Genco Shipping & Trading Ltd Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited Third Quarter 2024 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 800-770-2030 and entering the passcode 636-5548. 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 in terms of similar meaning in connection with the discussion of potential future events, circumstances, or future operating or financial performance. These forward-looking statements are based on management's current expectations and observations. For discussion of factors that could cause results to differ, please see the Company's press release that was issued yesterday, 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 and Trading Limited.

Good morning, everyone. Welcome to Genco's third quarter 2024 conference call. I will begin today's call by reviewing our Q3 2024 and year-to-date highlights. Additionally, we will provide an update on our value strategy, discuss our financial results for the quarter, as well as the industry's current fundamentals before opening the call for questions. For additional information, please also refer to our earnings presentation posted on our website. Starting on slide 5, Q3 2024 marked another strong quarter for Genco as we continue to advance our value strategy. Specifically, we furthered our fleet growth and renewal strategy by acquiring a high-quality, fuel-efficient 2016 built Capesize vessel that we promptly took delivery of in October. This was our third Capesize acquisition over the last 12 months, and importantly, this acquisition is part of Genco's broader fleet renewal strategy. Earlier in the year, we completed our exit from the four smaller and older 169,000 deadweight ton vessels and have redeployed the sale proceeds and additional cash towards the acquisition of three 2016 built Capesize ships. These transactions have been accretive to Genco's earnings power as we've added premium high-specification assets to the fleet and have also resulted in dry dock CapEx savings of $13 million in 2024 and 2025. Turning to Slide 6, in terms of shareholder returns, we continue to provide sizable dividends to shareholders. We declared a $0.40 per share dividend for the quarter, marking a quarter-over-quarter increase of 18%. Importantly, we have now declared 21 consecutive dividends representing $6.31 or $0.50 per share or 39% of the current share price as of November 5. The strong increase in the third quarter dividend coincides with firm freight rates and follows our recent decision to enhance our dividend policy and increase cash distributable to shareholders. Notably, we removed the dry-docking CapEx line item from the calculation for the third quarter. This increased the dividend by $0.27 per share. Based on the company's achievements in executing our capital allocation strategy and approaching our goal of net debt zero, we are pleased to take this important step to reward shareholders and further strengthen returns. This enhancement to our dividend formula reflects our belief that our low financial leverage will support larger dividends to shareholders. At the same time, we continue to maintain significant financial strength to grow and renew our fleet and further improve our earnings power. Turning to Slide 7, we continue to generate strong TCE performance. In Q3, our fleet-wide TCE increased by 59% on a year-over-year basis. Looking ahead to Q4, 65% of our available days are fixed to date at $18,786 a day, pointing to another firm quarter as this is well above our capital break-even rate. Moving to Slide 8, we believe Genco remains in a highly advantageous position moving forward. Specifically, we have an industry-low net loan-to-value ratio of 5%, a low cash flow break-even rate, and over $330 million in undrawn revolver availability providing significant financial flexibility and optionality for the company. Given the volatility and cyclicality of dry bulk shipping, we also believe our favorable risk-reward balance will allow us to provide sizable returns to shareholders and enable Genco to opportunistically grow the fleet and enhance our earnings power through dry bulk cycles. While the dry bulk market has experienced a strong first nine months of the year and Genco has booked 65% of its Q4 days at over $18,700 per day, freight rates have pulled back in recent weeks. This has been led by questions around the impact of China's stimulus and customs-related bauxite issues in West Africa, which has helped oversupply the Cape market in the Atlantic Basin. Overall, however, we maintain a constructive outlook for the dry bulk freight market, primarily due to positive supply-side fundamentals as highlighted by the low new building order-book, firm commodity demand, and the beginning of fiscal and monetary easing cycles in key global economies.

Thank you, John. On slides 10 through 12, we highlight our third-quarter financial results. Genco recorded net income of $21.5 million or $0.50 and $0.49 basic and diluted earnings per share respectively. Adjusted net income amounted to $18.1 million or basic and diluted earnings per share of $0.42 and $0.41 respectively, excluding a gain on sale of vessels of $4.5 million, non-cash vessel impairment charges of $1 million, and unrealized fuel losses of $0.1 million. Adjusted EBITDA for Q3 totaled $36.9 million, and for the first nine months of 2024, adjusted EBITDA amounted to $118.5 million, already higher than last year's full-year mark of $101.5 million. During Q3, our net revenues increased by 48% on a year-over-year basis. The strong boost in revenue was led by our Capesize vessels, which earned a TCE rate of $26,951 per day in Q3 2024, nearly $12,000 per day greater than the same period last year, highlighting the operating leverage and upside potential of that sector. On slide 13, we show the trajectory of our debt outstanding and our continued voluntary debt repayments. Since the end of 2020, we have paid down 82% of our debt, or nearly $370 million, which has resulted in a pro forma net loan-to-value ratio of only 5%. The company is currently on track to achieve its goal of net debt zero in the short term, a metric we have been targeting since the announcement of our value strategy in April of 2021. Specifically, this year, we have voluntarily paid down $120 million of debt under our revolving credit facility. We estimate these voluntary debt repayments will reduce interest expense by about $6 million on an annualized basis, or approximately $400 per vessel per day on our cash flow-making break-even rate. This highlights the importance and significant flexibility that our current 100% revolver structure offers us in that we can pay down debt to actively manage interest expense in what is still a high-interest rate environment without losing borrowing capacity to capture accretive growth opportunities. Moving to Slide 14, we highlight our quarterly dividend policy, which targets a distribution based on 100% of quarterly cash flow, less a voluntary reserve. As John mentioned, we recently enhanced our dividend policy by removing the dry-docking CapEx line item from our dividend formula in order to increase the amount of cash available for distribution to shareholders. Our quarterly dividend formula and our fleet's operating leverage enable shareholders to directly benefit from freight rate increases. Our Q3 2024 dividend of $0.40 per share represents an annualized yield of 10% on our current share price, more than double the 2-year U.S. Treasury rate of approximately 4%. Looking ahead to Q4 2024, we anticipate our cash flow break-even rate to be $10,847 per vessel per day, which includes $2,278 per vessel per day of drydocking-related CapEx for the quarter. Additionally, we expect our daily vessel operating expenses in Q4 to decline from Q3 levels. During the third quarter, our DVOE was $6,423 per vessel per day. In Q4, we anticipate DVOE to decline to a budgeted figure of $6,200 per vessel per day. Lastly, our Q4 TCE estimates to date are $18,786 per day for 65% fixed, led by our Capesize vessels, which are currently booked at nearly $26,000 per day for 59% of the quarter.

Thank you, Peter. As depicted on Slide 16, the Dry Bulk market was led by the Capesize segment during the third quarter. BCI averaged nearly $25,000 per day, which was the strongest quarter of the year and the strongest Q3 since 2021. While rates have pulled back recently, rates remain above our all-in cash flow break-even rate. Capesize and Supramax rates are currently $18,000 and $12,000 per day, respectively. Beginning in September, the Chinese government introduced a number of monetary and fiscal policies in an attempt to support the economy as outlined on Slide 17. The measures have largely targeted housing overcapacity in the country and ensuring China's ability to hit its 5% growth target for 2024. Regarding the steel complex, several key indicators are highlighted on Slide 18. China's iron ore imports rose by 5% through September year-over-year, led by strong export volumes in the seaborne market, most notably from Brazil. A portion of China's higher imports have replenished previously drawn down inventories. Iron ore port inventories currently stand at 154 million tons, an increase of 37% year-over-year. However, these levels remain below the 2022 highs in absolute terms and are only marginally higher than historical average levels on a days-on-hand basis. Furthermore, China steel production is 4% lower year-over-year through the first 9 months of 2024. As China's property sector has impacted domestic steel demand, steel exports have grown nearly 20% in the year-to-date and are on pace for their strongest year since 2016. On Slides 19 through 20, we highlight the growing long-haul ton-mile developments of the iron ore and bauxite trade. Specifically, the Simandou iron ore project in West Africa is on track to begin production in late 2025, with an expected ramp-up over 30 months, eventually hitting annualized production of 60 million tons. There's also continued bauxite export growth in this region with an 8% annual growth rate over the past 10 years. Bauxite and iron ore expansion in West Africa, as well as incremental production growth from Vale, are positive catalysts for the Capesize segment, given the origins of these export volumes, as these routes have three times the ton-mile impact of Australia to China cargoes. In terms of the grain trade, Q4 represents peak North American grain season extending into early next year. Regarding the Ukrainian grain trade, shipments have been firm despite the Black Sea grain initiative no longer being in place. Export season for the corn harvest is now in full swing with volumes in October significantly higher than a year ago. Regarding the supply side outlined on Slides 22 to 23, net fleet growth through the first 10 months of the year was at 3.2%. Historically low order book as a percentage of the fleet, as well as near-term and longer-term environmental regulations, are expected to keep net fleet growth low in the coming years. While we expect volatility in the freight market, the foundation of a low supply growth picture provides a solid basis for a constructive view of the DryBulk market going forward. This concludes our presentation, and we would now be happy to take your questions.

Your first question comes from Omar Nokta with Jefferies. Please go ahead.

Thank you. Good morning, everyone. I appreciate the update. I have a couple of questions. First, with the incoming Trump administration in a couple of months, how do you think that will impact the shipping markets? We often get asked this, particularly regarding the DryBulk sector. What are your thoughts on how this administration and its discussions may influence the DryBulk market? Also, can you provide any insights based on his previous term and its effects on the market? Any details would be helpful.

Sure. Looking back at 2018, I generally believe that there won't be a significant impact on ton miles. However, there can be unintended consequences when tariffs are implemented and global trade is disrupted. Goods will continue to move, though possibly in less efficient ways, which might lead to a slight increase in ton miles in the DryBulk sector. For instance, during 2018 when U.S. grain faced tariffs from China, we saw an increase in exports from Brazil. Once a deal was reached, ton miles returned to normal levels. Similarly, when Europe banned Russian coal, we observed an increase in ton miles as Russia redirected its coal to China and India. Overall, I maintain that there won't be any major effect, as goods will find a way to reach their destinations. Additionally, we may see an increase in China's fiscal stimulus spending if they perceive the tariffs as disruptive, but we should know more about that soon.

I appreciate that color. And then maybe you were talking just before on the market and how it's developed here recently. There's been a bit of volatility with rates coming off as we've gone into this quarter. And you mentioned a couple of the reasons for that. We have seen a bit of an improvement this week. I know it's just a few days, and it's nothing maybe to jump over about. But I just wanted to ask, can you just give a little bit of context of what do you think has put pressure on the market here recently? And then we have seen this improvement. Do you think this is just a modest bounce or perhaps the beginning of something more meaningful?

Well, look, we're optimistic going into the end of the year on rates. We think they're going to move up. And I think what you have to do is, again, look back to what's happened over the last several weeks. We really started with bauxite exports being cut back, and there were force majeures that were declared. So you had Capesize vessels that were intending to load bauxite pushed back into the Atlantic Basin, which started to push freight rates down. We saw a little bit of a slowdown in iron ore exports. So, that became an issue. And again, just the normal over-tonnage situations that develop, whether it's in the Pacific Basin or the Atlantic Basin from time to time; ultimately, those ships are filled up with either iron ore or coal, and equilibrium returns. I think that's what we're seeing right now. So we do think things are going to firm going into late November and December. Having said that, again, I think we'll see the normal seasonal downturn in the first quarter, nothing to be concerned about. As we get into the second quarter, rates should recover. And asset values, which I think is a pretty good bellwether, have held up pretty well over the last few weeks. We've seen a little softening but not a lot, particularly on the modern eco Capesize vessels.

Okay, can you provide an update on the force majeure issue regarding bauxite? Have those restrictions been lifted, and is everything back to normal?

Well, the force majeure is not an issue anymore, but I wouldn't say we're back to business as usual quite yet with the bauxite volumes. But again, we don't view that as any long-term issue. The ships that were pushed out in the Atlantic Basin have been soaked up, so to speak. Again, I think that's why you're seeing rates rebound.

Your next question comes from the line of Liam Burke with B. Riley Securities.

Thank you. Good morning, John. Good morning, Peter. John, asset prices are still relatively high, but Capesize valuations have come in. What does your acquisition pipeline look like, especially with your financial flexibility now?

We're still looking pretty heavily at our fleet renewal program. It's funny. Yes, asset prices have come in a little bit, but not a lot. We're still seeing Chinese buyers, in particular, gobbling up older Capesize vessels at some pretty firm numbers. In fact, even today, I saw one that's being bid on, and it's being bid up by multiple buyers. So firmness is still there. We're still in fleet renewal mode. We'll pick our lane. We think we did a really good job with acquiring the Genco Intrepid again at the right time. The valuations that we got on her were definitely higher than what we paid, so that's positive. I think you're going to continue to see, again, firm prices on particularly eco vessels. With the favorable supply side on the Capes, probably even firmer prices as we get into next year.

Great. And right now, you're on track to become net debt zero relatively soon. You're maintaining the revolver. Will you continue to do that to provide yourself flexibility on acquisitions?

Yes. Thanks, Liam. Yes, you're right. We have over $330 million of undrawn revolver availability as of the end of September. So certainly, a lot of liquidity and capacity for accretive growth opportunities. We've utilized a portion of that, a very small portion of it to purchase the Genco Intrepid, but the company has a significant amount of flexibility, more so than probably anybody in the peer group, to be quite honest, from a liquidity perspective. As markets continue to develop and we see opportunities, like John highlighted with this latest acquisition, there's certainly plenty of firepower to grow the company.

Our next question comes from the line of Sherif Elmaghrabi with BTIG.

Good morning. Thank you for taking my question. I would like to follow up on Liam's last question. Are you considering expanding beyond the dual-pronged Ultramax Capesize fleet, especially given the current abundance of opportunities for quality vessels in those segments?

I believe we will primarily focus on what we already excel at. We have established strong commercial platforms for both Capes and Ultramaxes, and we will continue with that strategy. The key question is whether we should consider acquiring Kamsarmaxes. I don't envision us making individual transactions; however, if there is a significant opportunity with Newcastlemaxes or Kamsarmaxes that allows us to expand commercially, it would be worthwhile. But buying just one, two, or three ships in a different sector doesn't seem to align with our strategy. We feel we've made wise choices with our Capes and Ultramaxes using a barbell approach, which has proven successful. Other vessel classes have not kept pace with the Capesize and Ultramax sectors.

And on the Intrepid acquisition, when you announced that acquisition, I believe the date it was expected to join the fleet was in late October or maybe early November, but it's already joined the fleet. So just for modeling purposes, how long after taking delivery of a vessel does it start generating revenue for Genco?

Sherif, yes, so absolutely, we took delivery of the Genco Intrepid on October 23. So it was a very prompt delivery, which is terrific. You get the ship on hire during Q4, which is traditionally a peak earnings time. Yes, it doesn't take very long, just a few days, for familiarization, getting crew, etc. So it’s pretty much delivery and then on hire shortly thereafter.

Your next question comes from the line of Bendik Nyttingnes with Clarksons.

Thank you. Good morning, guys. You locked in a good time charter rate this quarter. Should we view that as sort of an opportunistic one-off deal? Or should we expect a higher amount of coverage from you guys going forward?

Yes, that is indeed a strong rate. I see it as an opportunistic move. We will occasionally secure fixed-rate charters when suitable opportunities arise, especially in the Capesize sector, while also maintaining the index charters we've established so far. However, I consider this to be a unique opportunity that we acted on swiftly.

And as a bit of a follow-up, rates have come off quite a bit. You have some changing theme in terms of geopolitics. Are you seeing any change in appetite from charters on term versus spot contracts?

I mean I think there was a little bit of a pullback. Time charter rates came down with spot rates and the FFA curve. As usual, liquidity tends to decrease when you're in a declining rate environment. But again, I think sentiment has changed over the last week, which, again, you're seeing in the FFA market, and you're starting to see the spot market move back up and recover as well. I would think liquidity in the time charter market will move in the same direction upwards.

Your next question comes from the line of Ben Nolan with Stifel.

This is Pruneilla on for Ben. I wanted to ask about the new dividend policy. What do you think is the right amount of leverage to have on the balance sheet? Has that changed at all? Or is it the same?

I wouldn't say much has changed. We still aim to be net debt zero, which gives us significant flexibility in maintaining our dividend policy. As Pete mentioned, we also have a substantial revolving credit facility available for growth. For the right opportunity, we are open to leveraging up. As we've previously stated, we don't anticipate going to 50%, but we could consider leveraging back into the 20s temporarily, provided it supports a transaction that enhances cash flows and benefits shareholder dividends. This is one of the key reasons for having that revolving credit facility in place.

Right. No, that's helpful. And with some of the Capesize contracts rolling off early next year, is the plan to keep those as floating rate contracts? And then in terms of the market remaining similar to what you have now, how are you thinking about that going forward?

Again, opportunistic on the Capes and whether we do index deals or fixed rate, we've been very successful in putting some good percentages above the BCI on the index transactions. That's a matter of, again, picking your spot and moving quickly when those percentages are available. I think I would say more of the same, but we'll have to see where things are as these contracts roll off.

As there are no further questions at this time, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.