Genco Shipping & Trading Ltd (GNK) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited fourth-quarter 2015 earnings conference call and presentation. Before we begin, please note there will be a slide presentation accompanying today's conference call. That presentation can be found 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 anytime during the next two weeks, by dialing 1-888-203-1112 or 1-719-457-0820 and entering the passcode [6413478] (corrected by company after the call).

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 result 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 as amended, and the Company's subsequent reports filed with the SEC.

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

Good morning. Welcome to Genco's fourth-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 review our fourth-quarter highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals, and then finally open up the call for questions.

Starting with slide 5, we review Genco's fourth-quarter highlights. During the fourth quarter we recorded a net loss of $49.5 million or $0.69 basic and diluted loss per share, for the period ended December 31, 2015. Against a backdrop of a challenging drybulk market, we continue to take important steps to enhance our liquidity position, and increase our operating efficiency.

With respect to our liquidity position, on November 10, 2015 we completed the funding of a $98 million secured loan facility with funds associated with Hayfin Capital Management and Breakwater Capital Limited. Including this facility, we entered into a total of $158 million in new loan facilities during 2015.

As described in more detail in our earnings release, the current market conditions and historically low charter rates have negatively impacted our liquidity position and may continue to do so. As a result of this impact on our liquidity and a continued decline in vessel values, we face credit facility covenant compliance issues. We are currently in communication with our banks to address such covenant compliance issues and are considering a number of options.

Additionally during the fourth quarter, we did take delivery of the Baltic Mantis, completing our Ultramax newbuilding program. We reach an agreement to charter the vessel for 14 to 18.5 months at a rate based on 115% of the Baltic Supramax index. In terms of our cash position, as of December 31, 2015, we had $140.9 million in cash, including restricted cash.

Turning to slide 6, we provide an overview of our fleet. With the delivery of the last Ultramax newbuilding, Genco's fleet consists of 70 drybulk vessels made up of 13 Capesize, 8 Panamax, 4 Ultramax, 21 Supramax, 6 Handymax, and 18 Handysize vessels, with a total carrying capacity of approximately 5.2 million deadweight tons. Drawing upon our increased scale, which was a direct result of our merger with Baltic Trading in July of 2015, we reduced our direct vessel operating expenses on a per-vessel basis for the year, resulting in savings of approximately $4 million. In addition to operational efficiencies, we believe our increased sale has created a stronger global competitor, strengthening both our long-term commercial prospects and ability to deliver value to shareholders.

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

Thank you, John. Turning to slide 8, our financial results are presented. Before I discuss the results, I would like to reiterate 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. As a result of the adoption of fresh start reporting, the Company's consolidated balance sheets and 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 December 31, 2015, the Company generated revenues of $35 million versus $55.7 million for the same period of 2014. For the year ended December 31, 2015, revenues declined by $66.9 million to $154 million, compared to the year ended December 31, 2014. The decrease in total revenues for the fourth quarter and year-end periods, as compared to the prior year periods, was primarily due to lower spot market rates achieved by the majority of the vessels in our fleet, marginally offset by the increase in the size of our fleet following the delivery of three Ultramax newbuilding vessels.

For the fourth quarter of 2015, the Company recorded a net loss of $49.5 million or $0.69 basic and diluted loss per share. This compares to a net loss of $164 million or $2.72 basic and diluted loss per share for the fourth quarter of 2014.

Turning to slide 9, we present key balance sheet items as of December 31, 2015. As previously mentioned by John, the current market conditions and historically low charter rates have negatively impacted our liquidity position, and have resulted in a continued decline in vessel values. Although we are in communication with our banks to address covenant compliance issues, we anticipate receiving a growing concern opinion from our independent registered public accountants to be included in our Form 10-K for the year ended December 31, 2015, and have classified our outstanding indebtedness as a current liability as of December 31, 2015.

Our cash position, including restricted cash, was $140.9 million as of December 31, 2015. Our total assets were $1.7 billion, which consisted primarily of the vessels in our fleet, and cash. Our total debt outstanding was $588.4 million as of December 31, 2015.

As John mentioned, during the fourth quarter, we took steps to enhance our liquidity position. Specifically, we completed funding of 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 the facility's collateral value to loan ratio.

Moving to slide 10, our utilization rate was 98.6% for the fourth quarter of 2015, in line with the rate in the year-earlier period. Our TCE for the fourth quarter of 2015 was $4,711 per vessel per day. This compares to $8,310 per vessel per day recorded in the fourth quarter of 2014. The decrease in TCE was primarily due to lower spot rates achieved by the vessels in our fleet during the three months ended December 31, 2015, versus the same period last year.

For the fourth quarter of 2015, our daily vessel operating expenses were $4,954 per vessel per day, versus $4,840 per vessel per day for the fourth quarter of 2014. Primarily due to higher expenses related to the timing of the purchase of spare parts. Daily vessel operating expenses for the year ended December 31, 2015 were $4,870 per vessel per day, versus $5,035 per vessel per day for the year ended December 31, 2014, due to lower insurance, stores, and maintenance-related expenses.

This year-over-year decline in daily vessel operating expenses represents savings of over $4 million based on the 2015 ownership days. Furthermore, our daily vessel operating expense budget for 2016 is $4,820 per vessel per day, which could result in additional savings of approximately $1.3 million for this year.

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

Okay. I'll start with slide 12, which represents the Baltic Dry Index. The Baltic Dry Index continued to come under pressure throughout the fourth quarter of 2015, including reaching a then all-time low of 471 on December 16. Since the beginning of the year, the BDI has declined further, falling below the 300 point threshold for the first time on record in February. Subsequently, the BDI has marginally increased to over 375 while posting gains in each trading day since the trough on February 11.

Turning to slide 13, we outlined some of the recent market developments. We believe various seasonal factors are currently affecting the freight market, which has exacerbated the already fragile supply and demand balance. These factors include firm newbuilding deliveries, cargo disruptions and the Chinese New Year celebration.

Specifically relating to iron ore, cyclones in Australia caused Port Hedland to halt shipments in January. This resulted in Australian exports declining by 3% year-on-year during the month, and well below the fourth quarter of 2015 pace. Additionally, the Brazilian government ordered the Port of Tubarao to temporarily seize shipments due to environmental issues.

While through the first two months of February, Brazilian iron ore exports have increased by 13% year on year, the monthly export average of 27.5 million tons in 2016 to date is far below the monthly export average of 33.9 million tons, registered in Q4 of 2015. Reduced iron ore cargo available in the international market led to China's iron ore imports falling from a record of 96.3 million tons in December of 2015 to 73.6 million tons in February of this year. Despite the decrease from the December figure, China's iron ore imports have still been able to increase by 6% year over year for the first two months of 2016.

Turning to slide 15, we highlight global steel production. We note that in 2015, China's steel output fell by 2.3% year on year. The pace of decline steepened in January of 2016 with a nearly 8% year-on-year drop.

As China's domestic steel demand has waned, steel product exports have risen meaningfully. In 2015, exports rose by over 20% year on year as Chinese mills use this as a means to maintain production levels. As China has inundated the national market with inexpensive steel, several nations including India and the US have implemented measures to assist their respective domestic steel industries, which have had difficulty in competing with the lower priced product from China.

Through February of this year China's steel exports have fallen marginally year on year, possibly as a result of these actions, although two months of data is too small of a sample size to make any conclusions at this point. A positive development that has materialized so far in 2016 within the steel sector has been the strength exhibited in steel prices, which have risen nearly 20% in the year to date. This rise can be attributed to restock of depleted steel inventories, as well as the onset of peak construction season.

Steel inventories have been replenished aggressively over the past two months, as depicted on the bottom right of the slide. Which is in line with historical seasonality during the first quarter. Despite the recent improvement in steel mill margins, China has set out plans to cut between 100 million and 150 million tons of steel capacity over the next several years. The planned cuts will likely be of older inefficient mills that generate greater emissions.

Moving to slide 16, we turn our attention to the coal trade. In 2015, China's coal imports continue to be negatively impacted by protectionist policies implemented by the Chinese government to aid domestic coal miners. Shipments of the commodity to China fell by 30% year on year in 2015, and by 10% year on year through February of this year. Similar to the steel sector, the Chinese government has announced plans to rebalance the domestic coal sector and reduce overcapacity.

On slide 17 and 18 we outline current supply fundamentals. Given the underlying market conditions, supply-side measures undertaken by owners over the last several months have been encouraging. These measures consist of a record pace of vessel scrapping, limited newbuilding contracting activity, delayed delivery of newbuilding vessels and cancellations, as well as conversions of prior newbuilding contracts.

We believe vessel demolition is the most direct way to impact the current trading fleet. As a result, we view the over 10 million deadweight ton of tonnage scrap so far in 2016 as a highly positive development. Furthermore, a trend that has continued into 2016 from last year has been the scrapping of relatively younger tonnage.

The average age of vessels scrapped in 2016 is 24 years, compared to 25 years in 2015, and 27 years in 2014. This decline in the average age of vessels being scrapped has been propelled by the Capesize and Panamax sectors, which have an average scrap age of 21 years so far in 2016. We believe this trend could continue in further scrapping, because approximately 10% of the total fleet is 20 years or older currently.

As a result of the recent market conditions, newbuilding contracting activity has been almost nonexistent. Contracting activity through the first two months of 2016 is down by 90% year on year. While there have been no reported orders in the Cape Size and Supramax sectors since the start of the year, according to Clarkson's.

Furthermore, the slowdown in ordering activity together with cancellations and conversions, has been able to drive down the order book as a percentage of the fleet to 15%. This represents the lowest ratio since 2003. Regardless of the decline in the overall order book, there is still a firm amount of tonnage scheduled to deliver in 2016, as over 60% of the order book or approximately 74 million deadweight tons remains earmarked for this year. Of this total, it still remains to be seen what percentage will actually deliver.

In conclusion, we note that in regards to the industry's current supply-side fundamentals, we believe scrapping, slippage and cancellations or additional conversions of 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 your questions.

(Operator Instructions)

Doug Mavrinac with Jefferies.

John, just a handful of follow-up questions for you. First one being on the point you just touched on, that has to do with the fleet being rationalized. And the way that you do that is through scrapping.

When you look at what is being scrapped and the average age of what is being scrapped, and how that compares to secondhand values. At what age ship do you see that there being a point of indifference of saying all right, well, a 17-year-old ship, a 19-year-old ship, this is worth scrap now. So where's that point of indifference of operating versus scrapping? And then secondly, as that continues to get younger and younger, how does that affect the proportion of ships that are now in the scrapping zone?

Okay, let me take the second part of the question. Obviously the younger we get, the greater percentage of ships that can go to scrap. We have actually seen 15-year-old Capesize ships scrapped over the last couple months. We even saw that start to happen in third and fourth quarter of -- or really fourth quarter of last year.

What is encouraging is scrap prices have been increasing. I think that when you get to a ship that is 15 years old, you then have to do special surveys every 2.5 years instead of every 5 years, so your CapEx expense numbers can go up dramatically. Particularly with steel renewal. So I think these decisions, particularly on the larger Capes and the Panamaxes, from a financial standpoint, are pretty easy to make right now.

With Cape rates running at $500, $600 a day on the spot market, I think we have seen some lay-ups but not a lot, and I am expanding on your question a little bit. You really need a 12 month earnings number in Capes for example, of somewhere around $3,000 a day, to say we want to continue to operate the ship, and not lay-up or scrap. And clearly we are not near that right now.

Right, so taking that and saying, we are starting to see some 15-year-old ships being scrapped, and it's not really worth operating at these levels, does that mean that if you look at the proportion of ships that are over 15 years of age, are we talking like 15% of the fleet, 20% of the fleet? Such that, that's getting to be a pretty big number that you can start to say all right, we can start to see a pretty -- an even more meaningful reduction of the existing fleet, that can go towards the rebalancing?

Yes, look, I think we mentioned before, we're at really 10% for 20-plus but you could -- you are adding another, call it probably another 10%, Doug.

Right, and that is what is interesting about seeing that average age creeping up. Either because scrap values are increasing, or because the secondhand values are decreasing, it seems like you're getting close to that inflection point, or at least that point of indifference.

I think it's a combination of both, I think you are correct.

Got you. Thank you. And then as a follow-up, when you are doing your internal projections, and you mentioned how we are still seeing a lot of growth deliveries expected for 2016, that's not necessarily the case if you look at the order book for 2017 and 2018 and whatnot. So at what point do you, if you look at this from this perspective, do you start to see the potential that you could actually see the fleet starting to shrink, i.e. more demolitions than deliveries? Is it at some point later this year, is it some point in 2017, or do you even look at it from that perspective?

No, we look at it from that perspective. In fact, if you take the month of February, there was actually a very small shrinkage if you compare demolitions to what was delivered. January was a high delivery month. And that is normal. You always have people pushing December deliveries into January to get the newer date, but we did see February show negative fleet growth.

I certainly think as you get into 2017, you could see negative fleet growth. And I also -- we're talking about 15% of the order book and a lot of that being delivered in 2016. We still are very skeptical about what the actual order book is in terms of what will be delivered. We still that there a lot of cancellations that haven't been reported, and that are probably to come down the line.

Got you. Very helpful, thank you. And final question, as it pertains to the reclassification of your debt as current. Whenever I look at your balance sheet, I see $140 million in cash. I see significant equity value.

So given those two dynamics, and also seeing over the last couple of weeks a lot of the US listed peers getting amended and extended agreements done, how would you describe your current positioning within that current environment? Are those the types of conversations that you are having, as far as saying, okay, well, debt repayment is a potential option, given our cash on hand. How would you describe the tenor of your conversations on that topic of amend and extend?

Let's talk in general. Having over $100 million of cash on the balance sheet, I think, is helpful. I don't think there are many peers that actually have that kind of cash position. So that makes things a little more helpful and constructive.

We said in our press release, I said on the call, that we are in conversations with our banks. Of course, everybody wants details, but we can't provide any. We can't predict the actual outcome of what things will look like, but I think as everyone knows, we've always had a good and a productive relationship with our commercial banks. I would say we would are having constructive conversations. But look, the industry is challenging, nothing is easy, but like I said, you fall back on your relationships, and clearly we're, as I said, we are having constructive conversations. I can't really comment beyond that.

That was very helpful. And everything was very helpful, so thank you for the time, John.

Thanks, Doug.

(Operator Instructions)

Sherif Elmaghrabi with Morgan Stanley.

Just a quick modeling question for me. I realize that you said that you need to see a one-year rate of around $3,000 per day to justify the lay-up. But I've heard from some other owners that they've seen vessels in lay-up, so should I take that to mean that you don't have any ships in lay-up? Just for modeling purposes, and especially around some of the older vessels, what considerations would you need to take to look at selling the vessels or putting them away for a certain amount of time?

First of all, we don't have any ships on lay-up. The $3,000 number is particular to Capes. As you get into the smaller ships, that number comes down. I think what you've seen is, if you look at our employment details, we have been doing some transactions on the charter side in the Capesize sector where we've been setting a floor of $3,250 with a 50/50 profit share above that. Keeping in mind, that again the current index in Capes is around $500, $600 a day. We are well above that but still low numbers. We are taking the lay-ups off the table right now for Capes.

Got it, that is very helpful. Thanks gentlemen.

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