Earnings Call Transcript - GNK Q3 2022

Operator, Operator

Good morning, ladies and gentlemen and welcome to the Genco Shipping & Trading Limited Third 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. 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 888-583-1035 and entering the passcode 8740274. At this time, I will turn the conference over to the company. Please go ahead.

Peter Allen, SVP of Strategy

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 a 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, 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. 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 third quarter 2022 conference call. I will begin today's call by reviewing our Q3 2022 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. During the third quarter of 2022, Genco continued to achieve strong financial results. Our earnings were supported by our sixth consecutive quarter of fleet TCE greater than $20,000 per day combined with a sequential decline in operating costs. Notably, we declared a dividend of $0.78 per share for the third quarter of 2022, representing an increase of 56% compared to Q2 and an annualized yield of 22% based on our current share price. We have now paid 13 consecutive quarterly dividends totaling $3.795 per share. Since implementing our value strategy, which is focused on paying meaningful and sustainable dividends throughout the cycles, deleveraging and positioning Genco to capitalize on compelling growth opportunities, we have declared four quarterly dividends totaling $2.74 per share for a yield of 22%. During the quarter, we continued to successfully execute core pillars of our value strategy as we proactively paid down debt and further reduced our cash flow breakeven levels for the benefit of shareholders. Continuing to pay down debt during a time when we do not have any mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to zero and has enabled us to achieve significant balance sheet strength and industry low cash flow breakeven levels. We believe we have the most compelling risk-reward model in the drybulk public markets. Irrespective of the broader macro environment, we remain in a strong position to pay sizeable dividends to shareholders while seeking opportunities to take advantage of attractive growth opportunities as markets develop. For the third quarter, we drew on our significant operating leverage, generating a solid time charter equivalent rate of $23,624 per day as we capitalized on the cargo and time charter coverage we put in place during a strong Q2 market. The prudent approach of taking forward cargo coverage during the period of market strength and then significant benchmark freight outperformance during Q3 2022, particularly on our minor bulk fleet, specifically our Ultramax and Supramax, TCE during Q3 2022 was approximately $7,000 per day higher than the Baltic Supramax Index average for the quarter. Looking ahead, our estimated TCE for the fourth quarter based on fixtures to date represents coverage of over 75% of available days at approximately $20,500 per day, well above current spot rates of $12,000 and $14,000 per day for Capesize and Supramax vessels respectively. It is also significantly higher than our breakeven rate of approximately $9,000 per day. In terms of 2023 market trends, we expect continued low net fleet growth given the historically low order book, which together with IMO 2023 Environmental Regulations are expected to be supportive for freight rates. As a direct result of the low order book, demand growth has a low threshold to exceed in order to outpace supply growth to further tighten market fundamentals.

Apostolos Zafolias, CFO

Thank you, John. During the third quarter, we continued to record strong earnings and voluntarily paid down debt as we maintain a commitment to reducing financial leverage and our cash flow breakeven rates. On a cumulative basis since the start of 2021, we paid down $270 million of debt or 60% of our debt levels, enabling Genco to achieve a low net loan to value of 11%. Notably, the current scrap value of our fleet is over 2x our net outstanding. For the third quarter of 2022, we declared a $0.78 per share dividend, representing an annualized yield of 22%. While revenues remain firm, that 56% increase in the quarterly dividend from Q2 to Q3 reflected lower operating expenses in the latter period. Specifically, drydocking CapEx declined to $7.8 million from $22.6 million in the second quarter. Furthermore, our vessel operating expenses decreased by 25% to $22.1 million in Q3. Despite the large quarter-over-quarter decline, we continue to invest in upgrading select vessels within our fleet. While the overall operating environment related to cost remains challenging and difficult to predict given various macroeconomic factors, our success in completing the transition of our fleet out of Chinese crews and the progress in upgrading select vessels following our Technical Manager transition will help in maintaining comparatively lower operational expenses, including pandemic-related costs as well as spare and store expenses for the balance of the year. For Q3 2022, the company recorded net income of $40.8 million or $0.96 basic and $0.95 diluted earnings per share. Adjusted net income for the quarter was $1 per share when excluding unrealized losses and fuel hedges of $1.9 million. Our third quarter EBITDA adjusted was $60.3 million, bringing our 9 months 2022 adjusted EBITDA to $181 million. As of September 30, 2022, our cash position was $71.5 million, which when combined with our revolver availability, provides total liquidity of approximately $290 million. This substantial liquidity position combined with the fact that 5 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. In Q3 2022, we paid down debt totaling $8.75 million, representing the quarterly run-rate of voluntary debt repayment. Although we have no mandatory debt amortization payments until 2026, we plan to continue to voluntarily delever, as John mentioned, given our medium-term objective of reducing our net debt to zero. Following our substantial deleveraging since the beginning of 2021, our debt outstanding was $180 million as of the end of the third quarter, which resulted in a net debt of $108 million. We note that we also have interest rate caps in place with varying durations through March 2024, which limit our exposure to rising interest rates. As I mentioned, our Board of Directors declared a dividend of $0.78 per share for the third quarter in line with our value strategy calculation. Walking down the dividend formula, this resulted from operating cash flow of $60.4 million less debt repayments of $8.75 million, drydock and ballast water treatment system and energy-saving device cost of $7.8 million, and the previously announced reserve of $10.75 million. We expect our expense levels in the fourth quarter to continue to remain lower than the first half of the year as we have completed the transition of our fleet to our new technical management joint venture and completed the heaviest drydocking period of our vessels during the second quarter. We continue to focus on cost optimization while seeking to continue to meet stringent safety and vessel maintenance standards. In total, the expense and reserve side of the equation are estimated to be approximately $56 million for Q4, and included in that figure is the expected reserve at $10.75 million, which is based on the run-rate voluntary debt repayments expected to be made in the fourth quarter as well as the estimated cash interest expense.

Peter Allen, SVP of Strategy

Thank you, Apostolos. During the third quarter of 2022, Capesize and Supramax freight rates counter-seasonally declined from Q2 levels, a development that hasn’t occurred since 2012. Despite the decline, freight rates remained at firm levels overall, with non-scrubber fitted Capesize and Supramax indices averaging nearly $14,000 and $20,000 per day respectively during Q3. We believe the primary drivers behind this freight rate development were restrictive COVID-related policies imposed in China, the lack of the usual Ukrainian grain export season, and unwinding of congestion in certain ports and underperforming Brazilian iron ore shipments. At the start of Q4, we saw Capesize rates strengthen over $20,000 per day for the first time since July as inclement weather in China delayed vessel schedules, resulting in a shortage of tonnage availability. We believe this type of market reaction to seemingly minor weather-related events highlights the overall tightness in the supply and demand balance prevalent in the drybulk freight market. We expect this dynamic to persist in the years to come given the low level of capacity additions expected over the next 2 years. Regarding energy markets, we continue to see tightness globally as more regions turn towards coal imports. We have seen a rerouting of cargo flows as Russia exports more coal to China and India, while Europe has sourced more coal from the U.S., Colombia and Australia. Furthermore, after an expected contraction of steel demand in 2022, the World Steel Association forecasts a return to growth next year, which we believe will support demand for key commodities such as iron ore and coal. On the grain side, the third quarter typically represents a period in between the South and North American export seasons, in which the Black Sea regions augment its shipments. In July, UN brokered deals saw the establishment of a grain corridor to allow for grain shipments from the region, which has resulted in the shipment of approximately 10 million tons to date. However, at the end of October, Russia temporarily ceased their participation in the agreement only to rejoin days later. With the initial 120-day agreements set to expire on November 19, negotiations for an extension continue, and there remains uncertainty around exports from the Black Sea going forward. Regarding the supply side, net fleet growth in the year-to-date is approximately 2.4%. The historically low order book as a percentage of the fleet of just 7% as well as near-term and longer-term environmental regulations are expected to keep net fleet growth low in the coming years. Additionally, high scrap prices continue to attract owners of older tonnage, considering the increased level of investment these ships require in light of these upcoming regulations. Overall, we believe these positive supply and demand dynamics provide a solid foundation for the drybulk market and lead to a low threshold for demand growth to exceed in order to improve fleet-wide utilization and freight rates. This concludes our presentation. We will now be happy to take your questions.

Operator, Operator

Thank you, sir. Our first question comes from Omar Nokta from Jefferies. Please go ahead.

Omar Nokta, Analyst

Hi, thank you. Hey, guys, good morning. Just a couple of questions. Maybe just first off, I did want to ask about the Ultra Supra performance during the quarter. I would say it’s pretty strong and comes without the benefit of having scrubbers. And so at first I thought it was maybe related to the time charters you guys had put in place, but it does feel like maybe you had a pretty solid spot performance. Can you maybe just kind of go over that and how you drove such upside in the quarter?

John Wobensmith, CEO

Yes, thanks, Omar. Good morning. So you are correct, our Ultra Supra sector did very well, exceeding industry rates by about $7,000 a day over the Baltic Supramax Index for the quarter. If you look at the numbers, our spot rates on our Ultras were $26,668, while the benchmark was around $19,000 a day. We did have some period coverage on the Ultra Supras, but that was actually at a lower rate of $23,878. What drove that particular spot rate outperformance was, as we discussed on our last call, the unfortunate situation in Ukraine raised skepticism regarding grain movements in the third quarter, which is typically a high season for the Black Sea. We proactively began taking forward coverage for the third and fourth quarter because we anticipated limited grain availability. Fortunately, we predicted correctly, which contributed positively to our performance. Having a very active commercial platform allowed us to take those forward cargo listings, which we did this quarter and will continue to do when opportunities arise.

Omar Nokta, Analyst

Thanks, John. Okay. Yes, I recall that makes sense. And then maybe just more broadly wanted to ask about capital allocation as we go into next year. The past couple of years, you have been pretty diligent about paying down debt, reserving cash and also paying out a healthy dividend. In '23, the drydockings are supposed to come down, I think you have in the release $5.7 million, which compares to I think $40 million for this year. Given that decline, do you see yourselves adjusting the reserve for '23, in terms of how much you hold back from the payout?

John Wobensmith, CEO

Yes, a couple of things. And perhaps I will go into a little detail to clarify. If we look at projections going into 2023, which is always a bit risky, we have a good directional sense of where things are headed. However, predicting day-to-day rates can be tricky. We consider a variety of factors, including the SSA curve and third-party data providers, the latter of which is currently showing significantly higher projections than the SSA curve. We believe the FFA curve currently appears too low. At the end of the year, we will have another board meeting to assess our views on 2023. At that point, we will review the reserves and determine debt pre-payments, noting we have no mandatory repayments due. My aim is to inform the market of our decisions at the very beginning of next year, ahead of our earnings announcement.

Omar Nokta, Analyst

Okay, great.

John Wobensmith, CEO

Hopefully that answers your question. I agree with you on the CapEx; it’s a very light year for us. Interestingly enough, 2023, 2024, and 2025 are predicted to be high drydocking years for the overall Capesize fleet, but not for us. That’s an industry prediction. This could be an interesting factor helping to push rates up due to a large percentage of the fleet in drydock during those years.

Omar Nokta, Analyst

That’s interesting. Yes. Okay, great. Well, thanks, John. I’ll look forward to early next year and then I’ll turn it back into the queue.

John Wobensmith, CEO

Great. Thanks, Omar.

Greg Lewis, Analyst

Hi, thank you and good morning, everybody, and thanks for taking my question. John, I guess I will follow up a little bit on Omar’s question around capital allocation in a different way. I think you guys have been pretty upfront about returning cash to shareholders, but also managing the fleet. I guess what I am wondering is we have seen a little bit of a step down in asset prices here and clearly at least the sentiment around vessels in Q1 looks pretty challenging. We know FFAs can be wrong just as much as they can be right. I guess what I am wondering is, as we manage a good balance sheet still generating good cash flows based on low breakeven, could we see opportunities to renew or expand the fleet here now that some of the strong asset prices have pulled back a little bit?

John Wobensmith, CEO

The short answer is yes, Greg. We set this company up from a balance sheet standpoint to always play offense, and now we have positioned ourselves solidly for that. Our overall goal is to expand the fleet, beyond just normal renewal. It's a matter of finding the right transactions and timing. You are correct, asset prices have come down a little, but they still don't align with current freight rates. I believe we are in a different situation than in years past when high new building prices existed. Asset prices may be more stable and less correlated to freight rates moving forward. We expect opportunities, particularly in the first part of next year. One key factor currently holding freight rates back is China's zero COVID policy, which I expect to soften by the second quarter of next year. I believe that could lead to opportunities early next year, and we are focused on making the right purchases at the right time rather than in the upper historical quartiles in value.

Greg Lewis, Analyst

Okay, great. Thank you for that. No, I mean it is interesting as you think about China potentially reopening at some point next year, it would seem like it’s a pretty opportunistic time. I did want to follow-up because one of the things that we are wondering is, on the asset prices, realizing, hey, the spot market is down, but I was hoping you could maybe share a little bit of color and realizing you guys don’t have a lot of debt and don’t plan to have a lot of debt. But clearly, borrowing rates do impact asset prices as well. Any kind of sense for where modern tonnage lending rates are now and maybe where they are today versus where they were six months, nine months, or twelve months ago prior to the rise in interest rates?

John Wobensmith, CEO

Yes. Apostolos, do you want to take that?

Apostolos Zafolias, CFO

Yes. First, regarding our situation, we have interest rate caps in place for various durations through 2024, with a weighted average rate of 94 basis points. Therefore, we are pretty well hedged regarding existing debt. Overall in the market, LIBOR and SOFR rates have increased significantly, with banks charging margins that can range from 2% to 4%, and an additional 4% for LIBOR or SOFR, resulting in financing costs in the high-single digits. Alternative financing options are available, but at higher costs. Our strong balance sheet allows us to raise capital when needed, as we have a revolver in place, and a combined cash position of close to $290 million along with five unencumbered vessels, which provides us significant flexibility moving forward.

Greg Lewis, Analyst

Okay. Super helpful guys. Thank you very much. Have a great day.

John Wobensmith, CEO

Thank you, Greg.

Apostolos Zafolias, CFO

Thanks, Greg.

Operator, Operator

And our next question comes from Liam Burke from B. Riley. Please go ahead.

Liam Burke, Analyst

Yes. Thank you. Good morning, John. Good morning, Apostolos.

John Wobensmith, CEO

Good morning, Liam.

Liam Burke, Analyst

John, a large percent of the fleet for the fourth quarter was fixed vis-à-vis the spot market, and you figure in a declining spot market environment, it was a good call. How do you look at the fleet management going forward as you balance between time charters and spot?

John Wobensmith, CEO

Yes. Let’s break it down by segments. For the minor bulk segment, we have a robust commercial operating platform that conducts over 90% of our business directly with cargo owners. We are able to book these cargoes and trade around them; if it makes more sense, we’ll charter short-term or use our shifts to optimize profits. I don’t anticipate significant changes in this approach. Time charters may occasionally be used for periods of three to six months when it fits our strategy. For the Capesize segment, we tend to take time charter coverage for longer terms, ranging from one to three years, given the volatility. Currently, we believe longer-term time charter coverage isn't advisable due to low rates; we expect a recovery next year as supply diminishes and demand from China increases. When opportunities arise, we’ll take exposure off the table at certain rates, a strategy we've successfully executed in the past.

Liam Burke, Analyst

Super. And on the DVOE, you had a lot of one-time expenses in the second quarter, we saw it down sequentially. Is there more to go there, or is it pretty much leveling off at where we are in the third quarter?

John Wobensmith, CEO

Yes. We are approaching normalized levels. We have guided for a fourth quarter of about $5,150 per day, which indicates a more normalized trend. That said, inflation has impacted us, just like everyone else; spare parts and airfreight costs have risen. We’ve also adjusted crew wages to maintain quality. However, reaching the fourth quarter number of $5,150 per day feels like a return to a more sustainable rate, especially since our pandemic-related expenses have decreased significantly.

Liam Burke, Analyst

Great. Thank you, John.

John Wobensmith, CEO

Thanks, Liam.

Operator, Operator

Thank you. Ladies and gentlemen, as there are no questions in the queue, I would like to hand the call back over to our speakers for any additional or closing remarks.

John Wobensmith, CEO

Thank you very much. We appreciate everyone joining. I look forward to speaking to you soon. Thank you.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.