of demolition, the year-to-date total of vessels scrapped is $25.3 million deadweight ton. This total still remains nearly twice as much as what was removed from the fleet during the same period of 2014 and compares very favorably to the 16.3 million deadweight ton that was scrapped in all of last year.

We point out that scrapping within the Cape Size sector has been the most prevalent, as more than half of the total tonnage removed has been from this vessel class. A record 84 Cape Size vessels have been scrapped in the year to date, which surpassed the previous high of 70 vessels set in 2012.

In conclusion -- we note that in regard to the industry's current supply-side fundamentals, we believe scrapping, slippage and cancelations or additional conversions in newbuilding contracts are all essential components of reducing supply growth, which could lead to a more balanced supply-and-demand equation going forward.

This concludes our presentation, and we would now be happy to take any questions.

(Operator Instructions) Doug Mavrinac, Jefferies.

I just had a few follow-up questions for you all this morning. First, as it pertains to the market -- John, you talked about the volatility that we saw this year as it pertains to rates rising and then falling, both quite dramatically. My question is -- what does that volatility tell you, in terms of how far we are away from maybe a better-balance market?

Look, I mean, the positive news is that the market is reacting to cargo flows, which -- I think as we've said before, it's been awhile since we've seen that.

Right.

So what's really going on here, Doug -- we obviously had something unusual this year, where you had iron ore imports move up during the summer months. As I'm sure everyone is aware, it's usually a seasonally slow period. And that really led to the Cape Size market firming.

On the negative side, what we've seen is obviously the coal coming -- really slowing down significantly. That has really hurt.

And then, while the iron ore majors have done everything they said they were going to do in terms of volume increases, because of where the price of iron ore has gone on the downside, it has really cut out a lot of the higher-expense marginal producers. So we basically had sort of flat demand growth going into China.

Got you.

And actually, that touches on a topic I wanted to get to in a second, and that's -- when we look at the drag that the coal market has been -- I mean, you talked about how we were down 30% year over year -- clearly, we can't continue to go down 30% each and every year.

So to the extent that we maybe start to flat-line here, because you reach this point where they've got to take on a certain amount of coal -- when do you think that could be? I mean, do you think that we're kind of getting to the point where we're getting to -- okay, this is how much I've got to bring on? Or do you think that there could be the potential for further big declines going forward, and as it pertains to the coal demand in particular?

Look, it's tough to tell what the Chinese's government is going to do. I mean, what's going right now is clearly protectionist. Because the coal that is coming out of Australia is much higher quality than what they have on the domestic side as it pertains to sulfur and ash, which -- Chinese government says they're very focused on environment and keeping pollution down. Well, then they should really be importing more Australian ore.

So it is protectionist.

Right.

I think it's difficult to really say what the government is going to do going forward.

The tariffs that are in place on the thermal coal side still have another, I think, eight months or so to run. They removed the tariffs on the coking coal side.

Right.

But I think it's tough.

Look, on the positive side, you have India that has, I would say, outperformed on the import side. And while domestic production in India has continued to move up, it's still well below the targets that the government has set. And you got to keep in mind that a lot of these power plants that were built on the coast in India -- they were purposely built with facilities to import coal.

Right, right.

So that's somewhat of the replacement if Chinese coal continues to fall.

Right. So putting all that together -- I mean, we're seeing volatility, which tells me that we're not far away from a pretty balanced market, if you can get reaction rates to an increase in cargos. And also, you're getting to this point where they just, like I said, can't keep cutting. So even though the market is weak, it just doesn't seem like we're that far away.

As it pertains to the supply side -- I mean, obviously the market itself has been weak. But there's underlying supply-demand fundamentals. The supply side actually has been a bright spot. I mean, when we look going forward, and we look at the profile of the fleet, and we look at the order book, et cetera -- I mean, do you think we could see even further minimal net fleet growth to the extent that we saw it this year, going into 2016-2017?

Look, my view is there's still plenty of ships to be scrapped in all sectors. I think that where rates are right now, you're going to see scrappings pick back up again. I think someone -- I think there was a report of a Cape Size being scrapped yesterday.

So I do think there's more scrap going to come, I think it's going to pick up. I think there are still going to be more cancelations. That 18% of the fleet order book -- we feel there's -- there could be 20% of that order book that just doesn't appear.

Right.

A lot of that -- or not a lot, but some of it was ordered previous to 2013, probably won't appear.

Look, overall, I don't think our message has changed. We still think 2016 is going to be a volatile year, and probably not looking for a true recovery until you're going into 2017. And that's supply-related, more than anything else.

Right. Yes, got you.

And then, just final question -- and this, as it pertains to you guys in particular -- I mean, I know that you guys can't about NAVs and things like that. But compared to our NAV estimate, your shares are trading at a pretty big discount despite having relatively low financial leverage.

So as it pertains to kind of what people may be worried about, can you talk about maybe what your amortization schedule is for the next year and a half? Can you talk about any covenants that may require attention? Can you talk about those things that are related to kind of what some of your upcoming commitments are?

Yes. I mean, Doug, let me answer something just a little bigger, and then let Apostolos go through some of the covenant things.

But look, we agree -- the stock price is [trading] at a significant discount to its net asset value. And I mean significant discount. It is very hard to comprehend, particularly because of the runway that we have. And that's obviously one of the major things that investors look at with any of these companies right now. And I think we've demonstrated that we still have the ability to raise financing, and we've extended the runway even further at Genco.

So why the stock is where it is -- one can only speculate. But it does seem like maybe there is some large holder out there that is selling for -- who knows why. You're at year end, you have year-end tax reasons. You never know why people do what they do.

Right.

But the stock is trading at significant discounts.

But let me turn it over to Apostolos to go through some of the covenant things.

Okay.

Yes, Doug -- as far as the amortization goes, we don't expect any major changes in what we already have, even after placing this facility, putting place this facility. Our amortization for the third quarter was about $12.2 million. And yes, going forward, we expect it to be around $13 million on a quarterly basis.

The other important thing to point out is overall, the way that the Company has been set up, the breakeven expenses at $9,600 per day -- all in, that's including amortization, interest expense, and operating expenses and G&A -- we believe (technical difficulty) to some of our peers.

Right. That's all very, very helpful. Thanks for the time, guys.

Thank you, Doug.

[Magnus Harr], GMP Securities.

Just a couple of questions here -- first, on -- I mean, you provided very nice detail on your cash breakeven expenses. I guess based on those and current quarter, you're burning about $2,500 per day. Into the fourth quarter, can you provide any flavor -- I know the rates have been very volatile -- but what's the current run rate for the fleet through October? It'd be very helpful.

Our earned run rate of what, Magnus?

Just on the revenues per day. I mean, you had $7,000 a day for the third quarter, you were at $5,000 at the second quarter. I know rate has been volatile. But how is October looking?

Yes. Look, it's all going to depend to the BDI. Our exposure is [thought] we don't usually give forward guidance on earnings. I'll give you the breakeven level is at $9,600. Based on today's rates, I will guess we're about $6,000 on a weighted average basis across the fleet on earnings.

Right. I don't know --

Yes, but Magnus (multiple speakers you can see in the presentation, all the charter information is in here. So it's pretty straightforward to get to, particularly with having the breakeven slide at your disposal.

Right. So based on that $9,600 number, you're burning about $64 million a year. So with this new facility in place, I mean, you should have a runway well into 2017. But I guess if rates deteriorate further, I guess that's another question.

What other steps can you do to improve liquidity near term? Or you feel comfortable with this cash position now?

I think right now we feel comfortable with what we've done. I mean, you got to keep in mind, Magnus -- unlike most of our peers, we don't have these big CapEx programs where we're sitting there watching what vessel values do on the edge of our seat because of potential funding shortfalls. We don't have any of that. Everything is on the water. And the only CapEx we have are related or is related to dry docking. And I think in this market, that's a big thing. Big positive.

Right. And I guess with the new facility, your leverage going to about 35%. Do you feel like you have additional capacity there to take it up higher, if needed?

Yes, I would say there's probably some additional capacity. But like I said, what we've done at this point we're very happy with, particularly in this market. It's not the easiest market to raise debt, particularly related to drybulk assets.

All right. That's good, thanks.

Amit Mehrotra, Deutsche Bank.

I just wanted to go back to that discount to net asset value question. And it doesn't make entirely sense to me that's purely technical in terms of pressure. Because there's a lot of other drybulk companies that have bigger fleets that are on the water with more consolidated share capital bases that are trading at a significant premium relative to where you guys are -- still at a discount. And so I don't know if I totally understand, if it's just technical. And so clearly the market is taking a view on something.

And I just wanted to ask, in terms of the amortization payments relative to the cash balance, you guys have a pretty big fleet. Is there any minimum liquidity covenants or liquidity per ship that you guys need to keep on the balance sheet, either inter-quarter or at end of any period? Can you just provide us with that number?

Sure. On an overall basis, we're at about $52 million on a corporate minimum liquidity covenant.

Okay, so --

-- $6,000 (technical difficulty).

So --

I think you're (multiple speakers) -- this is Peter Georgiopoulos -- I think your basic premise is wrong. If you have a share that trades 100,000 shares a day and you've got someone trying to sell five million shares, your stock is going to get pounded.

So when we look at our stock, we look at the position the Company is in, we look at what we just did this week. We feel like we're in a very strong position. There's nothing -- I mean, you're obviously intimating that there's something behind the scenes. And I think 100% wrong.

No, I'm sorry if that -- I apologize if that's the message I'm trying to convey. I'm just trying to say that the market is clearly expressing a different view. And maybe they're not, but that just seems like the case. And so if you have sort of minimum liquidity covenants of $52 million, and your cash balance at the end of September was $54 million, and you have $13 million of amortization payments every quarter, and you're short of that breakeven levels in terms of TCEs and expenses -- where is the additional liquidity going to come from?

We just did $98 million.

And we also have another $20 million under our revolving credit facility as of September 30.

Got it. Okay.

Okay, guys. That's all I had. Thank you very much.

Okay.

At this time, there are no further questions. This concludes the Genco Shipping conference call. Thank you, and have a nice day.