Earnings Call Transcript - SHIP Q4 2020

Operator, Operator

Thank you for joining us, ladies and gentlemen, and welcome to the Seanergy Maritime Conference Call regarding the Fourth Quarter and 12 months of 2020 Financial Results. Joining me are Mr. Stamatis Tsantanis, Chairman and Chief Executive Officer, and Mr. Stavros Gyftakis, Chief Financial Officer of the Company. Currently, all participants are in a listen-only mode. We will have a presentation followed by a question-and-answer session. Please note that this conference is being recorded today. The Company has publicly released its financial results, which can be downloaded from the Seanergy website. If you do not have a copy of the press release, you may contact us, and we will be happy to send it to you.

Stamatis Tsantanis, Chairman and CEO

Hello, everyone, and thank you for joining our call. Today, we’ll discuss our results for the fourth quarter and full year period 2020, and we will provide you with a general update for the major corporate events that have taken place until today. I will start by saying that 2020 was a transformational year for Seanergy, where we managed to achieve a number of successful deals and lay a solid foundation for the future. We have indeed started to reap the benefits of our actions since the beginning of 2021, and we expect Seanergy to prosper for many years to come. The highlights of the Company’s achievements for the trailing 12-month period have been the following: We are growing our fleet by more than 40% with one Cape vessel delivered to us in Q3 ‘20 as well as three more Cape vessels agreed to be acquired since the beginning of 2021.

Stavros Gyftakis, CFO

Thank you, Stamatis. Good morning, everyone, and a warm welcome to our fourth quarter 2020 earnings call. I hope that you and your families continue to be safe and healthy. Before we get into the discussion of the historical financials, I can only echo Stamatis’ views concerning the future of our Company. We have done a tremendous job over the last 15 months to navigate Seanergy through the uncertain environment of 2020, and are now in the best possible financial position to take advantage of the promising uptick in the market. The fourth quarter of 2020 was marked by increased volatility, and day-rates were slightly lower than what most industry participants had expected. Net operating revenues, defined as revenues after deducting all voyage expenses and commissions, were equal to $16.7 million, a 13% reduction from $19.2 million in the fourth quarter of 2019. This reduction follows a 28% decrease in the daily time charter equivalent rate that was partly offset by increased fleet operating days after the delivery of the Goodship and the absence of expensive dry bulk and exhaust gas installation as was the case in the fourth quarter of 2019.

Stamatis Tsantanis, Chairman and CEO

Thanks, Stavros. I will start our discussion about our industry outlook by stating that after years of market imbalances, we’re now entering into a possible supercycle. Since the beginning of 2021, we are seeing the strongest start of the year for the Capesize market since 2014. This is driven by healthy demand for our key raw materials, but most importantly, by the most balanced vessel supply in decades. As regards to the fourth quarter of 2020, the Capesize market was affected by operational inefficiencies in Brazilian iron ore mines. The market remained volatile and Capesize daily rates during Q4 2020 ranged from a low of about $10,000 a day to a high of about $35,000 a day. Despite the volatility, global demand for steel-making raw materials remained strong throughout this period. This mix of favorable fundamentals led to a considerable recent spike in the Capesize market in January, while BCI earnings so far in the first quarter have averaged more than $16,500 a day. As stated before, this is the highest start of the year since 2014. Having in mind that Q1 is traditionally the weakest quarter for Cape vessels, we expect to see a much stronger market in the rest of the year. We are particularly happy to see this optimistic sentiment reflected also in the time charter rates. Indicatively, one-year time charter levels for standard Capesize vessels are currently around 22,500 barrels per day, which is a big leap from 10,000 to 12,000 barrels one year ago. Cape asset values have risen as well by more than 30% since the end of 2020. Looking at market fundamentals over the next two years, dry bulk demand growth is expected to average more than 2.5% in 2021 and 2022. In terms of iron ore and Capesize demand, we expect Vale in Brazil to continue steadily ramping up its production in the next three years in order to reach its long-term target of about 400 million tons per year. This compares favorably to current levels of about 320 million tons, and the ton manufactured is to be quite significant. The environmental regulations imposed on steel-making for lowering cargo emissions should continue to drive demand for higher-quality iron ore from Brazil. Moreover, the trillions of dollars of global stimuli are expected to drive infrastructure demand and fast iron ore demand for many years. We are particularly optimistic regarding vessel supply as the upcoming environmental regulations will have a twofold positive effect in the market. First, the immediate reduction of emissions that will be enforced in 2023 will lead to the speed reduction of the global fleet by approximately 10% to 15%. This will result in an effective reduction of available tonnage capacity, which will be even greater adjusted for larger ships. In addition, the uncertainty surrounding the global shipping emissions universe after 2030 has led to the lowest newbuilding order book in decades. The two factors I just mentioned are expected to create conditions of a severe vessel supply squeeze. This can potentially drive day-rates and the asset values to supercycle levels. As mentioned earlier, in our corporate developments, Seanergy has been strategically positioning for the moment. We have fixed the majority of our vessels or index-linked charters that will allow us to benefit directly from the rise in the market. We have acquired high-quality tonnage to gain the maximum amount of operating leverage with a strong market. With that note, I would now like to turn the call over to the operator and open the floor for any questions you may have. Operator, you have the call.

Operator, Operator

Thank you very much, sir. Our first question for today is from Tate Sullivan from Maxim Group. Please go ahead.

Tate Sullivan, Analyst

Yes. Hello. Good day. Thank you. Just circling back on a couple of your comments during the prepared remarks. Did you say earlier that the fixed rate in the current quarter is around $16,000 versus current rates of $22,500, or is that only on a portion of your ships, or did I hear that correctly, please?

Stamatis Tsantanis, Chairman and CEO

Hi Tate. Good morning. The rate that we have fixed those ships for about 98% of our fleet days for Q1, it’s going to be a bit more than $15,000 a day, which is fully in line with the BCI. I mean, the BCI, the Baltic Capesize Index since the beginning of the year has been around 16,500, 16,600. So we’re totally in line with the BCI for Q1.

Tate Sullivan, Analyst

Great. Thank you. And you’ve provided plenty of comments on your interest costs going forward after the restructurings. Can you…

Stamatis Tsantanis, Chairman and CEO

Before we go into that, the other comment about $22,000 was about the one-year time charter rate. So, having in mind that Q1 at $16,000, that’s about twice as much as the first quarters of 2020 and 2019. So, it’s usually the weakest quarter of the year. One year going forward time charter rate, that’s about $22,000 a day. So, yes, we are below the one-year term at a rate, but we are now completing the historically lowest quarter of the year.

Tate Sullivan, Analyst

Understood. Thank you, sir. Regarding your cash interest expense breakdown, compared to what you might report in 2021, is there a dollar range in which you could potentially reduce your interest expense, or do you have any comments on possible GAAP interest expense for 2021, or is it just too complicated to determine at this point?

Stavros Gyftakis, CFO

Hi Tate, this is Stavros. I mean, there are still some moving parts, because, as you know, I mean, we are acquiring some ships. I mean, we intend to get some debt on those. I mean, we tend to approach leverage going forward on a very conservative basis. So, we intend to not leverage those vessels above 50%. But, I mean, assuming conservative assumptions on our leverage going forward, interest expense per quarter should not be more than $2.6 million, $2.7 million or so.

Tate Sullivan, Analyst

Great. Thank you. You mentioned at the beginning the targeted combined capital ratio and referred to the current debt of around $130 million. Are you aiming for specific capital or leverage ratios moving forward?

Stavros Gyftakis, CFO

Yes. We are aiming for a leverage ratio of 55% to 60% overall. That is our goal. Currently, we may be slightly below those levels, as we want to finance the ships we acquire, with a focus on maintaining certain sales precautions. If we leverage the new acquisitions at about 50% to 55%, we should achieve an overall leverage of 55% to 60% as a company, which remains on the conservative side.

Tate Sullivan, Analyst

And last from me on the topic of securing of the financing behind the ship acquisition, the two additional ship acquisitions. Are you seeing similar rates to your other ships in your current financing? Has that changed since you restructured some of your debt? Can you comment on what you are seeing from lenders?

Stavros Gyftakis, CFO

Since the last equity raising, the Company’s leverage has significantly decreased, and our ratios have improved considerably. Seanergy has become a much more bankable entity. The interest rates we are encountering from potential lenders are around 3% to 3.5% plus LIBOR, which is much lower than our current implied interest rate. We will announce any financing arrangements soon. We are in discussions with some of our existing lenders and new lenders, and we expect the costs to be below 4%.

Tate Sullivan, Analyst

Okay. Well, thank you for all those comments. And thank you for the comments about the market and the bulk activity as well. Have a great rest of the day.

Stamatis Tsantanis, Chairman and CEO

Thank you, Tate. Have a good day as well.

Operator, Operator

Our next question for today is from Poe Fratt from Noble Capital Markets. Please go ahead.

Poe Fratt, Analyst

Yes. Good morning. I have several. So, if we could just start off by one. Rates have been very volatile. Stamatis, you think there’s a supercycle coming up, so you want to stay a little bit open. But, one thing that fit you in the past, just the rates have fallen out of bed, when there are things that just seem to happen to the industry. So, can you highlight how you’re trying to lock in or take advantage of what is a very strong first quarter and strong year and create a little more visibility on the cash flow front?

Stamatis Tsantanis, Chairman and CEO

Good morning, Poe. It's great to hear from you. That's a great question. In the third and fourth quarters of 2020, we aimed to maintain consistency with the time charter equivalent rate, and we are implementing the same strategy now in the first quarter. As you can see, there is significant consistency between the fourth quarter and the first quarter. We have also begun exploring some fixed rates that we believe will yield about $17,000 to $18,000 per day for the second and third quarters. This plan involves locking in a portion of our fleet when opportunities arise in the FSA market. As you mentioned, we expect the market to rise significantly in the upcoming quarters, but we are trying to manage visibility around volatility as much as possible. We will fix some ships at these rates, meaning a part of our fleet for the second and third quarters will be secured at an average of around $17,000 to $18,000 per day. Additionally, we have a number of deliveries scheduled in the coming months and will continue short-term fixing as well. Based on our expectations for market movement from the second and third quarters onward, we anticipate seeing substantially higher margins.

Poe Fratt, Analyst

Great. And can you just clarify, with the scrubber investment reimbursement, I thought your TCE rates should be above the indexes by anywhere from $1,500 to $2,500 just because of the structure of the TCE reimbursement. Can you just clarify whether that’s the case or what’s going on there?

Stamatis Tsantanis, Chairman and CEO

Yes, that’s a great question. For some of the ships equipped with scrubbers, we've managed to achieve a premium above the market rate, allowing us to receive both the reimbursement and the premium. However, our Capesize vessels, which are currently at 180,000 deadweight tons, have some that are slightly smaller at 170,000 deadweight tons. These smaller ships are seeing a slight discount compared to the index, around 5% to 9%, due to their size. The ships with scrubbers, on the other hand, are generating a premium, which balances the overall situation. We are expanding our presence around the Baltic Capesize Index.

Poe Fratt, Analyst

Great. And then, including the Goodship, all the acquisitions don’t have any debt right now. So, you have four, maybe call it, $90 million of acquisitions that were unencumbered that you could lever up to that 50% target. Are there other Capes within the fleet that are also unencumbered at this point in time?

Stamatis Tsantanis, Chairman and CEO

Currently, the Goodship and the Loadship in our fleet are completely debt-free. These are the only two ships we have without any debt. We have three more deliveries scheduled, and as Stavros mentioned earlier, we are in talks with several well-known financial institutions to obtain competitive leverage of around 50%. We anticipate this will materialize in the next few months. Additionally, we are exploring partnerships and agreements that will involve financial arrangements and commercial joint ventures similar to our existing ones. However, we cannot disclose any details at this moment due to ongoing developments.

Poe Fratt, Analyst

Great. And Stamatis, I think in your prepared remarks, you might have said how much pro forma cash is right now. But, if you didn’t, could you clarify how much cash you have after all the refinancings, the early repayments and net of the acquisitions, accounting for the acquisitions that are in process?

Stavros Gyftakis, CFO

Pro forma for the repayments, prepayments, and the advanced state for the ships that we have announced already, the cash is about $68 million. So, it’s a very sizable and significant cash amount for the Company.

Poe Fratt, Analyst

Yes, I believe I heard that correctly, $68 million, but does that figure include any deposits related to the pending acquisitions, or how accurate is that number? What other adjustments should we consider to determine your current cash level?

Stamatis Tsantanis, Chairman and CEO

Yes. That includes deposits for all the three ships that we have announced already. So that includes all the deposits. That includes the prepayments made. So yes, that includes that, of course.

Poe Fratt, Analyst

Okay. And then, when do you think you’re going to file your 20-F? And when can we get a full cash flow statement for 2020?

Stamatis Tsantanis, Chairman and CEO

We expect the 20-F to be filed on the 31st of March, which is next week. So, next Wednesday, we will be filing the 20-F, and we might have some additional corporate developments, post the corporate developments by that time.

Poe Fratt, Analyst

Okay. And then, you recently filed an F-1. And I expected it to take longer, but it looks like it was effective March 12?

Stamatis Tsantanis, Chairman and CEO

Yes.

Poe Fratt, Analyst

My understanding is that Jelco can convert $3 million of debt into shares at a favorable valuation level, and they have 45 days to do this after the effective date of the F-1. What do you think will happen? Have they mentioned anything about their plans to convert the $3 million into equity, or can you share any information on that?

Stamatis Tsantanis, Chairman and CEO

To be honest, we don’t have any guidance yet. We don’t know what their plans are. So, they might or they might not. So, that’s build and control. It’s an optional item that we granted to Jelco when the stock price was at $0.50. And now, of course, it might look differently. But, we don’t know what we’re going to do because that’s their option to exercise if they want it or not.

Poe Fratt, Analyst

Okay. And then, you mentioned you have 155.1 million shares outstanding. How many of the class-E warrants are still outstanding?

Stamatis Tsantanis, Chairman and CEO

Yes. There are approximately 8 million warrants still outstanding that have not been exercised yet. That's a small amount compared to the overall issuance.

Poe Fratt, Analyst

Okay, great. With the acquisition, you have one additional scrubber, bringing your total to seven scrubbers in a fleet of fourteen pro forma. Do you expect to install more scrubbers, or do you believe that having half the fleet scrubbed is a good approach for maintaining some flexibility on both sides?

Stamatis Tsantanis, Chairman and CEO

Not really, Poe. We are currently not fitting any scrubbers in China from our end. If we reach an agreement with charterers or future long-term charterers to install scrubbers on additional ships, we might consider it. One of our recent acquisitions included a scrubber, and we are comfortable with the equipment associated with it, which is why we proceeded. Overall, we take a very careful and balanced approach regarding scrubbers.

Poe Fratt, Analyst

Can you provide us with your current amortization? After everything is finalized and prior to the financing on the new vessels, how much debt is due in amortization for 2021? It would also be helpful if you could include the figures for 2022.

Stavros Gyftakis, CFO

Yes. Poe, we have currently around $136 million of debt outstanding. And as a rule of thumb, you can assume that around 10% of that’s amortizing annually. So it’s around $14 million that’s amortizing annually. Now on top of that, I mean we have value that we come up from time to time now. As you may remember, since the recent restructuring, I mean, we have a clean two-year runway. So basically, you can assume that around 10% of our debt is being repaid annually.

Poe Fratt, Analyst

Yes. And you already satisfied the $12 million of prepayment for Jelco this year. And then, there’s another $12 million that you might have to prepay if cash is sufficient next year.

Stavros Gyftakis, CFO

No, no, no. The prepayment that we did to Jelco, the $12 million, that was a mandatory repayment event treated by the equity offering. Now, our repayment obligation to Jelco for next year is $8 million at the end of the year, at the end of 2022. I’m sorry, we don’t have anything else in 2021. So, we have $8 million to Jelco at the end of ‘22 and another $8 million at the end of ‘23.

Poe Fratt, Analyst

Great. That’s helpful. Thank you, Stavros.

Stavros Gyftakis, CFO

Thank you, Poe.

Operator, Operator

There are no further questions. I will now hand back to the speakers for closing comments.

Stamatis Tsantanis, Chairman and CEO

Thank you, Jody. As we indicated in our earnings release, we are very confident that 2021 will be an exceptionally positive year. We have taken all the necessary actions in 2020 and thus far in 2021 to ensure the Company thrives for many years ahead. We are very optimistic about the market and now have a fantastic fleet. We look forward to sharing more positive corporate developments that will create significant value for all our shareholders. Thank you for joining our call, and we welcome any comments you may have via email or any other communication method. Thank you.

Operator, Operator

Thank you very much, sir. Ladies and gentlemen, that does conclude the call for today. Thank you all for joining. You may now disconnect.