Earnings Call Transcript - SHIP Q3 2020

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Seanergy Maritime Conference Call on the Third Quarter and Nine Months 2020 Financial Results. We have with us Mr. Stamatios Tsantanis, Chairman and Chief Executive Officer; and Mr. Stavros Gyftakis, Chief Financial Officer of the company. I must advise you that this conference is being recorded today. Forward-looking statements. Please be reminded that the company publicly released its financial results, which are available to download on the Seanergy website at seanergymaritime.com. If you do not have a copy of the press release, you may contact Capital Link at (212) 661-7566, and they will be happy to send it to you. Before turning the call over to Mr. Tsantanis, we would like to remind you that this conference call contains forward-looking statements as defined in the Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, concerning future events and the company's growth strategy and measures to implement such strategies. Words such as expects, intends, plans, believes, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks and are based on a number of assumptions and estimates, which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the company.

Stamatios Tsantanis, CEO

Thanks, Sharon. Good morning, everyone, and thank you for joining us today to discuss our results for the third quarter and nine month period of 2020. First, I hope that everyone listening to our call is in good health during these difficult circumstances. I also want to make a special mention to thank our seafarers for their continued support and commitment in our fleet during these challenging times. In the third quarter of 2020, the global economy saw a fast recovery from the initial adverse shock of the COVID-19 related crash. The Chinese economy registered GDP growth of 4.9% in the quarter and continued to drive strong demand for seaborne transportation of raw materials. As a result, Capesize freight rates have jumped from a daily average rate of about $7,100 in the first half of the year to approximately $20,600 per day in the second half so far. The current rate stands at about $12,000 per day. The daily average TCE of our fleet for the third quarter of 2020 was $16,219, a significant improvement from $7,000 per day in the first six months of 2020 due to the fast recovery of the Capesize market after June. This is more than double, obviously. As regards to the fourth quarter of 2020 to date, our commercial performance tracks the BCI index, which has averaged at approximately 20,500 quarter to date. As the market has softened since the beginning of November, it would be fair to assume that the TCE for the quarter will end up at approximately $17,000 per day unless there are positive developments.

Stavros Gyftakis, CFO

Thanks, Stamatios. Good morning, everyone. I hope that you and your families are staying safe and healthy. Our operating performance marked a clear improvement in the third quarter of the year when compared to that of the first half, aided by the strong recovery of the Capesize market. It is very promising to see that both steel and energy demand in China have shown a very strong and fast recovery during a period of extreme uncertainty, such as the one seen through the first months of the pandemic. In terms of our financial performance, I specifically refer you to the earnings press release issued earlier today, which details our financial results and vessel performance. During the third quarter, net operating revenues, defined as revenues after deducting own voyage expenses and commissions, amounted to $15.8 million, reduced by 1% from $15.9 million in the same quarter of 2019. The marginal reduction was a result of a lower daily time charter equivalent, which was partly offset by more operating days during the quarter. Indeed, our fleet recorded 973 revenue-generating days in the third quarter of 2020 when compared to only 709 operating days in the third quarter of 2019, during which two vessels were under scrubber installation and one vessel was under special survey.

Stamatios Tsantanis, CEO

Thank you, Stavros. As mentioned earlier today, we're very optimistic about the long-term prospects of the Capesize sector. The market has improved in each year from 2017 until 2019, and has been able to stage a very fast recovery from the COVID-19 induced crisis so far in 2020. As reminded by Stavros earlier, the last three years have been marked by various extraordinary negative events: the trade wars initiated by President Trump between the U.S. and China in the first quarter of 2019; the major mining disaster that occurred in Brazil in the first quarter of 2019; and the emergence of the COVID pandemic in the first quarter of 2020, which had a severe impact on dry bulk trade. In this regard, it's very encouraging to see the resilience of the market, which has bounced back quickly from these black swan events and achieved higher average levels each consecutive year. All indications point to the fact that the market will trade at sustainably higher levels as soon as the effect of these one-off events dissipates. As regards to market developments during the current year, China imports of raw materials initially fell in the first quarter due to the coronavirus effect before rebounding between June and September to compensate for the initial decline. We are optimistic that the global economic stimulus and the announced infrastructure investments amounting to trillions of U.S. dollars will help the market rise to even higher levels. The Capesize market is the first to respond positively due to the resilience in steel and iron ore demand, and the increasing high-quality ore supply from Brazil, which is expected to reach 400 million tonnes over the next three years, up from about 300 million to 320 million tonnes this year. As provided by Braemar ACM research, fresh economic data for October shows continued strength in the Chinese industry as stimulus continues to support the manufacturing and construction sectors. The official measure for industrial production grew 6.9% year-on-year in October as the Chinese economy continues to recover. Steel production has outpaced 2019 levels over the first ten months of the year by 5.5%, totaling 875 million tonnes. In my view, these figures provide even more support to the positive story of the Capesize segment that has proven resilient even through such unprecedented circumstances. Looking ahead to the next two years in more detail, in 2021 and 2022, the volume of trade is expected to return to an average growth of about 3%. As regards to fleet growth, the Capesize order book is at its lowest levels since 2003. New building orders so far in 2020 have amounted to about 2.5 million deadweight tonnes, a fraction compared to the full year figures of 20.7 million tonnes in 2018 and 14.2 million tonnes in 2019. This is a very significant reduction, which will likely lead to potential shortages of tonnage over the coming years, especially as older ships become harder to operate. Given the obscure outlook, the new environmental regulations, and until the IMO provides more guidance on the shape and form of new restrictions that are going to be introduced in 2030, it is unlikely to see a resurgence in new building vessel activity. In addition, major dry bulk charterers do not provide long-period contracts, which makes it even more difficult for new ships. Finally, the reluctance of traditional banks to finance vessels that do not comply with strict and highly uncertain regulations, and without period employment, adds another layer of difficulty to anyone considering new buildings. Seanergy's emphasis on the improvement of the fleet's environmental efficiency and the established long-term relationships with prominent charterers ensure our fleet's continued commercial success in this environment. Given the material improvement of our balance sheet in the past three quarters, we expect to be in an advantageous position for future market developments. On that note, I would like to turn the call over to the operator and answer any questions you may have. So Sharon, please take the call.

Operator, Operator

We will now take our first question. Please go ahead. Your line is open.

Tate Sullivan, Analyst

This is Tate Sullivan from Maxim Group. Thank you for your comments. My first question is whether you are planning to purchase a ship in the third quarter of 2020. Considering your cash position at the end of the quarter and the Jelco negotiations, are you satisfied with your ship mix? If so, could you discuss the short-term and long-term uses of cash? I have a couple of questions in there.

Stamatios Tsantanis, CEO

Of course. First of all, good morning, Tate. I hope you're well. Well, basically, we raised capital in 2020, and that capital needed to be allocated in a certain manner that we thought, and that we were directed, which is fair for all the shareholders of the company. With the cash that we raised, we deleveraged the company significantly. We bought an unlevered ship. And now we have a significant cash cushion, as Stavros said, to deal with any potential future uncertainty that may come. Now that ship alone, we thought it was one of the best moves we have made because we agreed to acquire that ship at the end of the second quarter at one of the lowest historical prices ever for this type of ship. We bought it for $11.4 million. Its first voyage alone is going to generate about $1.7 million to $1.8 million in cash. So you're looking at about 3 to 3.5 months for a 10% return on your capital or investment. So it makes great sense to buy that ship. And on a debt-free basis, it contributes significantly to the cash flow of the company. So we feel great about it, and we wish we had the capacity to make additional similar purchases.

Tate Sullivan, Analyst

Oh, excuse me, do you have the capacity to make similar purchases? Is that what you’re saying?

Stamatios Tsantanis, CEO

Well, right now, we don't because we're in discussions with various lenders in order to facilitate certain work through. But if that uncertainty goes away, we will certainly consider additional acquisitions if the market recovers in the next six to nine months at a higher level.

Tate Sullivan, Analyst

And then another question, you mentioned the cushion to work through if volatility returns. Can you remind me, and have you discussed your breakeven rate roughly for '21 and '22 with your current ship mix in context with the BCI currently tracking quarter-to-date? I think you mentioned 20,500 fleets.

Stamatios Tsantanis, CEO

Yes. Well, breakeven has reduced significantly in 2020, especially after the current offerings we've done because we deleveraged the company considerably. From about, I would say, around $18,000 that the breakeven was in the previous years, especially in 2019, with all this CapEx, we are now below $15,000 a day, sometimes $14,000 a day in certain quarters. So I would say around $14,000 to $15,000 a day as a weighted average breakeven for the company. Now the BCI is on average at 20,000. Today it's at 12. There is huge volatility, as you know, in the Capesize segment. At the beginning of the year, it was at $2,000 or $3,000 a day. It peaked at $35,000 a day. So we have to be cautious about the way that we allocate our capital and cash reserves because we might see dips again, and we might see peaks again. So we need to be careful and conservative about our capital allocation.

Operator, Operator

Thank you. I will now pass the call back to you, sir, for closing remarks.

Stamatios Tsantanis, CEO

No other question, Sharon?

Operator, Operator

No other questions at this time, sir.

Stamatios Tsantanis, CEO

All right. Thanks very much, everyone. Thank you for listening to our call and stay safe. Thank you very much.

Operator, Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.