Genco Shipping & Trading Ltd (GNK) 2022 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Fourth Quarter 2022 Earnings Conference Call and Presentation.

Before we begin, please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's website, www.gencoshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference will be accessible at any time during the next 2 weeks by dialing 1-877-674-7070 and entering the passcode 378900.

At this time, I will now 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, intend, plan, believe and other words in 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, 2022, and the company's reports on Form 10-Q and Form 8-K 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, everyone. Welcome to Genco's Fourth Quarter 2022 Conference Call. I will begin today's call by reviewing our Q4 2022 and year-to-date highlights, providing an update on our comprehensive value strategy, financial results for the quarter and the industry's current fundamentals before opening the call up for Q&A.

For additional information, please also refer to our earnings presentation posted on our website.

During the fourth quarter of 2022, Genco continued to achieve solid financial results, which capped off another strong year of earnings and shareholder returns. Notably, during 2022, we generated EBITDA of $227 million, which marked our second consecutive year of EBITDA well in excess of $200 million. Our earnings were driven by a fleet-wide TCE of $23,824 per day as we drew on our best-in-class commercial platform, outperforming our scrubber-adjusted benchmarks by nearly $3,000 per day, which added $44 million to the bottom line from our commercial platform alone. After a transformational 2021 in which Genco embarked on a path to become a low leverage, high dividend payout company, the first of its kind in the drybulk public markets, 2022 marked the first full year of this value strategy.

Our successful execution resulted in declared dividends totaling $2.57 per share for the full year of 2022, representing a dividend yield of 14% based on our Feb 21, 2023 closing stock price.

Importantly, during the fourth quarter, we declared a dividend of $0.50 per share, marking our 14th consecutive quarterly dividend. Since Q3 2019, we have now declared a total of $4.295 per share in dividends or approximately 24% of our current share price. We believe our track record of meaningful and sustainable dividends over 3.5 years through varying cycles speaks to the strength of the company's balance sheet and our prudent approach to capital allocation.

In addition to paying meaningful dividends, we also continue to focus on other pillars of our value strategy. Proactively paying down debt has enabled us to further reduce our cash flow breakeven levels for the benefit of shareholders. Continuing to pay down debt during a time in which we have no mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to 0, creating a compelling risk/reward balance.

Irrespective of the broader macro environment, we remain in a strong position to pay sizable dividends to shareholders while seeking opportunities to take advantage of attractive growth opportunities as markets develop. We believe the drybulk market is currently experiencing a typical seasonal lull, and we anticipate an improvement in freight rates based on catalysts that include China's reopening from restrictive COVID-related policies together with improving cargo flows as the year progresses. Importantly, this positive demand outlook coincides with a backdrop of a historically low newbuilding order book.

Given constraints in fleet capacity, demand growth has a low threshold to exceed in order to outpace supply growth to further tighten market fundamentals and move freight rates up. Ahead of this anticipated freight rate pullback in Q1, we fixed 84% of our Q1 days at a firm rate of $14,217 per day, well above current spot rates published by the Baltic Exchange for non-scrubber fitted Capesize and Supramax vessels.

Importantly, our Capesize fleet is fully scrubber-fitted and able to earn a meaningful premium above this daily published index. Our TCE is also well above our cash flow breakeven rate of approximately $9,500 per day.

As we've highlighted, since the announcement of our value strategy in April 2021, drybulk shipping is highly seasonal with significant operating leverage inherent in the business. Periods like what we are currently seeing in the first quarter, although temporary in our view, are why we chose to pre-pay over 60% of our debt over the last 2 years, substantially reducing our financial leverage and bringing our cash flow breakeven rate down to industry lows, a core differentiator for Genco compared to the peer group. This provides us with a high degree of flexibility within our dividend policy in regard to both our voluntary debt prepayments and our quarterly reserve. With no mandatory debt amortization until our credit facilities' maturity in 2026, our capital structure is built to support our value strategy in diverse market environments, with amounts of both debt prepayments and our reserve remaining under management's control.

While we plan to continue to pay down debt, as we've stated in the past, we maintain flexibility to reduce the quarterly reserve to pay dividends subject to the development of freight rates for the remainder of the first quarter and our assessment of our liquidity and forward outlook. The company remains very well capitalized, and we are beginning to see freight rates improve off of early year lows, supporting our thesis of a drybulk market recovery.

At this point, I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.

Thank you, John. During the fourth quarter, we continued to record strong earnings and voluntary pay down debt as we maintain a commitment to further reducing financial leverage. On a cumulative basis, since the start of 2021, we have paid down $278 million worth of debt or 62% of the debt levels, enabling Genco to achieve a loan net loan-to-value of 11%. Notably, the current scrap value of our fleet is nearly 2.5x our net outstanding balance.

For the fourth quarter of 2022, we declared a $0.50 per share dividend, representing an annualized yield of 11%. During the quarter, we continued to see a declining trajectory of our vessel operating expenses from the first half of the year, with Q4 daily vessel operating expenses registering 30% below Q2 levels.

Additionally, drydocking CapEx declined to $5.5 million in Q4 from $7.8 million in Q3 and $22.6 million in Q2. Despite the large declines in Boston in recent quarters, we continued to invest in upgrading select vessels within our fleet. Our success in completing the transition of our fleet out of Chinese crews and the progress in upgrading select vessels following our technical manager transition will help in maintaining comparatively lower crude change expenses, including COVID-19 costs.

For Q4 2022, the company recorded net income of $28.7 million or $0.67 basic and diluted earnings per share. Our fourth quarter EBITDA was $46 million, bringing our full year 2022 EBITDA to $227 million. As of December 31, our cash position was $64.1 million, which when combined with our revolver availability of $213 million, provides total liquidity of approximately $277 million. The substantial liquidity position, together with the fact that 5 of the Ultramax vessels that we acquired through 2021 remain unencumbered, provides significant flexibility for us to continue delivering under the 3 pillars of our comprehensive value strategy focused on dividends, deleveraging and growth.

In the meantime, we continue to make good progress on our medium-term objective of reducing our net debt to 0. Following our substantial deleveraging since the beginning of 2021, our debt outstanding was $171 million as of the end of last year, which resulted in net debt of $107 million. Although we have no mandatory debt amortization payments until 2026 when the facility matures, we plan to continue to voluntarily delever consistent with our strategy.

As I mentioned, our Board of Directors declared a dividend of $0.50 per share for the fourth quarter, in line with our value strategy calculation. Walking down the formula, this resulted from operating cash flow of $46.6 million less debt repayments of $8.75 million, drydocking ballast water treatment systems and energy-saving device costs of $5.5 million, and the previously-announced reserve of $10.75 million. We expect our vessel operating expense levels in the first quarter to be $6,250 per vessel per day, primarily due to timing of crude changes and purchases of spares and stores. For the full year of 2023, we expect our daily vessel operating expenses to be $5,990 per vessel per day. We continue to focus on cost optimization, while seeking to continue to meet stringent safety and vessel maintenance standards.

I will now turn the call over to Peter Allen, our SVP of Strategy, to discuss the industry fundamentals.

Thank you, Apostolos. During the fourth quarter of 2022, both the Baltic Capesize and Supramax indexes averaged approximately $14,900 each for the quarter. Firm levels overall, but below the peaks seen earlier in the year. China 0 COVID policy and unwinding of port congestion, a decline in Black Sea grain exports and underperforming Brazilian iron ore exports contributed to a counterseasonal second half of 2022. Furthermore, during the first quarter, we are currently experiencing a typical softness for this time of the year, driven by lower export volumes from key regions as well as the timing of the Chinese New Year and newbuilding deliveries. Specifically, Brazilian iron ore exports were down by 16% in January versus the Q4 average on newbuilding vessel deliveries rose at the start of the year due to the front-loaded nature of the order book, temporarily throwing off the supply and demand equation.

As we look ahead, we view several catalysts as potentially supporting the drybulk market, including China's reopening, further stimulus measures, tightness in global energy markets and continued rerouting coal cargo flows due to Russia's war in Ukraine. We believe these factors will benefit Capesize rates primarily, while we expect the onset of the South American grain season will be a driver for minor bulk earnings as we approach the end of Q1 into Q2.

Furthermore, we are currently less than 1 month away from the expiration of Black Sea grain initiative agreement that has seen over 22 million tons of grains exported since inception. The USDA forecasts Ukrainian grain exports have declined by approximately 30% during the current marketing year.

Regarding the supply side, net fleet growth in 2022 was 2.8%, the lowest level since 2016. The historically low order book as a percentage of the fleet of just 7% as well as the near-term and longer-term environmental regulations are expected to keep net fleet growth low in the coming years. Additionally, high scrap risks continue to be attracted to [owners] older tonnage, particularly for non-scrubber-fitted Capesize vessels, considering the increased level of investment the ships require and the current earnings environments for those ships. Overall, we have a constructive outlook for the drybulk market given the various demand catalysts, highlighted together with historically strong supply side fundamentals.

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

(Operator Instructions) Your first question comes from Omar Nokta from Jefferies.

Guys. Obviously, very nice to see the complete balance sheet transformation here over the past couple of years. Platform now looks pretty solid and really, a position irrespective of where we are in the cycle. I do want to ask about the 3 pillars that you highlighted, the dividend, the deleveraging, the growth. You last acquired a few ships, I guess, early last year. We've seen a pullback in rates.

I guess, one, what has that done to secondhand values here recently? And then also, do you -- does that open up an opportunity for you to add ships in the market today?

Yes, so the value side of it has been pretty interesting. I can't remember a time when I've seen values be so sticky with where freight rates went on the downside. Clearly, we're seeing an improvement of those freight rates, but I look at as very positive that the -- not just the equity markets, but the private ship-owning market obviously sees better times coming, which is why those values have held up.

I think what we're focused on, Omar, specifically to answer your question, is continued fleet renewal which you will see us do. We still have some older ships, particularly our [55s], which we're interested in rotating over into newer vessels, so I think you'll see that happen this year. And probably some of the 170s on the Capes. They are scrubber-fitted, so they're earning very good cash flows right now.

But in general, I think putting large-scale M&A aside, which we are very much focused on, but I think the fleet renewal is the immediate right now.

Okay. Yes, definitely a good point. So similar to what we've been seeing with the equities, the sentiment is still firm in the secondhand market.

And I guess, as you mentioned regarding the reserve, the $10.75 million. Obviously, it's a Board decision. You clearly have the -- it can be toggled to, I guess, presumably 0. How much of that, say, $10.75 million would you consider also maybe using for actual fleet renewal versus, say, reducing it potentially for dividend payout?

Yes, so we haven't had that specific conversation yet, Omar. We want to finish up and see where the quarter winds up in terms of fixtures. And then once we get to that sort of 100% level, then we'll have the conversation about how much we want to pay.

So I'm not directly answering your question. However, there was a lot of -- I can tell you there was a lot of discussion around this, and there is a consensus between the management team and the Board that as needed, we will dip into that quarterly reserve for Q1 in order to make sure we're continuing to pay dividends as we promised when we rolled out this policy.

I think just going back and going a little further in your question, if you remember, when we rolled this out, we were specific about what that reserve could be used for, and it provided the management team a lot of optionality when you had downside volatility like we've seen in the first quarter. Particularly when, as we look forward, we have confidence in a recovering freight market.

So nothing really new there. It just may come in first quarter. We may use a piece of that to augment the dividend.

Yes, makes sense, John. And maybe just 1 final 1 for me before I turn it over.

This week, we've seen a bit of a bump here in spot rates. I guess, really across the board from Capes down to the Handys, obviously, it's been a pretty slow start to the year. The past few weeks have been very quiet. Rates have been below, call it, breakeven. But we are seeing a bit of a bounce here this week. I know it's early. Anything to read into this latest move?

No, I think you're just seeing a recovery, particularly in the case of some very low numbers that we probably -- what we did, I think, overshot to the downside on spot Cape rates.

But I do -- again, I think you're seeing the beginning of the recovery across the board. We've seen it in the mid-sized ships as well. You're seeing it in the forward paper market. And I think that we're seeing Asia move up on the back of coal, and then Brazilian exports, we're going to have a record soybean season, right? So we're starting to get into that time period. So I think there's a few things that are driving it.

But I do believe the China reopening, I think you're going to see sort of 2 stages moving up. One, the actual reopening, and the service sector picking up as normal demand recovery occurs. But then also as we -- particularly as we get into the second half of the year, all the stimulus, and we believe more to come that the Chinese government is focused on, will start to really help out the steel sector and iron ore imports. And then I would note on the steel sector side, we are continuing to see utilization rates move up.

So I've given you a longer answer, but there's a lot of positive things and green shoots to focus on. And if you remember, we talked about this back in October last year, and I don't think our thesis has changed in terms of the timing.

Your next question comes from Greg Lewis from BTIG.

Yes. John, definitely appreciate your comments around the use of the reserve and refreshing our minds about that.

Peter, I did want to ask, you mentioned some comments around we'll just call it the East -- some of the Eastern Europe trade with grain and coal, and some of those like timelines that are approaching. How are you guys thinking about what that -- what those Eastern European coal and grain trades look like in '23 versus '22? I guess that's my first question.

Greg, thanks for the question. With us, a lot of the times, we focus on the seasonality of the grain trade. So right now, we're really focused on South American as the grain season ramping up. Typically, we really focus on the Ukrainian grain season. In a normal year, during Q3, that's when its peak season. Right now, the volumes are pretty light, anywhere from 2 million to 3 million tons per month. January, in particular, was a very light export month with a lot of the -- what everybody is seeing in the macro with Russia potentially delaying vessel inspections. But we're looking forward to just the grain deal be extended, hopefully, for longer than 120 days. They're currently working on potentially up to a year extension.

But on the coal side, that's really been an interesting development, and it's really been supportive of the overall coal trade. So when we look at coal, there's been such a lack of investment made in new mines and new volumes, but the story has really been around ton miles and rerouting, and that's actually been a positive for ton mile demand. So we expect that to continue in the [very] near-term and into later this year as well. But yes, certainly, a lot of moving parts.

And then just following up with some of the volumes out of Russia. In the tanker trade, you always hear about the dark fleet. Is there something similar going with that in drybulk, and is there kind of any way to quantify that?

So yes, the -- Russia is still exporting a lot of coal to India and to China, so that those trades have been substantial. Russia is actually the second largest supplier of China's coal imports at over 40 million tons a year, so it's a pretty big number. When you think about the coal trade for China, it's a very small portion of the overall coal use. But yes, quite a bit of volume still moving from Russia to China and India, which are the 2 largest coal importers, obviously.

Okay. Great. And then just, John, on your comments around, clearly, it's been -- Supramax markets been really outperforming Capes for on and off over the last, call it, 18-plus months. And even as we look at your performance, if you were to back out the scrubbers, I imagine the Capes would have underperformed the smaller vessels. You did mention a couple of times throughout the call that we're kind of expecting Capes. Is that really just the pickup in iron ore out of Brazil that's giving you the comfort, or is there anything else we should be thinking about?

No. Look, I mean, the 2 main commodities of Capes are iron ore and coal. As you heard Peter mention, we still think the coal trade is going to be firm, and we see that the pickup and the reopening of China and the infrastructure spending, that's going to be beneficial to the iron ore trade and hence the Capes. I mean, all you have to do is look at where the price of iron ore has gone. So the -- over the last few weeks, been volatile. But net, it's up quite a bit. So that is positive.

The relationship between the Capes and the Supramaxes, as you pointed out, has moved against what historical standards would dictate in terms of the spread. I think you're going to see that come back into a more normalized spread this year and going into next year, and why I think that is because again, Capesize demand is going to move up. I think demand will also move up in the mid-sized ships. However, one of the things that was propping up the mid-size ships last year, in particular, was the container trade and the fact that those ships were moving containers because of the hot container market. That doesn't exist anymore.

So I think you're going to see more of a normalized spread between the Capes and the mid-size sector going forward. But again, rising tides lift small boats, so I think everything is going to move up on the back of stronger demand.

(Operator Instructions) Your next question comes from Liam Burke from B. Riley.

John, Apostolos. John, you took a little volatility out of your earnings with the addition of the time charters. As rates come up and some of the shorter durations come off time charter, how are you looking at directionally waiting your -- the fleet between spot and time charter?

Well, so as we've talked about, most of the -- any long-term time charters we would do going forward would be in the Capesize sector to take volatility out of that. We have done some -- from a strategic standpoint, we've done some spot index deals, add some very firm numbers above the BCI plus a scrubber premium, so we've layered those in with the idea that the market will move up and we'll be able to take advantage of that. We need to see more upward movement and firmness in the Cape market before we will do any further time charters.

I would say right now, with the exception of what's on the books, our mentality is to stay very short. And we're not even taking on a lot of COAs in the minor bulks right now just because we believe this market is going to continue to move up. But as a portfolio approach, as we've done in the past, as the Cape market firms, you'll see us most likely take some exposure off the table just like we've done in the past, but now is not the time yet.

Okay. Your drydocking budget is -- or projections are fairly low. Does that give you any flexibility to move reserves around?

Liam, yes, the drydocking numbers are down significantly below what they were in 2022, which do help in further reducing our breakeven levels. I'd say that is a slightly separate sort of conversation. The reserve has been put in place and does provide us the flexibility to use it depending on market conditions. But again, the drydocking is a bit of a separate bucket within our overall breakeven levels.

But having a lower CapEx number for 2023, significantly lower than last year, obviously lowers our breakeven and gives more room for dividends as a whole.

As there are no further as there are no further questions at this time, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.