Genco Shipping & Trading Ltd (GNK) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited First Quarter 2021 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 88820 and entering the passcode 4187387. At this time, I will turn the conference over to the company. Please go ahead, gentlemen.

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 of the year ended December 31, 2020, 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 First Quarter 2021 Conference Call. I will begin today's call by reviewing our year-to-date highlights, providing an update on our new comprehensive value strategy, financial results for the first quarter, and the industry's current fundamentals before opening the call up for questions. For additional information, please also refer to our earnings presentation posted on our website.

The dry bulk market has experienced its best start to a year in over a decade with Capesize spot rates currently over $40,000 per day and Supramax is at over $20,000 per day. In addition to the current fair market conditions, we view the outlook favorably. The order book as a percentage of the fleet is at a historical low, limiting net fleet growth, while unprecedented stimulus as well as the Brazilian iron ore export recovery have combined to create improving supply and demand dynamics.

Our positive market outlook, together with our robust balance sheet has positioned Genco well to implement our new comprehensive value strategy. This new strategy is centered on low financial leverage and 3 key tenets: attractive quarterly dividends throughout the shipping cycles based on cash flow after debt service, less a reserve, further debt reduction, and growth of our asset base. We believe that this strategy will enable the company to create significant shareholder value and be a key differentiator for Genco over the long term.

As for our new dividend framework, we intend to pay a quarterly dividend based on operating cash flow, less debt repayment, capital expenditures for dry-docking, and a reserve. The quarterly reserve is targeted to be based on future quarterly debt repayments and interest expense. However, the uses of the reserve remain in Genco's option and include vessel acquisition, debt repayments, and general corporate purposes.

Maintaining a quarterly reserve as well as optionality for the uses of the reserve are important elements of the corporate strategy as it enables Genco to be flexible depending on market conditions and provide a more tailored approach to Genco's overall business model. We also believe this approach provides more transparency to the market to assist in forecasting the dividend, along with our breakeven and time charter equivalent guidance that we already provide on a quarterly basis. We are targeting Q4 2021 results for the anticipated first dividend under the new corporate strategy, which would be payable in Q1 2022.

During the first quarter of 2021, we began to execute this new corporate strategy as we reduced our debt balance by $48 million. Furthermore, in April, we agreed to purchase a modern fuel-efficient Ultramax vessel, marking the fourth Ultramax we have agreed to acquire since December of last year.

We've also taken advantage of the strong market to both time charter coverage as part of our portfolio approach to revenue generation. We have fixed the Genco Liberty, a 2016 built Capesize vessel, for 10 to 13 months at $31,000 per day, while also booking a Supramax and Ultramax vessel for $23,000 and $25,000 per day, respectively, for 5 to 7 months.

We are pleased to lock in these attractive rates while also maintaining significant operating leverage in a strengthening market. In addition to capitalizing on the firm market, we also intend to continue to opportunistically purchase assets on a low-levered basis as we further position the company to increase its dividend. These are key initial steps in executing our new strategy, and we look forward to making further progress as we advance towards our anticipated first dividend as part of this new approach.

In the interim, for the first quarter of 2021, we have increased our quarterly dividend to $0.05 per share from $0.02 per share paid during each of the previous 4 quarters in light of Genco's strong financial position, the current rate environment, as well as our go-forward market expectations. In executing our strategy over the balance of the year, we plan to draw on our robust balance sheet as well as cash flow generation in this strong market environment to pay down debt through regularly scheduled debt amortization and prepayments, while opportunistically growing our fleet on a low leverage basis.

Furthermore, we plan to refinance our credit facilities to increase flexibility, improve key terms, and lower cash flow breakeven rates. By the end of this year, we are targeting a net loan-to-value ratio of 20%, which we are currently on track towards achieving. Based on current fixtures as well as the forward curve, we estimate a net loan-to-value position of approximately 11% based on the current market values on a fleet of 40 vessels.

As detailed in our presentation, we highlight cash flow sensitivity regarding various scenarios for next year. For a frame of reference, current 1-year time charter rates as quoted by Clarkson's, stand at approximately $30,000 and $19,000 per day for Capesize and Supramax vessels, respectively.

Based on the illustrative time charter equivalent rates shown and the potential cash flow generated, Genco expects to be well positioned from a net loan-to-value perspective, resulting in potentially meaningful quarterly dividend in 2022. Furthermore, over the longer term, we plan to continue to reduce our debt balance with a goal of 0 net debt.

Importantly, Genco's barbell approached to fleet composition closely integrates with this low financial leverage model, given the large upside and operating leverage from the ownership of the Capesize vessels, together with the more stable cash flows from the minor bulk fleet.

While we hedged a portion of our fleet-wide available days in Q1 in anticipation of a seasonally softer first quarter, the market did experience a counter-seasonal rise in freight rates. Going forward, we plan to maintain our opportunistic spot oriented chartering approach, along with select longer-term fixtures for our Capesize fleet.

As such, we have started to see the impact of our fleet's operating leverage in the second quarter, as estimated by our daily TCE based on current fixtures for the quarter of over $20,000 per day, which is nearly 70% greater than our Q1 daily TCE and we've marked the company's highest daily TCE for a quarter since 2010. Importantly, we will have 7 of our Capesize vessels open for fixing in the coming weeks to take advantage of the meaningful increase in rates we have recently seen.

With respect to the market liquidity of our shares, since mid-December, ownership of large shareholders has been reduced from 58% down to 20% currently. While we believe these stock sales have contributed to Genco's trailing stock performance compared to a number of our peers in the short term, we view this as a positive in the long-term due to increased overall liquidity and free flow.

Specifically, our 30-day average trading volume has increased substantially to approximately 800,000 shares per day from approximately 200,000 shares per day prior to the recent large shareholder sales. At this point, I will turn the call over to Apostolos Zafolias, our Chief Financial Officer.

Thank you, John. For the first quarter of 2021, the company recorded net income of $2 million or $0.05 basic and diluted earnings per share. Excluding a noncash loss on sale of vessels of $700,000, adjusted net income for the quarter was $2.7 million or basic and diluted adjusted earnings per share of $0.06.

A 25% year-over-year increase in our fleet TCE to $12,197 per day was the primary driver resulting in increased adjusted EBITDA of $20.6 million for the quarter. During the quarter, we continued to further strengthen our balance sheet through operating cash flows from fair market conditions, together with opportunistic vessel sales, bringing our cash position to $164 million, including $40.5 million of restricted cash related to vessel sales as of March 31, 2021.

We also reduced our debt balance by 11% through a combination of scheduled debt repayments as well as the prepayment of our revolving credit facility. As a result, our debt outstanding gross of deferred financing costs is $401 million as of the end of the first quarter, which, after considering our cash position, results in net debt of $237 million.

Furthermore, as of April 30, we have reduced our net debt position further to approximately $220 million or 27% net LTV as we have built our cash position to $181 million. The low net debt balance and strong market fundamentals provide a solid foundation for us to execute on our new comprehensive value strategy. We also declared our 7th consecutive quarterly dividend, having increased the payout to $0.05 per share. This brings total dividends declared to over $0.80 per share since the third quarter of 2019.

As part of our fleet renewal program, during the first quarter, we completed our exit from the Handysize sector through the completion of the vessel swap transaction, in which we also acquired 3 modern fuel-efficient Ultramax vessels. Subsequent to the first quarter, we also delivered the Baltic Leopard, a 2009 built, 53,000 deadweight tonne Supramax vessel to her buyers in April. The Genco Lorraine is also expected to deliver to her buyers in June, concluding the divestiture portion of our fleet renewal program.

Our net income breakeven for the second quarter of this year is estimated to be approximately $11,900 per vessel per day. With regard to dry-docking, we anticipate 2 of our Capesize vessels to go into dry docking during the second quarter for approximately 45 days of estimated off-hire during this period.

In relation to our Capesize vessels, we also continue to position our fleet better to better capture potential market improvements. We expect to have 7 Capesize vessels available to be fixed in the coming weeks, of which we expect to balance 2 of them to the Atlantic Basin.

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

Thank you, Apostolos. During the first quarter of this year, freight rates experienced a counter-seasonal rally led by minor bulk vessels. Spot Supramax earnings exceeded $20,000 per day in March, a level not seen since 2010. Subsequently, during the second quarter, Supramax earnings have remained firmed above the $20,000 threshold, while Capesize earnings have increased meaningfully to over $40,000 per day.

Capesize rates continue to be led by iron ore demand from China after a 10% year-over-year increase in iron ore imports in 2020 to record levels, Q1 2021 imports are up by 8% year-over-year. Furthermore, steel production in China is up by 16% year-over-year in Q1, following all-time highs seen in 2020.

While China's demand remains strong, it is also anticipated that steel output and iron ore demand will recover in the rest of the world as the World Steel association forecasts a 9% year-over-year increase in ex -China steel demand in 2021.

Together with this strong demand picture, iron ore prices have exceeded $190 per tonne, greatly incentivizing iron ore miners to ship as much of the commodity as possible. Specifically, Brazilian iron ore exports, which came into the year on much stronger footing than in 2020, given Vale's recovering operations and a more moderate rainy season, have risen by 17% year-over-year in Q1.

The continued recovery and growth of Brazilian iron ore exports is expected as Vale is targeting run rates of 350 million tonnes per annum and 400 million tons per annum by the end of 2021 and 2022, respectively, as compared to 320 million tons seen at the end of last year.

On minor bulks, Supramax rates have been driven by strong grain demand from China, led by a recovery from the swine fever up break in 2018 and 2019 as well as continued inventory building and the Phase 1 trade deal. Additionally, we continue to see increased shipments of minor bulk commodities, closely linked to global GDP growth and economic activity.

Regarding the vessel supply side, net fleet growth in Q1 2021 was annualized 3.6%. However, with deliveries front-loaded, we anticipate this level will normalize over the course of the year as 2021, net fleet growth is forecast to be approximately 2%.

The order book as a percentage of the fleet is now below 6%, which compares to 6% of the fleet that is greater than or equal to 20 years old. Although we have now seen a firm dry bulk market since June of last year, new building vessel ordering in the sector has been relatively low over that period. Specifically, we've only seen approximately 200 new building contracts since June of last year despite a $20,000 Capesize market and $13,000 Supramax market on average during that time.

As a point of reference, similar rates were seen from the second half of 2013 to Q1 2014. The ordering back then was 6x higher, exceeding 1,100 new building contracts. We believe these positive supply side dynamics provide a solid foundation for dry bulk market fundamentals to lead to a low leverage, low threshold for demand to exceed, to improve fleet wide utilization, and in turn freight rates.

For this year and next, we view the supply and demand trends as favorable, as global trade flows improve further, while the Brazilian iron ore trade continues its recovery and growth trajectory. This concludes our presentation, and we will now be happy to take your questions.

(Operator Instructions) Our first question comes from Randy Giveans with Jefferies.

I always think it's going well. So the rates earned for the remainder of the first quarter and obviously, the second quarter, quarter-to-date rates, they're pretty good, but not great, at least relative to this epic market we're seeing. So I'm assuming that was due to some hedging, maybe some repositioning of the fleet. Was that the case? And then, I guess, looking ahead, more importantly, any further hedging or repositioning? Or will you be able to fully capture the strong market we're currently seeing?

So first of all, the first quarter and the early part of the second quarter, we definitely did hedging in both the Capesize as well as the minor bulks. We are on the back end of most of that. I think an overall comment, and then I'll come back to some specifics.

An overall comment is in a rapidly rising market, whether it's Capes or the Ultra Supras, it's very difficult to keep up with it because you're usually fixing anywhere from 15 to 30 days ahead of time. So there's always a lag effect on that.

Having said that, as we mentioned, we have 7 ships, so call it, 40% of our Capesize fleet that's coming open during the month of May. So we should be able to capture the firm rates that we're currently seeing. Just to give you a sense, though, we fixed 3 ships on a spot basis over the last week or so. We did one at $49,000 a day for an Australian round. One at $44,000 a day, which was a NOPAC round, Western Canada to China. And then we also did a $44,000 a day trip from South Africa to China. So we are capturing this. And yes, first quarter, we hedged, and we were pleasantly surprised with the rapid spike in rates.

And then I read through some of your charters once the release first came out last night, saw some good numbers. Then I realized the $23,000 and $25,000 a day were not for Capes, but for Supra and Ultramax, right? So very solid on those. With that, will you kind of look to lock in more time charters in the coming months, as rates remain high or play it out in the spot market?

A little bit of both. I think you'll see us do some more time charters in the Capesize fleet. We're certainly not going to put the entire fleet away but we do think it's a prudent portfolio approach, particularly in the Capes because of the volatility to take advantage of the high market when you can. So yes, I expect a couple more longer-term fixtures in the Capesize sector.

The minor bulks, those 5 to 7 months, that was very opportunistic. They're obviously good rates. But we've got a well built up trading platform on the minor bulk side. So in general, we think we can do better than the overall indices and the overall market. But those are great rates, as you pointed out. So we wanted to take advantage of it.

And then I'll just sneak in a quick one here. On the surprise dividend increase, how was that kind of $0.05 determined? And should we expect kind of gradual increases as you work towards this new policy or is stagnant $0.05 until the end of the year and the new policy kicks in?

Great question. Obviously, we're determining this every quarter with the Board. So it's hard for me to make any promises going forward. Having said that, the $0.05, I think, was done because of our confidence in the market going forward as well as being ahead of plan in terms of hitting our targets. And so I can't directly answer your question.

But as you know, we are moving towards an approach that returns a substantial portion of cash to shareholders. So I would -- we'll see how the market turns out. But like I said, at this point, we're ahead of plan, Randy.

Our next question comes from Omar Nokta with Clarkson Plateau Securities.

John, good to hear the -- obviously, the time charges from yesterday that you had disclosed and then some of the $40,000 a day plus rate you just discussed. Clearly, some very, very strong incoming cash flow. It looks like you guys are well underway on your new capital allocation strategy.

And one thing is you bought an Ultramax recently, and it sounds like you'll be quite a bit more acquisitive here in the coming months. Maybe just first question, and I apologize if you addressed this already. But the Ultramax that you just bought or taking delivery of soon, was that funded 100% with cash? And the next question is, for whatever you buy here in the interim until we get to the new strategy, will those all be funded with cash as well?

So the Ultramax that we just bought will deliver most likely in July, early August. We will use a combination, and I may have Apostolos jump in here, but we will use a combination of cash and low-levered debt, if you will. We have, as you know, monies on our balance sheet that are escrowed for, particularly for vessel purchases as well as the ability to borrow under our current credit facilities to fund those.

We have already -- as we mapped out this new strategy, we had already assumed internally some vessel acquisitions. So we've already sort of planned for this. I know the logical question is, well, how many are you going to do? That we'll have to see because that's very market determined. But we are still looking at transactions. I still believe this is a very attractive time to acquire in terms of the fact that values have not caught up with freight rates. They're still well below historical averages. So yes, I do intend us to continue to be acquisitive, and we'll be using cash and available that off the balance sheet.

Okay. Got it, John. And I guess you've been a bit more active on the Ultramaxes recently. Are you leaning that way here looking ahead? Or are you also looking at Capes?

Listen, we've been very upfront the barbell approach strategy that we have in place. It depends on what comes our way, but we do want to keep relatively balanced as we have in the past between the Capes and the Ultras. So I do expect us to look at both sectors.

And maybe one for Apostolos, just regarding the planned refinance of your existing debt. I just wanted to ask if you could share if you started that process officially and sort of what does the lender appetite look like for refinance?

Yes, Omar. Yes, we have started the process. We have ongoing discussion with lenders. And I'd say that, generally speaking, the lender appetite has been pretty strong. As you may realize, this is a good structure for banks coming in with a particularly low LTV and a very strong balance sheet for the company.

So more to come on that front then?

I'll add to that. I mean one of the key factors that Apostolos is working on is because of the low net LTV driving down the amortization as low as possible to get that breakeven rate very low. And obviously, at some point, we're -- while we're targeting and at some point, we want to get to really a 0 net LTV, if you will, to get down into those low $7,000 a day cash flow breakevens.

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

So John, on your fixtures on the time charters, they're running between, let's say, 6 months to a year. Is there any thought to extend further? Or are you just going to take the rates as they come and make your decision accordingly?

We'll take the rates as we kind of make our decision accordingly. I will tell you when we fixed the Capesize vessel, we took a very hard look at the 1-year market as well as the 2-year market. And while there is liquidity coming more and more into that 2-year market, we just did not feel we were getting paid enough for taking the discount.

The 2-year, just to give you an example, the Liberty was done at $31,000 a day. At that point in time, the 2-year market was in the low $20,000s. And we have higher expectations for 2022 than even this year. So we felt, just from a technical and a financial standpoint, it was better to do the 1-year rate. I do think as rates continue to firm, you'll see more 2-year yields being done. But again, it was a pure math exercise and the 1-year rate was better for us at this point.

Okay. And now, when you're looking at into 2022, and you feel comfortable as to where the rates are going. Is that just a function of the tighter supply? Or are you comfortable with the macro environment will continue to unfold well in your favor?

It's both. The supply is pretty well laid out at this point, at least through the end of 2023. And I'll point out what Peter Allen was saying earlier, 2023 and onwards is only 0.6% of fleet growth, 0.6%, just to put a fine point on it. So we're talking about very low fleet growth over the next sort of 2 years at a minimal.

So you take that against the backdrop of demand growth. You just don't need a lot of demand growth to have rates continue to be firm and even move higher. So I would say it's a function of both the very low supply but continued demand growth going into next year.

I should also mention, I mean, a lot of this, at least on the Capes, has to do with the continued recovery and ramp up from Vale and their production guidance, not just this year but ramping up to a run rate of 400 million tonnes by the end of 2022 on the iron ore front.

Our next question comes from Poe Fratt with Noble Capital Markets.

Can I just go through just to illustrate the 2-year. And I just want to make sure we're still on the same page. You say it's not worth it to take the 2-year at $20,000 when you get the 1-year at $31,000 right? I mean, if you take a 2-year at $20,000, that means you're taking the second year for essentially $10,000 a day, and that just doesn't -- I just want to make sure we're sort of thinking about it in the same terms.

Well, if you're taking 2 years to $20,000, you're losing $11,000 a day for the first year, right? And then, so $11,000 a day for 12 months. And then with our belief that next year is going to be higher than $20,000, it's pretty straightforward.

Yes, I was looking at it the other way. You're making $30,000 for the first year and then all you have to do to be whole is make $10,000 the second year.

That's another way to look at it. And I can just tell you, when we -- I don't want to get too specific here because I think it will bore people. But when you start looking at what the vessels should be earning in terms of load factors, we just were not getting paid for a 2-year deal. We were certainly getting paid for the 1-year deal.

And then on your Supras, do you have a like number for a 2-year? You said $19,000 for a 1-year. What's the 2-year looking like that you think you could have gotten a deal done if you have looked into that?

I haven't really seen 2-year Supramax deals done yet. There's been a lot of focus on the 5 to 7 in the market. And then there have been 12-month deals done. I haven't really seen much liquidity in the 2-year market yet.

And then it's pretty bad when you talked about rates and scoring. But can you just talk about what could potentially go wrong, not to rain on the parade, but what could potentially go wrong? Rates historically have been extremely volatile. And what do you think are the things that you're worried about over the next 6 to 12 months that might push rates down from current levels?

Look, I don't think we're out of the woods yet from the global pandemic. And while it's easy for us in the U.S. to [watch] that because of the high vaccination rates and everything opening up, the reality is Europe is still, with the exception of the U.K., is effectively closed.

We're seeing major issues in India, unfortunately, with a COVID outbreak. So that risk element, I think, is still there. And quite frankly, Genco, just because of its low leverage profile, if we do, and I'd say it's a big if, but if we do have another short-term demand shock, we could go right through that. And by the way, still execute on our new dividend strategy.

India is, as I said, it's a very unfortunate situation. I guess the good news from a market standpoint is that we have not -- India is not locking down like they did in the past. And I do think they're going to see somewhat of a slowdown in their steel industry. But the reality is dry bulk shipping is really more focused on thermal coal going into India. And their thermal stockpiles are down to 12 days coming into monsoon season. So I think there's actually a healthy story there to continue importing on the thermal coal side.

Ladies and gentlemen, this concludes the Genco Shipping & Trading Limited Conference call. Thank you for your participation, and have a nice day.