Earnings Call Transcript - GNK Q3 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Third Quarter 2020 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. A replay of the conference will be accessible any time during the next two weeks by dialing 888-203-1112 or 719-457-0820 and entering the passcode 5872493. At this time I will turn the conference over to the company. Please go ahead.

Unknown Executive, Unknown Title

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, 2019, and the company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC.

John Wobensmith, CEO

Good morning, everyone. Welcome to Genco's Third Quarter 2020 Conference Call. We will begin today's call by reviewing our year-to-date highlights, discuss our 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, we witnessed an uplift in global economic activity levels, which translated into a strengthening drybulk freight rate environment despite the continued uncertainty relating to the trajectory of COVID-19. Following a challenging first half of the year, Genco generated over a 70% increase in our time charter equivalent rate relative to the prior quarter, enabling us to return to profitability on an adjusted basis. In line with our thesis of a second half recovery, we were able to capitalize on the strengthening freight market, as we primarily employed our vessels in the spot market. In the fourth quarter to date, we anticipate further improvements to our time charter equivalent rate, led by our Capesize vessels at nearly $20,000 per day. As of November 4, our TCE was fixed at over $13,000 per day on a fleet-wide basis for 57% of the days. While we have seen a recovery and improvement in fundamentals, challenges relating to conducting crew rotations remain due to various port restrictions, difficulty arranging travel, and ensuring the health and well-being of our crew members. Genco has taken proactive measures by implementing industry-leading protocols and we have successfully completed the majority of our scheduled crew rotations for the year involving over 1,600 seafarers. The health and safety of our crew remains our top priority. We thank our crews around the world for their dedication and professionalism and are committed to continue to take steps to promote their health and safety amid the global pandemic. Regarding capital allocation, our strong balance sheet, along with an improving drybulk market, has enabled Genco to declare our fifth consecutive quarterly dividend, highlighting our focus on returning capital to shareholders. This brings the total dividends declared to $0.735 per share since the third quarter of 2019. Effectively deploying our capital will remain a top priority for management. We intend to continuously evaluate our capital allocation strategy as the drybulk market further evolves and as we seek to continue to create shareholder value. Going forward, we anticipate traditional drybulk seasonality to play a factor during the first quarter of next year. However, we plan to book forward cargoes and select period time charters to smooth this volatility, similar to what we have done in recent years. Overall, for 2021, we believe the drybulk outlook is favorable. Specifically, the order book as a percentage of the fleet is at an all-time low, limiting net fleet growth, while the Brazilian iron ore recovery and growth story, which has materialized since June, is expected to continue. We believe Genco is in a position of strength to benefit from these compelling fundamentals, particularly due to our ownership of both major and minor bulk vessels, our world-class in-house commercial operating platform, and our industry-leading balance sheet. We believe the record-low order book will be an important catalyst in creating a drybulk market environment in which demand growth outpaces supply growth in the coming years, which we view as a positive driver for freight rates.

Apostolos Zafolias, CFO

Thank you, John. For the third quarter of 2020, the company recorded a net loss of $21.1 million, or a basic and diluted loss per share of $0.50. Excluding non-cash vessel impairment charges of $21.9 million and a $0.4 million loss on the sale of vessels, adjusted net income for the quarter was $1.2 million, which translates to basic and diluted earnings per share of $0.03, while we generated adjusted EBITDA of $22.3 million. Genco's ability to capitalize on improved market conditions allowed us to further enhance our balance sheet, increasing our cash position to $160.8 million, which includes $24.5 million in restricted cash as of September 30, 2020. Our outstanding debt, before deferred financing costs, is $475.4 million at the end of the quarter. After taking our cash position into account, our net debt stands at $314.7 million. Additionally, we continued to sell our older, less fuel-efficient vessels as part of our fleet modernization and sustainability efforts. During the third quarter, we delivered two previously agreed upon vessels to their buyers. The sales of the Baltic Wind and Baltic Breeze, built in 2009 and 2010, closed on July 7 and July 31, respectively. Also, in October, we delivered the Genco Bay, a 2010-built vessel, and the Baltic Jaguar, built in 2009, to their buyers. We have agreed to sell three more Supramax vessels—Genco Loire, Genco Normandy, and Baltic Panther—with deliveries expected in the fourth quarter of 2020 and early 2021. The total gross proceeds from the sale of these seven vessels is $51.9 million, with associated debt of about $31.4 million. Our cash flow breakeven rate for the fourth quarter is estimated to be around $12,350 per vessel per day. This breakeven rate includes our Q4 2020 DVOE budget of $4,750 per vessel per day, averaged across our current fleet. While we have completed most of the scheduled crew rotations for our fleet, we expect to face increased costs and delays in the fourth quarter due to a resurgence of COVID-19 cases globally. Additionally, the time needed to position our vessels to regions where crew rotations can occur—due to various travel and governmental restrictions related to COVID-19—resulted in days during the third quarter when our ships were unable to generate revenue and may continue to do so. Concerning dry docking, we anticipate around 94 days of estimated off-hire time during the fourth quarter. Lastly, while we are adjusting our fleet to better capture potential market improvements as the year ends, we will have most of our Capesize vessels with contracts ending in November and December, and we may choose to ballast some of these ships to the Atlantic Basin to optimize earnings over the long term.

Peter Allen, Drybulk Market Analyst

Thank you, Apostolos. Following the lows in May, the freight rate environment improved significantly, led by the Capesize sector. Notably, Capesize rates have averaged over $20,000 per day since June 1, including peaks of over $30,000 experienced in July and October. This rise in Capesize rates has coincided with the meaningful uplift in Brazilian iron ore exports. From June to October, we have seen on average 10 million tons more per month exported as compared to the January to May period as Vale's operations have recovered from poor weather conditions earlier in the year, as well as from the 2019 Brumadinho dam incident. Overall, the iron ore trade continues to be driven by China, as imports have risen by 11% year-over-year, including imports of over 100 million tons for four consecutive months, something that has only occurred three times on record, prior to this year. Supporting this increased import level has been all-time high steel production in China, which has increased by 5% in the year-to-date. China has continued to gain global market share as output in the rest of the world is down by 12%. However, production in key countries such as India has been increasing off of the lows in April as demand improves. Regarding the coal trade, as has been widely reported, China has banned imports of coal from Australia. We view this as a way to limit coal imports into year-end due to import quotas, also a political move due to the trade tensions between the two countries. We currently expect this ban to be short term in duration, possibly being lifted early next year. As a natural reaction to this step taken by China, we are seeing a diversion of cargoes from Australia to other destinations, such as India, Vietnam, and Europe. In terms of minor bulks, the North American grain trade in Q4 remains encouraging. To date, the US has already sold over 33 million tons of soybeans for the 2020-2021 season as compared to only 12 million tons at the same time last year. China has been the primary driver of grain demand as the country continues to agree to large-scale purchases of US agricultural products, including more than half of the reported soybean and corn sales to date. Regarding the vessel supply side, net fleet growth in the year-to-date is approximately 3%. Importantly, we have seen 22 VLOCs scrapped this year fully offsetting the new building VLOCs that have been delivered. Furthermore, increased port congestion, 14-day quarantine periods, and deviations for crew changes have led to a decline in fleet-wide productivity. Lastly, we note that the order book as a percentage of the fleet is approximately 6%, which marks an all-time low. This also compares to 6% of the fleet that is greater than or equal to 20 years old. We believe these positive supply-side dynamics provide a solid foundation for drybulk market fundamentals. Looking ahead to 2021, we view the supply and demand trends as favorable as global trade flows further improve off of the trough level seen earlier in the year, while the Brazilian iron ore trade continues its recovery and growth trajectory. This concludes our presentation, and we will now be happy to take your questions.

Operator, Operator

Our first question comes from Liam Burke with B. Riley.

Liam Burke, Analyst

John, the Capesize rates have been quite volatile as we approach the end of the third quarter and into the fourth quarter. As we look ahead to 2021 and the changes in Chinese steel production, are you expecting continued volatility in that area, and if so, is there anything you can do regarding time charter?

John Wobensmith, CEO

The Capesize market has always been highly volatile, so I don't expect that to go away, but as I look into next year, we continue to see a recovery scenario with growth on the iron ore side as Vale continues to push up their output. We do think the Chinese will begin to import coal again at the beginning of the year. It's possible that they may not be importing as much from Australia, but then that just means they are going to be relying on sourcing coal from longer-haul trade routes like South Africa, Colombia, and maybe even see some more liftings out of the US again. So I do expect the volatility. However, we expect stronger rates going into 2021 than what we've experienced in 2020, and we also expect the COVID situation to abate. I think India in particular was a pretty big hit to the drybulk market this year, and they are now well on their road to recovery in terms of steel production. They still obviously have high COVID cases, but from an industrial output standpoint, their steel mills are almost back to full capacity or full utilization. In terms of the time charter market, Liam, we will continue to monitor that. We've looked at it all this year and it really hasn't gotten above sort of $14,000, $15,000 a day for a year and we think that that's not an attractive rate as we go again into next year with a really low supply or delivery schedule. But if we do see opportunities that make sense, we will definitely take some of the exposure off the table, particularly in the Capesize fleet.

Liam Burke, Analyst

Great. And just quickly on the fleet, you are selling Supramaxes and the Handys, your debt is amortizing steadily. You have a dividend program in place. What about the fleet, are there S&P opportunities there or do you just continue to bide your time?

John Wobensmith, CEO

Look, I think that first of all the ships that we've been disposing of, the Handysize, in particular, has been part of the strategy for the last few years to exit that sector and concentrate more on the Capesize as well as the Ultramax sector. So we've been able to execute on that to some degree. And then the 53s which we've also been selling are less fuel-efficient. We've been successful in operating those pretty well and we've been able to get well above the adjusted index rates on those. We've been doing a lot of steel off the East Coast into the Med and then cement back and that's been a very good trade for us on the ships and earned us premium rates. However, again those 53s have always been identified as part of the fleet renewal program, and we finally got to a point where in the third quarter and early fourth quarter where values moved up quite significantly on those 53s off of some pretty ridiculous numbers in terms of what people were willing to pay in the summertime. So our patience paid off on that and we've now been able to get some of those out the door. And I think overall, the company is focused on renewing the fleet, bringing the age down and reducing our carbon footprint, and getting rid of the less fuel-efficient vessels, which again, we've been able to execute on over the last several months.

Operator, Operator

Our next question comes from Randy Giveans with Jefferies.

Randy Giveans, Analyst

See, I guess a follow-up question on the question on the Supras and Handys. More recently, the sales have been Handys. This time, it looks like you're going to Supras. Kind of why that switch and are the next handful of sales going to be back to Handys or kind of either asset class? Then in terms of renewal, any interest in like en bloc purchase of modern secondhand Ultramaxes?

John Wobensmith, CEO

So just on the Supras, just to put a little finer point on it, we're not necessarily selling Supramaxes per se. We've been selling the 53s in particular. Again, those have been a focus for a while because of their fuel inefficiencies, their age, and we've again been focusing on more of the modern Ultramaxes. I think we'll continue to exit those 53s. I think we'll have three left. Then at the same time we're going to continue to look at exiting the Handysize. But again, our focus is really in the Capesize market and the Ultramax market, it's been like that since really 2016, 2017, that hasn't changed. We still believe heavily in those asset classes. To go to the second part of your question, time will tell in terms of how we redeploy capital, but the one comment I will make is, I think there is a dislocation in terms of freight rates and values today, meaning I think it's a very attractive time to acquire particularly eco, fuel-efficient tonnage. So we will continue to evaluate it, and as I said before, we've always been very focused on capital allocation and doing it the proper way that brings shareholder value and we spend a lot of time, the management team, along with the Board analyzing all of our different options before we make decisions.

Randy Giveans, Analyst

Sounds good. All right. And then switching over to kind of the iron ore trade. Obviously, Vale continues to ramp up production. The sales, there's a little disconnect in the third quarter, but they expect that to ramp up as well in the fourth quarter, have you seen that in the last month, six weeks or so and are you switching your fleet to have a little more exposure there in the Atlantic as opposed to the Pacific?

John Wobensmith, CEO

We have moved, I guess, a few more ships into the Atlantic. We'd always try to keep a pretty balanced approach to this. There are certainly times when Australia gets hotter than Brazil and then Brazil gets hotter than Australia. So we do try to position the fleet relatively evenly in between the two basins. I agree with you that Vale continues to ramp up on the iron ore side. I would like to see the coal come back into the market and provide some further support. The good news is, we've also seen iron ore going into Japan again as their steel industry gets back and up and running, which it has over the last few months. We're seeing a lot of coal going to Southeast Asia in general, into Vietnam and the Philippines, even Pakistan and Turkey. So it would be good to see the Chinese coal come back, but again, we look at Vale, we think they've solved their logistics issues, we think they've made a lot of progress with the environmental concerns. So we see that continuing to ramp up as we go into next year. I can't stress enough, and we're talking about a 6.3% order book. It's at an absolute historic low and I think the projection, even for deliveries next year is maybe 1.5% to 1.6% of the existing fleet against 4% to 5% demand growth projection. So that should bode well for next year.

Operator, Operator

At this time, there are no further questions. This concludes the Genco Shipping & Trading Limited conference call. Thank you for joining. Have a great day.