Q3 2019 Earnings Call
Ladies and gentlemen.
For these genco shipping and trading limited.
2019 earnings conference call.
Just one we're assembling today's audience and plan to be underway shortly.
We shut your patience please remain on the law.
Good morning, ladies and gentlemen.
Come to the Genco shipping and trading limited third quarter 2019 earnings conference calls and presentation.
Before we begin please note it will be a slide presentation accompanying today's conference call.
That presentation can be obtained from Gencos website, www dot genco shipping dot com.
I'd like to inform everyone that todays conference is being recorded and is now being webcast on the company's website at www Dot Genco shipping dot com.
We will conduct a question and answer session. After the opening remarks and instructions will follow.
Yeah.
A replay of the conference will be accessible at anytime during the next two weeks.
Right right right to 031112 or.
719.
570.
Two zero and entering the pass code 370.
Won three.
At this time I would like to turn the conference over to the company. Please go ahead.
Good morning, before I 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 at 1995, such forward looking statements use words, such as anticipate budget estimate expect project intend.
Plan believe in other words in terms of similar meaning in connection with a 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.
Yes 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 30, Onest 2018, and the company's reports subsequently filed with the FCC.
This time I would like to introduce John Wobensmith, Chief Executive Officer, Genco shipping trading limited.
Good morning, everyone welcome to check 'cause third quarter 2009 Cowen Conference call I.
I will begin today's call by revealing our third quarter and year to date highlights. We will then discuss our financial results for the quarter and the industry's card fundamentals and then ultimately open the call up for questions for additional information. Please also refer to our earnings presentation posted on our website. This morning.
In the year to date, we have taken important steps to strengthen our future prospects specifically, we advanced our comprehensive IMO 2020 strategy and further strengthened our fleet profile and earnings power. We also improved our credit facilities, enabling Jay Genco implement the next phase of our capital allocation strategy.
As announced in our earnings press release yesterday management in the board of directors have initiated a regular quarterly cash dividend policy with a dividend up 17, and a half cents per share for the third quarter of this year on top of this we declared a special dividend of 32, and a half cent per share utilizing net cash.
Proceeds from four recently agreed upon vessel sales after the repayment of the associated debt.
Following the payment of the aggregate dividends at 50 cents per share we intend to maintain the strength of our industry, leading balance sheet, which we believe is a key differentiator of the company.
We also will concentrate on maintaining net leverage physicians.
In terms of one of the lowest in our peer group effectively allocating capital for the benefit of our shareholders has been a significant focus of ours. Following last year's attractive acquisitions of high quality fuel efficient vessels and given gencos industry, leading balance sheet strong liquidity position of over 166 million down.
Dollars and a strengthening dry bulk market. We're pleased to now begin to return cash to shareholders. We believe that this decision is well times as we aim to create shareholder value throughout the drybulk market cycle, which is strengthened sequentially in each of the last three years.
This announcement marks an important milestone in achieving a key capital allocation objective under our long term strategic plan. This is also a testament to the development of our platform and the strong group of professionals that make up the genco team.
Regarding the progress of our IMO 2020 strategy, we've installed scrubbers on 12 of our 17 capesize vessels today, representing a completion rate of 71%. Additionally, we have three vessels in the shipyard being fitted with scrubbers currently and expect to have the remaining two capesize vessels enter the shipyard in the coming.
In weeks to commence installation.
A primary operational objectives for this year remains to complete our scrubber installation program ahead of the January Onest 2020 compliance date. This important effort is aimed at ensuring that these systems are fully functional.
Up to our operational standards and to provide ourselves with experience operating systems prior to regulations entering into force.
With our entire Capesize suite of 17 vessels entering the shipyard this year for scrubber fitting in addition to scheduled special surveys and ballast water treatment system installations 2019 as represented a year of substantial capital expenditure in this core portion of our fleet, we view that as an investment in our Capesize fleet. This year as we see.
To maximize Capesize utilization in 2020 since we will have no scheduled drydockings for these vessels positioning genco to capture market upside potential going forward.
During the third quarter, our fleet wide time charter equivalent increased by 58% compared to the previous quarter, while our estimated Q4 fixtures today imply another 20% increase from third quarter levels. This increased earnings trajectory over both quarters highlights the improvement of the dry bulk market since the first half.
The year end for Genco, specifically reflects more normalized trade patterns, particularly on our capesize vessels.
Furthermore, we've continued our fleet modernization efforts, having agreed to sell for older vessels in October of 2019, we completed the sales of two Handysize vessels. We have also agreed to sell our two remaining panamaxes, which are expected to deliver to their new owners during the fourth quarter.
Following the completion of these sales genco will have fully exited the panamax sector as we continue to execute our barbell approach to fleet composition and create a more focused fleet.
I'll now turn the call over to oppose Sosa, Folias, our chief Financial Officer [noise].
Thank you John .
For the third quarter of 2019, which were presented the most significant drydocking quarter and Gencos history. The company recorded a net loss of $14.6 million or 35 cents basic and diluted loss per share, excluding $4.2 million and non cash vessel impairment charges adjusted net loss for the quarter was 2.4.
Million dollars.
Cash, including restricted cash and debt outstanding growth of deferred financing costs are $106 million to $6.2 million and $518.6 million respectively as of September 32019.
Today, we haven't cured $24.7 million of scrubber related expenses through the first nine months of this year and have drawn down $21.5 million under the scrubber traunch over $495 million credit facility.
We estimate that we have an additional $13.5 million of cash installments remaining under our scrubber program. While we have remaining capacity of approximately $11.5 million to draw down onto the balance ballpark credit facility.
Supporting our strong balance sheet is our competitive cash flow breakeven rate, which we estimate at approximately $11667 per vessel per day for the fourth quarter.
We've also provided further detail on these breakeven rates in the appendix over presentation for your reference.
As John mentioned earlier, we have initiated a regular quarterly cash dividend policy in relation to this dividend policy would have amended restrictions on dividends and our credit facilities, enabling genco to capitalize on that strong liquidity position to return cash to shareholders.
We have a method the dividend covenants in our credit facilities, such that Genco may pay dividends and or repurchase shares under the following circumstances first we may pay dividends to the extend our total cash and cash equivalence is greater than $100 million, an 18 point, 75% total indebtedness whichever is higher second we.
Can pay dividends, if the collateral maintenance test ratio is more than 200%.
And then if neither of those to apply genco can pay dividends, but will be limited to 50% of the previous quarters net income.
Payment of dividends is also subject to customary conditions in the agreements or credit facilities Marshall Islands law and the discretion of our board of directors.
Ill now turn the call over to Peter Allen, our dry bulk market analysts to discuss the industry fundamentals.
Thank you post close.
The Baltic dry index has improved significantly in the second half of this year with freight rates, reaching multiyear highs in the process. The capesize market in particular has been driven by increased iron ore shipments out of out of Brazil at a time in which vessel capacity has been constrained due to the global fleet preparation ahead of IMO 2020, the strength of the Capesize market has built.
We're down to the smaller class vessels.
Providing an overall uplift to the earnings environment relative to the first half of the year.
A record amount of seaborne iron ore volumes were imported by China during third quarter as the country fueled it's near double digit.
Growth rate in steel output and partially rebuilt previously drawn down inventory levels on the supply side net fleet growth to days is approximately 3%. However, overall fleet wide productivity has declined due to a large portion of beyond the water tonnage being off higher due to scrubber retrofitting.
In terms of the order book vessel contracting has been relatively limited so far this year. Despite a strong market in the second half leading to a stable order book as a percentage of fleet at approximately 10%, which compares to 7% for fleets that is greater than or equal to 20 years old.
We believe these positive supply side dynamics provide a solid foundation the drybulk market fundamentals going forward. This concludes our presentation and we'd now be happy to take your questions.
Thank you.
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[noise].
We can take your first question from Randy Gibbons from Jefferies. Please go ahead.
Okay.
Okay.
Hey, how to gentlemen has it gone.
Morning, Randy.
Yeah, first and foremost obviously congrats on the dividend announcement things. The first one since 2008 or something like that so nice to see the return of capital. There. So look out the dividend I understand the special dividend was based on kind of the incremental cash proceeds from some vessel sales, but how does your determine kind of the regular quarterly dividend of 17.
Hi assets.
Really you're comfortable with your balance sheet bullish on the market outlook. So following this kind of new sustained dividend is the next use of free cash to purchase modern secondhand renewing your fleet or to further repay debt so kind of a two part question there.
Well look the on the 17 and a half cent per share a regular dividend policy.
Really came out of looking at where the any via the company.
He is and putting a putting a yield on on not today's kirk share price, but the much higher any value.
So that's how we determine the the per share basis. We obviously also look at the sustainability of that 17 in assets and and we look at our balance sheet. We look at our cash position. We look at runway models and that was the number that we felt comfortable putting forward and was sustainable.
In terms of other uses of.
Capital look our number one goal right now is to increase the valuation of the shares.
They're trading below a navy along with our peers and we've looked at a number of of capital allocation strategies to get that valuation up we've looked at share repurchases. We came to the conclusion after quite a few of our peers that have done. This is that that it has no effect on on the share price.
Yeah.
We have looked at well does it make sense to to increase the fleet in terms of asset acquisitions I do believe there are still good return on capital numbers in terms of asset acquisitions, but the market does not seem to be giving any any credit at least right now to that so what and so.
Then when we looked at dividends, we felt that this was the best way.
And the best tool in our bell to to try and move the.
Valuation stock closer to want to where it should be from from an NPV standpoint.
Oh, that's and you mentioned that maybe a few times there. So what is that kind of nvme sure about $10.
Yes, I mean, it's well above $10 I mean, its look on any given day, it changes, but but our when we look at brokers values, our cash position our debt position, it's somewhere in the mid Fortys.
Okay come in line with ours.
Second question look at the general kind of market and your Threeq versus Fourq you rates, obviously capesize have improved currently sell above your fourth quarter to date bookings, whereas the smaller asset classes are relatively flat both from Threeq to Fourq is picked up a little but kind of current spot rates are flat to slightly down from your quarter to date rates.
So how do you see the capesize market as well as the smaller asset class is kind of performing the rest of the quarter right has the back half a quarter look for those two segments.
Well look the the fourth quarter in General is you know, we're estimating is going to be 20% higher than than the third quarter and not say on thats, an uptick across the capesize sector is as well as our Meyer bulk fleet.
The Panamaxes are are on our on index deals and as I mentioned earlier, they are they're going to be sold before the before the end of the year.
Yep.
In terms of where where we see things I mean I wanted at one of I think we spoke about before that there was a lot of disruption.
With respect to installation of scrubbers, and what I mean by that is we had the majority of our fleet trading in the Pacific. So that we can make sure we hit the timing right on our slots at at the shipyards for our scrubber and stuff installation program.
And then coupled with the fact that we had a rising rapidly rising market.
Certainly in the Capes and also in the minor bulks as well and so it's always difficult to capture that real time, though now that the the market is has stabilized and even ticked down a little bit you'll see you'll see better and you are seeing better fixtures in the fourth quarter and we've.
Also we are also 71% of the way through our our scrubber program.
Which is which is very important so.
It should be a much more efficient.
Chartering, if you will for off for the fourth quarter, which is represented in the numbers.
Sounds good makes sense, so hey, thanks, again and congrats on the dividend.
Thank you.
Thank you we can take your next question from John Chappell from Evercore. Please go ahead. Your line is like.
Hi, guys is show more going on for John .
Thanks.
The.
The Big news on this call seems to be the dividend and that factor you guys were able to successfully.
Shareholders that you're going to going to do a sustainable dividend going forward and there is I noticed that you were able to also.
Work with the banks to come up with a series of covenants that that assuming would have enough headroom to be able to do this dividend going forward you you're targeting 17 the half.
It looks like the first two covenants are kind of.
Or kind of the first litmus test and then of the third covenant the 50% of the previous quarters net income. So I guess I'm just trying to understand is that because if you don't meet the first two then you're able to if you have positive net income during the quarter than you can pay 50% of that and if that meets the 17 half then you'll continue that.
And then if that if those three conditions are not a 100% than you'd basically have some floating component to it so where you'd pay less than subdued in half.
Well I, yeah, we haven't talked about the floating component, but yeah. Just look on the covenants. The key covenant is to have a minimum of $100 million in cash pro forma or 18.5% of the debt outstanding. So if you look at where we are today, we have $166 million in cash at the end.
On September Thirtyth, so there's quite a bit of cash there before we get down to the 100 million dollar minimum if you will.
50% of of net income that's always been in place in the credit facility. So that was not an AD. We just we just didn't we wanted to make sure we kept that in place as sort of a third tier, but I'd be much more focused on the minimum cash number that of 100 million then than anything else.
Okay, I see so you're saying that you with the first few covenants there's enough headroom that you feel it gets sustainability on the 17.5.
Sorry, I shouldn't really think I think of that is like some of your your I guess not your peers with some of the tanker companies have a floating type dividends. So this is really going to be more of a fixed in them going forward.
Yeah. This is this is or a regular 17 and a half cent dividend policy per quarter.
Okay, Great. That's a that's a good signal going forward I think for for confidence and then.
Regarding the the sales I think we obviously makes sense the noncore panamaxes getting removed from the fleet and then the age of the the other two smaller ships I'm sort of makes sense in terms of your.
Vessel sales is there anything else.
Other vessels that you can kind of 0.2 in the fleet that you think might be contract candidates to try to.
Generate shareholder.
Returns of cash that would kind of follow that mold.
Well look we have one older Handysize ships a left it's a 2005 I would say that something that that were looking to sell.
It's no secret that are that we've also looked at disposing of the 53000 deadweight tons ships. So I know nothing is nothing has changed on that front in terms of disposals.
Targeted.
Well, we'll have we'll look at how things are after we sell those and again, it's you're looking at everything in your tool belt at at the time right depending on the equity valuation.
And do we want to distribute those funds in terms of dividends to the value share buybacks do we want to put cash on the balance sheet ordered or do we want to do vessel acquisitions. It's it's definitely something that you look at in real time, and we will and I think we've demonstrated a particularly with this last special David.
And that.
There's a lot of time and effort lot of thought and to get to the right place, which is which is where we are today.
Yeah.
I agree I think that this nimble opportunistic strategy that really show investors you have confidence and returning capital is a good look so I'm going to turn it over to the next caller. Thanks.
Okay. Thanks, Sean.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone.
We can take you know Nick's question from no from clock.
Securities. Please go ahead.
Hi, Thank you Hey, guys.
Congrats on the high.
That's on the dividend announcement, obviously, a big deal.
Sorry, I'm, joining the call a bit late.
But you know just just want to maybe at big maybe bigger picture.
With the dividend now.
Clearly to us it looks like you said that as sustainable level over the long term do you think.
Do you feel the company, having been so spot exposed than we think it's obviously.
Good time to be exposed to spot market.
Does having a dividend policy now.
Kind of compel you to want to seek more longer term contracts.
For the fleet does that come into play at all.
I don't think units say comes into play basis, a dividend I mean, we're constantly looking at period opportunities and and managing it adds a portfolio. We have put some charters in place on on some of the smaller ships.
Over over the last couple of months the other at the other thing at our tool belt be because of the fact that weve that we've revamped the commercial platform is we can do what we can do quite a bit a forward cargo booking.
Which we which we started to do for the first part of the year, which is typically a little slower slower period. So we're not just limited to a time charters we have quite a few.
Trading opportunities in terms of forward cargoes that we can also do.
But to answer your question, just very concretely I wouldn't say it necessarily because of the dividend, but in general if we see a good opportunity on locking something in at a healthy rate, we're definitely going to do it.
Okay. Okay. Thanks, thanks for that color.
The other question is and sorry, if you adjusted already.
You have to have hundred million of cash to maintain the dividend and got 65 plus million above that.
Not thing you need to spend that but as you think about it. The do you feel if you were going to.
To deploy the capital you got the nice chart in the presentation that shows the focus on Capes, ultras and handy, but mainly capes and ultra.
Where do you think you spent an incremental dollar is around the capes or ultra.
Look I think it's both the where where we definitely want to continue the barbell approach. If you. If you look at what we did one at our last acquisition in June we did we did some capes than we did some alters that the exact same time.
To maintain that and as you pointed out we do look at the Capes and the alter is as as much more of the core fleet rather than the the handy size.
But again you know there the whole what the whole concept of of the regular dividend is clearly to return cash to shareholders, but it's also to allow the company.
Utmost optionality, so we still with the strong balance sheet, we can still do acquisitions, we can.
We obviously can still do share buybacks. We you know so it's it's all about maintaining optionality and that's that's really why we.
Why we chose the level of dividend that we did and and obviously, we feel that returning cash to shareholders right now is the best move.
Got it okay.
That's helpful. John Thanks, so much for that and congrats again on the dividend.
Thanks Omar.
Thank you we can now take next question from Emmett May Ross Rock from Deutsche Bank. Please go ahead.
Hey, guys. This is Chris matter on from it and so I hopped on a bit later as well.
So I apologize if this has been touched on but.
So it feels like 2020 should be a stronger year for cash generation than 2019 vessel supply is moving lower and the scrubber investments turning from a cash had headwind into a pretty considerable cash tailwind of spreads.
Hold their current levels. So I guess the question is what does this mean for the dividend outlook should we expect to see growth on the back of this kind of expected ramp in cash generation orders. The current dividend just kind of reflected the anticipation of that.
Stronger cash environment.
So the one the one thing I'll add to your list a positive factors in in 2020 is it is 2019 as I as I had said before was the biggest year. This company's ever had and its history of of dry dockings, meaning next year is a very low drydocking year in fact.
Zero of our capes or Drydocking next year. So we will have very high utilization.
But going back to your question look the dividend at right now at this point our policy is 17.5 cents a quarter. There's no reason why if if things.
Continue to move up and our positive that we won't revisit that but but again. These things are all looked at in in real time, we have a lot of things you know at our disposal right now increasing a dividends share buybacks vessel acquisitions. The main point of this is that this company.
Okay.
Continues to have that Optionality and will and we'll make the right move at the right on.
Appreciate that and then kind of looking at the Cape market. So you know rates in the market in general has been supported by increased at a service time for scrubbers.
You know installations are taking longer than expected I guess kind of how long or how into 2020 could this kind of a tailwind for the Cape market remain just as long as we're seeing this high on a service time.
From what from what we can sell as lease through the first quarter.
I think I think a lot of a lot of people who felt they were going to get scrubbers installed in the third quarter. That's all a lot of that's been pushed into the fourth quarter and a lot of the fourth quarter is getting pushed out of the first quarter.
There's there's definitely still big waiting times disruptions.
And you know if you're if you're going to arrive on the seen today and try to install scrubbers here, you're well into next year to even think about getting a slot.
Which is again why we wanted to get all this done.
Before the end of this year and then there's the whole operational side I mean, this is a brand new piece of equipment for most companies and you need to get that operational experience.
And run the traps if you will on these before before you get comfortable that you're using it long term. So that why that's why it was so important for us to get all this Don.
This year.
Alright. Thank you for the color on that and then just one last one if I could so earlier this year, China announced coal import quotas for 2019 that they were going to keep it flat at 2018 levels and through the first nine months of the year I believe coal imports were running about 10% higher year on year, So that implies a pretty sharp decline into Q4 our usage.
During this in the market and kind of what's your outlook for that as we head into yearend.
Yeah, I mean look we are seeing coal being cut back.
Which is you know it's all predicted right we've been talking about this for probably six months.
Because of the quota so yeah, I think we could see a softening as we get into law as we get into the end of year, but let let's also keep in mind that southeast Asia, particularly Vietnam. Those numbers continue to move up a double digit rates and Indian coal imports also.
Continue to move up 10.
At least so it's not just about China and you know I just even if we have a little softness on the Chinese side, we'll see that pick up again in a in the first and second quarters and the other thing you ought to keep in mind is that it's not just call them in the major commodity is iron ore ride and and valley in particular given guidance that.
Show, 5% more imports.
In the fourth quarter over the third quarter, which was which was a pretty strong quarter. So I think there mitigating factors on a little bit of cut back on the Chinese coal imports.
Well I appreciate the time it does it for me thanks, guys.
Okay I have a good day.
Thank you.
Therapies, there were no further questions in the queue at this time I would like to handle pullback hosts host for any additional closing remarks.
Well. Thank you very much everyone. This concludes the call everyone have a nice day.
Thank you. This concludes the Genco shipping and trading limited conference call. Thank you.
Thank you for your participation, ladies and gentlemen, having lifestyle.