Earnings Call Transcript - GNK Q1 2023

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited First Quarter 2023 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 at 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 2 weeks by dialing 1-877-674-7070 and entering the passcode 959617. At this time, I will turn the conference over to the company. Please go ahead.

Peter Allen, SVP of Strategy and Finance

Good morning. Before we begin our presentation, I note that in this conference call, we'll be making certain forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe and other words 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 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, 2022, and the company's reports on Form 10-Q and Form 8-K supplement filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

John Wobensmith, CEO

Good morning, everyone. Welcome to Genco's First Quarter 2023 Conference Call. I will begin today's call by reviewing our Q1 2023 and year-to-date highlights, providing an update on our comprehensive value strategy, financial results for the quarter and the industry's current fundamentals, before opening the call up for questions. For additional information, please also refer to our earnings presentation posted on our website. Following a year during which we generated sizable earnings and returned significant capital to shareholders, we continue to execute our value strategy for the benefit of shareholders. During the first quarter of 2023, Genco continued to achieve solid financial results in what has historically been a seasonal low period for drybulk freight rates. We achieved a time charter equivalent rate for the quarter of $13,947 per day, which was nearly $3,000 a day above our scrubber adjusted benchmarks, as we drew upon our best-in-class commercial platform. This led to net income for the quarter of $2.6 million, the company's 11th straight quarter of profitability. While drybulk cycles have historically been approximately 1 to 2 years in duration, I note that Genco has now achieved adjusted net income for nearly 3 consecutive years, highlighting what has been a longer and sustained period of profitability due to favorable market fundamentals. Given the visibility we have currently with the order book, near historical lows and the time in which new capacity can come online, we expect this cycle will continue to be extended. Looking ahead, our earnings power remains strong as our Q2 time charter equivalent guidance of $16,679 per day represents a 20% increase versus the Q1 level and well above our estimated cash flow breakeven rate for the quarter of approximately $9,400 per vessel per day. Importantly, we have a light drydocking schedule for the balance of this year, enabling the company to increase fleet-wide utilization during what we view as a firming market period. For the first quarter of 2023, we declared a dividend of $0.15 per share. While our stated formula with a quarterly reserve of $10.75 million did not produce a dividend for the quarter, the Board of Directors on management's recommendation to utilize a portion of our quarterly reserve to declare the 15% per share dividend. A central component of Genco's value strategy is maintaining a quarterly reserve as well as the optionality for the use of the reserve when appropriate as Genco seeks to pay sizable dividends in diverse market environments. During the first quarter, the drybulk shipping markets experienced seasonal volatility in freight rates. However, Genco continued to voluntarily pay down debt. The drybulk market realized a significant rebound since March, and our positive outlook for the balance of the year, underpinned by minimal supply growth, together with Genco's industry low cash flow breakeven rate and low financial leverage, gave the company confidence to reduce the quarterly reserve for first quarter to declare a meaningful quarterly dividend. This represents our sixth dividend payment under our value strategy with cumulative dividends declared to date of $3.39 per share over those 6 quarters. Consistent with our previously announced intention to maintain flexibility under our dividend policy, we reduced our reserve from $10.75 million to $2.19 million for the first quarter of 2023. This is a lever we've highlighted since the inception of our value strategy back in April of 2021 to utilize the reserve to smooth out periods of downward volatility. Importantly, we did not dip into amounts reserved in previous quarters, raise debt or sell assets in order to pay the quarterly dividend. We relied solely on reducing the reserve for the first quarter. Periods like this, Q1 2023, highlight Genco's key market differentiators, which are industry low cash flow breakeven rate, strong balance sheet and low financial leverage position. Despite a temporarily softer rate environment in the first half of Q1, we were still able to voluntarily repay debt and declare a sizable dividend, two key pillars of our capital allocation strategy. Since Q3 2019, we have now declared a total of $4.445 per share in dividends or approximately 31% of our current share price. We believe our track record of meaningful and sustainable dividends, almost over 4 years through varying cycles, speaks to the strength of the company's balance sheet and our prudent approach to capital allocation. In addition to seeking to pay meaningful dividends, we continue to focus on proactively paying down debt. Continuing to pay down debt during a time in which we have no mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to 0, having created a compelling risk-reward model. Regarding the current drybulk market, freight rates have rebounded meaningfully since the February lows. We currently stand at year-to-date highs for Capesizes at over $19,000 per day on the non-scrubber-fitted Baltic Capesize Index. We remain positive for the balance of the year given the reopening in China, and the impact this has on the drybulk market, which continues to be geared towards not only the world's second largest economy, but also developing Asia. The new building order book remains near historical lows, which will limit net fleet growth over the coming years, providing a solid foundation for an improving market. Given constraints in fleet capacity, demand growth has a low threshold to exceed in order to outpace supply growth to further tighten market fundamentals and move freight rates up. Before I close, I'd like to point out that this is the last earnings call for our CFO, Apostolos Zafolias, as he will be leaving the company in mid-June and will then serve as a consultant through year-end. On behalf of the management team and the Board of Directors, I once again thank Apostolos for the outstanding job he did over the course of nearly 2 decades at Genco Shipping. We wish him and his family all the best going forward. At this point, I will now turn the call over to Apostolos, our Chief Financial Officer.

Apostolos Zafolias, CFO

Thank you, John. During the first quarter, we continued to record solid earnings and voluntarily paid down debt as we maintain a commitment to further reducing financial leverage. On a cumulative basis, since the start of 2021, we have paid down $287 million of debt, or 64% of our debt levels since '21, enabling Genco to achieve a low net loan-to-value of 11%. Notably, the current scrap value of our fleet is nearly 2.5 times our debt outstanding balance. For Q1 2023, the company recorded net income of $2.6 million or $0.06 basic and diluted earnings per share, while our first quarter adjusted EBITDA was $19.9 million. As of March 31, our cash position was $50.4 million, which when combined with our revolver availability of $210 million, provides total liquidity of approximately $260 million. This substantial liquidity position, together with the fact that five of the Ultramax vessels that we acquired through 2021 remain unencumbered, provides significant flexibility for us to continue delivering under the three pillars of our comprehensive value strategy, which is focused on dividends, deleveraging and growth. In the meantime, we continue to make good progress on our medium-term objective of reducing our net debt to 0. Following our substantial deleveraging, our debt outstanding was $162 million as of the end of March, or $112 million of net debt. For the first quarter, our Board of Directors declared a dividend of $0.15 per share. Walking down the dividend formula, we had operating cash flow of $21.2 million, less debt repayments of $8.75 million. Drydocking ballast water treatment system and energy-saving device costs of $3.8 million. As a formula with a quarterly reserve of $10.75 million wouldn't have resulted in a dividend, the Board elected to utilize a portion of our quarterly reserve to declare this quarter's dividend. To reiterate what John mentioned, the Board's decision was based on the significant rebound in the drybulk market since March and our positive outlook for the balance of the year. Looking ahead to the second quarter, we anticipate our cash flow breakeven rate to be around $9,400 per vessel per day. Within that figure, we expect our vessel operating expense to be $6,250 per vessel per day, primarily due to the timing of crew changes and purchases of spares and stores. We continue to focus on cost optimization while seeking to continue to meet stringent safety and vessel maintenance standards. We do anticipate our vessel operating expenses in the second half of the year to be below those of the first half. Before I hand the call over, I would like to take this time to thank John and the Genco team, once again, for all the support and the great experiences over the last 18 years. I would also like to thank the equity analysts that have covered us, our bank group and the investor community as a whole. Thank you, all. I will now turn the call over to Peter Allen, our SVP of Strategy and Finance, to discuss the industry fundamentals.

Peter Allen, SVP of Strategy and Finance

Thank you, Apostolos. During the first quarter of 2023, the Baltic Capesize and Supramax indexes hit lows in mid-February of approximately $2,200 and $6,800 per day, respectively. However, these rate levels have been significantly rebounded to $19,000 and $12,000 per day, highlighting the significant operating leverage of these asset classes. We've seen positive drybulk indicators for much of the last 2 months. In addition to freight rates, we've witnessed asset values rise as well. Iron ore and coal imports into China were up meaningfully in Q1, while similar utilization increased from 81% to over 90% currently. This has translated into China's steel output being 6% higher year-over-year. While iron ore prices have pulled back recently, they remain approximately 30% greater than the end of October 2022 levels, just prior to China's COVID. China's Q1 GDP growth of 4.5% was also ahead of consensus estimates of 4%, and puts them in line to potentially exceed the 5% GDP growth target, a figure which we view as more of a floor at this stage. As we look ahead, we expect China's continued reopening to coincide with seasonally stronger drybulk shipment volumes, particularly for iron ore and coal, which we believe will be supportive for Capesize rates in the second half of the year. Regarding the supply side, annualized net fleet growth in Q1 2023 was 3.5%, primarily due to the front-loaded nature of the delivery schedule. Historically low order book as a percentage of the fleet of just 7%, as well as the near- and long-term environmental regulations, are expected to keep net fleet growth low in the coming years. Overall, we have a constructive outlook for the drybulk market given the various demand catalysts highlighted, together with historically strong supply-side fundamentals. This concludes our presentation, and we will now be happy to take your questions.

Operator, Operator

Your first question comes from Omar Nokta from Jefferies.

Omar Nokta, Analyst

Wishing you best of luck. And definitely, we'll miss working with you. You've been there since the very beginning.

Apostolos Zafolias, CFO

Thank you very much, Omar.

Omar Nokta, Analyst

I wanted to ask about the drybulk market, particularly how we have bounced back from the lows we experienced earlier this year. We're currently at the highest rates of the year, around $19,000 for the non-eco Cape. I'm curious about your perspective on the market. This seems to be one of the quietest increases in Cape rates we've seen in a long time, with little fanfare. There's been discussion about China's reopening being slower than expected, with its focus being more on the service sector rather than industrial activity. Despite that, we are observing Cape rates at 19, showing stronger support than anticipated, especially considering the recent decline in steel and iron ore prices. What do you think is happening in the market right now, and what do these current rates indicate given the overall situation?

John Wobensmith, CEO

Omar, I see the situation quite positively. When Cape rates, adjusted for scrubber usage, exceed 20, which is where we currently stand, it indicates a strong market, especially considering that we've noticed values rising for both Capes and Ultramax vessels over the last four months. Reflecting on our discussions about the potential recovery in China, which we began in October of last year, we believed that a significant rebound wouldn't occur until the latter half of 2023. However, we have been pleasantly surprised by the developments. I maintain my original forecast based on the recovering demand in China following COVID lockdowns. I still feel that the recent stimulus measures haven't fully taken effect yet, and that impact typically lags behind. Therefore, I expect to see more significant effects in the second half of this year. Additionally, we anticipate a notable decline in vessel deliveries as we approach the latter half of this year and into 2024 and 2025. It's quite interesting how we have become somewhat complacent, with daily Cape rates of $20,000 seeming ordinary. However, from our perspective, this is strong cash flow, exceeding our cash flow breakeven by over $10,000 daily. So to answer your question, I remain optimistic about the latter half of the year and the following 24 months. It's also noteworthy to see how stable the FFA curve remains for both Capesize and Ultramax, even though it may be flat, the levels are still quite healthy, ranging from 19 to 23 for Capes.

Omar Nokta, Analyst

Yes, that's helpful. It's interesting to note that the rates are significantly above breakeven. It appears that the supply situation may be tighter than we initially thought.

John Wobensmith, CEO

Yes.

Omar Nokta, Analyst

I have a quick follow-up. You mentioned the reserve. On a related note, Genco is clearly in a very strong financial position. You have a significant amount of cash and low overall leverage. You've reduced a lot of debt over the last couple of years. Your dividend approach is formulaic, including the drydock reserve and debt repayment reserve, along with an additional reserve that you adjusted this past quarter. Given Genco's strong performance currently, what are your thoughts on whether the additional reserve of $10.75 million is still necessary, or are you being too cautious with that?

John Wobensmith, CEO

The $10.75 million is primarily from our quarterly debt repayment plus interest. It's essential to maintain a reserve for fleet renewal moving forward since these are depreciating assets. We need to set aside funds to invest in newer tonnage as market conditions evolve. We have also maintained the $35 million per year in principal repayments, so our goal of reducing net debt to zero in the medium term remains intact. I believe it will be quite significant when we achieve net debt of zero and have no mandatory amortization. This would allow additional cash flow to be returned to shareholders. However, I want to emphasize that maintaining the reserve is important to ensure we are adequately preparing the company for future fleet renewal.

Operator, Operator

Your next question comes from Liam Burke from B. Riley.

Liam Burke, Analyst

John, your time charters, in a rising rate environment, how are you looking at that? Do you want to capture more of the spot market opportunity? Or do you see opportunities to time out some of these other charters?

John Wobensmith, CEO

Yes. When we focus on time charter coverage, we tend to concentrate on Capesize vessels due to their volatility. However, we are not inclined to commit to long-term fixed rates at this moment because we believe that firmer rates are on the horizon. In the first quarter, when rates were quite low, we made the decision to secure some Capesize vessels on index charters, achieving premiums significantly above the Baltic Capesize Index—ranging from 125% to 127% over the BCI, plus an additional scrubber premium. This strategy has proven beneficial as we're nearing $20,000 a day on the BCI. Nevertheless, for fixed rates, we are currently exercising caution.

Liam Burke, Analyst

Great. Peter, China steel production has bounced back pretty nicely in the first quarter. There have been rumblings about environmental initiatives. How are you looking at steel production, obviously, the derivative of iron ore demand?

Peter Allen, SVP of Strategy and Finance

Thanks, Liam. Good question. Steel production has obviously been really strong in the year-to-date, up 6% in Q1. Steel utilization in China has been rising almost every week this year. So there's been a lot of positive indicators there. Peak steel production in China tends to happen in Q2. So right around now, actually. But peak iron ore exports from Brazil and Australia, which is really what drives drybulk rates and keep rates in particular, that peaks in the second half of the year. And we do think that China needs to restock iron ore inventories. They've been drawn down significantly from peak levels. There's probably another 30 million tons they need to restock to get back to those highs last year. So that's actually what we're focused on more of the commodity flows on the iron ore side because steel production in China typically peaks during spring construction season right about now. So yes, we're very focused on Brazil and Australia, really ramping up iron ore exports in the coming months.

Operator, Operator

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.

John Wobensmith, CEO

Thanks, Liam.