Q4 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Genco shipping and trading limited fourth quarter 2019 earnings conference call in presentation.

Well we began please note that there will be a slide presentation accompanying todays conference call.

Presentation can be obtained Gencos website at www Dot Genco shipping dot com to inform everyone. Todays conference is being recorded and is now being webcast at the company's website www Dot genco shipping dot com.

We will conduct a question answer session. After the opening remarks and instructions will be given at that time.

A replay of the conference will be accessible at any time during the next two weeks by dialing 888 Choosy Roastery one one once you.

719.

Four or five seven.

He wrote 820 entering the pass code 7774363.

This time I would like to turn the conference over to the company. Please go ahead.

Good morning, before we begin our presentation I note that in this conference call was 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.

In other words in terms of similar meeting in connection with a discussion of potential future events circumstances or future operating our 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 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 interim report on form 10-K for the year ended December 31st 2018, and the company's reports subsequently filed with the FCC.

At this time I would like to introduce John Wobensmith, Chief Executive Officer, Genco shipping and trading limited.

Good morning, everyone. Welcome the Gencos fourth quarter 2019 conference call I will begin today's call by reviewing our fourth quarter and full year highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals and then open the call a question.

For additional information. Please also refer to our earnings presentation posted on our website. This morning.

2019 marked another important year for the company in which we executed several key initiatives to further strengthen gencos overall platform and enhance our earnings power. The execution of these initiatives together with a stronger drybulk market in the second half of that 2019 enable genco to return to profitability in the fourth quarter.

Her with adjusted net income of $3 million during the year. We also demonstrated a commitment to advance our disciplined capital allocation strategy, which continues to remain an important focus of ours for creating shareholder value.

Complementing our attractive acquisition of fuel efficient modern vessels in 2018 as well as our installation of scrubbers on our Capesize vessels in 2019, we drew upon our solid balance sheet and strong liquidity position to return capital to shareholders.

Marking an important milestone for the company last November we implemented a regular quarterly dividend policy as part of our broader capital allocation strategy. We're pleased to have now declared our second consecutive regular quarterly cash dividend of 17, and a half cents per share for the fourth quarter, notably over there.

Past two quarters, we had declared cumulative dividends of 67 and a half cents per share which includes a one time special dividends regarding our success implementing gencos IMO 2020 strategy. We're pleased to have completed our scrubber installation program for our Capesize vessels, realizing a key objective in our comprehensive IMO 20.

20 compliance approach.

Our ability to officially trade our Capesize vessels was limited in the second half of 2019, we were able to fully execute our scrubber installation program in a timely manner. Despite unprecedented tightness in shipyard capacity in China based on this success, which is a testament to the hard work and dedication of our entire team.

We were able to gain valuable experience operating the equipment ahead of January 2020, while also making sure the systems are fully operational and up to our standards.

With our entire Capesize fleet of 17 vessels entering the shipyard during 2019 for scrubber fitting in addition to scheduled special surveys and ballast water treatment system installations 2019 represented a year of substantial capital expenditure for this core portion of our fleet our investment in our Capesize fleet in 2019.

We will enable us to maximize capesize utilization in 2020 since we will have no scheduled drydockings for these vessels. This year as such we believe we're well positioned to capture market upside potential going forward.

Furthermore, we've been able to capture the fuel spreads between high and low so for fuel so far this year, which together with more normalized trade patterns are reflected in our Capesize time charter equivalent forward guidance of approximately $17000 per day for the first quarter.

For a minor bulk vessels, we continue to outperform the market exceeding our internal benchmark by over $700 per day. During 2019. This highlights the continued progression of our active commercial platform our global team in the U.S., Singapore in Copenhagen booked approximately 420 fixtures over the course of last year.

Sure and continued to add key new customers to further diversify our earnings stream.

Well, our fleet fleet wide Q1, TC performance today to strong relative to the daily Indice indices. We believe it is best to view these performance metrics over a full year period as such going forward, we wouldn't be reporting our T.C.E. against our internal benchmarks on a yearly basis to avoid the choppiness quarter to quarter.

Results can bring due to the volatility inherent in freight rates during the first quarter, we've experienced a seasonal freight rate pulled back and anticipation of this we work to cover a portion of the quarter, providing genco with a degree of insulation from current market conditions and additional to seasonal weakness the outbreak of the novel.

Corona virus has further impacted industrial activity commodity demand and freight rates in the early part of this year, our focus remains on the health safety and well being of our crew members, particularly for those onboard our vessels in the far east to this end we've undertaken several precautionary measures and instituted protocol.

Sales in an effort to protect our dedicated team a seafarers during this time and certainly hope for containment other corona virus as soon as possible.

During periods of freight rate volatility as we are currently experiencing the importance of our strong balance sheet as highlighted even more so together with our approach of deploying a fleet with direct exposure to the major and minor drybulk commodities, both of which presents strong long term demand prospects, specifically we view.

We view on more than $162 million in liquidity is a key debts differentiator of genco as we aim to continue to create shareholder value throughout the drybulk market cycle, while maintaining one of the lowest net leverage position in our peer group.

Ill now turn the call over to oppose to fully as our Chief Financial Officer.

Thank you drawn for the fourth quarter of 2019, the company reported net income of $49 million or two cents basic and diluted earnings per share excluding $1.3 million a noncash vessel impairment charges of end point $8 million loss on sale vessels adjusted net income for the.

Quarter was $3 million during the fourth quarter, we generated adjusted EBITDA of $27.9 million, enabling us to further solidify our already strong balance sheet, specifically cash including restricted cash is $162.2 million as of December 31, 29 team. This.

Despite it being our busiest drydocking year in the company history, and a cumulative dividend of 50 cents per share payable paid in Q4 of 29.

Comparatively our debt outstanding gross of deferred financing costs is $495.8 million as of the another year.

Additional steps to further enhance our balance sheet have been the opportunistic sale of five older less less fuel efficient vessels. During the second half 2019 in early 2020, as we continue our fleet modernization efforts.

Four of these vessels have been delivered to their new buyers to date, there are mainly vessel sale to present the sole panamax currently in our fleet I need to complete our exit from the sector as we continue to execute our barbell approach the fleet composition, creating a more focused asset base consistent with his approach were evaluating the sale of our 10 remaining handysize vessels.

Which we view as noncore assets within our fleet mix for the first quarter of 2020, we anticipate a non cash impairment charge in the range of 79 million to $85 million associated with the adjustment of these vessels that respected for fair market values.

Separately as John mentioned earlier, we have fully executed our scrubber retrofit program. In 2020, we have approximately $10 million are remaining scrubber related expenses to pay wall, we have approximately $11 million remaining under a scrubber tranche of our credit facility, which is available for us to drawdown.

Our cash flow breakeven rate for the first quarter of this year is estimated to be approximately $11780 per vessel per day included in our breakeven rates as our 2020, DB budget figure or $4590 per vessel per day weighted across our current fleet.

Furthermore, we anticipate approximately 136 days of estimated off hire your time relating to vessel Drydocking during Q1 of 2020.

Also we will have 10, capesize vessels with contracts expiring in the coming weeks, depending on the market conditions, we may elect to buy less certain of those capesize vessels to the Atlantic basin in an effort to maximize our earnings over the long term.

Ill now turn the call over to Peter Allen, our dry bulk market analysts to discuss the industry fundamentals.

Thank you post laws.

Following a strong second half of 2019 freight rates have come under pressure so far at the beginning of 2020 seasonal factors are currently a play including increased newbuilding deliveries due to the front loaded nature of the order book weather related disruptions impacting cargo availability and the occurrence of the lunar new year in China.

Act of these factors on the Drybulk market has been accentuated by the onset of the novel Corona virus and its effect on industrial activity in China.

Specifically various high frequency indicators, such as daily coal consumption as well as road traffic points, a meaningful year over year decline seen activity levels in China, which has impacted demand for some of the commodities that we carry.

We point out that the duration impact of the Corona virus remains uncertain at the current time and is challenging to predict.

First thing specifically on near term Drybulk demand drivers. We note that the start of the South American grain season should begin to see Brazilian soybean experts exports ramp up meaningfully March on the major bulks, particularly in iron ore, Although valley revised down its first quarter output guidance the company's expectation for the full year remained unchanged implying.

Hi concentration of iron ore production in the second half the year, which coincides with historical peak Brazilian iron ore shipments on the supply side as the global Maritime industry has shifted to comply with the IMO 2020 regulations higher fuel cost, particularly for larger vessels consuming compliant fuel have made trading these vessels challenging.

We believe that older non scrubber fitted capesize vessels are becoming uncompetitive in this costly fuel environment, given current market conditions and the regulatory landscape, we anticipate a supply side reaction through increased vessel demolitions, particularly for these vessel types.

While we saw from Newbuilding deliveries in January which led to annualize net fleet growth of approximately 7% during the month, we expect supply to normalize over the course of year reacting to market conditions as well as the heightened regulatory environment.

We noted the order book as a percentage of the fleet remains low at approximately 9%, which compares to 7% of fleet that is greater than or equal to 20 years. We believe these positive supply side dynamics provide a solid foundation for Drybulk market fundamentals going forward. This concludes our presentation and we would not be happy to take your questions.

Thank you Sir if he would like to signal for question you can signal by pressing the Starkey followed by the digit one on your telephone keypad keep in mind, if you're using a speakerphone. Please check your mute function has been released to allow the signal to reach our equipment.

So again that star one for questions.

All for just a moment till dollar everyone the opportunity to signal for questions.

Our first question will come from Randy Gideon with Jefferies.

[noise] Howdy gentlemen has it gone.

Morning, Randy.

Hey, guys. Two quick questions from me say your your one Q 20 coordinate rates are quite impressive, especially I guess, 78% at 17000, a day for your Capesizes now looking specifically at that kind of asset class. How much of this is outperformance due to maybe or early bookings versus skus.

Robert premiums and also kind of looking at current Capesize rates of 3000, a day and using a spread it maybe 200 tonne what do you currently earning on one of your scrubber fitted capesizes.

Right. So the the Q1 fixtures I would say it was was impacted by bye bye three events in terms of being strong one was a forward booking ahead of time its as clearly we were not a let's say predicting krona virus, but we were predicting a seasonally slow first quarter.

So we did forward bookings and took advantage of that both physically.

With the Capesize fleet as well as we took some some capesize cargos forward as well for cover the second thing is we also bought quite a bit of fuel.

Towards the end of December and again that was that was beneficial because it was a fairly low price on high sulfur fuel oil and then the third is the is the is the third scrubber related spread which is probably somewhere around six to $7000.

A day as part of that.

Okay. So consistently and then your next question was on the $200 bread.

Yeah kind of current rate environment.

On a silver fitted Kate.

Yeah. So the spread today I think it's about 100 $155 hundred unsure XT dollars.

So that is that is certainly.

That is certainly weekend.

We did all of our all of our bookings.

But having said that you know I think with again, a seasonal slow period for shifting but also the slow down from the krona virus.

As as that starts to 'em we.

Yeah, when that starts to get in our rear view mirror I expect more demand for very low sulfur fuel oil. So I expect that spreads to to push back up towards 200.

And I would also we expect.

That it you know as the price of oil I should say, if the price of oil because I'm certainly not oil analyst, but if the price of oil moves up that spread will lot will move up as well.

So currently I would say it probably around 5000 dollar a day.

Premium.

That we're earning basis, having our scrubbers onboard and and burning high sulfur fuel oil versus low sulfur fuel oil.

Okay, well, that's kind of inline with our view and then second question as it pertains to the ongoing assets sales, especially with the 10 handysize vessels that are now for sale how have the asset values been impacted by the current weakness is there's still a liquid market and the S&P side and then as it pertains to the used to.

The cash.

Would you say top priority for <unk>, you know accretive Nab transactions is selling the vessels that NAV and buying them at buying shares at a discount to 30, 35% to NAV or are you looking to further repay debt or kind of what do you get to do with the incremental cash.

All right well, let's talk about the S&P market first so the S&P market is it's slow and again that is that is typical this time here from a seasonal standpoint, but but clearly amplified by the by by the realities as well as the negative sentiment due to the krona virus situation.

I think you need to just take a step back with these 10 ships.

You know we identified this fleet is noncore when we did our strategic plan back in early 2017, they were not part of our fleet renewal program, what what management in the board has decided to do was make these part of our fleet renewal program at our last one when we had our last.

Board meeting so.

We're not necessarily looking to sell these next week. So just to be very clear on that this is going to be an opportunistic approach to to make sure that we're getting the best value and and I would say right now its probably not the ideal time to want to be selling shifts we're making good money on the show.

Yes, we're beating our indices are benchmarks to these vessels.

So it's a matter of a.

Finding the right opportunity I expect it to be this year to be very clear, but then we will we'll we'll we'll look for from firmer prices.

Okay, and then use of that cash.

So used to that cash I again I you know we have this capital allocation strategy and I I think that we have to look at it you know at the time that we've sold probably a majority of those ships does it does it doesn't make sense at the time to.

Buyback stock does it make sense to do a dividend area or does it make sense to ought to buy assets and that's what we'll look at it at the at the time.

Okay.

That's fair way that's it for me thanks, so much.

Thanks Randy.

Thank you. Our next question comes from Omar Nokta with Clarksons Plateau Securities.

Hi, Thank you Hey, guys just wanted to.

I'll up a little bit on hey, good morning, just one of the follow up on a on Randy's question regarding the Handys Oh, no you've outlined that it's you know you're not selling them. This week you do expect due this year I can't recall, if they're the best with her sister ships or not but do you think there's appetite to just cellphone and sort of one on block deal or would it be more.

Dribble out you think.

Look so there are there are there are two sets a sister ships there. The 830 fours and then there are the two a 32 hockey dotty types.

I think there's an opportunity to do and on block sale.

Somewhere down the road somewhere down the road.

But again Omar I'm I'm being a little cagey about it because you know there is not a situation where there's an immediate needs and that's a sell vessels. So we want to it we want to do it in a in a in a way that really maximizes shareholder.

Shareholder value and and proceeds so I I will look at both on block is well as you know maybe it's one or two at a time, but but getting it done but the that the idea here is is is to maximize proceeds for the company.

Thanks doesn't make sense and then they'll clearly with 162 million to cash you've got you've got climb to wait and get the like deal.

That's exactly correct.

Yeah, and then just as we think about the potential free cash flow that can get unlock when you sales do you have you given I'm not sure if its filed with the able to stay but how much that is currently outstanding against the those 10 ships.

Oh, we have not fall that number specifically, but.

It would be it will be paid down on a pro rata basis.

You know it's.

We can give you that number I'm our hold on one second we'll get it yeah.

Well first of all this is a is retrieving that is Oh do you have any other follow up Omar.

Yeah sure just maybe one more.

And he was just when you think about let's say the proceeds or you think about putting them to work and we're in a different environment hopefully a few quarters down the line and if we're in a balanced market, where it makes sense to buy ships or how do you gauge whether you buy a a cape you buy a ultramax.

Or supramax and how does buying a case goods scrubber you know how does that thought process come together. If you just give us some color on how you're thinking about it yeah sure sure. So look I you know again.

The strategy. The company is the barbell approach, where we're focused on on the Cape size as well as a ultramax tonnage in terms of any growth that we do going forward.

And so the way we will assess that again, it's always at the time in terms of what what we feel phone commodity demand is return on capital potentials, which obviously has to do with the pricing of vessels at the time and and future earnings. So those those are the two asset classes that that will focus on in terms of scrubbers.

I would you know I would say I still think you know capes there there's a good opportunity to to earn good good or excess cash flows and good returns on an honest scrubber investments. So if I had my druthers I would take a a cape with a with a scrubber installed.

But again it depends on depends on when we're redeploying the capital, but if it's something this year I or even next year I think you'd say.

A worthwhile investment.

Okay, and then just maybe following up on that you clearly the ultramaxes for the past couple of quarters at least of I've been outperforming the super at least in your operating result, you think about deploying capital in that segment that from here on out it's most likely going to be ultra is that you go after versus the super.

Yes, yes, yes, and actually the the Super is I mean, there's a there's a cost to capital for every ship rights to the Ultramaxes are obviously more than not more than the the super as well we've been outperforming our benchmarks on the Super as an earning good return on capital on on those shifts, but if you.

Asked me specifically the Ultramaxes are obviously a newer design.

And so yeah, we would focus on alter is more so than than the super is for any fleet renewal.

I think a pull so that's has the the number Omar.

Yeah. So Omar just getting back to you goes the way the that works. Those those are a part of a pool of vessels are collateralized 400, another 60 million dollar credit facility.

So it's paid pro rata based on the market value at the time, but based on current market values you'd be about $50 million of debt pay down in relation to those 10 ships.

Okay. Good thanks, very much that's really helpful or John Apostles. Thanks again.

Okay. Thanks Omar.

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Thank you. Our next question comes from Liam Burke with B. Riley FBR.

Yes. Thank you good morning, John Good morning post close.

Morning.

John you spoke about pre buying a high sulfur fuel coming into 2020.

Do you anticipate any supply problems as they go through the year, possibly into next year.

Uh-huh in for the high sulfur fuel oil.

Yes.

No I mean look most of the ER, we're really fueling up almost exclusively in in Singapore, with our Capes and we don't see any supply disruptions or issues.

In in Singapore with high sulfur fuel oil I do think and it you can certainly see it there are issues in some of the smaller ports in terms of having a in terms of having inventory, but but that doesn't affect us where like I said, we're doing the majority of our bunkering in a in Singapore on or Capes.

Great. Thanks, John.

Thank you.

Thank you once again as a reminder, if you'd like to ask a question. Please press star one now.

Our next question comes from a net Roger.

Deutsche Bank.

Hi, Good morning. This is Chris on from it I hopped on the call a bit late so apologies if you touched on this in the prepared remarks, but you know the spot market has stabilized over the last couple of weeks are you seeing increased activity into China over the span and if so is it really just markets reopening post lunar new year or do you think you know the situation to start.

To stabilize though.

Current virus.

Look I would say things are starting to stabilize I think it's still a little early to tell as to when the capes start to really move up in in a in a significant way.

You know our belief is when I'm when things do.

Well when the when the current a virus is is contained in things. There are stable. We do expect that the Chinese government will do a large stimulus package it could be even one of these level three packages.

Which will be geared towards infrastructure and the steel industry. So I you know I I think the case, we'll we'll certainly benefit from mom from from what happens on the infrastructure side on the minor bulks, we've actually seen some some strength, we're definitely seeing a soybean ship.

Let's move up off the East Coast to South America, you know, Brazil has had a record soybean crop this year and that is really just started to ramp up and we've seen that in the and the all in the ultra rates moving from the Oh, you know sort of low fives to low Sixs and we think that's going to continue and then we've also seen.

In the Atlantic we've seen some strains in the black sea from from a from a leftover high corn crop that's still continuing to it to move out of the Black Sea always these commodities, we on the soybean and corn on corn side are going out to Asia, including China and then we've also seen cold start to pick up.

Up out of out of Indonesia going into a into India and China as well. So I think stabilized is is the right term I would say in the minor bulks.

We're starting to watch to see some strength and the ER and the Capes you know we expect.

Once things get back to little more normal situation.

Ah, yes, it is a bit but interestingly it does feel like I said things in China are stabilizing and at least by my math, China accounts from 35% of Drybulk imports, but over the last few days the entire equity markets sold off quite significantly on reports that the viruses spreading internationally and you see you keep seeing Iran and Italy.

Yes, like the two biggest countries. How do you think about that tradeoff in terms of Drybulk demand like China is clearly most important yeah, I'd imagine far more important than southern Europe in Iran. How do you is kind of think about that trade up as it relates to drybulk demand maybe over the next month.

Yeah, well, let's say I [laughter], we're not doing a lot of dry bulk business with <unk>. In fact, I don't think we're doing anything with Iran. Just to be glare, and we're not doing a lot.

And with Italy, So I wouldn't look at those two is as big drivers in a in the dry bulk market, but I think I.

I think you know in general people are obviously concerned about Europe overall, and if the if the virus spreads in Europe, and then you know obviously, the the U.S., but what you know what we'll see how that goes obviously the cases are very low I think as you pointed out China is the major driver too.

The drybulk industry.

Whether it's whether its major or minor bulks and I think China is really the the one to to watch yeah. It is interesting and at is that you know president NZ did reiterate.

You know that he needs to deliver the the GDP target this year, both from an economic and social target standpoint.

So I think they are I feel they're very focused on it and again once things get back to the normal I I do expect some significant stimulus and and help from the Chinese ago in Chinese government for their economy in the best way to do that and the quickest is a infrastructure spending which go.

Goes directly to the steel industry, and and clearly iron ore.

Oh, Yeah, certainly feels the probably the case and then just one more we've heard rumblings about potential scrapping of summer the older via slow season, the market certainly it'd be helpful to the case.

You know fundamentals do you any insights here.

Yeah, we're definitely seeing be LLC scrapped, we're seeing capes scrapped and it you know from what we have seen.

It does look like there's at least another eight to 10 viola sees that that are marked for for scrap this year and I think it's interesting because it's earlier than a them what we then.

What we even thought so there's definitely deliveries of yellow sees this year, but there seems to be there's going to be more of an offset then then maybe what we had thought a few months ago. It on offset in in a positive manner with the with higher scrapping levels.

And yet maybe I'll add a yeah. The other thing a lot as this while nobody likes to see freight rates, where where they are today, there's no doubt that that drybulk shipping is reacting on the on the scrapping side like it has in the past I think we've got well I think we've had 13 capes scrapped or already today.

Right.

And you've got right now you've got about 100 Capesize vessels that are you know that are 18 years old and an older. So I still think there Ah theres a real opportunity for the Capesize fleet to a slim down do you do have scrapping.

That's it feels like it and then one more if I could so we've seen a decent amount of time charters for scrubbers equipped vessels on the tanker side and I know you guys are in the spot market, but the question is have you seen any scrubber fixtures on the Drybulk side, particularly capes just trying to see if their premiums are coming in at a similar level that got 6000 issue.

And just what we're seeing the spot market.

Yeah, Yeah, there's really not much going on in the fixed rate time charter market right now, which I think is you know a normal.

<unk> response to win when you have rates, where they are today. The only thing we've seen our our index deals.

There's been a couple of those that have been done with with the with it you know on paper a decent looking percentage premium, but when you actually you know where rates are today that percentage premium for scrubber means you know it means trainees right. So yeah, clearly that's not something we're interested in.

Alright, I appreciate all the color thanks for the time guys.

Thank you.

Thank you we have no further questions at this time. This concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

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