Genco Shipping & Trading Ltd (GNK) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Fourth 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 anytime during the next 2 weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 9610869.

At this time, I will turn the conference over to the company. Please go ahead.

Good morning. Before we begin our presentation, I note that in this conference call we'll be making certain forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, 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 this morning, the materials relating to the 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, 2020, 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 2021 Conference Call. I will begin today's call by reviewing our 2021 and year-to-date highlights, providing an update on our implementing comprehensive value strategy, financial results for the 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.

Looking back in 2021, it was truly a transformational year for Genco across the board, capped off by a Q4 that was the best since 2008. Nearly a year ago, we proactively pivoted our capital allocation strategy towards a low leverage compelling dividend model. We spent the balance of 2021 laser focused on the implementation of the strategy following the blue print we laid out back in April 2021. After completing initiatives centered around financial deleveraging and growth, we are now in a position to distribute meaningful quarterly dividends commencing in the fourth quarter of 2021 to be paid this March.

As we stand here today, we are pleased to have developed a unique drybulk vehicle that offers an attractive risk-reward profile for the benefit of shareholders. We believe our platform represents a differentiated dry bulk offering given our industry low cash flow breakeven rate and low financial leverage combined with high operating leverage through the scale of our balanced fleet, a best-in-class commercial team, and a strong liquidity position. A company that can check all of these boxes has not been previously in place in the drybulk public markets, which is why we are so excited to rollout our fourth quarter results that have capped off a year of not only significant cash flows for the company, but also significant financial discipline.

Over the course of last year, we paid down $203 million of debt, representing 45% of our debt balance at the start of 2021. Importantly, we are now in a position in which the current scrap value of our fleet is nearly 2 times our debt outstanding. These pay-downs together with a global refinancing completed mid last year have ensured the Genco has no mandatory debt repayments until 2026. In addition, this has resulted in lower overall cash flow breakeven rates, which we believe will enable Genco to pay dividends across diverse rate environments.

Continuing to pay down debt during a time with no mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to zero. In the near term, we are focused on rewarding shareholders through compelling dividends, while continuing to delever to be in a position to reward shareholders over the longer term and support sustainable dividends. We view this as prudent to further improve our financial standing over time with Genco in an even stronger position to take advantage of attractive growth opportunities as markets develop.

Furthermore, in early 2021, we opportunistically grew our core minor bulk fleet capitalizing on a disconnect between freight rates and ship values to augment our earnings power. Specifically we purchased 6 high quality, fuel-efficient Ultramax vessels for an aggregate of $150 million. In January of 2022, we took delivery of the final 2 of those vessels, the Genco Mary and the Genco Laddey both built in 2022 at DACKS shipyard.

Throughout the course of the year on a parallel path to our deleveraging and taking advantage of growth opportunities, we also steadily ramped up our quarterly dividend from $0.02 per share in Q4 2020 up to $0.15 per share in Q3 2021. For the fourth quarter 2021, we declared a quarterly dividend of $0.67 per share, representing a nearly 350% increase versus the previous quarter and marking our first dividend under our value strategy methodology.

This substantial dividend represents an annualized yield of 14% based on Genco's closing share price as of February 23, 2022. Interestingly, if we paid down our targeted quarterly run rate of $8.75 million of debt in Q4 2021 instead of the $59 million of debt we actually paid, our quarterly dividend would have been $1.85 per share nearly 3 times higher than the actual payout. This highlights the dividend capacity and significant operating leverage combined with our industry low breakeven rate. Management maintained its disciplined approach towards capital allocation, which we believe will well position the company both now and going forward. We have now declared dividends for 10 consecutive quarters for cumulative dividends following $1.725 per share or approximately 9% of yesterday's closing share price.

In addition to the measures taken to execute on our value strategy, from an earnings perspective, the fourth quarter was our strongest in over a decade, led by net income of $90.9 million and a time charter equivalent rate of $35,200 per day. Looking ahead to the first quarter, our estimates point to continued strong results with a time charter equivalent of approximately $24,215 per day based on fixtures to date across the fleet for 87% of our owned available days. This firm number highlights our proactive approach to securing revenue ahead of a seasonally softer market period as well as incremental earnings generated through our opportunistic container fixtures. In addition, the container fixtures demonstrates Genco's innovative approach towards developing niche trades and they have proven to be highly beneficial for the company by generating premium rates above the typical drybulk specific backhaul route, while further insulating Genco from the softer January market and providing premium paying positions upon re-delivery.

In line with our portfolio approach to fixture activity, which consists mostly of spot trading, opportunistic period charters and forward cargo coverage last year, we fixed 7 vessels on period time charters for 1 to 2 years at rates ranging from $23,375 per day to $32,000 per day. To illustrate this, our earnings release contains our estimated TCE to date for the first quarter of 2022 broken out by vessel class and spot and fixed rate time charter equivalent rates.

Our scrubber-fitted Capesize vessels are also benefiting from the widening fuel spreads, which currently stand at over $200 per ton. This provides us with a competitive advantage in a high fuel price environment in 2 ways. First, we can purchase less expensive fuel while completing a voyage, and second, it reduces the investment of ballasting vessels to the Atlantic Basin, capture developing trends in cargo flows.

From a market perspective, we continue to have a positive outlook for drybulk rates due to the low order book. We are starting to see timing and weather-related disruptions that impacted the market early in the year subside. Overall, we believe we are in a cyclical drybulk market upturn and have solid visibility as I mentioned particularly on the supply side given the historically low newbuilding order book that we believe will support the market over the coming years.

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

Thank you, John. During 2021, we maintained our focus on improving our balance sheet taking steps to further reduce our leverage and breakeven levels and enhance our earnings power and dividend potential. For the fourth quarter of 2021, the company recorded net income of $90.9 million or 2.16 and $2.13 diluted earnings per share, our highest earnings per share since 2008. Adjusted for the gain of vessels, earnings per share were $2.02 and $1.99 basic and diluted respectively.

Our fourth quarter EBITDA, adjusted EBITDA was $102.2 million which to put in perspective is higher than adjusted EBITDA for all of 2020. Our full-year adjusted EBITDA of $253 million was also greater than 2019 and 2020 combined and doubled out of 2018. During the quarter, we continued to further strengthen our balance sheet through increasing operating cash flows and taking advantage of fair market conditions. Our cash position as of December 31, 2021, was $120.5 million following $203 million of debt repayments through the year together with a $109 million paid to acquire vessels over the same period. Pro forma for the acquisition of 2 Ultramax vessels in January of 2022, our cash balance is approximately $80 million. Following substantial deleveraging, our debt outstanding is $246 million as of the end of the year which after considering our pro forma cash position results in net debt of $166 million or 16% net LTV.

Importantly, while we have no mandatory debt amortization payments until 2026, we plan to continue to voluntarily pay down debt with a medium-term objective of reducing our net debt to zero, which we believe is consistent with our focus on paying consistent dividends through the cycle. Looking ahead, we plan to voluntarily pay down $8.75 million of debt during the first quarter representing an annualized run rate of $35 million of voluntary debt repayments over a year to further strengthen our balance sheet.

As John mentioned, our Board of Directors declared a dividend of $0.67 per share for the fourth quarter of 2021, in line with our value strategy calculation. Walking down our dividend formula, this consisted of operating cash flow of $101 million less debt repayments of $59 million, dry docking ballast water treatment system and energy saving device costs of $2.9 million, and the previously announced reserve of $10.75 million. Going forward, we will be disclosing estimates on both the revenue as well as the expense side in order to provide visibility of the dividend framework. Specifically, we plan to communicate our TCE estimates for the fixed portion of our fleets available days, estimates on the expense side and the anticipated level of the reserve.

Earlier in the presentation on Slide 11, we provided an illustration of the expense estimates for the first quarter of 2022. Specifically, operating expenses are estimated to be $31.6 million, debt repayments $8.75 million, and dry-dock related expenses $5.9 million. The reserve is expected to be $10.75 million, which is based on the $8.75 million of voluntary debt repayments expected to be made in the second quarter of 2022 as well as estimated cash interest expense. In total, the expense side of the equation would be $57 million for Q1 2022.

Moreover, in an effort to provide perspective on the significant operating leverage of the fleet and sensitivity of our dividend framework, we have included an illustrative representation of our dividend per share on Slide 23. Subject to the assumptions in our presentation, our current dividend framework would produce an annual dividend of $1.69 in $20,000 a day fleet-wide TCE rate environment and as high as $7.21 per share in a $35,000 a day fleet-wide TCE rate environment. Our estimate for 87% of the first quarter's available days is $24,215 per vessel per day similar to the levels on the third bar in the chart which would indicate an annual dividend of $3.53 or 18% yield.

Our first quarter 2022 estimated breakeven rate excluding any voluntary debt repayments is approximately $9,500 per vessel per day. Our total ownership days for the first quarter are estimated to be 3,948 and we anticipate 5 vessels to drydock resulting in approximately $6 million of cost, 99 days of estimated off hire time during the quarter.

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 2021, freight rates remained firm following a strong Q3 driven by augmented demand for raw materials and an improving coal trade, solid iron ore volumes and a continued fleet-wide reduction in productivity. Spot freight rates remained on the uptrend in early October with Capesize rates exceeding $85,000 per day and Supramax earnings approaching $40,000 per day. Towards the end of 2021 and into early 2022, Capesize and Supramax rates pulled back from these decade-plus highs due to various seasonal factors. These include weather-related cargo disruptions impacting Brazilian iron ore volumes, which were down 13% year-over-year in January and front-loaded newbuilding deliveries as we saw annualized net fleet growth of nearly 6% in January.

Additionally, the timing of the Lunar New Year in China together with the Beijing Olympics resulted in steel mill utilization declining by approximately 5%. These seasonal factors are beginning to subside which are being reflected at spot earnings with Capesize and Supramax rates are up approximately 200% and 50% respectively versus earlier year lows. On the demand side in 2022, we anticipate China to continue to shift towards more accommodative policies to support economic growth. We have seen the shifts commence last December through a series of interest rate cuts and continue into early this year with increasing lending growth following a year of contraction.

The trajectory of lending growth tends to be a leading indicator of metals demand. The timing of policy accommodation and its potential impact is expected to coincide with improving drybulk trade flows in the coming months and a ramp-up of China's steel production driven by spring construction season. We've already seen an uptick in work on construction projects in many parts of China that have restarted sooner after this year's Lunar New Year than in years past, partly as a response to the central government on for quick progress on new infrastructure projects to help boost the domestic economy. We believe these developments are positive for iron ore trade, particularly as seaborne volumes rise in Q2 and Q3.

Regarding trade flows, we expect coal demand to remain firm given tightness in energy markets. On the grain side, the South American grain season has had an early start, which has been supportive of minor bulk earnings. Overall, we believe we are in a cyclical uptrending market. Our positive go-forward thesis for the drybulk market is underpinned by the historically low order book. The order book as a percentage of the fleet is 6.6%, which compares to 7% of the fleet, which is greater than or equal to 20 years old, implying fleet renewal rather than material net fleet growth in the coming years. Encouragingly, newbuilding vessel orders have been relatively low despite the strong market conditions in part due to uncertainty around go-forward future propulsion and tightness and shipyard capacity. Overall, we believe these positive supply side dynamics provide a solid foundation for the drybulk market and we do a low threshold for demand growth have to exceed in order to improve fleet-wide utilization freight rates.

This concludes our presentation and we'd now be happy to take questions.

(Operator Instructions) We'll take our first question from Randy Giveans with Jefferies.

Few questions. Excuse me. So starting with the charter backlog, I think you mentioned around 8 vessels on that. Clearly the FSA curve is rising in this environment. Time charter rates are picking up as well, any plans to maybe lock away some additional tonnage for the rest of the year or do you expect spot rates to keep outperforming that FSA curve, and briefly, can you give the percentage of days fixed so far for the full year?

Sure. So a couple of things. As we said in the past, we do like the idea of a portfolio approach, particularly in the Capesize sector with the volatility. So I could see us doing 1 to 2 -or cut some more 1- to 2-year charters in the Capesize sector as rates continue to move up, I don't think we're at the point yet where we're comfortable locking them away. But we do expect rates to continue to improve overall. Still something I'll point out is the 2 index deals that we just did in the Capesize sector, those are pretty neat deals because we did them at really the low point of the Capesize market. So we were able to get very premium percentages over the index, particularly for the -- than when we did at 121%. And we also have the option in those index deals to fix or lock those in at any time. So you could see us take advantage of that as well. So short answer is yes, we're going to continue to look at longer term charters though we don't think the market is quite there yet, but it's moving in the right direction. In terms of fixtures, I'll let Peter Allen answer that question on as a percentage.

Randy. So for the full year, we have about 30% of full year days fixed at approximately $24,000 a day.

Good deal. All right. Second question, final one for me. You mentioned the dividend $0.67, well ahead of our expectations. So nicely done there. And you also said it could have been, I believe, $1.85 using that kind of go-forward run rate reserve. So using your quarter-to-date rates, assuming rates stay at least at that $24,000, $25,000 for the rest of the quarter, using the table on Slide 11, the chart on Slide 23, just in terms of direction, is it pretty fair to assume the next dividend should be higher than this current dividend of $0.67?

So look, we still have 15% of the overall fleet to fix. So it's a little tough for me to know it exactly. But Randy, the numbers that are in there in terms of the $35 million debt repayment target run rate for 2022 is in there. Obviously, the reserve that goes along with that are in there, drydocking. So I guess I would leave it to you to put that extra 15% of freight rates in there and come up with the dividend. But so that -- I'm only a little hesitant just because we haven't booked the entire fleet yet.

Got it. And...

It's a very small piece that still has not been fixed. Yes. Chart 23, $25,000 a day divided by 4, you're getting $0.80-plus. So I'll take that as a highly likely.

That's it for me. Congrats again on the best quarter since 2008. Good to see the market in an upswing.

And we'll take our next question from Magnus Fyhr with H.C. Wainwright.

Congrats to a great quarter. You clearly laid out your dividend strategy here and use of cash, I mean, primary use for dividends and debt repayments. How should we think about potential acquisitions going forward? And in what part of the cycle do you kind of just stop doing acquisitions and just focus on dividends?

So first of all, I think dividends are a major focus, Magnus. I do think you'll still see us do some fleet renewal, most likely, particularly in the 55,000 tonners that we have and are certainly earning very good returns, but the values of those have increased significantly. So the opportunity to maybe trade those out, swap those out and redeploy the capital into newer, more fuel-efficient vessels. I could see us doing that this year. But -- so I would say right now, it's really dividends, fleet renewal. We obviously are always looking at larger M&A transactions, but as a whole, I still think it's interesting, I'm changing gears here a little bit, but I still think values have not caught up with freight rates. So I do think there are good opportunities for return on capital-type transactions. But as you've seen in the past, whenever we do those, we tend to derisk them and put them away on a 2-year charter. And we've been hitting anywhere from paying off 40% to 50% of the ship in the first 2 years. So those types of deals still look attractive. I'll just go back to what I said. We're very focused on the dividend model. We're focused on keeping leverage low. Net debt was 16% loan to value at the end of the year, and we're focused on fleet renewal.

Okay. Great. And just one more question. You laid out the sensitivity to the fuel spread. Any chance you could highlight what the fourth quarter actuals were as far as realized fuel spread or just the $1 million that you made out of the fuels?

I don't have that number in front of us per se. I will give you another number that's pretty compelling. And that is if you look at our actual sort of through the end of February from when we first installed the scrubbers in 2019 and you look at the forward curve for 2022, and we're running at about a 35% IRR by the time we get to the end of 2022. So that's a pretty compelling number, but I don't have the specific fourth quarter number.

Magnus, this is Peter. So if you just look at the average spot spread in Singapore in Q4, it was about $150 per ton. So obviously, now we're over $200 per ton. So it's a significant increase and it's obviously been rising with rising fuel prices there's high correlation between the spread and the price of oil historically. So yes, I think that's -- and if you look at the Page 15 in our presentation $150 fuel spread is approximately $28 million of incremental revenue on a annualized basis, so that's probably a decent barometer of the fourth quarter number.

I was just going to finish up, the great thing is the equipment and installation cost were paid off at the end of 2021. So everything we're making now is just straight return on investment.

We will take our next question from Greg Lewis with BTIG.

Congrats on a good quarter, everybody. John, just we've seen cycles. I think you've seen probably a couple more than me, realizing before you became the CEO, you were the CFO, how do you think about cash, right? I mean, obviously, we have the dividend payout model -- the dividend strategy, which we're laying out. Clearly, there's going to be opportunities at a certain point to buy ships and do a lot of different things with the cash we're making. Just kind of curious how you kind of view cash as you think about having it on the balance sheet.

Well, let me go back to our value strategy, right? It's where clearly dividends are a major focus right now, as I said before, fleet renewal is. Continuing to delever, we're looking at that target run rate of $35 million in debt repayment for 2022. We'll be building up the reserve, and that reserve has a lot of optionality in terms of what we can do with it. We can use it to buy ships. We can use it for share buybacks if we feel that's the right thing to do. We can use it to smooth out quarterly dividends again if we feel that, that's the right thing to do. In general, we really want to get to a place where our dividend is seasoned, and our stock begins to trade off of a free cash flow or a dividend yield in excess of NAV so that our shares can be used as currency for further acquisitions when the timing is right. Look, the other thing is, Apostolos put into place a very large revolving credit facility. That was very purposeful in terms of being able to move on an acquisition if it made sense at the time. So I think the company is certainly set up than it ever has been from a leverage, dividend and potential growth profile at this point. But hopefully, that answered your question, that's a little longer answer.

Yes, that was helpful. And then just bigger picture on the market realizing that it's a fluid situation, and there's a lot more important things going on than how it pertains to the drybulk market. But as we look at what's going on in Eastern Europe, in Russia and Ukraine, I guess Ukraine is a pretty big grain exporter. I believe Russia is a large coal exporter, probably not seeing anything just yet, but I mean, like how should we -- I mean, like how -- what type of -- I mean, do we have any sense for where these exports generally go and where those replacements could be and really just trying to understand there's big issues here, but like is that going to be supportive of ton miles, I think it might be. Just kind of curious if you guys have any view on what's happening over there and how that's going to impact the market?

So look, as you said, it's fluid, it's evolving. If we look at I guess some of the facts before opinion, you're really talking about out of the Ukraine grains, which is corn and wheat as the major commodity that comes out of Ukraine, iron ore to some degree though Brazil and Australia are the big exporters, but there is some iron ore that comes out of Ukraine and then there's some coal that comes out of the Ukraine.

I think overall, as a macro view, with the low supply and the low order book in drybulk shipping, you just don't need much demand growth overall to continue to build on 2021. So we still believe in the cyclical upturn. I think as it gets to grains, I think, which is obviously the largest commodity, you need to keep in mind that you're really talking about a very slow period right now for Ukraine in general on exports. The height of the grain season is really August. So we're quite some time away from that. We do believe that the U.S. could make up. If there were significant cutbacks on the grain side, we do believe the U.S. could make up some of that slack. So there could be a ton-mile increase there.

As I mentioned, iron ore, it's out of the Ukraine a very small part of global trade. Some of that could be made up probably by Brazil and Australia and even India. But I think, just to round this out a little bit, there's unfortunately always geopolitical risk in drybulk. Obviously, the Ukrainian situation is an unusual, but I still emphasize the low order book. We don't need much demand growth. If you look at Genco as a company, you were really set up for volatility with this low leverage model, low breakeven rate, creating a very good risk-reward model. We've got Q1 mostly fixed at $24,000 a day. So that risk is off the table.

Greg, honestly, as you said, this is all sort of hit really late last night and this morning, and there's a very large group of Ukrainian seafarers around the world. And as far as we're concerned, the focus should really be on them and our hearts go out to them and their families. We hope they stay safe. I think it's a little early, I guess, to see exactly what's going to go on here. But again, I'd just go back to how Genco is set up in the low supply situation.

We will now take our last question from Liam Burke with B. Riley.

I know this is a high-class problem, but where along the capital allocation strategy would a buyback make sense in terms of your alternatives understanding your objective is to pay a dividend and to become debt free.

Look, again, I think we want to give the dividend model a few quarters to be seasoned and see how that reacts. We do believe it takes a few quarters, I think as I've said before, we've gone back and we've looked historically at companies when they start declaring big dividends and how long it takes to be seasoned and get down into that single digit dividend yield, and it does take 2 to 3 quarters. So we'd like to see that pass first. And then if there are opportunities on share buybacks, we're going to look at them. Again, that's one of the reasons why the reserve is in place.

Fair enough. I think you said that the -- you didn't think that fleet assets have caught up with rates. How does potential acquisitions in terms of this year look to you?

I think right now, we're focused more on the fleet renewal side. But as I said, you can -- right now, you're talking about in the Ultramax sector, cash-on-cash returns for 1-year charters in sort of the 40% range. So yes, let's actually call it around 35% 1-year cash-on-cash returns. I think that's pretty attractive still. But you've got to find the right transaction. And again, I think the first thing you're going to see us do is more fleet renewal swapping out the older ships for newer tonnage and redeploying the capital.

And there are no further questions at this time. And this concludes today's call. Thank you for your participation.

Thank you.