Genco Shipping & Trading Limited (NYSE:GNK) Q1 2022 Earnings Conference Call May 5, 2022 8:30 AM ET
Peter Allen - Senior Vice President, Strategy and Finance
John Wobensmith - CEO
Apostolos Zafolias - CFO
Conference Call Participants
Magnus Fyhr - HC Wainwright
Chris Robertson - Jefferies
Liam Burke - B. Riley
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
00:10 Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited First Quarter 2022 Earnings Conference Call and Presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com.
00:37 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 two weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 1292605.
01:20 At this time, I will turn the conference over to the company. Please go ahead.
01:26 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 in terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance.
01:50 These forward-looking statements are based on management's current expectations and observations. For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday, the materials relating to this call posted on the company's website and the company's filings with the Securities and Exchange Commission including, without limitation, the company's annual report on Form 10-K for the year ended December 31, 2021, and the company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC.
02:19 At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.
02:24 Good morning, everyone. Welcome to Genco's first quarter 2022 conference call. I will begin today's call by reviewing our Q1 2022 and year-to-date highlights, providing an update on our implemented comprehensive value strategy, and 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.
02:52 During the first quarter of 2022, Genco achieved its best results for the January to March period in over a decade, as we continue to successfully execute our value strategy, which is focused on paying meaningful and sustainable dividends throughout the cycles, deleveraging and growth for the benefit of shareholders. Most notably, we declared our first full dividend pay-out under our capital allocation policy.
03:19 The $0.79 per share dividend for Q1 2022 represents an 18% increase as compared to the previous quarter and a 14% yield based on yesterday's closing share price. This marks our 11th consecutive quarterly payout reflecting cumulative dividends of $2.515 per share. On an aggregate basis, since the start of 2021, we have paid down $252 million or 56% of our debt, leading to a low net loan to value of only 12%.
03:59 Importantly, we are now in a position in which the current scrap value of our fleet is nearly 2.5 times our debt outstanding. This has resulted in lower overall cash flow breakeven rates which we believe is essential for paying dividends across diverse rate environments and is a key differentiator of Genco versus its peers. In January, we completed the acquisition of the two remaining 2022 built Ultramax vessels, we agreed to acquire in early last year. These acquisitions have enabled our core Ultramax fleet to more than double in size since Q4 2020. These measures together with those executed in 2021 have led Genco to create the most compelling risk reward model in the dry bulk public markets through a combination of low financial leverage, high operating leverage, and industry low cash flow breakeven rates.
04:54 Continuing to pay down debt during a time that we do not have any mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to zero. We continue to be focused on rewarding shareholders through compelling dividends, while continuing to de-lever supporting sustainable dividends over the long-term. We view this deleveraging as prudent to further improve our financial standing over time to ensure Genco is in even stronger position to take advantage of attractive growth opportunities as markets develop.
05:28 From an earnings perspective, we generated a strong time charter equivalent rate during the quarter of $24,093 per day, an increase of 98% from the same period of 2021, as we benefited from our past success fixing forward cargoes and period time charters ahead of a seasonally softer first quarter rate environment.
05:51 Looking ahead to the second quarter of 2022, we expect a sequential rise in time charter equivalent rates as we have approximately 68% of our available days booked at over $27,500 per day, highlighting our significant operating leverage to improving market conditions, our sizable fleet, our best-in-class commercial platform and barbell approach to fleet composition. In terms of current market trends, Russia's war in Ukraine has led to higher commodity prices a re-direction of cargo flows, particularly those for grains and energy resulting in growth in ton-mile demand.
06:31 Higher fuel prices have also led to a slowdown in the sailing speeds of the drybulk fleet. Despite general uncertainty regarding the longer-term impact of the war, particularly in respect to the global grain trade. We continue to have a positive outlook for drybulk rates due to the low order book that we believe will enable demand to continue to exceed supply. Notably, low go-forward net supply growth increased port congestion and fleet inefficiencies together with upcoming environmental regulations have resulted in as good of a supply side picture as we have seen in decades. As a consequence, demand growth does not have a high threshold to exceed in order to outpace supply growth to further tighten market fundamentals.
07:19 At this point, I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.
07:26 Thank you, John. During the first quarter, we maintained the commitment to reducing leverage and breakeven levels during a time when we have demonstrated the operating leverage of the fleet and ability to return significant capital to shareholders. For the first quarter of 2022, the company recorded net income of $41.7 million or $0.99 basic and $0.97 diluted earnings per share.
07:50 Our first quarter EBITDA was $58 million as compared to $20 million for the same period last year. During the quarter, we continued to further strengthen our balance sheet through increasing operating cash flows by taking advantage of fair market conditions and time charter coverage. Our cash position as of March 31, 2022 was $49.1 million following $48.75 million of debt repayments during the quarter, as well as $40.8 million paid to acquire the two vessels in January.
08:21 Our revolver availability as of March 31 is $222 million resulting in a total liquidity position of $271 million. In Q1 2022, we voluntarily paid down debt totaling $48.75 million, which consisted of $8.75 million of our run rate quarterly voluntary debt repayment, together with an additional prepayment of the revolver of $40 million, which was part of the working capital management exercise to save interest expense without impacting the dividend calculation. These funds can be withdrawn again as needed in accordance with the terms of the revolver.
09:02 Importantly, we did not have any mandatory debt amortization payments until 2026, when the facility matures. Even with this favorable mandatory amortization schedule, we do plan to continue to voluntarily de-lever with a medium-term objective of reducing our net debt to zero. Following our substantial deleveraging, our debt outstanding is $197.25 million as of the end of the first quarter, which results in net debt of $148 million and a net loan to value of 12% as of May 3.
09:34 Looking ahead, we plan to voluntarily pay down $8.75 million of debt during the second quarter, representing an annualized run rate of $35 million of voluntary debt repayments over a year. As John mentioned, our Board of Directors declared a dividend of $0.79 per share for the first quarter of 2022 in line with our value strategy calculation. Walking down our dividend formula, this consisted off operating cash flow of $55.7 million, less debt repayments of $8.57 million.
10:07 Drydocking ballast water treatment system and energy saving device costs of $2.8 million and the previously announced reserve of $10.75 million. Going forward, we will continue to communicate our TCE estimates for the fixed portion of our fleets available days, estimates on the expense side, as part of our cash flow breakeven disclosure and the anticipated level of the reserve.
10:30 On Slide 9, we have also provided an illustration of the expense estimates for the second quarter of 2022. In relation to drydock expenses, we strategically plan the dry docking of our Capesize vessels during a seasonally softer freight rate environment within the year and anticipate completing the majority of our dry docking related CapEx for the year during the current quarter. This will enable us to maximize Capesize utilization and earnings in the second half of the year, which has historically outperformed as higher iron ore volumes are shipped out of both Brazil and Australia.
11:04 In total, the expense and the reserve side of the equation is estimated to be $76.8 million for Q2 2022. 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, as well as estimated cash interest expense.
11:26 I will now turn the call over to Peter Allen, our SVP of Strategy to discuss the industry fundamentals.
11:33 Thank you, Apostolos. During the first quarter of 2022 freight rates initially came under pressure due to seasonal factors, that remained firm on a relative basis. These factors included weather related cargo disruptions, timing of newbuilding deliveries, as well as the Lunar New Year in China and the Beijing Olympics. Furthermore, in January, Indonesia temporarily banned coal exports to ensure domestic supply. As several of these factors subside Capesize and Supramax rates have increased off of their earlier year lows and currently stand at over $22,000 and $30,000 respectively.
12:04 As we look ahead, we anticipate an uplift in seaborne iron ore cargo availability as full year guidance from the major iron ore miners, points to a meaningful rise in shipments in Q2 to Q4. We expect this rise in shipments to coincide with China's economic policies moving towards a more accommodative stance as the year progresses. In the very near term, various regions in China remain under lockdown which has impacted demand. However, we do note that steel mill utilization has improved to 87% from as low as 75% in February.
12:35 We continue to see tightness in the energy markets globally as demand was initially driven by low stockpiles and strong economic growth and has now been exacerbated by Russia's war in Ukraine. We have seen a re-routing of coal cargo flows as Russia exports more coal to China and India, while Europe has sourced more coals from the U.S., Colombia and Australia, which has increased ton miles.
12:53 On the grain side, Ukraine accounts for 13% of global wheat and corn trade. While we are seeing marginal incremental exports out of neighboring ports, no shipments are occurring out of Ukraine as we approach typically their peak export season in the third quarter. We are however seeing end users accelerate the procurement of commodities and as a result prices have increased significantly.
13:16 Regarding the supply side, higher fuel prices have led to a slowdown in the fleet reducing available capacity. This reduction together with augmented port congestion, and a low order book bode well for the drybulk supply side of the equation. Our current positive thesis for the dry bulk market is underpinned by the historically low order book. The order book, as a percentage of the fleet is 6.6%, which compares to 7.8% of the fleet that is greater than or equal to 20 years old, implying fleet renewal rather than material net fleet growth in the coming years.
13:43 Overall, we believe these positive supply side dynamics provide a solid foundation for the dry bulk market and lead to a low threshold for demand growth have to exceed in order to improve fleet wide utilization and freight rates.
13:53 This concludes our presentation and we would now be happy to take your questions.
13:58 Thank you. [Operator Instructions] And we'll go ahead and take our first question from Magnus Fyhr with HC Wainwright. Please go ahead.
14:23 Yeah. Good morning and congratulations to a great quarter. Just a question on, you've been reducing debt here significantly over the last year. Part of your strategy is fleet replacement have recent developments with Capes being maybe just temporarily at a discount to the smaller ships changed your kind of thoughts going forward, where you want to expand and replace the fleet or just curious to see your thoughts there?
14:56 Good morning. Magnus. So I actually think it's an opportunity right now because what we've seen are Ultramax values move up faster than Capes values. Now, in the Ultramax sector you're still getting very good cash on cash returns, particularly if you put something away for a year or two. So I still think values have not caught up with the current rate environment, but because of -- in our view, because of the lockdowns that have occurred in China, there has been a little bit of seasonal -- maybe not seasonal softness, but the typical Q1 softness has extended by a couple of months because of those lockdowns and I think that because of that values in the Capes have not run as much. So I still think there is a catch up to occur there.
15:48 We're starting to see the Capes market play out like we've been talking about for the last month in public forums. So I -- it doesn't change our strategy. We still like having that direct exposure on the iron ore front in the Capes, but also running our minor bulk commercial platform and having ships for that. So I think you'll see us keep a similar balance. But I do think it's important to note that the Capes probably do have some catch up to do and we believe that's going to happen over the next month or so.
16:20 All right. Thank you. And I mean, as part of reducing -- I mean, you're getting close to zero debt here. I guess, it gives us some flexibility for acquisitions, but would you see that as a kind of a long-term focus on deep down at that level or could we see that level pick up here with potential acquisitions?
16:44 Look our medium-term goal is to get to net debt zero. So we are not there yet, but we've also laid out our plans in terms of prepayments for this year. I think if you use that run rate, we might get down on net debt zero by the end of 2023 depending on what the rate scenario is, but -- and what values do. We have a large revolver in place, Magnus. And if -- clearly, if the right transaction comes, we will use it, but what we don't want to do is, lever up and for the sake of this value strategy dividend strategy.
17:31 So I think right now, you're going to see us do more fleet replacement. We obviously would like to get to a point where our shares are trading at a good premium to NAV, which we think will occur. And then you have the ability to use your shares as currency as well for a transaction.
17:49 Okay. And in the meantime, with the stock trading at a pretty big discount to NAV. Any thoughts on buying back shares here rather than reducing debt?
18:02 I'm not too sure if it's trading much at a discount to NAV. I think it's got some, I'm not sure what your NAV is, but it's actually improved quite a bit and we're getting back to the levels of probably being closed close to NAV not yet though. What -- again, what I'm more focused on and I've said this in the past is, dividend yield and getting the equity so it's trading in that 8% to 10% range, and also getting to an EBITDA multiple that should be in the 5 to 6 range in terms of trading. So, and we're not there yet that implies quite a bit of upside. And once you start to get into that you should be, you should be well above NAV.
18:48 All right. Great. Well, thanks for taking my question.
18:52 Thank you, Magnus.
18:55 And we will go ahead and move on to our next question from Chris Robertson with Jefferies. Please go ahead.
19:03 Hey, gentlemen. Thanks for taking my questions.
19:07 Yeah. Please go ahead, Chris.
19:10 Yes. So, yeah, Magnus brought up the topic of fleet renewal, so I just wanted to follow up with a question related to the older end of your fleet. So John, are you thinking about kind of the vessels built prior to 2010, and possibly monetizing those assets to help offset some of the cost with just some basic fleet renewal with some second hand acquisitions of more modern tonnage?
19:34 Yeah, I think, again, as we've said in the past the 55,000 deadweight ton ships, those would be the next ones that we would concentrate on for fleet renewal. And yes, we would redeploy that capital into newer more fuel-efficient vessels. The one thing I would tell you is those vessels -- they're earning about a 46% cash-on-cash return over 12 months, we've gone back and looked at what the earnings power of those ships were in terms of actual fixtures. So you're paying off 50% of the value of those ships. So I think it's -- there is no urgent need to do anything there, but it's certainly something that that we're going to do and I would base it around more market timing and opportunistic at this point, just because of the return numbers.
20:29 Okay. That's fair. Along those lines looking into 2023 and beyond in terms of IMO regulations and compliance. I'm assuming there will be a very minimal CapEx outlay to kind of upgrade some of these systems and energy efficiency systems on the vessels. Could you talk about that a little bit?
20:51 I'll let Apostolos address that, we have a budget for 2022, which is part of our dry docking budget which we broke out. Apostolos you want to give the details on that.
21:01 Yeah. So, Chris, if you are generally speaking for the full year, we have about $14 million of fuel efficiency upgrade costs that's broken out again. The heavy in the second quarter at $6.8 million and then $2 million for the balance of the year.
21:18 Great. Thanks, Apostolos.
21:23 Yeah, just be clear, Chris, what that entails is putting -- as Apostolos said the energy saving devices so it is going to be very high grade, high-spec paint systems, EPL's for engine, RPM Management, data collection devices, so we [indiscernible] it around the fleet out. So we have real time look at fuel burn, and we can manage that fuel efficiency quite a bit. And as I've said in the past, while we're spending CapEx of $14 million to $15 million this year, there is a pretty quick return on that. There is a payback of about a year to a year and a half because we will truly be saving on fuel.
22:12 Got it. That's good color, John. Thank you.
22:15 [Operator Instructions] And we'll take our next question from Liam Burke with B. Riley. Please go ahead.
22:31 Thank you. Good morning, John. Good morning, Apostolos.
22:35 Good morning, Liam.
22:36 Good morning.
22:37 John, looking into the second half, there is a potential supply constraint of grain out of Ukraine. How are you looking at that in terms of the risk of the business?
22:51 Yeah, I still again have the opinion, not a lot of grain is going to flow out of Ukraine. I do think there is a possibility that the U.S. will be able to make up for some of that. I think Brazil as it comes into, its growing season later in the year. We will also be able to make up for some of that. There will be ton-mile expansion, most likely on the grain trades because of that also. I think it's difficult to determine whether it's a net gain or a net loss in terms of ton-miles overall right now. So I look at it as a risk. I'm not sure if it's upside or downside right now. So the way we're positioning things is we are doing some hedging for the second half of the year, particularly in the third quarter on the grain side.
23:52 And I would tell you, just to be clear, we don't think anything is, -- we're not going to have this massive downward volatility. There is still a lot of coal flowing. There's still a lot of minor bulks flowing. Obviously, the U.S. grain season will be up and going and will be strong. And in terms of taking some risk off the table, yeah, we're going to do that at some very good rates.
24:14 Fair enough. And do you see any, on the order book side, do you see any motivation on the market to increase orders on some of the larger vessels like Capesize or do you anticipate that supply or that capacity remain pretty tight even after 2024?
24:36 Well, let me right now, it's obviously very tight as you pointed out for almost 2024 is even difficult to get slots right now, a lot of the orders are getting pushed into 2025. But I still think newbuilding prices continue to move up basis input costs, particularly on the steel side as well as just pure demand for the birth. So I think that's positive. It continues to displace the new build parity versus secondhand values. So I think this from a financial standpoint, it's hard to get your head around ordering. But also again, I can't say it enough with the environmental regulations that are coming. I think it's very difficult to make sense of ordering new ships today basis conventional fuel and not knowing the fuel of the future or having a real sense of, is it going to be ammonia, is it going to be hydrogen? We believe it will be, but we're not 100% on it yet. And I think you are also seeing even LNG is starting to lose favor globally, in terms of new fuel. I think people look at it as purely a stepping stone and that might get phased out much quicker than now one might think is ammonia and hydrogen becomes more available over the next 10 years. So I think that's, I think there is a quite a few factors that are keeping a ceiling on a new build orders today.
26:11 Okay. Thank you, John.
26:15 Thanks, Liam.
26:17 And with that, that does conclude the Genco Shipping & Trading Limited conference call. Thank you for your participation. You may now disconnect.