Genco Shipping & Trading Ltd Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited First Quarter 2021 earnings conference call and presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's website, www.gencoshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference will be accessible anytime during the next two weeks by dialing (800) 938-24-87 and entering the passcode 24967. At this time, I will now turn the conference over to the company. Please go ahead.

Good morning. Before we begin our presentation, I note that in this conference call, we 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 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, 2023, and the company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

Good morning, everyone. Welcome to Genco's First Quarter 2024 conference call. In addition to reviewing our Q1 2024 and year-to-date highlights, we want to use this opportunity to provide an update on the progress we are making three years into our comprehensive value strategy as well as on the industry's current fundamentals. We will then open up the call for questions. For additional information, please also refer to our earnings presentation posted on our website. Separately from our earnings release, we issued a press release yesterday with the news that leading proxy advisory firm, ISS, made recommendations consistent with those of our Board for all of the items to be voted on at our Annual Meeting of Shareholders this year. While we are pleased with this result, the focus of our call this morning will be over the results for the first quarter of 2024 and the ongoing implementation of our comprehensive value strategy. If you wish to see more information regarding matters to be voted on at our Annual Meeting, please refer to the press release I mentioned or our website at www.voteforgenco.com. Beginning on Slide 5. During the first quarter, we further executed our value strategy, which is aimed at driving returns through the dry bulk cycles and creating sustained long-term shareholder value. Building on a solid end to 2023, Q1 2024 marked another strong quarter for Genco. We drew on our leading commercial platform and significant operating leverage to generate Q1 net income of $18.8 million, driven by a fleet-wide time charter equivalent rate of $19,219. Notably, Q1 TCE increased relative to Q4 for the first time in over 15 years. In terms of shareholder returns, we increased the Q1 dividend quarter-over-quarter to $0.42 per share as our strong Q1 earnings flowed into our dividend, consistent with our transparent policy. During the quarter, we also further improved our risk-reward balance as we voluntarily paid down debt and improved our net leverage position to 7% as we approach our goal of net debt 0. Turning to Slide 6. We provide a snapshot of how our approach to capital allocation centered around dividends, deleveraging and growth has developed since implementing our value strategy a little over three years ago. In 2021, we laid out a clear path and related objectives to transform Genco into a low-leverage, high-dividend-yielding company with significant financial flexibility to provide shareholders with returns and opportunistically grow through the dry bulk shipping cycles. Since that time, we have paid down $279 million of debt while distributing nearly $200 million to shareholders in the form of dividends and investing $236 million in our fleet. As we implemented the strategy in 2021, we prioritized vessel acquisitions and debt paydowns to reduce our cash flow breakeven when the cyclical turn in the market began creating a strong foundation for the execution of our value strategy. Since 2022, we have continued to voluntarily pay down debt while increasing our focus on dividends. On Page 7, we highlight the compelling dividends we have provided to shareholders. The first quarter dividend marks our 19th consecutive quarterly dividend payment, representing the longest period of consecutive dividends in our peer group. Over this time, we have declared $5.57 per share in dividends or approximately 25% of the current share price. Complementing shareholder returns during Q1, we continue to prioritize fleet renewal as highlighted on Page 8. Following the timely acquisition of two high-specification Capesize vessels in Q4, we divested three 2009 to 2010 built vessels and delivered to buyers in Q1 and early Q2 2024. Through these transactions, we have improved the fuel efficiency of our fleet, increased our earnings power, reduced our fleet's average age and saved approximately $10 million in dry docking CapEx for 2024. Importantly, we also increased utilization in the current strong market. With the execution of this phase of our fleet renewal plan, we have further advanced our barbell approach to fleet composition as shown on Page 9. Capesize vessels provide high operating leverage and upside potential with a focus on the iron ore, coal and bauxite trades, while the minor bulk vessels provide more stable earnings streams, operate on diverse trade routes and are more closely linked to global GDP growth. We believe owning ships in both of these sectors supports Genco's value strategy. Moving forward, we continue to evaluate further opportunities in the sale and purchase market to further renew our fleet. Turning to Slide 10. We continue to generate strong TCE performance. In Q1, our fleet ride TCE increased by 38% on a year-over-year basis. Looking ahead to Q2, 65% of our available days are fixed today at over $20,000 a day, pointing to another firm quarter as this is well above our cash flow breakeven rate of approximately $10,000 per day. Turning to Slide 11. We believe Genco remains in a highly advantageous position moving forward. Specifically, we have an industry-low net loan-to-value and cash flow breakeven rate and nearly $300 million in undrawn revolver availability. This provides significant financial flexibility and optionality for the company going forward. We believe our low-leverage, high-dividend payout model executed in scale is industry-leading in the dry bulk shipping public markets. Given the volatility and cyclicality of dry bulk shipping, we also believe it creates a favorable risk-reward balance to provide sizable returns to shareholders, opportunistically grow the fleet and enhance our earnings power through the cycles. I will now turn the call over to Peter Allen, our Chief Financial Officer.

Thank you, John. On Slides 13 through 15, we highlight our first quarter financial results. Genco recorded net income of $18.8 million or $0.44 and $0.43 basic and diluted earnings per share, respectively. Adjusted net income amounted to $21.4 million or basic and diluted earnings per share of $0.50 and $0.49. Excluding other operating expenses of $1.8 million, a loss on sale of vessels of $1 million and unrealized fuel gains of $0.2 million. Adjusted EBITDA for Q1 totaled $41.9 million, more than double the total from the same period of 2023. During the first quarter, our net revenues increased by 44% on a year-over-year basis while our recurring cost structure remained approximately flat over the period, illustrating the high degree of operating leverage inherent in the business. This operating leverage is best displayed by our Capesize vessels, which earned a TCE of $25,600 per day in Q1 2024, nearly $10,000 per day higher than the same period of last year. With such operating leverage, there is less of a need for financial leverage to achieve strong returns. On Slide 16, we highlight the trajectory of our debt outstanding and our continued voluntary debt repayments. In the year-to-date, we have utilized the built-in flexibility of our $500 million revolving credit facility to voluntarily pay down $85 million of debt so far this year, primarily utilizing proceeds from vessel sales. On a go-forward basis, we estimate these debt paydowns will reduce interest expense by approximately $5 million on an annualized basis or approximately $350 per vessel per day on our cash flow breakeven rate. We have now paid down nearly 75% of our debt or $334 million, resulting in a pro forma net loan-to-value ratio of 7%. Given our 100% revolving credit facility, we plan to continue to actively manage our debt balance to save on interest expense while opportunistically drawing down for vessel purchases given our nearly $300 million of undrawn capacity at the end of Q1. Moving to Slide 17, we highlight our transparent dividend policy, which targets a distribution based on 100% of excess quarterly cash flow, excluding maintenance and withholding for future investment. The nature of our variable dividend policy and our fleet's operating leverage enables shareholders to directly benefit from freight rate increases as we've seen over the last couple of quarters. Our Q1 2024 dividend represents an annualized yield of 7.4% on the current share price, well above the 2-year U.S. Treasury rate of approximately 4.8%. Looking ahead to Q2 2024, we anticipate our cash flow breakeven rate, excluding incremental annual meeting related expenses to be $10,207 per vessel per day, well below our Q2 TCE estimates to date of $2,126 for 65% fixed, pointing to another strong quarter. These incremental annual meeting related expenses will also be excluded from the Q2 dividend calculation. I will now turn the call over to Michael Orr, our Dry Bulk Market Analyst, to discuss the industry's current fundamentals.

Thank you, Peter. As shown on Slide 19, the dry bulk market stayed strong during the first quarter, even though this is typically the weakest time of the year for freight rates. Notably, Q1 Capesize rates hit a 15-year high due to continued tight vessel supply in the Atlantic Basin and dry weather in Brazil, which boosted iron ore exports. As of Q2, Capesize and Supramax rates have remained stable, recently rising to around $28,000 and $16,000 per day, respectively. The balance in the dry bulk market, as observed in recent years, means that events affecting ship supply can influence freight rates. As mentioned on Slides 20 and 21, low water levels in the Panama Canal reduced the number of ships passing through, causing significant delays in vessel rerouting. Some vessels were initially redirected through the Suez Canal, but attacks on commercial ships in the area have caused many shipping companies to avoid the Southern Red Sea and Gulf of Aden, further hindering global dry bulk fleet efficiency. In relation to the Chinese steel market on Slides 22 and 23, China's iron ore imports increased by 5% in Q1 2024 compared to last year, while port inventories of iron ore have been rising since October. The World Steel Association expects China's steel production to remain stable at 2023 levels, with global production forecasted to grow by 4%, particularly driven by an 8% increase in India, suggesting higher demand from developed countries and support from secondary trade routes. In terms of the grain market, we are currently experiencing the South American grain season. The USDA predicts a significant rise in exports from Brazil and Argentina, with an additional 25 million tons of corn and soybeans expected to be shipped this marketing year, bolstering minor bulk rates. On the supply side, as detailed on Slides 25 to 27, net fleet growth for 2023 was 3%. The historically low order book relative to the fleet and impending environmental regulations are anticipated to maintain low net fleet growth in the coming years. While we foresee some volatility in the freight market, the solid outlook of low supply growth supports our positive perspective on the dry bulk market moving forward. This concludes our presentation, and we are now ready to take your questions.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. Our first question is from Omar Nokta with Jefferies.

So, I mean, obviously, we're seeing a strong Cape market and your averages so far point to the solid earnings continuing into the second quarter. You talked a bit here on the market. There's been a lot of discussion on bauxite over the past several months or quarters really as a new trade in the market that's really supportive of Capes. Maybe could you just give a little bit more color kind of on how that market or how that trade has been developing? Because in the past, it's always been Capes and iron ore and those are two kind of married at the hip. How does bauxite come in and influence things from your perspective here over the past few quarters or so?

Well, I think, Omar, I wouldn't necessarily call it a new trade because it's been around for a few years, but it's now getting to the point where it's meaningful in terms of ton miles. And so, there's a significant amount of bauxite that's, as you said, coming out of West Africa. It's going to Asia. So, it's a relatively long route creating ton miles. The nice thing about the bauxite trade also is there's still growth that is projected for this year and next year. And it clearly is supplementing the iron ore trade coming out of Brazil. So, you're getting more of a balanced Atlantic basin versus what's happening in Australia in terms of the iron ore trade. And just going back to the growth numbers, I mean we're projecting in 2024 this year, 8% year-on-year growth on a tonnage basis.

You mentioned the balance in the Atlantic market. Iron ore is a significant part of the total dry bulk trade, but it can be volatile, particularly with Brazil showing swings at times, especially early in the year, though that hasn't been the case this year. From your perspective on bauxite, does it generally show similar volatility, or is it more consistent with the gradual growth you noted in terms of cargo?

Yes, you are correct. There is some volatility in the bauxite trade. In the third quarter, we typically experience the rainy season, which adds to the seasonality. It's important for capesize vessels to have that extra flexibility in the Atlantic Basin. This year, particularly in the first quarter, Brazilian iron ore exports increased by 12% compared to the previous year, and there was also strong bauxite export activity. This situation enhances the options available in an already tight Atlantic Basin. However, we do see additional seasonality in the third quarter due to the rainy season affecting bauxite, but we expect it to pick up again in the fourth quarter.

And obviously, Q3 and Q4 are strong periods for Brazilian iron ore traditionally.

And then maybe just one final one for me, guys. I noticed you fixed the Genco Liberty for one year here at 35,000, which is clearly above what I would say the market averages we've seen recently. It's also seemingly above the forward FFA curve. It's above at least visibly the 1-year time charter assessment from various broker houses. And of what's happened, I guess? Is the market stronger than headline rates or index rates or assessment? Is this repeatable this 35,000? Any color you can give perhaps just on kind of that versus what we kind of see day-to-day in the Baltic?

We previously discussed the market conditions, and while the FFA market was higher than it is currently, we've experienced a recovery over the past two weeks. Recreating those earlier rates would be challenging today. However, this illustrates our approach: when we encounter favorable rates and liquidity, particularly in the Capes, we take the opportunity to reduce risk within our portfolio. That's precisely what we did with the Liberty. We will continue monitoring the market and making informed decisions. The Cape market remains robust, and we often discuss the prevailing low supply situation, which is still very relevant given the limited order book. The most significant shift we've observed in recent years is that due to this low supply, any increases in demand are immediately reflected in the freight markets. Recall the oversupply scenarios of 2015 and 2016, where even substantial new iron ore could enter the market without affecting freight rates. That is no longer the case today; there is a healthy supply and demand balance. Therefore, any increases in demand are quickly visible in the freight market.

We'll take our next question from Liam Burke with B. Riley.

John, you managed your barbell strategy on the fleet well. You're always looking to handle your assets effectively since their value is so high. What does it look like for your ability to add more vessels?

I see it in terms of three main areas. In terms of fleet renewal, we will continue to dispose of our older ships and reinvest that capital in newer, more fuel-efficient assets, which will enhance our potential earnings and dividend payouts. Currently, vessel prices seem to be at a high point, but there is also a higher risk associated with purchasing at these levels. I remain hopeful that our equity will continue to narrow the gap on NAV, as we are already quite close, allowing us to use our equity as currency for the right deals. I believe this approach will be beneficial in this market. These are the three perspectives I have on this situation.

And on the Capesize time charters, with the index, you are really overearning on those assets. Do you see more opportunities to time charter the Capesize? Or is there any consideration for longer-term charters on your non-Capesize vessels?

The index deals are clearly beneficial, and we've effectively timed our entry into those deals. As mentioned, they are generating a significant premium compared to the BCI along with scrubber economics. Regarding fixed rates, I previously mentioned the Liberty. As the market continues to show volatility, we will strategically position a ship to minimize our exposure in the Capesize sector. Our focus is less on minor bulks, where we have a strong commercial trading platform that allows us to create arbitrage opportunities and exceed our benchmarks. However, we will consider attractive rates for one-year charters if they arise, but the emphasis remains on Capes due to the current volatility. Thank you, Liam.

Our next question comes from Sherif Elmaghrabi with BTIG.

First, on the debt. Genco doesn't have scheduled amortization, but you have been regularly paying down almost $9 million until this year where repayments have stepped up. So, my question is, how are you thinking about voluntary repayments going forward, especially now that the debt per vessel is so low?

Thank you, Sherif. Currently, our debt per vessel is under $3 million, which is quite impressive when considering the scrap value and the value of the vessels themselves. This puts us in a low leverage situation, as you mentioned. Regarding our debt, we don't have any scheduled amortization until the facility matures in 2028. With our current revolving credit facility, we're effectively managing our debt balance to minimize interest expenses, which helps lower our breakeven point and enhances our ability to pay dividends. We're committed to reducing our existing debt. We have sold $65 million worth of ships this year and used that cash to pay down the revolving credit facility, while maintaining the option to redraw if necessary. Moving forward, our target remains at $8.75 million and $35 million for the year, and we will continue to manage this actively, ensuring we retain our borrowing capacity.

I would like to mention that $8.75 million is part of our overall reserve, which not only involves paying down debt but also allocating funds for fleet renewal, given that shipping entails depreciating assets. We will periodically review that reserve to ensure it aligns with our capital allocation strategy. We are committed to exploring all options regarding capital allocation to reach the right decisions at the board level. We are getting closer to our goal of having net debt at zero and are currently evaluating several opportunities.

And then on fleet management, what sort of specs do you look for in a vessel that you might acquire? You know, you sold three older ships, added two in Q4, but especially given where values have climbed to. And I'm curious also how numerous are those opportunities in the sale and purchase market?

So we're solely focused on what I would refer to as eco vessels, which are really in the end of the day, 2015 and newer that carry the much more fuel-efficient engine designs. That's paramount for us. I would say in the Capesize market, it's not as easy. Those ships do not come up for sale as often. The deal that we were able to do in December was just a fantastic deal. The timing was good, but also the ability to get our hands on those two modern Capesize ships. It's quite a bit easier in the Ultramax sector. There's just more liquidity, more assets available for sale. But patience pays off as you saw what we did in December. So I'm confident that we'll be able to continue the fleet renewal strategy.

We will move next with Poe Fratt from Alliance Global Partners.

You mentioned, John, on the S&P market that you potentially as your stock moves up close to the NAV, it potentially becomes a narrow in the quiver, so to speak. Have you turned any deals down in the past because of your equity value where the seller has been looking for equity?

I wouldn't say we've turned down deals. It's more accurate to say that we've chosen not to engage in equity transactions. Clearly, issuing equity below net asset value is dilutive, and we want to avoid that. However, as I mentioned earlier, we're approaching net asset value and I'm cautiously optimistic that we will reach that point and potentially exceed it as our value strategy progresses. Additionally, as you pointed out, we have the option regarding the purchase price available to us.

When you assess your forward cover, it's quite strong for Capes, but a bit softer for Ultras and Supras. Could you provide some insight into how the remainder of the quarter appears? Specifically, where do you currently stand in terms of booking for Capes compared to Ultras and Supras? My impression is that the Cape market has declined slightly compared to the earlier months when you were booking in March and April, while the Ultras and Supras have seen a modest increase. Is that correct? Could you share your current booking situation?

Spot rates for Capes are currently around $29,000 a day. Additionally, we have some index deals that are earning significant premiums over that BCI figure I mentioned earlier. In the Atlantic basin, the numbers are slightly higher, and we typically break our fleet up a bit. We have a couple of ships that are currently ballasting to the Atlantic, although we haven't fixed them yet. You're right that the market softened a few weeks ago, but in the last two weeks, we've observed a strengthening. A few weeks back, we were in a strong position with limited ships open, but now we're seeing ships that are becoming available again in a stronger market. However, it's all relative. Overall, these numbers are still quite good. Even with the softness we experienced recently, the numbers for Capes remained high.

No reason to complain. Can you talk about the Ultras and Supras, where you sort of see the rest of the quarter there and where the current rates are?

The spot rates for Capes are currently around $29,000 a day, not taking into account adjustments for scrubbers or vessel fuel efficiency. We have index deals that earn significant premiums above the BCI number I mentioned. Looking at the Atlantic basin, the numbers are slightly higher. We are breaking the fleet up a bit; some of our ships are currently ballasting to the Atlantic, although they haven't been fixed yet. The market did soften a few weeks ago, but we've seen a bit of strengthening in the last two weeks. A few weeks ago, we were in a good position with not many ships available, but now we have some ships opening up in a somewhat stronger market. Overall, these numbers are quite good. Even with the recent softness, the rates for Capes remain high.

Yes, that's correct. So, for Q2, it will be estimated about $4.5 million, and that would be excluded from the dividend calculation. That's correct, just like it was in Q1.

Meaning it will not take away from the dividend payout potential.

Understood. Sorry, I had written down 4.5%. And then can you just talk about your cost guidance on Page 39 in the appendix. It looks like you're running a little bit higher on the OpEx side and the G&A side. Are those just first half cadence and that we should potentially see OpEx and G&A come down over the second half of the year? Or can you just give me a flavor about those two cost components?

Yes, sure. So, on the OpEx side, it's more timing related. First quarter, this number is actually not too far off from what our Q1 actuals were. But it is more timing related than anything else. We like to look at this stuff over a 12-month period, typically, than just three months quarter-to-quarter. On the G&A side, a lot of that stuff is front-loaded as well, and we would anticipate that not really moving much, but there is a front-loaded nature to the G&A side as well.

And as there are no further questions at this time. This concludes your conference call for today.