Earnings Call Transcript - GNK Q2 2021

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Second 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 at www.gencoshipping.com. A replay of the conference will be accessible at any time during the next 2 weeks by dialing (888) 203-1112 or (719) 457-0820 and entering the passcode 8885406. 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 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, 2020, 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 Second Quarter 2021 Conference Call. I will begin today's call by reviewing our year-to-date highlights, providing an update on the company's new comprehensive value strategy, financial results for the quarter and the industry's current fundamentals and then open the call up for questions. For additional information, please also refer to our earnings presentation posted on our website. The second quarter of 2021 was a transformative period for Genco. In April, we announced our new comprehensive value strategy centered around growth, deleveraging and dividends. Since then we have made notable progress working towards paying our first dividend under this strategy. Highlighting our strong progress in achieving growth objectives over the last 4 months, we have agreed to purchase 6 modern, fuel-efficient Ultramax vessels to build out this core portion of our fleet to 15 ships. We believe that we are at a unique point in the drybulk cycle with freight rates at their highest levels in over a decade while values which have increased year-to-date have lagged the upward trajectory of earnings. This creates compelling return on capital opportunities. To capitalize on this and to de-risk our latest purchase of 3 Ultramaxes, we secured 3 2-year charters at rates ranging from $23,375 to $25,500 per day, locking in an unlevered cash-on-cash return of approximately 50% over this period on those 3 newly-acquired ships. In terms of our proactive deleveraging progress, during the first half of 2021, we repaid $82.2 million of debt or 18% of the beginning of the year debt balance. This included the retirement of our scrubber facility as well as the prepayment of our revolver. Financial deleveraging is a key part of our value strategy. Therefore, given the strong market, we believe it is prudent to accelerate debt repayments to further fortify our balance sheet as we position the company to distribute sizable dividends in diverse rate environments. At the end of this year, we are targeting a net loan-to-value of 20%, which we are currently on track towards achieving. Ultimately, our medium-term goal is to reduce our net debt position to 0 through additional debt repayments over the coming years. Importantly, we have now achieved a foundational component of our corporate strategy and a key milestone towards full implementation. Specifically, we are pleased to have entered into a new credit facility to complete the global refinancing of our existing credit facilities. We expect the new facility to significantly enhance our capital structure, improve key terms of our debt, reduce our cash flow breakeven rate and provide further optionality for the company. Later in the call, Apostolos will elaborate on some of the details and features of this new credit facility. Regarding returning capital to shareholders and our current quarterly dividend for the second quarter, we increased our payout to $0.10 per share, our second consecutive quarterly increase. We have now declared a total of $0.905 per share in dividends over the last 8 quarters. We are pleased with the progress we are making and continue to target Q4 2021 results for our anticipated first dividend under our new corporate strategy, which would be payable in Q1 2022. In addition to the measures taken to execute our value strategy from an earnings perspective, the second quarter was our strongest in over a decade. Our net income of $32 million and our time charter equivalent rate of $21,137 per day, both marked our highest since 2010. Additionally, our first half adjusted EBITDA was $70.9 million, nearly identical to our full year 2020 adjusted EBITDA of $71.8 million. Looking ahead to the third quarter, our estimates point to continued strong results with a time charter equivalent over $27,000 per day based on fixtures to date across the fleet. Moreover, we will have the majority of our Capesize vessels open for fixing in the coming weeks to take advantage of the meaningful increase in rates we have recently seen, highlighting our significant operating leverage in a robust and improving drybulk market. In addition to the current firm market conditions, we view the market outlook favorably. The order book as a percentage of the fleet is at a historical low, limiting net fleet growth, while unprecedented stimulus and the Brazilian iron ore export recovery have combined to create improving supply and demand dynamics. Our positive market outlook, together with our robust balance sheet, has positioned Genco well to implement our new comprehensive value strategy as we focus on unlocking shareholder value. Not to be overshadowed by the measures we have taken on the value strategy, there were several other key corporate updates that occurred in the recent months. Genco was ranked #1 out of 52 public shipping companies in the Webber Research 2021 ESG scorecard. To that end, on the environmental side, we joined a working group alongside 33 other participants across the maritime value chain to study the feasibility of ammonia as an alternative fuel as part of the long-term goal to decarbonize shipping. Additionally, we plan to enter into a new joint venture, GS Shipmanagement with The Synergy Group for the technical management of our fleet. We expect the creation of this joint venture will provide a unique and transparent service to the management of our vessels and resolve in increased visibility and control over vessel operations, increased fleet-wide fuel efficiency to lower our carbon footprint and potentially unlock further vessel operating expense savings.

Apostolos Zafolias, CFO

Thank you, John. For the second quarter of 2021, the company recorded net income of $32 million or $0.76 and $0.75 diluted earnings per share. A 216% year-over-year increase in our fleet-wide TCE to $21,137 per day was a primary driver resulting in increased adjusted EBITDA of $50.2 million. During the quarter, we continued to further strengthen our balance sheet through operating cash flows from fair market conditions together with opportunistic vessel sales bringing our cash position to $161.2 million including $44.9 million of restricted cash as of June 30, 2021. We also reduced our debt balance in the year-to-date by 18% through a combination of scheduled debt amortization as well as the prepayment of our scrubber and revolving credit facilities. As a result, our debt outstanding is $367 million as of the end of the second quarter, which after considering our cash position resulted in net debt of $206 million. Genco's already low leverage position and strong freight rate environment have enabled us to enter into a new global refinancing of our debt. We appreciate the strong and ongoing support from our leading banking group. As a key step towards implementing our comprehensive value strategy, we have entered into an agreement with our lenders for a $450 million credit facility, which consists of a 5 year term loan together with a sizable revolver that can be used for growth. This new debt structure will provide improved capital allocation flexibility and significantly reduce our cash flow breakeven rate, which combined with the strength of our balance sheet provides a solid foundation for our value strategy and our goal to distribute sizable dividends to shareholders. The $450 million credit facility provides for a $150 million term loan and a revolving line of up to $300 million, which can be used for acquisitions and general corporate purposes. Based on current market conditions and management estimates, we are targeting a year-end debt balance of approximately $250 million following targeted debt paydowns of approximately $117 million over the second half of the year. If we make these targeted paydowns, we will have no mandatory debt amortization payments until December 2025. Regardless of this favorable mandatory debt amortization schedule, we plan to continue to voluntarily pay down debt with a medium-term objective of reducing our net debt to zero. Key terms of the new facility include competitive pricing of LIBOR plus 215 basis points to 275 basis points, and we expect to be on the low end of that range after the first measurement date in relation to September 30 results. A favorable covenant package, including a lower minimum liquidity covenant as compared to our existing facilities and other customary covenants including a minimum collateral maintenance covenant, minimum working capital and net debt to capitalization covenants. In addition, there are no restrictions on dividends other than customary event of default and pro forma financial covenant compliance provisions. Importantly, 5 of our vessels to be acquired will remain unencumbered and not pledged as collateral for this new facility. This will provide Genco with further flexibility and optionality on a go-forward basis. On Slide 17, we have provided estimated expense levels on a per vessel per day basis for you. With regard to dry docking, we anticipate 2 vessels to enter dry dock this quarter resulting in approximately 40 days of offhire, estimated offhire during the third quarter. In terms of vessel sale and purchase activity, we anticipate taking delivery of 4 of the 6 Ultramaxes that we have agreed to acquire during the third quarter, and we also completed the sale of our last 53,000 deadweight ton Supramax vessel, the Genco Lorraine, in July. Furthermore, we agreed to sell the Genco Provence, a 2004 built Supramax vessel and the oldest ship in our fleet for $13.25 million with expected delivery in the fourth quarter of 2021. Importantly, with this sale, we will be avoiding budgeted dry docking CapEx of approximately $800,000 in next year in 2022.

Peter Allen, SVP of Strategy

Thank you, Apostolos. During the second quarter of this year, freight rates continued to increase to 10 year plus highs driven by a resurgence of global economic activity leading to augmented demand for raw materials. Spot freight rates for both Capesize and Supramax vessels currently stand at over $30,000 per day. During the first half of the year, global steel production rose by 14% year-over-year supporting the iron ore trade and Capesize rates. While China's output rose by 12%, ex-China has seen a notable rebound rising by 18% year-over-year led by India, the EU and Japan. We have also seen a recovery in the Brazilian iron ore trade, which is up by 11% year-over-year. There is a highly seasonal weighting towards the second half of the year for Brazilian iron ore exports, which historically rise approximately 20% from July to December versus January to June. On the minor bulks, rates have been driven by strong grain demand from China. Additionally, we continue to see increased shipments in minor bulk commodities closely linked to global GDP growth and economic activity. Regarding the vessel supply side, net fleet growth year-to-date is approximately 2%. The order book as a percentage of the fleet is 6%, which compares to 7% of the fleet that is greater than or equal to 20 years old. Encouragingly, new building vessel ordering has been relatively low this year despite the strong market conditions. We believe these positive supply and demand dynamics provide a solid foundation for the drybulk market and lead to low thresholds for demand to exceed to improve fleet-wide utilization and freight rates. For the balance of the year, we expect increased iron ore exports to be a catalyst for Capesize rates, while increased grain exports from the Black Sea region in August are expected to be supportive to Supramax earnings in the Atlantic Basin ahead of the North American grain season in the fourth quarter. These demand drivers are expected to be met by favorable supply side fundamentals underpinned by the historically low order book. This concludes our presentation. And we would now be happy to take your questions.

Operator, Operator

We will move on to our first question from Randy Giveans of Jefferies.

Randy Giveans, Analyst

Congrats, obviously, on the best quarter in a decade. I'm sure I'll say the same again next quarter but I guess, 2 questions for me. First, you mentioned you're going to repay $117 million in debt during the back half of the year, you also have, I believe, $87 million due to complete the acquisition of the 4 vessels. So I guess, where does that put your balance sheet and your maybe financial flexibility for future acquisitions or maybe even share repurchases at this point in the next few months?

John Wobensmith, CEO

We recently acquired three ships, which will be delivered between August and October. We mitigated the risk of these purchases by securing time charters on three of our existing ships for two years, with rates between $23,375 and $25,500. This arrangement yields a 50% cash-on-cash return, meaning we're effectively financing half of the purchase price over two years for ships built in 2014 and 2017. I believe we've done well in managing risk. We also have a substantial revolving credit facility to support acquisitions, but we remain focused on our value strategy and reducing our debt. Currently, we're satisfied with the acquisitions we've made, and we will still have cash available at the end of the year after repayments and deliveries. We will continue to explore opportunities as they arise, especially since freight and time charter rates remain attractive, as evidenced by recent two-year deals.

Randy Giveans, Analyst

Sure. Yes, I can see that as well. And then speaking of those charter rates that you mentioned there, you chartered out a few of those Ultramaxes, very strong rates, as you mentioned, $23,000, $24,000, $25,000 for 2 years. I guess a few questions around that. Any additional appetite for further Ultramax charter outs or is there kind of a base level of spot exposure you want to have there? And then as it pertains to the Capesizes, I think you only have one charter there or maybe 2. Is the reason that charter activity and rates aren't as elevated on the Capesizes because of maybe uncertainty around Chinese steel production? And really, I'm just trying to ask you about that as well, so kind of a 2-for-1 question here because that's clearly the big concern in the market.

John Wobensmith, CEO

So in terms of chartering activity, we may do a couple more on the Ultras, but I think you're going to see us focus more on the Capes in terms of locking up cash flows. That is the most volatile sector, and as we come closer and closer to implementing fully the value strategy, I think it makes sense to have coverage in place. Rates today in the Capes are still probably around $30,000 a day for 1- and 2-year rates are probably $24,000 to $25,000 a day. So good, healthy numbers. Having said that, the spot market is actually quite a bit higher. My guess is as the spot market continues to hold up over the next couple of months and increase along the lines of the FFA curve, you'll see those charter rates move up further. But I think that's where you're going to see us concentrate a little more on de-risking and our portfolio approach and putting some more ships away under longer-term charter.

Randy Giveans, Analyst

Got it. On the steel front.

John Wobensmith, CEO

Yes. On the steel front, there are many conflicting reports. Often, we hear statements from the Chinese government that don't lead to actual changes. It appears there is some reduction in steel production, likely tied to the Communist Party anniversary and pollution control efforts, especially in Beijing. This trend may persist for a while, but we don’t foresee any major changes. Iron ore shipments are crucial for drybulk shipping in relation to China. While steel production impacts that, Brazil is increasing its output and improving its logistics since early 2019, and we expect these volumes to keep rising. We've observed situations where steel production remains steady, yet iron ore imports increase. As we approach the second half of the year, which is typically stronger, Vale usually sees shipments rise by 18% to 20% compared to the first half, and we don't anticipate significant changes in that regard. The Chinese government has aimed to lower iron ore prices successfully, which benefits steel margins. Consequently, the steel companies prefer these lower iron ore prices, and Vale, along with Australian iron ore producers, has low cash flow breakeven points. Even with minor decreases, they still generate strong cash flow. In summary, we believe the market will firm up as we enter the third quarter for both Capesize and Ultra ships.

Randy Giveans, Analyst

Yes, I appreciate the color and I agree. Obviously, the increase in Vale exports and really the non-Chinese steel production ramping as well could offset that.

Operator, Operator

We'll move on to our next question from Omar Nokta of Clarksons Securities.

Omar Nokta, Analyst

I guess, as Randy said, congratulations on I guess on several fronts, the earnings and then also this refinance, the acquisitions and the new JV. I did want to ask about the $450 million credit facility, which with the $300 million revolver it's a pretty decent-sized revolver, I'd say and one I don't think I've really seen much of in the shipping space over the past several years. So I guess, kudos to you on being able to get a revolver that size. But also I wanted to ask in terms of how the mechanics of the revolver, how does that work in terms of vessel acquisitions? We've seen it where if you have a revolver and you use it to buy ships, that portion that's been drawn converts into a term loan. Is that what's happening here or does this stay on as a revolver?

Apostolos Zafolias, CFO

Thanks, Omar. No, it's a regular revolver. It does not convert into a term loan. You're able to draw and pay back and redraw, and it has regular quarterly reductions of about $11.7 million, but it does not term out. It's just a regular revolver and gives us plenty of flexibility going forward. I will also say that 5 of the vessels in our fleet will stay unencumbered, so those provide additional flexibility for us in the future. And it also has an uncommitted accordion feature. So if we did want to increase the facility amount, we could do that by putting additional vessels in there.

John Wobensmith, CEO

Yes. I mean, Omar, I would look at it as a holistic $450 million credit facility. Yes, $300 million is a revolver and $150 million is a term loan, but it's really a $450 million facility that, as Apostolos says, reduces based on a 20-year amort schedule at $11 million and change per quarter. That's how I would view it.

Omar Nokta, Analyst

Got it. Yes, there is a solid schedule in place. While you are aggressively reducing debt, hypothetically speaking, if you weren't using much of the facility, could you draw the full $30 million needed to purchase a ship? Would that amount be completely available for funding the ship, or would it need to comply with specific loan-to-value covenants?

John Wobensmith, CEO

You could...

Apostolos Zafolias, CFO

So you could draw down $30 million depending on the revolver availability, obviously. You would not need to put it out as collateral. There is an overall covenant of 55% LTV for a drawdown, but that's for the whole revolver.

Omar Nokta, Analyst

Got it. Yes. And I appreciate you kind of answering that. And then one kind of follow-up is, as Randy asked about, you intend to repay $117 million here during the second half, get you down to that $250 million at year-end. And it sounds, if I recall it, Apostolos you mentioned that you're not going to stop there at year-end $250 million, next year you intend to continue paying down debt. Is there a certain level or amount that you intend to pay or you have a target of how much of that $250 million you want to pay down next year?

John Wobensmith, CEO

Great question, Omar. So we don't have a target set yet, but as we're coming into the next quarter earnings call, if you will, we will have our third quarter cash flow in the bag, so to speak, we will have probably 60% of our fourth quarter fixtures done. So we will have a very good sense coming into the end of the year regarding our cash position and how much we'll be paying ultimately down to. Clearly, the target is $250 million; it'd be great if we could go lower than that, but that's going to depend on freight rates. So also at that time, we're going to take a view on 2022, and we will then let the market know what we plan on repaying for debt for 2022. So it's a little bit of a let's wait, let's make sure we have as much information as possible as we head into year-end, and then we can set that repayment for 2022.

Omar Nokta, Analyst

It makes sense. It seems that regardless of the amount of debt outstanding at year-end, if I do a simple calculation, it will be below the scrap value of the fleet, which is not a bad position to be in.

John Wobensmith, CEO

Yes, I would agree with that. Ultimately, one of the main goals of this strategy is to reduce our net debt to zero because we want a solid, low cash flow breakeven rate that allows us to continue paying dividends throughout any market cycle.

Operator, Operator

We will now move on to our next question from James Jang of Univest Securities.

James Jang, Analyst

I have a couple of quick questions. We're expecting a start of a real super cycle in the drybulk sector in the coming year, and we're expecting that to last about 2.5 to 3 years. My question is, are you open to chartering in vessels at current levels if you have the same sentiment as me with the super cycle coming up or would you like to own vessels?

John Wobensmith, CEO

I believe it’s a mix of both. First, we are definitely in the business of owning vessels and intend to remain so. As part of our minor bulk strategy, we often book forward cargoes and occasionally use other vessels to transport those cargoes. We do charter vessels in, but typically this is for short-term cargo coverage where we see the potential for profit. We have engaged in some longer-term charters, usually for 3 to 5 months or 4 to 6 months, but these are primarily backed by a solid backhaul cargo to cover most of the minimum period while allowing us to make money on the front haul. If you're asking about long-term chartering, I would say no. We consider long-term charters to be higher risk. Our fleet is large enough to operate efficiently, and we prefer to utilize our minor bulk fleet and trade it with four cargoes. As mentioned, we may use other vessels on a short-term basis, but overall, the answer is no—we see long-term chartering as too risky.

James Jang, Analyst

Got you. Okay. The next question is on the expensing. So with the smaller vessels folded in, do we assume that the Cape will be in the next month that you would look at or you view maybe more of still a case-by-case basis and value?

John Wobensmith, CEO

I would call it a case-by-case basis. We have a barbell approach where we've identified we want to continue to grow in Capes and Ultras. There have been some very compelling Ultramax transactions that we've been able to execute on, which we have quickly and definitively. The Capesize market in terms of acquiring eco vessels, which is what we are focused on, is a little more challenging in the sense that the market is not as liquid as the eco Ultramax market, but we will definitely continue to look at that. And if we see an opportunity, then we'll move on it.

Operator, Operator

And it appears we have no further questions at this time. I'd like to turn the conference back for any additional or closing remarks.

John Wobensmith, CEO

Thank you, everyone, for participating today, and I hope everyone has a nice day and enjoys the rest of your summer. Thank you.

Operator, Operator

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