Earnings Call Transcript - SHIP Q2 2023

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Seanergy Maritime Holdings Corp. Conference Call on the Second Quarter Ended 30th June, 2023 Financial Results. We have with us, Mr. Stamatis Tsantanis, Chairman and CEO; and Mr. Stavros Gyftakis, Chief Financial Officer of Seanergy Maritime Holdings Corp. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. Please be advised that this conference call is being recorded today, Wednesday, 2nd of August, 2023. The archived webcast of the conference call will soon be made available on the Seanergy website. To access today's presentation and listen to the archived audio file, visit the Seanergy website following the Webcast & Presentations section under the Investor Relations page. Please now turn to slide two of the presentation. Many of the remarks today contain forward-looking statements based on current expectations. Actual results may differ materially from the results projected in those forward-looking statements. Additional information concerning factors that can cause the actual results to differ materially from those in the forward-looking statements is contained in the second quarter ended 30th of June, 2023 earnings release, which is available on the Seanergy website. I would now like to turn the conference over to one of your speakers today, the Chairman and CEO of the company, Mr. Stamatis Tsantanis.

Stamatis Tsantanis, CEO

Thank you, operator. Hello. I would like to welcome everyone to our conference call. Today, we are presenting the financial results for the second quarter and first half of 2023, while also announcing the distribution of another cash dividend. I'm very pleased to report a profitable quarter for Seanergy with our daily time charter equivalent outperforming the market index. We achieved a daily time charter equivalent of $18,700 or 20% above the index average for the quarter, leading to a quarterly net revenue of $28.3 million and net income of $700,000. This represents a sequential improvement compared to the first quarter of 2023, whereby revenue was $18 million and net loss came in at $4.2 million. In the second quarter, the Capesize market recovered from the seasonal weakness seen at the start of the year, with the Baltic Capesize Index averaging at $15,600, up from $9,100 in the first three months of the year. Demand for seaborne transportation remains strong, but charter rates came under pressure as historically low congestion, combined with higher deadweight adjusted vessel speeds, have resulted in a temporary effective vessel oversupply. It is encouraging to see strong increased ton-mile demand for key raw materials, and I'm very optimistic that the negative effects of the low congestion have already peaked. During the quarter, we remained consistent with our shareholder distribution strategy while looking to expand our fleet through accretive opportunities. As we will discuss in more detail, we agreed to acquire a Newcastlemax vessel at a great price, while we also repurchased about 2% of our common shares in the open market at a significant discount relative to the current stock price. Lastly, we continue to optimize our balance sheet through $54 million of refinancing transactions that will reduce our interest rate margins and help neutralize a portion of the increase in benchmark interest rates. Our overall liquidity increased by around $15 million through these transactions, and I'm glad to report that there are currently no loan maturities until 2025, which provides a clear runway for more shareholder distributions. Let's now move to Slide number 4 to discuss our shareholder rewards initiatives. Our Board has authorized the distribution of another regular quarterly dividend of $0.25 per share for the second quarter, which brings our total distributions since the commencement of our dividend program to $23.9 million or about $1.33 per share. This represents 23% of current price levels. Moreover, during the quarter, we repurchased about $1.6 million worth of common shares at an average price of $4.35 per share, which is 25% lower than our current price levels. We constantly monitor our share valuations, combined with liquidity, and we may emphasize the buybacks over dividends in future quarters. In any case, the total capital returned to our shareholders since the start of the program amounts to about $64 million, and I'm confident that this will continue to be the top priority for Seanergy's management. Moving on to Slide number 5, which is an overview of our commercial developments. As you can see, our fleet has performed better than the Capesize market since the start of 2022, that's 18 months ago. In the past six months, particularly, our TCE was 20% higher than the BCI. This is a result of our robust commercial performance, our hedging activities, as well as the investments made in improving our vessels' efficiency over the years. In addition to energy-saving devices, about 3/5 of our ships are scrubber-fitted, allowing them to earn fuel spread premiums. Currently, about 25% of our ownership days in the third quarter are fixed at an average daily rate above $21,000 a day and 21% of our days for the rest of the year are fixed at an average rate of $22,000. In terms of TCE guidance, we expect our TCE to be approximately $16,100, assuming that our ships will earn the current FFA rate. This is 22% higher than the $13,200 average of the BCI in the third quarter to date. Regarding vessel transactions, in May, we agreed to expand our fleet with our first new Newcastlemax vessel, which was built in 2011 at the MAX shipyard in China. The vessel delivery is estimated to take place around October 2023, initially through a 12-month bareboat time charter, while Seanergy has a purchase option at the end of the charter period. The total cash outlay, assuming exercise of the purchase option next year, will be $30.5 million. Upon delivery, we expect the vessel to be deployed in an index-linked time charter at a significant premium to the BCI. Lastly, in our commercial developments, we extended the duration of three of our time charters at the same or better terms than before. Since April, the charterer extended its existing time charter for a period of 24 to 30 months with a higher premium over the index and a new fuel spread profit-sharing scheme for Seanergy, receiving the majority split. In June, the charterer exercised the second option of the period with the extension period starting between August and November of this year, also with a higher fuel profit-sharing scheme for Seanergy. The same charterer elected to extend the time charter of the Lordship in direct continuation of the previous agreement. The extension will commence in October 2023 and last until August 2024, with an increase in the scrubber profit share accruing for Seanergy. That concludes my rundown of this quarter's highlights. I will now pass the floor to Stavros, our CFO, before returning for a brief market commentary.

Stavros Gyftakis, CFO

Thank you, Stamatis, and welcome everyone to our second earnings call for 2023. Let us start by reviewing the main highlights of our financial statements for the second quarter and six-month period that ended on June 30, 2023. Amid the weaker-than-expected Capesize market, our financial performance was satisfactory with net revenue for the quarter reaching $28.3 million. Net revenue for the first half of the year was equal to $46.4 million. These figures are lower than the respective period of 2022, albeit once again, in terms of PCE, we outperformed the BCI by approximately 20%. Meanwhile, our adjusted EBITDA in the second quarter was equal to $15.7 million and $19.6 million in the first half of the year. The respective figures for last year were $17.3 million and $34.2 million, respectively. Nevertheless, in the second quarter of 2023, we returned to profitability, recording a net income of $700,000, trimming the net loss for the year so far to $3.5 million. With the bottom of the market now in the rearview mirror, we are optimistic that we will continue on a profitable trajectory for the rest of the year. Moving on to our balance sheet. Despite the volatile market and increased interest rates, as well as our continuous efforts to return capital to our shareholders through dividend distributions and buybacks, we retained a solid cash position of approximately $22.5 million or $1.4 million per vessel. On the debt front, we retained a moderate debt ratio of 50%, while we achieved to even reduce our net debt since the beginning of the year by approximately 7%. The net debt at the end of the first half of the year stood at $212 million, a figure fully covered by the scrap value of our fleet based on current scrap prices. I will return to discuss our debt profile further in a moment. Let us now turn to Slide 7 to discuss our profitability performance. As I mentioned before, we outpaced the market benchmark in both the second quarter and first half of 2023. Specifically, we achieved a TCE of $18,700 per day in the second quarter and $14,760 per day for the first six months of 2023. Our efficient commercial strategy and our decision to hedge part of our freight exposure for the second quarter have helped us to perform better than the market. As a result, we recorded an adjusted EBITDA of $19.6 million for the first half of the year with an improved margin in a period when capesize freight rates remained overall subdued. With an improved market outlook for the rest of 2023, we expect our financial performance to strengthen further. Meanwhile, our average daily operating expenses, excluding pre-delivery expenses, were $6,900 per day in the first half of the year, a figure very close to the levels recorded in 2022. The elevated OpEx are attributed mainly to price inflation in goods and services across the shipping sector as well as the global economy. Cash G&A, that is, general and administrative expenses adjusted for certain non-cash items in the first half of the year, were $4.6 million. However, this figure includes administrative expenses incurred by Seanergy in managing United Maritime's operations, for which we have received approximately $1.3 million in fees in the same period. Based on that, our actual cash G&A is approximately $3.2 million or $1,000 per ownership day, which is very competitive compared to our listed peers. Let's now move to Slide 8 to discuss our debt profile. Debt at the end of the second quarter was $235 million, including convertible notes, which are expected to be fully repaid by the end of the year. Given this number, the debt per vessel totaled $14.7 million, basically unchanged from the end of 2022. During the first half of 2023, we concluded $53.8 million of financings, which benefited Seanergy in numerous aspects. As discussed in detail during our first earnings call months ago, we refinanced three of our vessels through two sale and leaseback agreements and a new sustainability-linked loan. The interest margin of the two sale and leaseback facilities is lower than the previous financing by 120 basis points and 50 basis points, respectively. In addition, with the refinancing of the championship sale leaseback, we have addressed all loan maturities until the second quarter of 2025, removing any potential threshold from the company, even if market recovery is slower than expected. Finally, we added approximately $15 million of extra liquidity, which supports our shareholder rewarding initiatives and the acquisition of the Titan ship as previously discussed by Stamatis. Lastly, it is worth mentioning here that our leverage remains practically unaffected at around the 50% mark. Our overall debt strategy has allowed us to retain a scrap coverage of total debt for another quarter above 90%. The market value of our fleet at the end of the second quarter was $443.3 million or $27.7 million per vessel, almost twofold the debt per vessel levels. Finally, as regards to our cash interest expenses, these will increase in the first half of 2023, which was inevitable given today's interest rate environment. However, our financing strategy did partly offset the steep increase in base rates over the last 15 months. Let's now turn to Slide 9. Our EBITDA guidance for the year is expected to surpass the $45 million mark, even if the market in the second half of the year averages at $15,000 per day. Based on our current operational capacity, even a small increase in expected freight rates for the second half would lead to an EBITDA above the $50 million mark. Here, it's worth mentioning that we have already fixed 21% of our ownership base at an average rate that exceeds $20,000. In addition, our new vessel is expected to be employed at a significant premium over the BCI index. Given all these actions and the potential market rebound in progress, we expect that we will be able to increase our profit, enhance further Seanergy's value, and continue our shareholder rewards initiatives. This concludes my review. I would now turn the call back to Stamatis, who will discuss the market and industry fundamentals.

Stamatis Tsantanis, CEO

Thank you, Stavros. In the current year so far, we have seen a very healthy increase in the seaborne transportation of the main raw materials like iron ore, coal, and bauxite. However, the Capesize charter rates have been negatively affected by the increase in the effective supply of tonnage without any material increase in the actual number of new vessels. The effective tonnage supply increase is a result of the reduction in port congestion to historical low levels and the higher deadweight adjusted vessel speeds observed, particularly in the larger ore carriers. Such higher speeds are slightly counterintuitive, given the recent emphasis placed on the reduction of the industry's carbon footprint. This has been the case for all dry segments across the board as overall dry bulk ton-mile demand in the first half of the year grew approximately 5.5%, while effective tonnage supply was up by 7.1%, according to broker reports. Looking at the actual order book of new vessels, it currently stands at the lowest levels in several decades. Considering the importance of ship supply when it comes to long-term dry bulk market direction, we remain optimistic for a positive dry bulk trend. Overall, dry bulk ton miles are expected to grow by around 3.3% and 2.5% in 2023 and 2024, respectively, with corresponding fleet growth of 2.9% and 1.9%, respectively. Given that the large part of the 2025 deliveries has already taken place and that the trend of declining congestion seems to have reached the bottom over the past months, the balance seems quite positive. Moving on to Capesize demand. China's iron ore imports in the first half of 2023 were up by 7.7% year-on-year, which is a substantial increase. As we discussed in our last quarterly update, the lower iron ore inventories will drive increased imports regardless of domestic steel market conditions. China's economy has taken longer to recover from the COVID lockdowns than we had initially anticipated, but we view the delay as reasonable given the magnitude of the economic setback. As iron ore inventories remain at low levels, while steel production and exports have recently picked up steam, the eventual recovery in the general economy is forming very favorable conditions for the Capesize market. Looking beyond iron ore, seaborne coal exports have also seen significant growth this year, with full-year ton miles expected to be up by 5.4%, according to research. Coal trade volumes are generally subject to seasonality, but importantly, higher average coal volumes are setting a higher floor for Capesize utilization and charter rates compared to the years before 2021. This, along with the ever-increasing bauxite volumes, should result in a sustainable upward trend for demand drivers. Regarding the general economic environment, it should be noted that since early 2022, the world economy has dealt with a combination of unusual circumstances, punctuated by record high inflation, rising interest rates, and China being in complete lockdown for three years. This is now mostly behind us, with significant higher ton-mile demand and China stimuli expected to support the market, along with massive infrastructure projects globally. Moving on to Capesize vessel supply, based on the limited outstanding order book, the outlook for the Capesize sector remains very encouraging. The Capesize and VLOC order book scheduled for 2023 delivery amounts to only about 1% of the total fleet, with total order book across all delivery years being only about 4.8% of the existing fleet. The limited new building activity over the last few years has kept fleet growth at very low levels, and Capesize fleet growth in 2024 is not expected to surpass 1%. Despite the limited long-term fleet growth in the Capesize market, during the first half of the year, the volatility in charter rates has been primarily a result of short-term factors. These factors have led to an increase in effective tonnage supply, so it is worth discussing the main factors causing that. The first is the historical low fleet congestion, attributed mainly to better weather conditions globally, as well as the release of more than 250 vessels from the grain corridor in Ukraine. The second factor would be increased vessel speeds. It has been observed in the main long-haul C3 route that many large ore carriers are operating at excessive speeds, contributing to a temporary tonnage oversupply. It goes without saying that increased speeds have an exponential effect on CO2 emissions. We have calculated that even if 100 ships reduced their speeds by one knot, the annual reduction in CO2 emissions would exceed 500,000 tons. Overall, we expect ship congestion to begin increasing towards historical averages in the coming months. Additionally, speeding ships should start adhering to the new environmental regulations. Once the temporary oversupply of ships decreases, we strongly believe that Capesize freight rates will rebound to much higher levels. Seanergy is in an excellent position to deliver higher returns in this favorable environment; rewarding our shareholders through distributions remains our highest priority, and we will continue doing so based on the strength of our pure-play Capesize exposure and our high-quality fleet. On that note, I would like to turn the call back to the operator and answer any questions you may have.

Operator, Operator

And the first question comes from Tate Sullivan from Maxim Group. Your line is open. Please ask your question.

Tate Sullivan, Analyst

Hello. Thank you, good day. I wonder if we could start with the press release from July 6, which included the repurchase details as well as the bareboat-in charter acquisition of the Newcastlemax. Can you start and explain why you structured the acquisition that way and the benefits of that structure, please, in this current market?

Stamatis Tsantanis, CEO

Hello, Tate. Good morning. How are you?

Tate Sullivan, Analyst

Great. Thank you.

Stamatis Tsantanis, CEO

Excellent. So I'm going to start with the fact that the fleet of the company was reduced recently due to the sales of older ships to United Maritime. We wanted to increase the number of ships under our commercial and technical management. However, we wanted to find ways and not to spend too much cash on the company. We found this bareboat agreement with very prestigious Japanese owners, and they accepted that we charter the ship for a period of about a year. We also have a purchase option to acquire it afterward. Overall, I think it's a great deal for the company because we increased the operating leverage significantly with the Newcastlemax vessel. At the same time, the cash outlay remains quite limited, allowing us to reserve cash for other purposes, such as stock buybacks or other initiatives. The overall deal is advantageous because, all things considered, the bareboat hire, the advanced payments, and the purchase option make the overall price of that vessel quite low, lower than the recent transactions we've seen in the market. So it's a win-win-win situation for us, and that's why we decided to do it.

Tate Sullivan, Analyst

And did I hear you say…

Stamatis Tsantanis, CEO

That in one of the remarks that it should have a premium to the BCI as a 2011 vessel? And why is that going to be the case? It does indeed. Yes. Just to put things into perspective, in the filings of other companies that have acquired new Newcastlemax vessels for something close to $80 million, those ships are understood to be chartered to the BCI at 145% to 150%. This ship we bought for about $30.5 million and it's going to be chartered to the BCI at a premium of over 20%. So we're spending a fraction of what other companies are paying for similar tonnage, and the revenue-generating capacity of that ship is going to be very good with a premium over the BCI. Regarding return on investment, I would say that this is very comparable.

Tate Sullivan, Analyst

And then the last one on that, thank you for the detail, is what in terms of buying the ship at the end of the 12-month bareboat period for $20 million? What do you need to see in the market to exercise that option?

Stamatis Tsantanis, CEO

I think we will most likely exercise that option. I don't foresee reasons not to exercise the option. So there's a high degree of certainty that we would likely proceed with that.

Tate Sullivan, Analyst

Great. And one other for me, too. You had higher utilization in the second quarter. That was the main factor that caused the revenue to exceed my expectations at 99%, which is the highest in at least 4 quarters. Should that decrease in the coming quarters with any scheduled downtime?

Stamatis Tsantanis, CEO

I mean, we have reported all the dry docks that we have until the year end. We don't have any material dry docks until the year-end, so I would assume that our utilization rate will remain at 98% to 99% for the remainder of the year.

Tate Sullivan, Analyst

Okay. And then last one for any of the deposits made for the variable charter in Q2 or all the payments related to that are in Q3 and the rest during the second half of the year?

Stavros Gyftakis, CFO

The first $3.5 million has already been deposited. There is only one remaining deposit of $3.5 million, which is due upon delivery of the ship, estimated in the fourth quarter. That's the only remaining outlay before we take delivery of the vessel.

Tate Sullivan, Analyst

All right. Excellent. Great to hear an update. Have a great rest of the day. Thank you, both.

Stamatis Tsantanis, CEO

Thank you, Tate. Have a great day. Bye-bye.

Operator, Operator

Thank you. Now we're going to take our next question. Please stand by. The next question comes from the line of Christopher Kay from Arctic Securities. Your line is open. Please ask your question.

Unidentified Analyst, Analyst

Hello, gentlemen. Congrats on another great call.

Stamatis Tsantanis, CEO

Hello. Thank you.

Unidentified Analyst, Analyst

Regarding the Newcastlemax acquisition, it appears to be a strong deal. You're acquiring a good premium compared to conventional capes and in relation to the BCI. From a strategic perspective, are you planning to pursue more acquisitions, or is this going to be a one-time event?

Stamatis Tsantanis, CEO

Well, I cannot really answer this question directly. We might have similar opportunities in the future that we will take into serious consideration. If the economics work well for us, it's pretty similar to trade. So these types of ships carry the same cargoes which are iron ore, coal, and bauxite. From both a commercial perspective and operationally, we will use the same charters we already have a relationship with, based on years of trust. If it is a good quality ship, we might look at additional Newcastlemax or Capesize vessels under this structure. But it’s not that we are actively seeking new acquisitions. Overall, it’s a more general approach focused on shareholder rewards as well. For us, it would require a very good deal to consider.

Unidentified Analyst, Analyst

Thank you. And when we're looking at asset values now, it seems to be quite disconnected from time charter rates. So what's your view on the current disconnection? I mean something has to give here at least when we're looking at this from a historical perspective. What's your view? What's holding the values up now?

Stamatis Tsantanis, CEO

That's a great question. First of all, if you consider the buyers for Capesize and Newcastlemax vessels, they are mostly serious players. You don’t see many speculative acquisitions in the Capesize sector. These are major players, and for them, this represents great value based on their investment, as it is for us. The value of a Capesize vessel, knowing that the overall annual order book is around 1% to 1.5%, combined with almost zero new order book for the foreseeable future, the fleet is aging, and we have new regulations coming in. So the best fundamentals right now appear to be in the Capes and Newcastlemax segment. There is liquidity coming from other segments of the shipping universe like container ships and tankers, enabling investments in vessel acquisitions. We see serious players getting back into the game, which I consider a good sign.

Unidentified Analyst, Analyst

Thank you. And regarding your traffic strategy, you obviously have taken on some coverage which has been well-timed. I must say, another great job done there. But what's your view going forward and what rate would you need to see in order to book quite a lot of 2024 dates?

Stamatis Tsantanis, CEO

Well, for 2024 I cannot give you an answer. It's going to be the first year that you can have all these regulations kicking in. Therefore, we expect to see many speed adjustments in 2024. I would like to remind everyone on this call the fact that even though people say that the average fleet speed is lower than it used to be, that’s actually incorrect. If you look at the deadweight adjusted speed of the fleet, it's actually much higher. The speeds of many large ore carriers are higher than what's sustainable if we're to meet emissions standards. So one way or another, the industry will have to abide by the new regulations, and speeds will likely be reduced. That said, the reasons the market is at these low levels are related not only to congestion, which is at historical low levels, but the fact that larger ore carriers can operate at these excessive speeds, causing temporary oversupply. Once we regulate and control this issue, I expect a better market. So regarding 2024, it's the first year with new environmental regulations coming into effect. We're more optimistic for 2024. I won’t give you specific projections just yet, but I wouldn’t be too soon to fix anything for 2024.

Unidentified Analyst, Analyst

Great. Thanks a lot. I look forward to 2024.

Stamatis Tsantanis, CEO

Thank you.

Stavros Gyftakis, CFO

Thanks.

Operator, Operator

Thank you. There are no further questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Stamatis Tsantanis, CEO

Thank you, Nadia. Have a great day.