Genco Shipping & Trading Ltd. (GNK) CEO John Wobensmith on Q4 2018 Results - Earnings Call Transcript

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About: Genco Shipping & Trading Limited (GNK)
by: SA Transcripts
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Earning Call Audio

Genco Shipping & Trading Ltd. (NYSE:GNK) Q4 2018 Earnings Conference Call March 5, 2019 10:00 AM ET

Company Participants

John Wobensmith - Chief Executive Officer

Apostolos Zafolias - Chief Financial Officer

Peter Allen - Vice President & Drybulk Market Analyst

Robert Hughes - Chief Operations Officer

Conference Call Participants

Jon Chappell - Evercore ISI

Magnus Fyhr - Seaport Global

Espen Landmark - Fearnley

Chris Snyder - Deutsche Bank

Christopher Robertson - Jefferies

James Jang - Maxim Group

Liam Burke - B. Riley FBR.

Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Fourth Quarter 2018 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 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 two weeks by dialing 888-203-1112 or 719-457-0820 and entering the passcode 6651935.

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

Unidentified Company Representative

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 this morning, 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, 2017, and the company's reports subsequently filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

John Wobensmith

Good morning, everyone. Welcome to Genco's fourth quarter 2018 conference call. I will begin today's call by reviewing our fourth quarter and full year 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.

Starting on slide 5, we review Genco's fourth quarter and full year highlights. During 2018 we continued to execute Genco's strategic plan as we further developed our active commercial platform and took steps to optimize our fleet composition, enabling Genco to capitalize on a stronger drybulk rate environment in 2018.

For the fourth quarter, we recorded net income of $18.3 million or basic and diluted earnings per share of $0.44. Excluding the $2 million gain on the sale of vessels in the quarter, we recorded adjusted net income of $16.3 million or adjusted basic and diluted earnings per share of $0.39.

We've also continue to access capital under favorable terms. Following the consolidation of our credit facilities in 2018 as well as the completion of our acquisitions, we have recently agreed to a financing structure in support of our comprehensive IMO 2020 strategy.

Specifically, we have agreed to an amendment under our $460 million credit facility which will provide an additional tranche of up to $35 million to finance the portion of our scrubber program, the details of which Apostolos will discuss later in the call.

As we have mentioned previously, we are implementing a portfolio approach ahead of the IMO 2020 regulation, focused on installing scrubbers on our Capesize vessels and consuming compliant fuel in our minor bulk fleet. We continue to evaluate options to install scrubbers on a portion of our minor bulk fleet to provide flexibility as the marine fuel environment evolves.

Furthermore, we have continued to execute our fleet growth and renewal program. In addition to acquiring six high specification fuel-efficient Capesize and Ultramax vessels in the third quarter of 2018, we have now sold eight older less-efficient vessels, reducing the average age of the fleet by approximately two years and strengthening our earnings power.

Genco's major bulk fleet is comprised of 19 vessels, transporting commodities such as iron ore and coal with its Capesize and Panamax vessels. In addition to the major bulk commodities, Genco continues to maintain direct exposure to minor bulks with 39 Ultramax to Handysize vessels, transporting materials such as grain, bauxite, fertilizer, cement and among other various materials.

On slide 6, we highlight Genco's 2018 performance as compared to 2017. Under the first full year of our active commercial strategy and full service operating logistics platform, Genco increased operating cash flow generation and further solidified its already strong balance sheet.

Together with improved market conditions, this resulted in more than doubling of our adjusted EBITDA year-on-year as we achieved the company's highest time charter equivalent rate since 2011 and daily vessel operating expenses came in under our 2018 budget.

Of note, our annual fixture volume increased from 125 fixtures in the previous tonnage provider model, to well over 400 in our active platform and our direct cargo customers grew from 0 to over 90, highlighting the benefits of providing a leading drybulk commodity producers and charters with a 24-hour global logistic solution with offices in New York, Singapore and Copenhagen.

Turning to slide 7. We have outlined our leading market platform and margin expansion that reached a 2018 high in the fourth quarter. Expanding our deployment mix to incorporate voyage charters and direct cargo liftings throughout the year, while leveraging our in-house relationships and commercial expertise, led to strong results.

Specifically, in the fourth quarter, we recorded a time charter equivalent of $13,237. While for the year, our time charter equivalent was $11,364. For 2018, we outperformed the relevant adjusted Baltic Exchange benchmark sub-indices by approximately $500 per vessel per day, leading to incremental net income of approximately $11 million.

Additionally, our daily vessel operating expenses came in under budget for the year, leading to savings of approximately $1.5 million. We believe that time charter equivalent is an important barometer of measuring a company's revenue-generation capabilities, but also believe it is important to view time charter equivalent performance alongside operating expenses on a per vessel per day basis, as well as G&A, to get the full picture.

While we registered strong 2018 time charter equivalent performance, we have also achieved our performance under an efficient cost structure, which has led to wider margins and a better return on capital. In terms of our fixtures for the first quarter of 2019 to-date, we have fixed 85% of the fleet as $10,042 per day per vessel.

On slide 8, we outline the major drivers for the drybulk market for 2019. Following two consecutive years of demand growth outpacing supply growth in 2019 fundamentals appear more balanced. By the way, the year is developing so far in the early stages, we believe that 2019 could turn out to be a tale of two halves for this market of which the first half is likely to be dominated by seasonal factors as well as the tragic Vale situation and further developments on the U.S.-China trade front.

Assuming more clarity is provided through updated production guidance and a possible trade deal between the world's two largest economies, we believe the broader industry-wide focus will then turn towards preparing for IMO 2020 compliance. At that point particularly as we enter the seasonally stronger third and fourth quarters, iron ore miners could be attempting to catch up on output and shipments to hit full year targets and a more traditional year from a North American grain season perspective could come to fruition assuming trade tensions ease. This may coincide with environment of low net fleet growth as well as anticipated supply side disruption through the installation of scrubbers ahead of the January 1, 2020 compliance date.

Currently, we believe the recent short-term volatility highlights the importance of our solid liquidity position as well as our approach of deploying a fleet with direct exposure to the major and minor drybulk commodities both of which present strong long-term demand prospects. We view our strong cash position and balance sheet as key differentiators of Genco, which we believe can create strategic opportunities for us in this historically cyclical industry. The importance of the strength of our balance sheet is further highlighted in times of short-term freight rate volatility.

Furthermore, as a management team, we remain focused on the continued progression of the overall Genco platform. After solidifying our balance sheet and transforming our commercial platform over the last two years, we are now in a position of strength to take advantage of larger scale transformative transactions, if the right opportunities arises in the future. Rather than focusing on short-term market fluctuations, we plan to continue the pursuit of long-term value creation for shareholders.

On slide 9, we highlight our barbell approach to fleet composition, which provides direct exposure to both major and minor bulk commodities and enables the fleet's cargoes carried to closely mirror those of global commodity trade flows.

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

Apostolos Zafolias

Thank you, John. Turning to slide 12. Our financial results are presented. For the fourth quarter and 12 months ended December 31, 2018, the company generated revenues of $112.2 million and $367.5 million respectively. This compares with revenues for the fourth quarter of 2017 and the 12 months ended December 31, 2017 of $74.9 million and $209.7 million respectively.

The increased revenues for both the quarter and full year were primarily due to the employment of vessels on spot market voyage charters as well as the result of higher spot market rates achieved by the majority of the vessels in our fleet versus the same period last year. In the fourth quarter, we benefited from the opportunistic repositioning of our vessels in Q3 as well as full quarter of operations from the acquisition vessels that we completed in Q3.

For the fourth quarter of 2018, the company recorded a net income of $18.3 million, or $0.44 basic and diluted earnings per share. This compares to net income of $2.6 million, or $0.07 basic and diluted loss per share for the fourth quarter of 2017.

For the 12 months ended December 31, 2018, the company recorded a net loss of $32.9 million, or $0.86 basic and diluted loss per share. This compares to a net loss of $58.7 million, or $1.71 basic and diluted loss per share for the 12 months ended December 31, 2017.

Turning to slide 13. We present key balance sheet items as of December 31, 2018. Our cash position including restricted cash was $202.8 million. Our total assets were $1.6 billion, which consistent primarily of the vessels in our fleet and cash. Our total debt outstanding gross of $16.3 million of unamortized debt issuance costs and inclusive of the current portion of long-term debt was $551.4 million as of December 31, 2018.

Moving to slide 14. Our utilization rate was 98.7% for the fourth quarter of 2018. Our TCE for the fourth quarter was $13,237 per vessel per day, which compares to $10,761 per vessel per day recorded in the same period of last year. The increase in TCE was primarily due to higher rates achieved by the majority of the vessels in our fleet during the fourth quarter of 2018 versus the fourth quarter of last year.

Daily vessel operating expenses were $4,336 per vessel per day for the third quarter of 2018 below our budget of $4,440 per vessel per day and below the prior year period of $4,387 per vessel per day. The decrease in daily vessel operating expenses was predominantly due to lower maintenance related expenses partially offset by higher expenses related to crewing.

Turning to slide 15. We highlight our favorable debt structure based on the consolidation of our credit facilities. In addition to our $108 million acquisition credit facility, we closed on an oversubscribed $460 million credit facility during 2018. These two facilities have enabled us to simplify our capital structure, while providing Genco added flexibility in regard to additional indebtedness, potential dividends and vessel acquisitions.

Additionally, as John mentioned, in February, we entered into an amendment to our $460 million credit facility, providing an additional tranche of up to $35 million that will cover 90% of the expenses related to the acquisition and installation of scrubbers.

Borrowings under the $35 million tranche will bear interest at LIBOR plus 250 basis points through September 30, 2019 and LIBOR plus a range of 225 to 275 basis points thereafter dependent upon total net indebtedness to total consolidated EBITDA for the preceding four calendar quarters.

Turning to Slide 16, we provide select balance sheet items reflecting our strong liquidity position of over $200 million. We evaluate our capital allocation strategy on an ongoing basis weighing both the short and long-term impact of liquidity uses. In the current market conditions, we believe that preserving strong liquidity along with the optionality that this encompasses is in the company's best interest.

While on Slide 17, we outline our fourth quarter estimated breakeven rates. We anticipate Genco's cash breakeven rates to be approximately $11,019 per vessel per day for the first quarter of 2019. And we note that quarterly debt amortization payments under both of our new credit facilities commenced on December 31, 2018.

We've also provided further detail on those breakeven rates in the appendix of our presentation for your reference. We expect to incur capital expenditures for the installation of ballast water treatment systems and scrubbers in 2019 as described in detail in our latest 10-K.

I will now on the call over to Peter Allen, our Drybulk Market Analyst to discuss the industry fundamentals.

Peter Allen

Thank you, Apostolos. I'll begin with Slide 19 which represents daily spot rates for the sub-indices of the Baltic Dry Index. During 2018, the BDI averaged 1,353 which is 18% greater than 2017 as all four sectors experienced year-over-year gains. Last year also marked the highest yearly average since 2011.

As is highlighted in the chart on the top-half of the page, while Capesize saw a significant amount of volatility, the minor bulk sectors remained resilient through year-end. Subsequently, during the first two months of 2019, freight rates for the four sectors stand below where they ended last year as it's historically been the case for this quarter.

Turning to Slide 20, we outline some of the seasonal factors behind these recent freight rate fluctuations. These factors include increased newbuilding deliveries due to the front-loaded nature of the order book, weather-related disruptions impacting cargo availability, and the celebration of the Lunar New Year in China.

In addition to these typical Q1 factors, the downward move in freight rates has been accentuated by the tragic Vale dam incident, which occurred at the end of January, reports a further coal import restrictions in China as well as the continued overhang of the U.S.-China trade dispute.

As most of these events are seasonal and short-term, we believe there are potential demand drivers that could help support freight rates in the coming months including peak spring construction season in China, together with the potential restocking of iron ore, as well as the onset of South American grain season.

Importantly, we anticipate this potential uptick in demand relative to current levels to be met by a backdrop of low net fleet growth, particularly as we enter the second half of the year.

Turning to Page 21, we take a further look at the Vale incident as previously mentioned. Vale has stated that it will decommission all dams built by the upstream method over the course of the next three years. The estimated production impact is approximately 40 million tons of iron ore per year which the company is said to be partially offset by the increase in production of other systems of the company. On top of this, a court-ordered suspension of production at the Brucutu mine, which Vale is challenging, impacts another 30 million tons per annum.

While we still await further details from Vale to quantify the total 2019 impact, we note that prior to this incident Vale had been pushing to increase production in their northern system due to the further ramp-up of S11D, while reducing output in the southern system which is where this incident occurred.

As a response to this development the price of iron ore initially spiked over $90 per ton but has since settled to approximately $85 per ton. This price rise could lead to additional seaborne iron ore miners reentering the market as well as incentivize other majors particularly in Australia to increase shipments. However it could also lead to a further destock of iron ore in China given these higher prices.

Moving to Page 22, we highlight global steel production which grew by 4.5% in 2018 year-over-year. This growth was primarily led by an over 6% increase in China's output. However, 2018 iron ore imports marginally declined by 1% during the same period primarily due to destocking of inventories within the supply chain. Steel margins in China began to tighten in the second half of the year disincentivizing the use with higher cost higher quality, seaborne ore, and incentivizing the use of lower-cost lower-quality ore already stocked at mills and ports.

In addition to strong growth in China's steel output, India overtook Japan as the world's second largest steel producer in 2018 as the company registered nearly 5% growth year-over-year. All granted steel production in India continues to be supportive to the country's seaborne coking coal trade.

Turning to Page 23, we highlight some key points regarding the minor bulks. We anticipate soybean shipments from Brazil to China to begin to ramp up in the coming weeks as another front comp is expected again this year.

We note that regarding U.S.-China trade tension, it has been reported that China has begun, purchasing U.S. soybeans. Specifically, it was announced that China agreed to purchase 10 million tons of U.S. soybeans in February.

We note that while buying announcements have occurred, the shipment of the majority of the purchased soybeans has not yet materialized which could be supportive going forward when these cargoes hit the market.

Lastly, on the minor bulks, we continue to see added shipments of bauxite from West Africa to China as Guinea is now China's largest supplier of the commodity. Growth projects remain in the pipeline scheduled for a mid to end 2019 ramp-up which could further boost demand for this trade.

On Slide 24, we outlined current supply-side fundamentals. In 2018 the drybulk fleet grew by 2.9%. This growth materialized by newbuilding deliveries being down by 27% in 2018 relative to 2017 as scrapping declined to levels not seen in over a decade given the improved drybulk market.

Given upcoming environmental regulations, together with current market conditions, we anticipate an uplift in vessel demolition this year that will help to contain net fleet growth. We note that the order book as a percentage of the fleet is approximately 11% which compares to 7% of the current on-the-water drybulk fleet that is greater than or equal to 20 years old. Given last year's slippage rate of approximately 20%, it remains to be seen how much of the order book will actually deliver.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take the first question from Mr. Jon Chappell with Evercore.

Jon Chappell

Thank you. Good morning guys.

John Wobensmith

Good morning, Jon.

Jon Chappell

John, a lot of uncertainty in the market right now and I think your point about liquidity is very well taken. That being said, you're one of the few companies that doesn't have a buyback program in place or a dividend for that matter. And just given the performance of the stocks both kind of summer last year, when things were still doing well and there's a bit of a disconnect and then kind of accelerated into year-end and earlier this year given the news out of Brazil. How do you think about the liquidity buffer you want to keep during this kind of first half period of uncertainty? And what could the spare capital allocation be if you were to decide that you want to employ some of that capital?

John Wobensmith

Look I mean, first of all, Jon, as I've said before, we're constantly evaluating the use of our liquidity whether that's share buybacks or dividends. Right now with this short-term volatility we feel very strongly that it's better to maintain a strong balance sheet and have optionality around that which includes being in a position to take advantage of opportunities that others may not have because they don't have this strong liquidity position that we have.

So that's where we are today. But having said that, we're going to continue to look at whether it makes sense to do a share buyback program. We will continue to look at when the right time is to do some sort of dividend. So I don't think it comes down to what we feel the cushion is we like the balance sheet as it is today. And we think it actually is an extra value for shareholders from an optionality standpoint because of that. Because I think we're one of the few that has this capital structure.

Jon Chappell

To follow-up then on the optionality. I mean, it seems like you're kind of constantly in the market looking for acquisitions or for modernization. But you are also have been constantly in the market on disposing of older assets. Has the kind of uncertainty that's really escalated in the last couple of months ground the S&T market to a halt? Is there really a true kind of willing buyer, willing seller market out there? Or should we expect the asset values to kind of be in a state of flux until a little bit more gets cleared up on the demand side?

John Wobensmith

So just going back to what we've done Jon. First of all, we've disposed much -- pretty overage units right? The Panamaxes being the last ones that we did. That fleet renewal program and disposing of the older ships was centered around not just their age and the cost of maintaining them, but also on the environmental regulations that are coming down -- that are coming very quickly including installing ballast water treatment systems and then IMO 2020. IMO 2020 is the big one. And in term -- we want to make sure that we have the most fuel-efficient fleet that we can which is why we took advantage of getting rid of those older ships last year. I think that has -- I think that was a very smart move.

I think on particularly older ships values actually probably have come down a little bit in the first part of the year. So I think again we made the right decision. But you're not seeing a lot of sales, but there is a little bit of movement in the Ultramax sector. We've seen a little bit of movement in some of the Capes. But the modern very fuel-efficient ships we have not seen any trades on over the last few weeks. But I will say though I mean, we've seen what's happened right in the Supramax market. We've seen a nice rebound I still think it has a ways to go on the minor bulk. And I think because of that you will start to see that S&T market start to become a little bit more liquid again.

Jon Chappell

Okay. That makes sense. Just one more for me. John you can answer it or Peter can. I think it's pretty clear what's happening in the iron ore market from the headline risk perspective. But I think coal is a little bit less clear. It seemed maybe in December that once we enter the New Year that the new quotas in China would kind of reset everything back to zero and it'd kind of business as usual as far as coal imports are concerned yet a little bit more than two months in we're still talking about restrictions, but they're not completely clear. How do you kind of interpret what's happening with the China market with coal? Is this temporary? Is this kind of the new regime? And how do you think about coal going forward?

John Wobensmith

Well, so, you know, I've said many times I look at Chinese coal imports as the black box. I think it is very difficult to understand because they are policy made -- decisions made almost on a weekly basis. Having said that, I am not concerned for coal imports this year into China and for India for that matter. That's where I think you're going to really see continued growth. My guess is China coal imports are going to be relatively flat compared to 2018 which is still a good number. But I think you're going to see more seasonality this year.

So I think we're one month or two away from seeing the coal imports start to pick up. I'm not concerned with the restrictions that have been put in place. It's a small amount and the reality is China needs Australian coal. It is much higher quality than what they have domestic and much higher quality than what comes out of Indonesia. So from an environmental standpoint, I expect those coal imports to continue this year.

Jon Chappell

That's really helpful. Thanks, John.

John Wobensmith

Thanks, Jon.

Operator

Thank you. Our next question comes from Magnus Fyhr with Seaport Global.

Magnus Fyhr

Yes. Good morning. Just a question on the fleet renewal strategy. Can you just refresh my memory on the divestiture Canada? Some marked only 10 years of age whereas some other ones that are not highlighted are 15 years of age on the Supramaxes?

John Wobensmith

Right. So what we have disposed right are all the what I would call overage ships. So that was all done last year. And we did one Supramax as well the Genco Cavalier. So right now in terms of what we've identified on the fleet renewal program, we still have seven ships left, which are the 53,000 deadweight ton ships. And those ships, they do consume a little bit more fuel and so those are ships that we are looking to opportunistically, potentially dispose rather than redeploy the capital in more modern fuel efficient vessels.

Having said that, Magnus and we were – it's interesting we looked at these ships last year. We are into about an 18% cash-on-cash return on these ships. So we – while they're a little less fuel-efficient than we like we found some very good trades to put these in place. And again, this is something that probably wouldn't have been achievable 18 months to 24 months ago. It's because of this commercial platform that's now in place and the customers that we now have. And so we found a good use for these ships. But those are the seven ships that will continue to opportunistically look at to sell and redeploy the capital.

Magnus Fyhr

Okay. And just – I mean, you've been adding on the Capesizes and you still have two Panamaxes left. I mean, will the core focus going forward be on the Capesize Supramaxes? Or are you planning to maybe divest some of the other smaller segments?

John Wobensmith

No. Look I think we like the fleet in terms of structure right now where we have again this barbell approach with the major bulks, which is primarily centered around the 17 Capes. And then also the minor bulks the Ultramax all the way down to Handysize. The Handysize performed very well for us last year from a return on capital standpoint and I expect the same this year.

Magnus Fyhr

Okay. Great. That's it for me. Thank you.

John Wobensmith

Thank you, Magnus.

Operator

Thank you. Our next question comes from Espen Landmark with Fearnley.

Espen Landmark

Hey, good morning, guys. I guess, we're nearing kind of the 4Q earnings season and a lot has been said about U.S., China and iron ore out of Brazil. I guess, there is even some chatter today that while it might see one of its licenses restated. But I wanted to ask about the paper market, because I think in second half of 2018 there appeared to be significant long positions just kind of being unwound by traders who are long freight. And I think that were impacting the physical market as well. So in your view, how are the traders and the cargo owners positioned for 2019?

John Wobensmith

You mean in terms of the FFA curve?

Espen Landmark

In terms of being net long or short freight.

John Wobensmith

I mean, I wish I knew that Espen. I'm not sure what – as you know most of this stuff is private, right? So it's difficult to tell who has what booked. I don't have a good answer for your question. I think we all know what these – what the public companies have done in terms of time charters or staying short. But I'm not sure, who owns what in the FFA book and who owns what on the cargo side?

Espen Landmark

No. I guess, that's fair enough. And then looking at the Capes now they're doing what $4,500 a day which is half of the Panamaxes, the Capes in general are doing very low rates now in comparison to the smaller ships even adjusting for the low season. I mean, should we be seeing Capes being preferred to smaller vessels soon just given the rate differences?

John Wobensmith

Listen, I think the Capes are way oversold. I do expect this to start to come back in the next 30, 60 days. I don't – we can't stay at these numbers. It doesn't make sense. And there is still plenty of cargo flowing out of Australia. And I do think that– I do think that the – that Brazilian cargoes will start to come back into the market. But we probably have a little more time for Vale to recover. It's interesting – it is interesting that the Baltic Cape Index even though we're at a low point right now January and February still averaged $10,800 in this year. I'm not saying that that's a great number, but its well above what I believe is a short-term number as you pointed out at $4500, $5000 a day.

Espen Landmark

And finally just looking at your drydocking pulse for 2019, $34 million or so, I'm guessing that's around $1.5 million per ship. So it's a material number, but I guess you can reduce by selling some of these older ships. But in 2020 there seems to be a similar amount of vessels scheduled for docking. Should we expect $30 million, $35 million of kind of costs also next year?

Apostolos Zafolias

Yes. Espen this is Apostolos. Yes you're right 2019 is a particularly heavy drydocking year, but it's also driven by the ballast water treatment system installations as these vessels are coming in for drydock, as well as work-related scrubbers obviously. We haven't -- I don't believe we've put out numbers for 2020, but they are significantly lower than what those are for 2019. I'd say less than half of CapEx expenses for 2020 as compared to 2019.

Espen Landmark

Okay. That’s helpful. Thank you guys.

Operator

Thank you. Our next question comes from Amit Mehrotra with Deutsche Bank.

Chris Snyder

This is Chris Snyder on for Amit. So just following up on previous comments around the Chinese coal trade. And looking beyond any short-time import restrictions, I would like to hear your thoughts on the long-term outlook for this trade. And the reason I ask is because of course LNG is taking share pretty aggressively.

And I think the view has always been that this would be offset by reduced domestic coal production and leaving imports flat to may be slightly up. However over the last couple of years Chinese coal import -- domestic coal production has gone higher. So I need just kind of color on the outlook for this trade will be helpful?

John Wobensmith

Look let's talk medium term because I'm not sure how far out long term means. But I continue to believe that China is going to hold relatively steady at the 225 million to 250 million tons of imports.

I'll just go -- I think there's a couple of things. So you - there is no doubt that this is subject to policy decisions that are made within China that's why again, I always refer to this as somewhat of a black box and difficult to predict. I think price has a lot to do with it.

And what I can tell you is the imports -- they are very small fraction, right, of the total domestic coal usage. We're continuing to see coal-fired plants come online even, they're very clean coal-fired plants. But nonetheless coal-fired plants come online in China.

So I think for definitely the near to medium term coal is going to continue to be a very important energy source for China. And the import -- the imported coal is the higher-quality product than what they can produce in -- domestically. But at the end of the day it comes down to -- I think comes a lot down to price and it comes down to policy decisions. I'm not concerned about LNG displacing coal imports at this point.

Chris Snyder

Okay, fair enough. And just...

John Wobensmith

Just wanted to -- sorry to cut you off. But just one other thing to -- because we focus so much on Chinese coal and it's important, don't get me wrong, but you also have to take into account increased imports both on coking and thermal coal going into India. Thermal coal going into Vietnam, Turkey, Philippines, Taiwan those are -- those in my mind are the growth areas, whereas I look at China as more sort of steady on the import side.

Chris Snyder

Okay, yes. Fair enough. What kind of caught us off-guard was just seeing the Chinese domestic coal production had moved higher because like that was kind of always contrary to what we're hearing with the domestic coal shutdowns.

The next question is just kind of on the S&T market. You guys sounded -- in the prepared remarks you sounded pretty open to exploring any sort of attractive opportunities should they arise. Have you noticed kind of any the asking price from potential sellers kind of come in over the last two months, just given the weakness and kind of the relatively bleak outlook for drybulk right now?

John Wobensmith

Well, I think I don't know if I'd call the drybulk outlook bleak. I think that's a little bit of an overstatement. I agree the iron ore markets are in disarray right now which is directly affecting the Capesize ships. But the minor bulks have -- again they have started their -- a nice recovery which is both seasonal, but it's also very much demand-driven.

I think right now the S&T market, I mean look there are a lot of Ultramaxes for sale, there are a lot of Supramaxes for sale. I haven't seen too many offers on the Capes funny enough. And they're probably -- with that many ships on the market there may be a little pressure on price. But again as the Supramax market comes back, I think they're going to be supported. I'm not too concerned about that, particularly on the modern fuel-efficient ships.

The interesting thing that no one's asked yet is, scrapping right? I think on the Capesize side in particular, we've already seen some increase scrapping this year over last year. And I think 2019 and going into 2020 because of not only the market that we're in right now, but as people look forward and think about having an installed ballast water treatment systems and the IMO 2020 issues with fuel efficiency on older Cape, I think that's going to drive scrapping more. And we could have a nice surprise to the upside on the demolition side.

Chris Snyder

Okay. Yeah, that's interesting and makes sense. And then last real quick on the 17 scrubber fitted Capes. Have charters been reaching out to you guys potentially looking to put those vessels on to term employment? And if so, what kind of premium would -- are you seeing relative to kind of just the current term market?

John Wobensmith

Yeah, right now, we're going to be obviously installing these scrubbers. We will be doing a majority of voyage charters, because we want to capture that entire upside on the fuel spread for ourselves. If you go and do a charter, you're going to have to get some of that away. And we find it -- it's very important for us to try to stick to the shortest payback period as possible and recoup our investment on this. And so, again, you're going to see us continue to do what we're doing right now which is direct voyage business where we can keep the majority of that spread for ourselves to repay that investment.

Chris Snyder

Okay. That’s it for me. Thanks for the time guys.

John Wobensmith

Okay. Thanks, Chris.

Operator

[Operator Instructions] Our next question comes from Christopher Robertson with Jefferies.

Christopher Robertson

Hey, guys. Thanks for taking my call. Regarding IMO 2020 and the compliant fuels, are there any operational concerns around fuel compatibility? Have you been able to test any of the VLSFO and kind of what are the plans in place to ensure a smooth transition there?

John Wobensmith

Yeah. So, this is -- so I'm going to let Rob Hughes, our new Chief Operations Officer answer that question for you.

Robert Hughes

Thank you. Thank you for the question, Chris. Yes, we do have plans to test the VLSFO in the coming months. Compatibility, while the fuels may be compliant, not all fuels appear to be compatible with one another. So understanding where those fuels are in response to maybe the paraffinic or aromatic is going to be very important. And instituting key procedural guidelines for the transfer into the day tanks of where they are shipped. So we have a plan in place. And then we're going to get there.

Christopher Robertson

All right. Thanks for that color. So regarding the new debt structure, so outside of the regularly scheduled quarterly amort, that's on slide 15, do you plan on accelerating any debt repayments this year?

Apostolos Zafolias

No. There is no specific plan of accelerating, but we do have the option under the credit facility. But it's the regular debt amortization. And then since you brought it up, I should mention that the $35 million additional tranche related to the scrubber facility would start amortizing in March 31 of 2020 and -- yeah.

Christopher Robertson

You mentioned the increased scrapping. So on the scrapping side, are there any concerns that the increased availability of scraps steel supply would maybe put downward pressure on iron ore demand?

John Wobensmith

No. I'm not too terribly concerned. I mean, we saw a little bit of a substitution effect last year. We've actually seen scrap going into China, tail off pretty significantly. So, I don't see any increase usage of scrap at this point.

Christopher Robertson

Okay. Well, that’s it for me. Thanks. Thanks for the color guys.

John Wobensmith

Thanks.

Apostolos Zafolias

Thanks.

Operator

Thank you. Our next question comes from James Jang with the Maxim Group.

James Jang

Hey, guys. How are you doing?

John Wobensmith

Hi, James.

James Jang

I just have, I guess, a follow-up on scrapping. So scrapping levels have really leveled off and so far 12 vessels -- 12 drybulk vessels have been scrapped this year. So, what's going to accelerate this, right? Because we expect -- we were pretty much all expecting scrapping to increase ahead of IMO and we haven't seen that happen. Last year, there were only 57 vessels scrapped. So, what's going to be the catalyst for this?

John Wobensmith

Yeah. So, I mean, first of all, IMO doesn't start till January 1, right, of next year. So, I still think there is plenty of time to see some -- to see increased scrapping. I think the rubber really starts to hit the road for IMO probably end of the third quarter, because at that point you're really going to need to be very far down the road on doing your change of [Technical Difficulty] or you will have had to install scrubber.

I'll go back to just my earlier comment, it just not -- it's just not IMO 2020 which I think when you talk about an 18-year-old Cape even, the fuel efficiency of an 18-year-old Cape versus even a 10 -year-old Cape is markedly different. So, from a commercial perspective you're probably going to get priced out of the market.

The second thing is, again, these ballast water treatment systems for Capes, in general, are anywhere from $750,000 to $1 million. So, that's a lot of capital that needs to be spent on an overage ship. So, I think that's going to be a driver as well.

What I'm also interested to see is, do we get additional scrutiny on some of these well quite a few of these deals you see conversions that are now VLOCs with the accident that happened with the Polaris ship that still seems to be an open issue. And -- with what I think could be some increased pressure on Vale as well. So that I think is also a factor that could change.

James Jang

So that's a great segway because I've been working on something and I don't know if you have more insight into this. But with the Vale dam disaster and safety being a priority and with the Stellar Daisy sinking, at what point does Vale kind of go to Polaris and tear up those COAs?

A – John Wobensmith

Yes. Look I don't have an answer for you on that. I think...

James Jang

Come on John.

A – John Wobensmith

But, no, I mean look -- no but I'll give you a view. I don't know about tearing up COAs, but I would certainly hope that it would be an option for both sides to -- because Polaris and some of these other owners of these VLCC conversions also had new VLOCs coming on right with COAs. So you'd hope that there could be some sort of substitution effect instead of let's say just tearing up a contract, but coming to some agreement that the older VLOCs would be scrapped and there'd be a substitution, more so than just let's say tearing up a contract.

James Jang

Got you. Okay. And also there seems a spread between low sulfur and high sulfur could be narrower than expected. I mean, would that change your plans on installing scrubbers on future vessels?

A – John Wobensmith

Look, I think we're all actively looking at what the spread is going to be. I think as you know, we've run our investment cases on a $200 spread. The spread today is I think around $175 or so. And that's the 0.5% spread versus high sulfur fuel oil. I do think that is probably not going to be indicative of what happens. I think that spread is going to widen particularly as we get into end of this year. And the demand for high sulfur fuel oil drop significantly.

But it's again that's why we've taken a very balanced approach on this. We have not made the decision on our minor bulk fleet. We will continue to monitor this, like to have a little more clarity on where the spread may wind up towards the end of the year. But we certainly feel very comfortable by what we're doing on our 17 Capesize vessels. And again those have been -- that investment case has been built around a $200 spread. Even at $175 it does not make any material difference in terms of our payback period. Though, it does start to make a difference on the smaller ships which is why we wait and see on those vessels.

James Jang

Okay. And one final one. So you have the three older Handys. Are there any plans for those this year?

A – John Wobensmith

No, not now. Not this year. Again, we're happy with what we're being able to do from a trading perspective on those ships.

James Jang

Okay. Thanks for the color guys.

A – John Wobensmith

Okay. Thank you.

Operator

Thank you. Our next question comes from Liam Burke with B. Riley FBR.

Q – Liam Burke

Thank you. Good morning John, good morning Apostolos.

A – John Wobensmith

Hi, Liam, hello.

Q – Liam Burke

John, you've done a great job moving down vessel operating expenses. Do you have any more movement lower on that level? Or do you see any leverage you can pull to further move that down?

A – John Wobensmith

No look, I think we've moved all the efficiencies, the large efficiencies [Technical Difficulty] out of that. We've gone from 2014 being $5035 a day down to 2018 which came in at $4379 a day which doesn't take much do the math. That's $14 million a year in savings that we've been able to put forward. I think you have to be very careful and I think we've sort of gotten pretty close to this what we don't want to do is we don't want to compromise safety of the ship and our crew and we don't want to compromise maintenance which goes hand-in-hand with the safety side.

So if you look at our daily vessel operating expense budget for 2019, it is $4525 a day which is a little bit higher than our budget in 2018. However, we have a very as you know heavy year for drydocking. And so that's what pushes that number up slightly. And we also have a greater number of Capesize vessels in 2019 versus 2018. I think our DVOE is very competitive compared to the peers. But again there's a very, very keen eye on the safety aspect as well as making sure we're doing maintenance properly.

Q – Liam Burke

Okay. Thank you, John. And on the open systems in the countries that are banning open-loop systems on the scrubbers. Do you see any logistical challenges being prepared to carry low sulfur fuel as well as on the ships that do have scrubbers?

A – John Wobensmith

No. We do it today, right? So we carry 0.1%, so we can operate in the Emission Control Areas that exist in Europe, that exist in the U.S. So that's something that we've already doing. We've been doing it now for a couple of years as the regulations have come into effect. In terms of how we again made the decision to install scrubbers that was all assumed that in those -- in that investment case that we would be burning 0.1% fuel as we came in support. So I don't see any challenge there.

Q – Liam Burke

Great. Thank you, John.

A – John Wobensmith

You’re welcome.

Operator

Thank you. Ladies and gentlemen, that will conclude Genco Shipping & Trading Limited's fourth quarter 2018 earnings conference call and presentation. Thank you for your attendance. You may now disconnect.