Q4 2020 Genco Shipping & Trading Ltd Earnings Call
Please standby we're about to begin.
Good morning, ladies and gentlemen, and welcome to the Genco shipping and trading Ltd fourth quarter 2020 earnings Conference call.
Before we begin please note there will be a slide presentation accompanying today's conference call that presentation can be obtained from genco website at www Dot Genco shipping dotcom.
To inform everyone today's conference is being recorded.
It's being webcast at the company's website at Www Dot Genco shipping Dot com.
We will conduct a question and answer session. After the opening remarks instructions will follow at that time.
A replay of the conference is accessible anytime during the next two weeks by dialing 888.
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1112.
Or 719457.
Zero 820.
Entering the pass code 950 1899.
At this time I will turn the conference over to the company. Please go ahead.
Good morning, before we begin our presentation I note that in this conference call, we'll be 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 true.
Jack intend plan believe and 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 release that was issued yesterday.
Sturdy the materials relating to this call posted on the company's web site on 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 31, 2020 on the company's reports on form 10-Q and form 8-K subsequently filed with the SEC at this time I would like to introduce <unk>.
John Bolton Smith, Chief Executive Officer of Genco shipping and trading Ltd.
Good morning, everyone welcome to <unk> fourth quarter 2020 conference call.
I'll begin today's call by reviewing our 2020 and year to date highlights discuss our financial results for the quarter and the industry's current fundamentals before opening the call up for questions for.
For additional information. Please also refer to our earnings presentation posted on our website.
During a highly challenging operating environment in 2020, our strong in house commercial platform and operations team continued to build on its track record of benchmark outperformance, while we took important steps to execute our strategic plan and effectively position genco for the long term.
For the year, we outperformed our internal benchmarks by approximately $800 per day generating $15 million of incremental EBITDA.
Notably 2020 marked the third consecutive year debt Mark outperformance for our minor bulk fleet. In addition, our time charter equivalent in Q4 of $13167 was the highest genco has achieved two years, our strategy of maintaining short term coverage during trough market conditions earlier.
In 2020 and repositioning the fleet ahead of an expected market upturn paid off with strong performance in the second half of the year.
The unfortunate onset of COVID-19 in early 2020 resulted in a demand shock that significantly impacted the drybulk earnings environment, particularly during the second quarter of last year.
However, drybulk earnings were able to meaningfully recover beginning in June.
The Q2 impact and the subsequent rebound in freight rates as highlighted on slide eight of our presentation by the earnings of our Cape size vessels, which realized time charter equivalents of over $16000 per day in each quarter of 2020 with the exception being the COVID-19 related lows of Q2.
During the first quarter of 2021 today, we have selectively repositioned vessels in both our major and minor bulk fleet to improve earnings over the remainder of the year given our opportunistic chartering strategy. We anticipate the majority of the vessels in our fleet to be opened for fixing in mid March to mid April to take advantage of the meaningful.
The increase in rates, we've seen recently and the expectation of more to come.
As part of the significant progress we have made renewing our fleet. We officially completed the vessel divestiture portion of our fleet renewal program through the sale of our 53000 deadweight ton Supermaxilla and our non core handy size fleet, while expanding in the core altra Mac sector.
In December we announced the acquisition of three modern fuel efficient ultra Max vessels and exchange for six older non core handy size vessels. This transaction, which is structured as an asset swap without additional capital required accomplished a number of key objectives for genco, including building scale in our core.
Ultra Mac sector to complement our in house commercial platform, while divesting non core assets. Importantly, this also reduces the average age of our fleet and eliminates nearly $4 million of scheduled Drydocking Capex in 2021.
Moving to capital allocation and based on our strong balance sheet combined combined with positive drybulk markets on the battles Genco declared our sixth consecutive quarterly dividend highlighting our focus on returning capital to shareholders. This brings total dividends declared to $75.05 per share since the third quarter of 2000.
19, effectively deploying our capital will remain a top priority for management, we intend to continuously a value evaluate our capital allocation strategy as the drybulk market further improves with the goal of creating shareholder value over the long term.
Regarding the liquidity of our shares since mid December ownership of large shareholders with board representation has been reduced from 58% down to 32% currently while we believe this has contributed to genco trading at a discount to NAV and.
And trailing stock performance compared to a number of our peers in the short term we view this as a positive in the long term due to increased overall liquidity and free float.
<unk> forward, we believe the Drybulk outlook is favorable specifically the order book as a percentage of the fleet is at an all time low limiting net fleet growth, while unprecedented stimulus and over 5% global projected GDP growth as well as the Brazilian iron ore export recovery have combined to create.
Proving supply and demand conditions.
With the ownership of both major and minor bulk vessels are world class in house commercial operating platform and our industry, leading balance sheet Genco is well positioned to benefit from these compelling industry fundamentals. We believe the record low order book in particular will be an important catalyst in creating a dry bulk market environment.
In which demand growth outpaces supply growth in the coming years, a very positive driver for freight rates.
Lastly in January we.
We signed the Neptune declaration on Seafarer wellbeing and crew change to address the unprecedented crew change crisis caused by COVID-19, Genco has worked tirelessly to return seafarers to their home countries safely and on time completing over 100 crew rotations in 2020 involving approximately.
2000, seafarers amid the ongoing COVID-19 pandemic Genco continues to prioritize the health and safety of both our crew members and onshore team, we think global seafarers for their sacrifices and commitment to professionalism during a very challenging period, and we remain committed to facilitating crew.
Changes to help resolve the assumed net humanitarian crisis as quickly as possible.
I will now turn the call over to upholstery, <unk>, our chief Financial Officer.
Thank you John.
For the fourth quarter of 2020, the company recorded a net loss of $65 $9 million or $1 57, basic and diluted loss per share excluding noncash vessel impairment charges of $74 $2 million and a $1 million loss on sale of vessels adjusted net income for the quarter was $9 3 million.
Our basic and diluted earnings per share of <unk>.
While we generated adjusted EBITDA of $29 7 million.
During Q4, the company recorded a $67 2 million noncash impairment charge related to non Super Max vessels on its fleet as the estimated on discounted cash flow. Each of these vessels did not exceed their net book values. These vessels are not part of our fleet renewal program and we do not intend to sell these vessels currently.
During the quarter, we continued to further strengthen our balance sheet through operating cash flow from fair market conditions, together with opportunistic vessel sales, bringing our cash position with $179 7 million, including $35 $5 million of restricted cash related to vessel sales as of December 31 2020.
Our debt outstanding growth of deferred financing cost is $449 $2 million at the end of the fourth quarter, which after considering our cash position, resulting in a net debt of $269 5 million.
As part of our fleet renewal program during the fourth quarter, we delivered four vessels to their respective buyers, including three supermaxilla on one hand side in Q1 to date, we have taken delivery of the three modern <unk> vessels and deliver the six older hanging besides vessels completing the previously announced cash neutral vessel swap transact.
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Separately, we delivered three more vessels, including true Supermaxilla on one hand, besides vessels with their new owners.
We have agreed to sell our final true 53000 deadweight ton per Max's the Baltic leopard and the Genco Lorraine, which we anticipate to deliver to their buyers by the second quarter of 2021.
These sales will conclude the divestiture portion of our fleet renewal program.
Representing the sale of older less fuel efficient non core tonnage.
Our net income breakeven rate for the first quarter of this year is estimated to be approximately $11350 per vessel per day included in our breakeven rate as our Q1 2021 daily vessel operating expense budget of $5100 per vessel per day weighted across our current fleet reflect.
This reflects the greater weighting of Capesize vessels following the sales of smaller Super Max and handy size vessels.
In 2020, as well as an anticipated increase in use of Covid related expenses in the first quarter of 2021.
With regard to Drydocking, we anticipate approximately 20 days of estimated off hire during the first quarter in relation to the dry docking of one of our capesize vessels.
In relation to the Capesize vessels during the fourth quarter, we utilized our strong Pacific markets to continue trading in the region with less balance thing because at Atlantic as a result, and while we continue to position our fleet to better capture potential market improvements, we may elect to balance certain of these vessels that have contracts expiring in the coming weeks to the Atlantic Basin.
I'll now turn the call over to Peter Allen, our Drybulk market analyst to discuss the industry fundamentals.
Okay.
Thank you Apostolos.
The market improvements seen during the third quarter carried over into Q4 with Capesize rates, reaching 2020, Hi Inn.
Cobra nearly $35000 following the lows during the second quarter of 2020 since June we've now had a strong drybulk market for nine consecutive months with the Baltic Capesize index, averaging over $18000 per day on a Baltic Supermax index, averaging $10500 per day over that time.
In 2021 to date, the Capesize rate improvement that materialized in mid December continued through the first half of January with the Capesize rates, reaching their highest point for the first quarter. Since 2014 more recently capesize rates have experienced the pull back due to typical seasonal factors that come into play during Q1, and Q2, including weather related disruptions impacting.
Cargo availability on the front loaded nature of the new book, an order book incurred.
Encouragingly Brazilian iron ore exports are on stronger footing. So far this year as compared to last with January exports have risen by 8% year over year.
Continued recovery in growth Brazilian iron ore exports are expected as value is targeting run rates of 350 million tonnes per annum, and 400 million tons per annum by the end of 2021, and 2022, respectively as compared to 320 million ton seen at the end of 2020.
Last year, China's iron ore imports grew by nearly 10% year over year to a record $1 2 billion tonnes propelled by all time high steel production in 2021, we anticipate continued strong demand by China, while demand for iron ore on the rest of the world is expected to recover together with steel production following the COVID-19 related declines of last year.
On the minor Bulks supermax earnings have risen in a counter seasonal fashion currently at levels not seen since 2010.
This has been driven by strong grain exports from the U S to China as well as increased shipments from of minor bulk commodity is closely linked to global GDP growth.
China's demand for grain has been led by a recovery from the swine fever outbreak in 2018 in 2019 as well as continued inventory building.
<unk> volumes are front haul fixtures book from the Atlantic to the Pacific Basin have resulted in a tight supply picture in various Atlantic regions, which is further supported freight rates.
Regarding the supply side and Thats the growth in 2020 was three 8% with the forecast for 2021 at approximately 2%. The order book as a percentage of the fleet is now below 6%, which marks on all time low. This also compares to 6% of the fleet that is greater than or equal to 20 years old. We believe these positive supply side dynamics provide a solid foundation.
<unk> for dry bulk market fundamentals.
For this year and next review the supply and demand trends as favorable as global trade flows further improved while the Brazilian iron ore trade continues its recovery and growth trajectory. This concludes our presentation and we would now be happy to take your questions.
Thank you and if you would like to signal for a question you could signal by pressing the star key followed by the digit one on your telephone keypad keep in mind, if youre using a speakerphone make sure. The mute function has been released to allow the signal to reach our equipment.
Again, it is star one if you would like to ask a question.
We will go ahead and take our first question from Omar locked up from Clarksons Plateau Securities. Please go ahead.
Hi, there. Thank you hi, guys wanted to morning.
Morning, just wanted to check in with you some interesting commentary on the fleet renewal program, which has obviously been ongoing for several quarters. Now you mentioned that the sweet divestiture portion of the program is now complete and I take that as simply now Youre just not planning on further sales here for the near term and I guess also the <unk>.
Right down on the supers as just more accounting.
Posted precursor to us on that solar cells.
Yes Omar debt.
No more vessel sales plans.
Vessel that were originally identified in the fleet renewal program worthy.
On the divestiture side, where that 50 threes and then the handy size all of that is complete so at this point.
The sales are Divesture program is.
<unk> is over and done with.
In terms of the impairments.
Yes that was that was non cash accounting and we.
We have no plans to sell any of those vessels.
Got it thanks, John and then as you obviously think about the fleet discussed a much more positive outlook, we've seen a much stronger drybulk market. So far this year, how do you feel about acquisitions going forward you did the swap for the three ultra maxes.
Do you see yourselves, becoming much more acquisitive and.
Based off of that.
Question when you when you think about the major versus the minor bulk segments. Do you go after one particular vessel segment or do you want to maintain kind of similar ratios of ownership.
So look in general there Theres a lot of levers to capital allocation right. There's there's vessel acquisitions theirs.
What youre doing on the on on the dividend side going forward. These are all conversations that debt we actively have.
With the with the management team as well as the board.
Still think right now.
Vessel values have they've moved up a little bit, but they still do not match the underlying fundamentals on freight rates and what I mean by that is they are below freight rates are well ahead of vessel value. So I still think it's a very good time to.
Two off to be in growth mode. If you will vessel values.
Being in sort of the.
They are still on the lower floor tile. If you look at it from from average historical period. So.
I still think it's a good time and I don't think we're anywhere near mid cycle rates. So again I can't stress enough I think asset values have a ways to go. So I think it's I think there are good opportunities out there right now in terms of what you know what we believe very strongly and you know in our in our barbell approach.
And focusing on the Cape size segment as well as the <unk> segment.
Look you you whenever you are looking at things you always look at the individual transaction at the time.
We have a I would say in general with the with the vessel sales, where we've switched switched our.
Our weighted if you will a little more towards the capesize sector.
So.
You may see us.
If I was to look at it today I would say, maybe we would balance out more with <unk>, but we haven't made any decision.
On on on on what to go after quite yet.
Thanks, John and I agree with you it does feel very very early innings still.
Exactly and then just a yeah and then just a follow up maybe and I'll pass it on.
So in terms of the ships.
So that obviously had an interesting point in time with regards to.
On the fleet dynamics in fleet characteristics.
When you when you are thinking of an acquisition is there in terms of age and carbon.
Footprint do you want to continue to evolve and stick with the modern vessels.
Much to the ultimate because that you acquired.
Basically check the right boxes when it comes to the carbon and the green transition or do you feel like there are opportunities to kind of be a bit more optimistic with older tonnage.
No I I think if you look at what we've done.
The 50 threes are a prime example, so those are those are somewhat older vessels and they were pretty high on the fuel consumption side, which is why they were identified as as sales candidates.
Going forward we.
We believe very much in reducing our carbon footprint. So I think youre going to see us focus more on <unk>.
Go type vessels 2015 and newer.
For a couple of reasons one we obviously believe very strongly in our.
In the in demand outstripping supply in freight rates and vessel values continuing to move up.
Got you. So we think there's some good opportunities in that 2015 and newer vessel class.
And continuing to have a lot of operating leverage.
But then you can still you can still go after.
Fuel efficient ships and and reduce your carbon footprint, which is also a major focal point for us.
Yes.
Makes sense very good John.
On the.
Looking forward to seeing how things play out here going forward.
Turn it over.
Thanks Omar.
And we will go ahead and take our next question from Randy given from Jefferies. Please go ahead.
Oh, the gentlemen, how's it going.
Good morning, Randy.
So congrats obviously on the third consecutive year here of outperforming the benchmark indices. So clearly the platform is working now as it relates to the $800 a day and $15 million on incremental earnings.
Is maybe the driving force of this you know you mentioned the indices are scrubber adjusted for the Cape sizes, Youre Ultras don't have scrubbers and arent necessarily the newest ships out there. So how is your business model, our chartering strategy, resulting in these outsized returns.
Alright, so so on the capes.
You know as you pointed out where we're benchmarking against day.
The Platts Scrubber index, so we're taking out.
The benefits of the scrubber on looking purely at what the commercial team can can do with the vessel.
And.
I think in the in the Capesize sector.
Quite a few things one of which I mentioned is you know when we had the when we had the downturn in the second quarter due to the COVID-19 pandemic.
We are.
Because of the strong balance sheet, we did not have to go into panic mode. If you will and sticks at very low rates, we had a lot of confidence that the second half of the year would would recover and so we were able to be spot and take advantage of that recovery that happened in the second half.
So that from a strategy standpoint was one on one of the big things, but also just in the.
If you go a little more granular, we we have relationships with all the iron ore majors were going direct to the iron ore majors, So we're able to.
Capture margins that are higher than if you remember years ago. When we were just tonnage providers. So taking that middleman out has been has been very helpful and trading directly on a voyage basis with iron ore majors, that's what's driven the capes.
On the on the minor Bulks I would say, it's a similar setup in that dealing directly with with cargo owners. If you look at yes, yes per christiansen and his team have added 150 new customers.
Over the last three years, which is pretty pretty incredible.
And all of that is again direct business, but what we're also able to do on the minor bulks is a lot more trading where we're able to book forward cargoes.
And either use our own ships to move those vessels or or charter in.
Someone else's vessel to be more efficient and make money on an arbitrage trade.
So a lot more things you certainly can do on the minor bulks because of triangulation on all the different cargoes, but the ability to book forward cargoes and and have arbitrage opportunities.
So a long.
A long answer, but hopefully all understandable.
Yeah, no a lot of a lot of reasons behind the outperformance understandably.
Alright, and then looking at your kind of vessel acquisition potential right Andy.
Appetite for ships for share transactions like we've seen some of your peers do recently.
Yeah I I.
I would say in general that would be part of the thing that you would look at under on when we're again looking at capital allocation and I can't stress enough I think that's that's one of the more important.
Things in the shipping industry is is the.
The decisions, you're making on the capital front.
But.
We also want to make sure that we're doing.
Transactions, so that that that would be a pretty big tenant.
To accomplish that.
Yeah.
That's fair and then I guess from briefly if you can just touch on you mentioned you have a lot of vessels coming available in Brazil in mid March mid April.
Are you seeing that capesize market developing here in the coming weeks, obviously, it's underperforming Panamax is currently and that's kind of in the teeth of Chinese new year, but where is that market looking like here in the next few weeks and months.
Yeah look I think over the next couple of weeks, we're still going to be.
Probably right around where we are today.
In the low teens I think you have to look at.
The fact that Brazil is still in a rainy season, theres still undergoing maintenance on the mining side.
That should all.
From a from a seasonal standpoint should all fix itself.
Or get back to normal run rates is probably the better way to put it.
By mid to late March so.
I think things start to move up as we get towards the end of March and early April.
And if you look at what is from.
From again from a seasonal standpoint look what's going on in China construction, usually starts to pick up as we get into April.
And maybe maybe I'm answering your question on too much here, but you you still have low iron ore inventories, you've got a very high price of iron ore.
You've got steel production, continuing in China, and steel inventories below where they normally would be this time of year. So the steel is.
He is being consumed.
So I think theres a lot of factors that from a seasonal standpoint, and then from just demand outstripping supply growth. This year, we should start to get into this as we get into April I. That's on the Capes, but I would also tell you we have a major piece of our of our minor bulk fleet also coming open.
In for net.
Early April to mid April and.
We think the Atlantic is going to continue to be very strong and so we're going to have probably about 75% of our minor bulk fleet positioned in that basin and enable to take advantage of it.
Okay.
Perfect Yeah that covers it from me thanks, so much.
Okay, Randy to take care of yourself.
And as a reminder, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
And we will go ahead and take our next question from Liam Burke from B Riley. Please go ahead.
Thank you good morning, John Good morning Apostolos.
Good morning Liam.
John as your.
Looking at your debt amortization schedule, you're comfortably doing it in a rising rate environment and your cash flow is strong is there any need to.
Accelerate the pay down or is that.
Thought process on the capital allocation side.
No I don't I don't at all alternatives that until we're at a pulse is just for a second book, but my view is no.
Look we were paying off debt as scheduled.
And leverage is coming down rather quickly, but it's already at a pretty low level, but it's coming down rather quickly even off of that.
And I'll, let apostolos dresses I actually think there are.
Some opportunities to to refinance that debt this year and and make it even more attractive but a puzzle as you want to you want to address that real quick.
Yes sure. Thanks John.
I Echo what John said look on a net debt position is up $270 million a purity.
Leading position in the industry.
Very strong balance sheet.
That coupled with our liquidity position I think it would give us the potential to drive our breakeven levels further down.
And we could either do it sort of under the existing facility, but we could also refinance those facilities, which we believe could see.
Save upwards of $1000 per per vessel per day.
Going forward.
And.
Typically this is the quarter, where Ah lunar new year things are awfully slow and it looks like a stronger than normal seasonally slow quarter.
Is there anything in there that's that much unusual you highlighted the fact that inventories on.
On the iron ore inventories are low in China, but is there anything else in there that would would account for that.
Yeah, I mean look I think.
I think we're all aware that there was not nearly the amount of.
<unk> Downs and travel that took place in China over lunar new year.
I think a lot of factories.
They may have closed for a very short period of time, but then got up and running quickly again.
Looking at steel production the steel production numbers.
Continue to be higher than what we saw last year.
So I don't think there I think that's part of it I also would tell you in the in the in the minor bulks in the in the grain trades.
We're obviously seeing a.
The result of of the falling and trade tensions with China buying a lot of soybean and corn from the U S. So.
So we haven't seen that over the last couple of years and I. You know I think that has that sounds that's twofold right. It's the falling and trade tensions, but it's also the recovery in China's hog population from coming off the back of the swine flu.
And we're expecting a very strong southern hemisphere.
Season led by Brazil on the soybean front so.
Yeah, I mean, I I'm, we're pretty positive across all vessel classes for 'twenty and 'twenty one.
And I think you'll you'll start to see capes move.
Move up pretty significantly as we get into the early part of second quarter.
Great. Thank you John Thank you Apostolos.
Thanks Liam.
Yes.
And with that we have no further questions that does conclude our question and answer session for today.
And with that that also does conclude our conference call. Thank you all for your participation you may all disconnect.
Thank you.
Yeah.
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