Earnings Call Transcript - GNK Q4 2022

Operator, Operator

Good morning, ladies and gentlemen. And welcome to the Genco Shipping & Trading Limited Fourth 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 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 two weeks by dialing (1877) 674-7070 and entering the passcode 378900. 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, 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 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 fourth quarter 2022 conference call. I will begin today’s call by reviewing our Q4 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 Q&A. For additional information, please also refer to our earnings presentation posted on our website. During the fourth quarter 2022, Genco continued to achieve solid financial results, which capped off another strong year of earnings and shareholder returns. Notably, during 2022, we generated EBITDA of $227 million, which marked our second consecutive year of EBITDA well in excess of $200 million. Our earnings were driven by fleet wide TCE of $23,824 per day as we drew on our best-in-class commercial platform outperforming our scrubber-adjusted benchmarks by nearly $3,000 per day, which added $44 million to the bottom line from our commercial platform alone. After a transformational 2021 in which Genco embarked on a path to become a low-leverage, high-dividend payout company, the first of its kind in the dry bulk public markets, 2022 marked the first full year of this value strategy. Our successful execution resulted in declared dividends totaling $2.57 per share for the full year of 2022, representing a dividend yield of 14% based on our February 21, 2023 closing stock price. Importantly, during the fourth quarter, we declared a dividend of $0.50 per share, marking our 14th consecutive quarterly dividend. Since Q3 2019, we have now declared a total of $4.295 per share in dividends, or approximately 24% of our current share price. We believe our track record of meaningful and sustainable dividends over three and a half years through varying cycles speaks to the strength of the company's balance sheet and our prudent approach to capital allocation. In addition to paying meaningful dividends, we also continued to focus on other pillars of our value strategy. Proactively paying down debt has enabled us to further reduce our cash flow breakeven levels for the benefit of shareholders. 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 zero, creating a compelling risk-reward balance. Irrespective of the broader macro environment, we remain in a strong position to pay sizable dividends to shareholders, while seeking opportunities to take advantage of attractive growth opportunities as markets develop. We believe the dry bulk market is currently experiencing a typical seasonal low and we anticipate an improvement in freight rates based on catalysts that include China's reopening from restrictive COVID-related policies together with improving cargo flows as the year progresses. Importantly, this positive demand outlook coincides with a backdrop of a historically low newbuilding order book. 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. Ahead of this anticipated freight rate pullback, in Q1, we fixed 84% of our Q1 days at a firm rate of $14,217 per day, well above current spot rates published by the Baltic Exchange for non-scrubber fitted Capesize and Supramax vessels. Importantly, our Capesize fleet is fully scrubber fitted and able to earn a meaningful premium above this daily published index. Our TCE is also well above our cash flow breakeven rate of approximately $9,500 per day. As we have highlighted since the announcement of our value strategy in April 2021, dry bulk shipping is highly seasonal with significant operating leverage inherent in the business. Periods like what we are currently seeing in the first quarter, although temporary in our view, are why we chose to prepay over 60% of our debt over the last two years, substantially reducing our financial leverage and bringing our cash flow breakeven rate down to industry lows, a core differentiator for Genco compared to the peer group. This provides us with a high degree of flexibility within our dividend policy in regard to both our voluntary debt prepayments and our quarterly reserve. With no mandatory debt amortization into our credit facility's maturity in 2026, our capital structure is built to support our value strategy in diverse market environments with amounts of both debt prepayments and our reserve remaining under management's control. While we plan to continue to pay down debt, as we stated in the past, we maintain flexibility to reduce the quarterly reserve to pay dividends subject to the development of freight rates for the remainder of the first quarter and our assessment of our liquidity and forward outlook. The company remains very well capitalized and we are beginning to see freight rates improve off of early year lows supporting our thesis of a dry bulk market recovery. At this point, I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.

Apostolos Zafolias, CFO

Thank you, John. During the fourth quarter, we continued to record strong 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 $278 million worth of debt or 62% of the debt levels, 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 the fourth quarter of 2022, we declared a $0.50 per share dividend, representing an annualized yield of 11%. During the quarter, we continued to see a declining trajectory of our vessel operating expenses from the first half of the year with Q4 daily vessel operating expenses registering 30% lower than Q2 levels. Additionally, drydocking CapEx declined to $5.5 million in Q4 from $7.8 million in Q3 and $22.6 million in Q2. Despite the larger declines in costs in recent quarters, we continued to invest in upgrading select vessels within our fleet. Our success in completing the transition of our fleet out of Chinese cruise and the progress in upgrading select vessels following our technical manager transition will help in maintaining comparatively lower crude change expenses, including COVID-19 costs. For Q4 2022, the company recorded net income of $28.7 million or $0.67 basic and diluted earnings per share. Our fourth quarter EBITDA was $46 million, bringing our full year 2022 EBITDA to $227 million. As of December 31st, our cash position was $64.1 million, which when combined with our revolver availability of $213 million, provides total liquidity of approximately $277 million. The substantial liquidity position together with the fact 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, 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 zero. Following our substantial deleveraging since the beginning of 2021, our debt outstanding was $171 million as of the end of last year, which resulted in net debt of $107 million. Although we have no mandatory debt amortization payments until 2026 when the facility matures, we plan to continue to voluntarily deleverage consistent with our strategy. As I mentioned, our Board of Directors declared a dividend of $0.50 per share for the fourth quarter in line with our value strategy calculation. Walking down the formula, this resulted from operating cash flow of $46.6 million less debt repayments of $8.75 million, drydocking ballast water treatment systems and energy-saving device costs of $5.5 million and the previously announced reserve of $10.75 million. We expect our vessel operating expense levels in the first quarter to be $6,250 per vessel per day, primarily due to timing of crew changes and purchases of spares and storage. For the full year of 2023, we expect our daily vessel operating expenses to be $5,990 per vessel per day. We continue to focus on cost optimization while seeking to continue to meet stringent safety and vessel maintenance standards.

Peter Allen, SVP of Strategy

Thank you, Apostolos. During the fourth quarter of 2022, both the Baltic Capesize and Supramax indexes averaged approximately $14,900 each for the quarter, firm levels overall but below the peaks seen earlier in the year. China's zero COVID policy and unwinding of port congestion, a decline in Black Sea grain exports and underperforming Brazilian iron exports contributed to a counter seasonal second half of 2022. Furthermore, during the first quarter, we are currently experiencing a typical softness for this time of year, driven by lower export volumes from key regions, as well as the timing of the Chinese New Year and newbuilding deliveries. Specifically, Brazilian iron ore exports were down by 16% in January versus the Q4 average, while newbuilding vessel deliveries rose at the start of the year due to the front-loaded nature of the order book temporarily throwing off the supply and demand equation. As we look ahead, we view several catalysts as potentially supporting the dry bulk market, including China's reopening, further stimulus measures, tightness in global energy markets and continued rerouting of coal cargo flows due to Russia's war in Ukraine. We believe these factors will benefit Capesize rates primarily while we expect the onset of the South American grain season will be a driver for higher bulk earnings as we approach the end of Q1 into Q2. Furthermore, we are currently less than one month away from the expiration of the Black Sea grain initiative agreement that has seen over 22 million tons of grains exported since inception. The USDA forecasts Ukrainian grain exports to decline by approximately 30% during the current marketing year. Regarding the supply side, net fleet growth in 2022 was 2.8%, the lowest level since 2016. The historically low order book as a percentage of the fleet of just 7%, as well as the 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 be attractive to owners of older tonnage, particularly for non-scrubber fitted Capesize vessels, considering the increased level of investment in ships required and the current earnings environments for those ships. Overall, we have a constructive outlook for the dry bulk 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

Thank you. And your first question comes from Omar Nokta from Jefferies.

Omar Nokta, Analyst

Obviously, very nice to see the complete balance sheet transformation here over the past couple of years, the platform now looks pretty solid, and really is positioned irrespective of where we are in the cycle. I do want to ask about the three pillars as you highlighted, the dividend, the deleveraging, the growth. You last acquired a few ships, I guess, early last year. We have seen a pullback in rates. I guess, one, what that had done to secondhand values here recently and then also, does that open up an opportunity for you to add ships in the market today?

John Wobensmith, CEO

The value aspect has been quite fascinating. I don't recall a time when values have remained so resilient despite the decline in freight rates. Clearly, we are observing an improvement in those freight rates. It's encouraging that both the equity markets and the private ship owning sector anticipate better times ahead, which explains why values have remained steady. In response to your question, Omar, our focus is on ongoing fleet renewal, which you will see us pursue. We still operate some older ships, especially our 55s, which we aim to replace with newer vessels. Therefore, you can expect that to occur this year. Additionally, we may also replace some of the 170s on the Capes, as they are equipped with scrubbers and currently generating strong cash flows. Overall, while we are certainly focused on large-scale M&A, fleet renewal is our immediate priority.

Omar Nokta, Analyst

That's a very valid point. We have noticed that the sentiment in the secondhand market for equities remains strong. Regarding the reserve of $10.75 million, it's clearly a decision for the Board. It could potentially be adjusted to zero. How much of that $10.75 million would you consider using for fleet renewal, as opposed to possibly allocating it for a dividend payout?

John Wobensmith, CEO

We haven't had that specific conversation yet, Omar. We want to conclude the quarter and see how it turns out in terms of fixtures. Once we reach that full capacity, we will discuss how much we want to distribute. I’m not directly addressing your question, but I can confirm there has been substantial discussion on this topic, and the management team and the Board agree that if necessary, we will use some of that quarterly reserve for Q1 to ensure we continue to pay dividends as promised when we implemented this policy. To elaborate further on your question, when we introduced this reserve, we outlined its intended use, which gives the management team flexibility during downturns like we've experienced in the first quarter, especially as we anticipate a recovering freight market. There’s nothing particularly new here; it’s possible we might utilize a portion of that reserve to enhance the dividend in the first quarter.

Omar Nokta, Analyst

And maybe just one final one for me before I turn it over. This week we have seen a bit of a bump here in spot rates. I guess really across the board from Capes down to the Handys. Obviously, it's been a pretty slow start to the year. The past few weeks have been very quiet, rates have been below, call it, breakeven. But we are seeing a bit of a bounce here this week. I know it's early. Anything to read into this latest move?

John Wobensmith, CEO

No, I think we're observing a recovery, especially as the Capes experienced some very low numbers. I believe we overshot to the downside on spot Cape rates. However, I think we're at the onset of a recovery across all segments. We've noticed this improvement in midsized ships as well, and it's evident in the forward paper market. Asia is starting to pick up, driven by coal and Brazilian exports, and we're expecting a record soybean season. This period marks the beginning of an upswing. I believe several factors are contributing to this, particularly China's reopening. You will see a two-phase improvement: first, the actual reopening and the revival of the service sector contributing to normal demand restoration, and then, particularly in the second half of the year, the benefits from stimulus measures initiated by the Chinese government will significantly bolster the steel sector and iron imports. Additionally, we are witnessing increased utilization rates in the steel sector. I've provided a lengthy answer, but there are many encouraging signs to pay attention to. As a reminder, we discussed similar points last October, and I don't think our perspective on the timing has shifted.

Operator, Operator

Your next question comes from Greg Lewis from BTIG.

Greg Lewis, Analyst

John definitely appreciate your comments around the use of the reserve and refreshing our minds about that. Peter, I did want to ask, you mentioned some comments around, we’ll just call it ease of some of the Eastern Europe trade with grain and coal and some of those like timelines that are approaching. How are you guys thinking about what those Eastern European coal and grain trades look like in '23 versus '22? I guess that's my first question.

Peter Allen, SVP of Strategy

We often concentrate on the seasonality of the grain trade. Currently, our focus is on South America's grain season, which is ramping up. In a typical year, we would focus on the Ukrainian grain season during the third quarter, as that is usually the peak. At this time, the volumes are relatively low, ranging from 2 million to 3 million tons per month. Specifically, January was an especially light month for exports, largely due to macro factors such as Russia potentially delaying vessel inspections. We are hopeful for an extension of the grain deal beyond the current 120 days, with discussions about extending it for up to a year. On the coal side, we've seen interesting developments that have been supportive of the overall coal trade. There has been little investment in new mines and volumes, but the focus has shifted to ton miles and rerouting, which has positively impacted ton mile demand. We expect this trend to continue in the short term and into later this year. There are certainly many factors at play.

Greg Lewis, Analyst

And then just following up with some of the volumes out of Russia, in the tanker trade, you always hear about the dark fleet. Is there something similar going on with that in dry bulk and is there kind of any way to quantify that?

Peter Allen, SVP of Strategy

So yes, Russia is still exporting a lot of coal to India and to China, so those trades have been substantial. Russia is actually the second largest supplier of China's coal imports at over 40 million tons a year. So it's a pretty big number when you think about the coal trade. For China, it's a very small portion of the overall coal use. But quite a bit of volume still moving from Russia to China and India, which are the two largest coal importers, obviously.

Greg Lewis, Analyst

John, regarding your comments, the Supramax markets have significantly outperformed Capes over the past 18 months. If we exclude the scrubbers, I believe the Capes would have underperformed compared to the smaller vessels. You mentioned a few times during the call that we are expecting a positive trend for Capes. Is this mainly due to the increase in iron ore shipments from Brazil, or are there other factors we should consider?

John Wobensmith, CEO

No. Look, I mean, the two main commodities of Capes are iron ore and coal. As you heard Peter mention, we still think the coal trade is going to be firm. And we see the pickup and the reopening of China and the infrastructure spending that's going to be beneficial to the iron ore trade and hence the Capes. I mean, all you have to do is look at where the price of iron ore has gone. So over the last few weeks, it's been volatile, but net it's up quite a bit. So that is positive. The relationship between the Capes and the Supramaxes as you pointed out has moved against what historical standards would dictate in terms of the spread. I think you're going to see that come back into a more normalized spread this year and going into next year. And why I think that is because, again, Capesize demand is going to move up. I think demand will also move up in the mid-size ships. However, one of the things that was propping up the mid-size ships last year in particular where it was the container trade and the fact that those ships were moving containers because of the hot container market, that doesn't exist anymore. So I think you're going to see more of a normalized spread between the Capes and the mid-size sector going forward. But again, rising tides lift all boats. So I think everything is going to move up on the back of stronger demand.

Operator, Operator

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

Liam Burke, Analyst

John, by adding time charters, you've reduced some volatility from your earnings. As rates increase and some of the shorter durations of time charters expire, what is your directional outlook on balancing the fleet between spot and time charters?

John Wobensmith, CEO

As we mentioned, most of the long-term time charters we plan to pursue going forward will be in the Capesize sector to mitigate volatility. We've strategically engaged in some spot index deals at competitive rates above the DCI plus a scrubber premium. This is with the expectation that the market will improve, allowing us to capitalize on the upward movement. However, we need to see more growth and stability in the Cape market before committing to additional time charters. Currently, aside from what we already have in place, our strategy is to maintain a very short position. We're also refraining from taking on many COAs in the minor bulks at this time due to our belief that the market will continue to rise. However, as part of our overall strategy, once the Cape market strengthens, we will likely start taking some exposure off the table like we’ve done previously, but that time is not yet here.

Liam Burke, Analyst

Is your drydocking budget or projections relatively low? Does that provide you with any flexibility to adjust reserves?

Apostolos Zafolias, CFO

Yes, the drydocking numbers are down significantly below what they were in 2022, which do help in further reducing our breakeven levels. I'd say that, that is a slightly separate sort of conversation. The reserve has been put in place and does provide us the flexibility to use it depending on market conditions. But again, the drydocking is a bit of a separate bucket within our overall breakeven levels.

John Wobensmith, CEO

But having a lower CapEx number for 2023 significantly lower than last year, obviously, lowers our breakeven and gives more room for dividends as a whole.

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.