Genco Shipping & Trading Ltd (GNK) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited third quarter earnings 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 any time during the next 2 weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 8299019.

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, 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, 2016, and the company's report subsequently filed with the SEC.

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

Good morning. Welcome to Genco's Third Quarter 2017 Conference Call. I will begin today's call by reviewing our third quarter 2017 and year-to-date 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.

Turning to Slide 5. We review Genco's third quarter highlights. During the third quarter, the drybulk market continues to come into balance, further strengthening as the quarter progressed. Demand for seaborne iron ore, coal and minor bulk cargoes remained firm, which combined with marginal net fleet growth, led to an improved freight rate environment. These market developments, together with the successful implementation of our new commercial operating platform, enabled Genco to achieve improved year-over-year results and grow our cash position to $185 million.

For the third quarter, we recorded a net loss of $31.2 million or $0.90 basic and diluted loss per share, or an adjusted net loss of $12.5 million or $0.36 basic and diluted net loss per share, excluding the $18.7 million noncash impairment charge.

Following the steps we took earlier in the year to bolster our minor bulk operations, we recently established a Singapore presence which will enable us to further expand our in-house commercial operating platform and grow our footprint globally while strengthening relationships with leading iron ore producers and charterers worldwide through our full-scale logistics solution.

On Slide 6, we've outlined the progress we have made further enhancing our industry-leading operating platform. In addition to our strong balance sheet and our cost leadership, our success transforming Genco's commercial platform to an active owner model, offering a full-scale logistics solution to cargo owners, has positioned us to more fully capitalize on a drybulk recovery. We are pleased with the progress we have made with our commercial initiatives, which provide us with a strong foundation to implement the next phase of our strategy as we seek to take advantage of our strong liquidity to grow the company and enhance Genco's industry leadership. Specifically, we believe there are current compelling opportunities to acquire modern tonnage at historically low asset values during a recovering market.

Turning to Slide 7. We have outlined our leading market position. In the chart on the left-hand side of the page, you can see that as a result of our commercial, technical and operational initiatives, we have improved our margins significantly, which are reflected in our increasing time charter equivalent rate. In addition, we also continue to maintain low daily vessel operating expenses resulting from cost-saving measures put in place to date and are focused on cost leadership. These measures have improved our liquidity position as our cash balance has risen during each quarter of 2017.

Moving now to Slide 8. I will briefly review our fleet. Genco's fleet consists of 60 drybulk vessels made up of 13 Capesize, 6 Panamax, 4 Ultramax, 21 Supramax, 1 Handymax and 15 Handysize vessels, with a total carrying capacity of approximately 4.7 million deadweight tons.

On the next 2 slides, I will discuss in greater detail some of the initiatives we have implemented to optimize our commercial strategy for both major and minor bulks, which I touched on earlier.

First, I'll focus on the major bulks on Slide 9. As previously mentioned, we have expanded our commercial footprint by establishing a Singapore office. We are excited by the prospect of having an active profile in the Far East market, which will allow Genco to better focus on the employment of our Capesize vessels and backhaul trades on the minor bulk fleet. This will also enable Genco to implement real-time management of the Capesize fleet to augment earnings and create a 24-hour operation while expanding our network of clients, getting the company closer to cargo interests.

We also continue to benefit from our focus on strategically deploying our fleet. Our success of staggering expiration dates of charters as well as weighting expirations toward the second half of the year enable us to take advantage of a stronger rate environment in the third quarter and positions us well in the fourth quarter.

In addition to a number of contracts on our Capesize suite that expired in the third quarter, additional contracts will expire in the fourth quarter.

As we have mentioned in the past, we believe Capesize vessels present -- possess the most upside potential through direct exposure to improving fundamentals of the iron ore and coal trades.

Furthermore, we strategically frontloaded our 2017 drydock schedule to maximize fleetwide utilization during stronger market periods. As we continue to progress into the fourth quarter and look ahead to 2018, we only have 5 of our 60 vessels scheduled to drydock through the end of next year. As a result, we look to take advantage of this light drydocking schedule during a time in which we believe supply and demand dynamics will further improve.

Moving on to Slide 10, I will discuss our initiatives aimed at strengthening the commercial prospects of our minor bulk fleet. First, we are pleased with the company's success expanding our in-house commercial platform to offer a full-scale logistics solution to cargo owners, incorporating voyage charters and direct cargo listings to our service offerings. Additionally, we continue to implement a process that optimizes the geographic trading of each of our vessels based on vessel class, cargo, customer and port requirements in order to achieve better fleet utilization.

Second, our decision to reallocate freight exposure through a more balanced Atlantic versus Pacific split has enabled Genco to capture earnings premiums offered by the Atlantic market as the drybulk industry continues to recover.

Lastly, we continue to integrate and implement new commercial resources as our Commercial Director of the minor bulk fleet is overseeing the chartering of a number of Supramax and Handysize vessels that previously traded in pools. We continue to expect to have all of our vessels currently in pools to redeliver to Genco and be a part of our in-house commercial platform by mid-November of this year.

I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer, to discuss our financials.

Thank you, John. Turning to Slide 12, our financial results are presented.

For the third quarter and 9 months ended September 30, 2017, the company generated revenues of $51.2 million and $134.8 million, respectively. This compares with revenues for the third quarter of 2016 and the 9 months ended September 30, 2016 of $38.9 million and $91.7 million, respectively. The increased revenues in both 2017 periods were primarily a result of higher spot market rates achieved by the majority of the vessels in our fleet versus the same periods last year. In the most recent quarter, increased revenue was partially offset by the operation of fewer vessels as compared to the 2016 third quarter.

For the third quarter of 2017, the company recorded a net loss of $31.2 million or $0.90 basic and diluted loss per share. Adjusted net loss is $12.5 million or $0.36 basic and diluted loss per share, excluding $18.7 million of noncash impairment charges. This compares to a net loss of $27.5 million or $3.80 basic and diluted loss per share for the third quarter of 2016.

For the first 9 months of this year, the company recorded a net loss of $61.3 million or $1.80 basic and diluted loss per share. This compared to a net loss of $192.7 million or $26.65 basic and diluted loss per share for the first 9 months of 2016.

Turning to Slide 13, we present key balance sheet items as of September 30, 2017. Our cash position including restricted cash was $185.1 million. Our total assets were $1.5 billion, which consists primarily of the vessels in our fleet and cash. Our total debt outstanding gross of $9.6 million of unamortized debt issuance costs was $526.6 million as of September 30, 2017.

Moving to Slide 14. Our utilization rate was 97.9% for the third quarter of 2017. Our TCE for the third quarter was $8,573 per vessel per day, which compares to $5,779 per vessel per day recorded in the third quarter of 2016. The increase in TCE was primarily due to higher spot rates achieved by the vessels in our fleet during the third quarter of this year versus the third quarter of last year as well as the progress in implementing our commercial initiatives.

Daily vessel operating expenses increased to $4,553 per vessel per day for the third quarter of 2017 compared to $4,483 per vessel per day for the comparative 2016 period predominantly due to the timing of drydocking related expenses and purchases of stores and spare parts, partially offset by lower crew costs.

Although daily vessel operating expenses were higher in the third quarter relative to the comparative period, DVOE for the 9 months ended September 30, 2017 was on budget at $4,427 per vessel per day versus $4,523 per vessel per day in the comparative 2016 period.

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 operation. Based on estimates provided by our technical managers and management's views, our daily vessel operating expense budget for 2017 remains at $4,440 per vessel per day on a weighted average basis for the entire year for our fleet of 60 vessels.

On Slide 15, we highlight our favorable fixed debt repayment schedule. We note that in Q4 of 2017, our fixed debt repayments totaled $2.2 million, while in 2018, quarterly fixed debt repayments amount to $3.3 million or $13.2 million for the full year. We believe our strong liquidity position, coupled with low fixed debt repayments through next year provides Genco with a solid foundation as market conditions improve.

Turning now to Slide 16, we outline our cash breakeven rates. Our breakeven levels remains strong amongst -- remain amongst the lowest in the industry, which is a direct result of the vessel operating expense optimization initiatives we had implemented over the last several years, substantially reducing operating costs without sacrificing the company's high safety and maintenance standards. We anticipate Genco's cash breakeven rate to be $7,261 per vessel per day for the fourth quarter of 2017. We've also provided further detail on the breakeven rates in the appendix of our presentation for your reference.

In addition, on the bottom of the slide we have provided our drydocking schedule for the rest of the year and into 2018. We expect one of our vessels to be off-hire due to drydocking for a total of 20 days for the fourth quarter of 2017 and 80 days for all of 2018. The estimated drydocking costs for the fourth quarter of 2017 and full year 2018 are anticipated to be $900,000 and $3.4 million, respectively.

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

Thank you, Apostolos. I'll begin with Slide 18, which represents the Baltic Dry Index.

The BDI began the third quarter with marginal increases in July. However, as the quarter progressed, the BDI found meaningful support. After beginning the quarter at under 900 points, the BDI rose to over 1,500 by the end of September, representing the first time crossing this threshold since March of 2014.

Turning to Slide 19, we outline some of the key market developments influencing this increase in freight rates.

Record steel production in China continues to be the preeminent driver of the drybulk market. Strong output has been incentivized by high steel mill margins, which has led to heightened demand for high-quality seaborne iron ore. A reduction of excess steel capacity among lower-quality producers has resulted in augmented output from larger steel mills. This has led China's steel production to divert from its traditional seasonality as production has continued at a strong pace without the lull typically seen during this period.

Continued strong steel output has been met by all-time high Chinese iron ore imports. Specifically, China's imports for the commodity have risen by 7% year-on-year during the first 9 months of 2017, including a mark of 102.8 million tons in September, the first time that China's iron ore imports exceeded the 100-million-ton threshold. Ample supply of iron ore, particularly from Australia and Brazil, has aided China's appetite for seaborne cargoes. With Vale's continued wrap up of their S11D mine, we anticipate cargo volume to rise through the end of the year and into 2018. Vale estimates 2018 iron ore production will hit 390 million tons compared to their 2017 target of approximately 360 million tons, representing an incremental 30 million tons of iron ore that could hit the market from the [long ton mile]origin.

When focusing on drybulk seasonality, we do note that Brazilian iron ore exports have risen between 10% and 30% in the second half of the year as compared to the first half and every year since 2009, which we believe will continue to add to ton mile demand for Capesize vessels. We believe this abundance of seaborne iron ore supply currently available has been pressuring the price of iron ore, which has fallen to approximately $60 per ton.

Also a factor are restrictions on steel and centering activity in Northern China specifically, Tangshan, which is China's top steelmaking city. We do note that these restrictions are implemented solely in northern China. According to Macquarie, outside of this region, there remains approximately 770 million tons of steelmaking capacity in China that is unaffected by the winter curtailment policy. And if current margins are sustained, it is possible that these mills may attempt to capture this opportunity by increasing production.

In addition to rising steel production, another key factor impacting the drybulk market has been the relative strength of the Chinese coal trade, as detailed on Slide 20. China's coal imports have risen by 14% year-on-year through the first 9 months of 2017. During September, imports totaled 27.1 million tons, marking the high point for this year so far. Tighter domestic supply in China due to various mining accidents and ensuing safety inspections have driven demand for the seaborne material.

With regard to India, coal power plant stockpiles have fallen to 3-year lows, representing less than a week of demand. Coal India has not seen large growth rates in domestic production to cover the shortage, which should help support coal shipments in the near term as supply remains tight.

In addition to the global coal and iron ore trades, we highlight the global grain and certain minor bulk trends on Slide 21. We are currently in the middle of peak North American grain season, which has supported freight rates out of the U.S. Gulf. We've been able to take advantage of this increase in demand by strategically positioning a portion of our minor bulk fleet in this region over the last several months.

Additionally, Malaysia has extended its ban on bauxite mining through the end of the year. This has resulted in a shift to the global bauxite trade to more long-haul routes from the Atlantic into the Pacific, particularly from West Africa.

On Slide 22, we outline current supply side fundamentals. In the year-to-date, the drybulk fleet has grown by 2.8% after taking into account the scrapping of older tonnage. The vast majority of this expansion materialized during the first half of the year.

Annualized fleet growth has been minimal since June, and we would expect that to remain the case through the remainder of the year. While newbuilding deliveries have fallen by 13% year-on-year, vessel demolitions have declined 50% during the same period. We believe this highlights the positive sentiment currently within the drybulk space.

Despite low demolition totals, we do note that of that 27 Capesize vessels scrapped to date, 7 have been over 250,000 deadweight tons, which compares to just 3 vessels of that type scrapped in all of 2016. There remain 46 VLOCs in the drybulk fleet with an average age of 24 years old. This tonnage on an aggregate basis is approximately 4% of the Capesize fleet and will need to be scrapped.

On the newbuilding front, 172 newbuildings have been contracted to date. Despite these orders, the order book as a percentage of the fleet is still manageable at 8.2%, close to a 15-year low. In terms of size, the drybulk order book currently stands at 66.8 million deadweight tons, while tonnage 20 years or older totaled 56.3 million deadweight tons. Of the current order book, it remains to be seen how much will actually be delivered, considering that slippage is currently running at 30% and cancellations of orders continue.

In conclusion, with regard to the industry's current supply-side fundamentals, we believe scrapping, slippage and cancellations are all essential components of reducing supply growth going forward, further improving the market supply and demand balance.

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

(Operator Instructions) And we'll take our first question from Doug Mavrinac from Jefferies.

John, I just had a few follow ups for you this morning, with the first one being one of the last points that you made in terms of industry supply growth and the outlook. You mentioned how newbuilding activity has picked up a bit here, and it's not a surprise given how strong the market is. And so my question is, when we look at how activities picked up, which is really kind of backfilling deliveries when you look at how the order book itself hasn't really changed, but can you give us an update as far as kind of things that affect the ability to place newbuilding orders? Like are the yards changing their ability to provide refund guarantees? Does financing availability change in any way such that when you look at -- you've been afraid to strengthen, could those types of factors continue to suppress what ordering would've otherwise been?

Yes. Doug, there are still, I would say, large issues in terms of being able to successfully order a vessel, which we think are beneficial and keeps a lid on newbuildings, particularly in China. There's still a real difficulty to get refund guarantees in place on the back of contracts. Bank financing, still a very, very tight market. And I think that -- I don't see that changing. I do think it's interesting. A lot of the growth in the order book has actually come from the Vale front on the VLOCs, and we all know there's a significant number of these, 46, 47, that are going to have to come out of the market over the next, whatever, couple of years. And then the only other thing I would note is you're really talking about 2020 at this point. (inaudible) orders shipped. So I think you've got pretty clear visibility going into '18 to '19, and it is very possible [you see] growth of only really 1% to 2% in 2018 against the demand growth backdrop of at least 3%. So -- yes, go ahead.

I was saying, that's what I was going to ask you, is when you look at your chart up on Page 22, you kind of see the uptick in Q4 of 2020. So is that whenever you should expect to see a delivery take place if an order were to be placed today? And that's kind of almost even 3 years’ worth of runway, especially if you kind of consider that those could be some replacement types of orders for those Vale ships and whatnot. Is that a fair representation of kind of what the supply outlook is?

Yes. I think, yes, absolutely today. And if you just look at the order book of 66 million deadweight ton versus 56 million deadweight ton of a fleet that's 20 years old, there is -- this is a more replacement than real growth.

Right. Got you. All right very helpful, John. And then switching gears a bit, so obviously, spot rates have been strong. We kind of see it in a variety of ways. One way I'm trying to figure out if we've seen it yet is, has that increase in spot charter activity and spot rates translated to an increase in the appetite from charterers to secure time charters at reasonable rates? I'm sure you guys want to hawk in time charters at very depressed rates. But have we seen that materialize yet into more reasonable time charter rates?

Yes. I mean, look, I think recently, there's a little bit of pullback in the 1-year market, particularly in the Capesize sector in the sense that there aren't as many 1-year deals being done. But again, going into next year, the prospects look pretty favorable, particularly on the larger ships but also the smaller ships, so I would expect that market to become more liquid again.

Right, right, right got you. And then just kind of as a follow-up to that, I mean, you guys have clearly been doing a lot of strategic things, one of which is your in-house management, which I'm going to get to in a second. But when you think about the strategy of employing your fleet, if time charter rates were to strengthen in 2018, would you entertain increasing your fixed rate time charter contract coverage? And if so, would it be more of an opportunistic thing? Or would you say, "Okay, well, I want to keep Capesize spot exposure, but I'm okay locking in fixed rate time charters on some of the smaller ships." So would that be something you entertain? And how would you think about strategically employing your fleet in a strengthening time charter price environment?

I would say it would be highly opportunistic. I think we have a definite bias towards staying in the short-term market. We continue to see, as I've noted earlier, real growth prospects in the iron ore trade in particular, which will benefit our Capesize and growth side on demand side for the smaller ships. So I'm not sure -- I think next year is more of just a strengthening recovery, and then you start -- you get into 2019, and depending where our rates are, maybe then, you start to look at fixing something out longer term. But for the time being, we're positive on the market, and so I don't think you'll see us putting things away at this point for longer term.

Got you. Got you. Very helpful.

The other thing I would add is just the platform that we've put in place on the minor bulk fleet, we are seeing real benefits in going directly with cargo rather than just being a tonnage provider. So to take that off the table and lock ships away right now or even '18 doesn't make any sense to us.

Got you. Very helpful, John. And then 2 more questions, one of which you just kind of answered, and that is when you look at kind of some of your strategic decisions in terms of getting into the minor bulks and having someone head that up; and then you mentioned in your press release the hiring of a Head of Major Bulks and then the opening of a Singapore office. It sounded like you already answered it, but are you already starting to see some tangible signs and benefits of some of those strategic moves?

Yes, for sure. So the Singapore office has just opened. So good stuff to come out of there. On the minor bulk side, I mean, you can just see, if you look at our Q4 numbers on Page 7, we've got a substantial increase over the third quarter. We are still taking ships back from the pool, and they are being redelivered in the Pacific. That should all be done by the middle of November, but we are still making investments to move, particularly those minor bulk ships, from the Pacific into the Atlantic. But overall, we're seeing very strong fixtures in the fourth quarter, particularly the ships that we've already moved into the Atlantic. It's worked out very well.

Got you. Very good, very good. And then final question for you before I turn it over. When we look at the market and we look at how the market has been impacting your cash position, cash has been building, and we believe that the outlook is fairly attractive for 2018 and '19. So given kind of what the rates have already done to your cash position and against the backdrop where you have really no real CapEx commitments to speak of other than maintenance, and then you also have a relatively strong balance sheet, so how do you think about -- what are you going to do with some of that cash? And basically, capital allocation decision going forward, I mean, does M&A start to enter the equation? So how do you think about kind of how you're going to position yourself kind of against that seemingly inevitable backdrop?

Look, I think that, again, if you just go to what I've said in the beginning of this presentation and you look at what the company has been focused on, we started out in October of last year, strengthening this balance sheet. We then focused more and more on the comp side of equation -- on the comp side of the equation, which we're very happy with at this point, and then we turned to the commercial platform, which over a period of 6 to 8 months, we have completely hit the reset button on. It's a brand-new commercial platform, a brand-new way of doing business for the company in terms of moving from a tonnage provider to dealing directly with cargo and being an operator. And now we're at the point where, as you said, is M&A and growing. So those are the opportunities that we are focused on right now. And we believe from an asset value standpoint, we're still at historical lows, and there -- and it's a very attractive time to grow, particularly because we're in the beginnings of the recovery for drybulk.

We'll take our next question from Magnus Fyhr with Seaport Global.

Just 2 questions. Just first question on your commercial strategy. I mean, you've made some investments here. You mentioned that you're seeing some early signs of the benefit of the strategy. Is there any way you can quantify the investments that you made? And also, what kind of returns do you plan to get from these investments? What kind of premium do you think you can get over the benchmarks?

So first of all, yes. I think these are -- the investments that we've made, which from a G&A standpoint, are actually not all that substantial. I think what you need to keep in mind is we were incurring about $3 million a year in fees that were being paid to pools, which we'll not be incurring going forward. So that's been a big benefit. The Singapore office is -- maybe it's another, per year, $500,000, so it's not all that much. There's -- as I said, the $3 million in savings on the pool side has been a big benefit. We still have several vessels that, particularly in the Handysize, that we're taking back from the pools. So I think it's tough to measure returns until we get all those vessels back, which as I said before, will be mid-November. But if you look at what we've been doing in the fourth quarter and you look at some of the fixtures that are detailed in the back of the presentation, I think you kind of -- you already see the benefit. I mean, you look at some of these fixtures we've done out of the U.S. Gulf, it's $24,000 a day, $20,000 a day on the Ultramax, Supramax. These are rates that are significantly above the index and I think you really start to see the rubber hit the road, if you will, in the fourth quarter this year going into first quarter next year.

Okay, great. And are there any additional investments that you plan to make as far as new offices, other retail offices?

Not at the time being. We've got a full team in New York on the minor bulk side and we'll be moving the Capesize operations out to Singapore.

All right, great. And just one last question. How does the new upcoming regulations play into your fleet renewal strategy? I'm sure it's hard to find new modern ships available in the S&P market. And how does that compare to buying older ships, maybe 5-year-plus and upgrade them?

Yes. First of all, there actually is. There's a pretty liquid S&P market right now, and there are newer ships for sale. They don't necessarily tend to be the transactions that you see from the broker that everybody looks at, the one ship here and the one ship there; and that's not something we're interested in. There are larger fleets that are 5 years and newer, and I think you'll see us concentrate on that. From, first, the standpoint of just fleet renewal for Genco, but as you said, the -- as regulations come in, you certainly want to be more and more efficient on the fuel consumption side.

And how do you plan -- I mean, with the fleet that's a little bit older, I know you've done a lot of upgrades to some of the vessels. But 2, 3 years away -- I guess, 2 years away to the new regulations, how do you plan to address that? Are you just going to burn the new fuel? Or what's the thoughts there?

Yes. I mean, at this point, we certainly plan on burning the ultra-low-sulfur fuel. We think that cost will be passed on to the cargo interest and will not be an increased cost to any shipping company in the drybulk space. It remains to be seen, but it's obviously highly possible, particularly if the price of that fuel remains high, that we do see a slowdown in the global fleet of drybulk shipping, which would obviously be helpful on the rate side.

Yes. I guess, I'm actually surprised that not -- people talk more about the incremental environmental savings you can do by slowing down the global fleet. So anyway, that's it for me.

(Operator Instructions) That concludes today's conference. Thank you for your participation. You may now disconnect.