Q4 2021 Genco Shipping & Trading Ltd Earnings Call
For a discussion of factors that could cause results to differ please see the company's press release that was issued this morning, the materials relating to the 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 31, 2020, and the company's reports on Form 10-Q .
Q and form 8-K subsequently filed with the SEC at this time I would like to introduce John woven Smith, Chief Executive Officer, <unk> trading limited.
Good morning, everyone welcome to <unk> fourth quarter 2021 conference call I will begin today's call by reviewing our 2021 and year to date highlights providing an update on our implement a comprehensive value strategy financial results for the quarter and the industry's current fundamentals before opening the call up.
For questions for additional information. Please also refer to our earnings presentation posted on our website.
Looking back at 2021, it was truly a transformational year for genco across the board capped off by a Q4 that was the best since 2008.
Nearly a year ago, we proactively pivoted our capital allocation strategy towards a low leverage compelling dividend model. We spent the balance of 2021 laser focused on the implement implementation of the strategy. Following the blueprint we laid out at <unk> in April 2021.
After completing initiatives centered around financial deleveraging and growth. We are now in a position to distribute meaningful quarterly dividends commencing in the fourth quarter of 2021 to be paid this march as we stand here today. We are pleased to have developed a unique drybulk vehicle that.
Offers an attractive risk reward profile for the benefit of shareholders. We.
We believe our platform represents a differentiated dry bulk offering given our industry low cash flow breakeven rate and low financial leverage combined with high operating leverage through the scale of our balance fleet a best in class commercial team and a strong liquidity position and.
The company that can check all of these <unk> has not been previously.
Place in the Drybulk public markets, which is why we are so excited to rollout our fourth quarter results capped off a year of not only significant cash flows for the company, but also significant financial discipline.
Over the course of last year, we paid down $203 million of debt, representing 45% of our debt balance at the start of 2021.
Importantly, we are now in a position in which the current scrap value of our fleet is nearly two times our debt outstanding. These paydowns together with a global refinancing completed mid last year have ensured the genco has no mandatory debt repayments until 2026. In addition, this has resulted in.
Lower overall cash flow breakeven rates, which we will which we believe will enable genco to pay dividends across diverse rate environment continuing.
Continuing to pay down debt during a time with no mandatory debt repayments is consistent with our medium term goal to reduce our net debt position to zero in.
In the near term, we are focused on rewarding shareholders through compelling dividends, while continuing to delever to be in a position to reward shareholders over the longer term and support sustainable dividends. We view this as prudent to further improve our financial standing over time to put genco in an even stronger position to take advantage of a track.
Of growth opportunities as markets develop.
Furthermore, in early 2021, we Opportunistically grew our core minor bulk fleet capitalizing on a disconnect between freight rates in ship values to augment our earnings power specifically, we purchased six high quality fuel efficient ultra Max vessels for an aggregate of $150 million.
In January of 2022, we took delivery of the final two of those vessels the Genco Mary and the Genco Laddie both built in 2022 at <unk> shipyard.
Throughout the course of the year on a parallel path to our deleveraging and taking advantage of growth opportunities. We also steadily ramped up our quarterly dividend from <unk> <unk> per share in Q4 2020 up to <unk> 15 per share in Q3 2021 for.
For the fourth quarter 2021, we declared a quarterly dividend of 67 per share representing a nearly 350% increase versus the previous quarter and marking our first dividend under our value strategy methodology. This substantial dividend represents an annualized yield of 14%.
Based on <unk> closing share price as of February 23, 2022 inter.
Interestingly, if we paid down our targeted quarterly run rate of $875 million of debt in Q4, 2021, instead of the $59 million of debt, we actually paid our quarterly dividend would have been $8 85 per share nearly three times higher than the actual payout.
This highlights the dividend capacity and significant operating leverage combined with our industry low breakeven rate management maintained its disciplined approach towards capital allocation, which we believe we are well positioned the company in both now and going forward.
We have now declared dividends for 10 consecutive quarters for cumulative dividends totaling $1 72, and a half cents per share or approximately 9% of yesterday's closing share price.
In addition to the measures taken to execute on our value strategy from an earnings perspective, the fourth quarter was our strongest in over a decade led by net income of $90 $99 million and a time charter equivalent rate of $35200 per day.
Looking ahead to the first quarter, our estimates point to continued strong results with a time charter equivalent of approximately $24215 per day based on fixtures to date across the fleet for 87% of our owned available days. This firm number highlights our proactive approach to securing revenue.
Ahead of a seasonally softer market period, as well as incremental earnings generated through our opportunistic container fixtures. In addition, the container fixtures demonstrates <unk> innovative approach towards developing niche trades and they have proven to be highly beneficial for the company by generating premium rates.
Above the typical drybulk specific backhaul route while further insulating genco from the softer January market and providing premium paying positions upon re delivery.
In line with our portfolio approach to fixture activity, which consists mostly of spot trading opportunistic period charters and forward cargo coverage last year, we fix seven vessels on period time charters for one to two years at rates ranging from $23375 to 32.
Dollars per day.
Illustrate this our earnings release contains our estimated TCE to date for the first quarter of 2022 broken out by vessel class and spot and fixed rate time charter equivalent rates are.
Our scrubber fitted capesize vessels are also benefiting from the widening fuel spreads, which currently stand at over $200 per ton.
This provides us with a competitive advantage and a high fuel price environment in two ways first we can purchase less expensive fuel, while completing a voyage and second it reduces the investment of <unk> vessels to the Atlantic basin to capture developing trends and cargo flows.
From a market perspective, we continue to have a positive outlook for drybulk rates due to the low order book, we are starting to see timing and weather related disruptions that <unk> passed the market early in the year subside overall, we believe we are in a cyclical dry bulk market upturn and have.
Solid visibility as I mentioned, particularly on the supply side given the historically low new building order book that we will believe that we believe will support the market over the coming years.
At this point I will now turn the call over to <unk> <unk>, our Chief Financial Officer.
Thank you John .
During 2021 were maintained their focus on improving our balance sheet, taking steps to further reduce our leverage and breakeven levels and enhance our earnings power and dividend potential for the fourth quarter of 2021. The company recorded net income of $99 million or $2 16, basic and $2 30.
Diluted earnings per share our highest earnings per share since 2008 <unk>.
Adjusted for the gain on vessels earnings per share were $2, <unk> and $1 90 to $1 99 basic and diluted respectively.
Our fourth quarter EBITDA, adjusted EBITDA was $102 $2 million, which to put in perspective is higher than adjusted EBITDA for all of 2020.
Our full year adjusted EBITDA of $253 million was also greater than 2019, and 2020 combined and double that of 2018.
During the quarter, we continued to further strengthen our balance sheet through increasing operating cash flows by taking advantage of firm market conditions, our cash position as of December 31, 2021 was $125 million following $203 million of debt repayments through the year together with one <unk>.
Third 9 million paid to acquire vessels over the same period.
Pro forma for the acquisition of two ultra <unk> vessels in January of 2022, our cash balance is approximately $80 million.
Following substantial deleveraging our debt outstanding is $246 million at the end of the year, which after considering our pro forma cash position results in net debt of $166 million or 16% net LTV.
Importantly, while we have no mandatory debt amortization payments until 2026, we plan to continue to voluntarily pay down debt with our medium term objective of reducing our net debt to zero, which we believe is consistent with our focus on paying consistent dividends through the cycle.
Looking ahead, we plan to voluntarily paid down $8 $75 million of that during the first quarter, representing an annualized run rate of $35 million $35 million of voluntary debt repayments over a year, we further strengthened our balance sheet.
As John mentioned, our board of directors declared a dividend of <unk> 67 per share for the fourth quarter of 2021 in line with our value strategy calculation.
Walking down our dividend Formula This consisted of operating cash flow of $101 million.
Debt repayments of $59 million dry docking ballast water treatment system and energy saving device costs of $2 $9 million and the previously announced reserve of 10 $75 million.
Going forward, we will be disclosing estimates on both the revenue as well as the expense side in order to provide visibility of the dividend framework, specifically, we plan to communicate our TCE estimates for the fixed portion of our fleets available days.
Estimates on the expense side and the anticipated level of the reserve.
Earlier in the presentation on slide 11, we've provided an illustration of the expense estimates for the first quarter of 2022, specifically operating expenses are estimated to be $31 6 million debt repayments $8 $75 million and drydock related expenses $5 $9 million.
The reserve is expected to be $10 $75 million, which is based on the $8 $75 million of voluntary debt repayments expected to be made in the second quarter of 2022 as well as estimated cash interest expense in total the expense side of the equation would be $57 million for Q1 2022.
Moreover, in an effort to provide perspective on the significant operating leverage of our fleet and sensitivity of our dividend framework. We have included an illustrative representation of our dividend per share on slide 23.
Subject to the assumptions in our presentation, our current dividend framework would produce an annual dividend of $1 69.
And a $20000 per day fleet wide TCE rate environment, and as high as $7 21 per share and a $35000 a fleet wide TCE rate environments.
Our estimate for 87% of the first quarter's available days is $24215 per vessel per day similar to the levels on the third bar in the chart, which would indicate an annual dividend of $3 53 or 18% yield.
Our first quarter 2022 estimated breakeven rate, excluding any voluntary debt repayments approximately $9500 per vessel per day. Our total ownership days for the first quarter are estimated to be 3948, and we anticipate five vessels to dry dock, resulting in approximately $6 million of cost $9 90.
Days of estimated off hire time during the quarter.
I will now turn the call over to Peter Allen, our SVP of strategy to discuss the industry fundamentals.
Thank you apostolos during the fourth quarter of 2021 for aggregates remains firm following a strong Q3, driven by augmented demand for raw materials, and an improving cultrate solid iron ore volumes and our continued fleet wide reduction in productivity spot freight rates remained on the uptrend in early October with Capesize rates exceeding $85000.
Per day, and Super Max earnings approaching $40000 per day towards the end of 2021 into early 2022, Capesize and <unk> rates pulled back from these decade plus highs due to various seasonal factors. These include weather related cargo disruptions impacting Brazilian iron ore volumes, which were down 13% year over year in January and Frontloaded, New building deliveries as we.
Annualized net fleet growth of nearly 6% in January . Additionally, the timing of the lunar new year in China together with a vision Beijing Olympics resulted in steel mill utilization declining by approximately 5%. These seasonal factors are beginning to subside, which are being reflected in spot earnings of Capesize and supermax rates are up approximately 200% and 50% respectively versus Earl.
Earlier year lows on the demand side in 2022, we anticipate China to continue to shift towards more accommodative policies to support economic growth.
We have seen this ship shifts commence last December through a series of interest rate cuts and continue into early this year with increasing lending growth following a year of contraction.
Injectors of lending growth tends to be a leading indicator of metals demand.
Timing of policy, a combination and its potential impact is expected to coincide with improving dry bulk trade flows in the coming months in a ramp up of China's steel production driven by spring construction season, we've already seen an uptick in work on construction projects in many parts of China that have restarted sooner. After this year's lunar new year than in years past, partly as a response to the central government calling for quick.
Progress on new infrastructure projects to help boost the domestic economy.
We believe these developments are positive for iron ore trade, particularly as seaborne volumes rise in Q2 and Q3.
Regarding other trade flows we anticipate coal demand remained firm given tightness in energy markets on the grain side South American grain season has had an early start which has been supportive of minor bulk earnings overall, we believe we are in a cyclical up trending market are positive go forward thesis for the dry bulk market is underpinned by the historically low order book the order book as a percentage of the fleet of six six.
<unk>, which compares to 7% of the fleet, which is greater than or equal to 20 years old implying.
Fleet renewal rather than material net fleet growth in the coming years Encouragingly, New building vessel orders have been relatively low despite the strong market conditions in part due to uncertainty around go forward future propulsion and tightness in shipyard capacity overall, we believe these positive supply side dynamics provide a solid foundation for the dry bulk market and lead to a low threshold.
For demand growth to exceed in order to improve fleet wide utilization in fragrance. This concludes our presentation I would now be happy to take your questions.
But if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again, Please press star one to ask a question.
Yeah.
Okay.
We will take our first question from Randy <unk> with Jefferies. Please go ahead.
Okay.
Howdy gentlemen, how's it going.
Good Randy how are you doing.
All is well for.
A few questions here.
Excuse me so starting with the.
Charter backlog I think you mentioned around eight vessels on that.
Nearly the FFA curve is rising in this environment time charter rates are picking up as well any plans to maybe lock away. Some additional tonnage for the rest of the year or do you expect spot rates to keep outperforming that FFA curve and then briefly can you give the percentage of days fixed so far.
For the full year.
Sure.
So a couple of things as we said in the past we do like the idea of.
Portfolio approach, particularly in the Capesize sector with the volatility so I could see us.
Doing one to two a cut some more one to two year charters in the Capesize.
Sector.
As rates continue to move up I don't think we're at the point, yet where we're comfortable locking them away, but we do expect rates to continue to improve overall.
So one thing I'll point out is the two index deals that we just did in the Capesize sector those are pretty pretty neat deals because we did them at the.
Really the low point of the of the Capesize market. So we were able to get very premium.
Percentages over the index, particularly for the.
The one we did at 121%.
So and we also have the option in those index deals too.
To fix our lock those in at any time, so you could see us take advantage of that as well. So short answer is yes, we're going to continue to look at longer term charters, though we don't think the market is quite there yet, but it's moving in the right direction in terms of fixtures.
Peter Allen answer that question as a percentage.
Randy.
So for the full year, we have about 30% of our full year days fixed at approximately $24000 a day.
Perfect.
Good deal alright, thank you for that.
Second question final one from me you mentioned the dividend 67.
Well ahead of our expectations. So nicely done there and you also said it could have been I believe a $1 85 using that kind of go forward run rate reserve, so using your quarter to date rates.
Assuming rates stay at least at that $24 25000 for the rest of the quarter slide on using the table on slide 11. The chart on Slide 23, just in terms of direction is it pretty fair to assume the next dividend should be higher than this current dividend of 67%.
So look we still have 15% of the overall fleet to fix so it's a little tough for me to know it exactly but.
Randy the numbers that are in there in terms of the $35 million debt repayment target run rate for 2022 is in there obviously the reserve that goes along with that are in their drydocking.
So I guess I would leave it to you to put that extra 15% of freight rates in there.
And come up with with the dividend but.
So that I'm only a little hesitant just because we haven't booked the entire fleet yet.
Got it.
And that obviously are doing obviously.
Obviously.
It's a very small piece that that still has not been fixed.
Chart 23, 25000, a day divided by four you're getting eight plus sense. So.
I'll take that as a highly likely.
That's it for me Congrats again on the best quarter since 2008, good to see the market in an upswing.
Great. Thanks, Randy.
And we will take our next question from Magnus <unk> with H C. Wainwright. Please go ahead.
Yes, good morning, and congrats to a great.
Great quarter.
Clearly laid out your.
Dividend strategy here.
Use of cash I mean primary use for dividends and debt repayments, how should we think about potential acquisitions.
Going forward and what part of the cycle do you kind of just stopped doing acquisitions I'm just focused on dividends.
So first of all I think dividends are the are a major focus Magnus I do think youll still see us do some fleet renewal most likely particularly in the in the 55000 towers that we have and are certainly earning very good returns.
But the values of those have increased significantly so the opportunity. So maybe trade those out swap those out and redeploy the capital into newer more fuel efficient vessels I could see us doing that this year.
But so I would say right now it's really dividends fleet renewal. We obviously are always looking at larger M&A transactions.
But but as a whole.
I still think its interest and changing gears here, a little bit, but I still think values have not caught up.
With freight rates. So I do think there are good opportunities for return on capital type transactions, but as you've seen in the past whenever we do those we tend to derisk them and put them away on a two year charter and we've been hitting anywhere from paying off 40% to 50% of the ship in the first two years. So those types of deals still look at <unk>.
<unk>.
I'll just go back to what I said, we're very focused on the dividend model, we're focused on keeping leverage low.
Net debt was 16%.
Loan to value at the end of the year and and we're focused on fleet renewal.
Okay, great. Thanks for that answer and just one more question.
You laid out the sensitivity to the fuel spread any chance you could highlight what the fourth quarter actuals were.
Far as realized the fuel spread or just.
The million dollars that you made out of the fuel.
I don't have that number in front of us per se I will give you another number.
That's pretty compelling and that is if you you look at our actuals.
Sort of through the end of February from when we first install the scrubbers in 2019.
And you look at the forward curve for 2022, and we're running at about a 35% IRR by the time, we get to the end of 2022, so that's a pretty compelling number but I don't have the specific fourth quarter number so.
Yeah, Hi, <unk>. This is Peter so if you just look at the average spot spread in Singapore in Q4, it was about $150 per ton.
So obviously, we now are over $200 per ton. So it's a significant increase and it's obviously been rising with with rising fuel prices is a high correlation between the spread in the price of oil historically.
So yes, I think that's and if you look at the page 15 in our presentation of $150.
Fuels fuel spread is approximately $28 million of incremental revenue on an annualized basis. So.
That's probably a decent barometer of the fourth quarter number.
Okay, Great magnets for me thank you.
Okay I was just trying to finish up.
Great thing is the equipment and installation costs were paid off at the at the end of 2021. So everything we're making now is just straight return on investment.
Alright, great. Thank you.
Thank you.
Once again, if he would like to ask a question. Please press star one and we will take our next question from Greg Lewis with BP.
Please go ahead.
Okay. Thank you and good morning, everybody and congrats on a good quarter everybody good morning, John .
We've seen cycles, I think you've seen probably a couple more than me.
Sure.
<unk>.
Before you became CEO you were the CFO , how do you think about cash right I mean.
Obviously, we have the dividend payout model the dividend strategy, which we're laying out.
Clearly theres going to be opportunities at a certain point to buy ships in.
And do a lot of different things with the cash we're making just kind of curious how you kind of you kash.
As you think about having it on the balance sheet.
Well, let me let me, let me go back to our value strategy right.
Clearly dividends are a major focus right now as I said before fleet renewal is key.
Continuing to Delever.
We're looking at that target run rate of $35 million in debt repayment for 2022, we'll be building up the reserve.
And that reserve has a lot of Optionality in terms of what we can do with it we can use it to buy ships. We can use it for share buybacks. If we feel that's the right thing to do we can use it to smooth out quarterly dividends again, if we feel that that's the right thing to do.
In general.
We really want to get to a place where our dividend is seasoned.
And our stock.
Gains to trade off of our free cash or dividend yield in excess of NAV.
So that our shares can be used as as currency.
For further acquisitions when the timing is right.
So.
Look the other thing is <unk>.
<unk> put into place a very large revolving credit facility that was very purposeful and.
In terms of being able to move on an acquisition if it made sense at the time. So I think the company is.
Well, it certainly setup than it ever has been.
From a from a leverage dividend and potential growth profile at this point.
Hopefully that answered your question is a little longer answer.
Yes.
Yes that was helpful. Thank you and then just.
Bigger picture on the market realizing that.
It's a fluid situation and there's a lot more important things going on then handle it pertains to the drybulk market, but as we look at what's going on in Eastern Europe , and Russia and Ukraine.
I guess, Ukraine is a pretty big.
Grain exporter.
I believe Russia.
Large coal exporter.
Probably not seen anything just yet, but I mean.
Like how should we I mean like.
What type of them I mean.
Do we have any sense for where these where these exports generally go and where those replacements could be and really just trying to understand.
There's big issues here, but like is that going to be supportive of ton miles I think it might be just kind of curious.
If you guys have any view on what's happening over there and how that's going to impact the market.
So look as you said its fluid it's evolving.
If we look at.
I guess some of the some of the facts before opinion.
You're really talking about out of the Ukraine grains.
<unk>, which is corn and wheat.
As a major commodity that comes out of the Ukraine iron ore to some degree, though obviously, Brazil and Australia are the big exporters, but there is some iron ore that comes out of Ukraine, and then Theres. Some coal that comes out of out of the Ukraine.
I think overall as a macro view.
With the low supply and the low order book and Drybulk shipping.
You just don't need much demand growth overall to continue to.
To build on 2021, so we still believe in the cyclical upturn.
As it gets to grains, I think which is obviously the largest commodity you need to keep in mind that you're really talking about a very slow period right now for Ukraine in general on exports.
Hi to the grain season is really August so we're quite some time away from that we do believe that the U S could make up.
If the if there were significant cutbacks on the grain side, we do believe the U S could make up some of that slack so that could be a ton mile increase there.
As I mentioned iron ore, it's out of the Ukraine, a very small part of global trade some of that could be made up probably by Brazil, and Australia and even India.
But I think.
Just to round this out a little bit.
Unfortunately always geopolitical risk in dry bulk obviously the Ukrainian situation is.
And unusual.
But I just I still emphasize the low order book, we don't need much demand growth. If you look at Genco and <unk>.
As a company you were really set up for volatility with this low leverage model low breakeven rate, creating a very good risk reward model. We've got Q1, mostly fixed at $24000. A day. So that that risk is is off the table.
Greg honestly.
Got it.
As you said this is all sort of hit this really late last night and this morning.
And there are there's a very large group of Ukrainian seafarers around the world and as far as we're concerned the focus should should really beyond them in.
Our hearts go out to them and their families and we hope they stay safe.
So it's.
I think it's a little early I guess to to see exactly what's going to go on here, but.
Again I'd just go back to how Genco is set up in the low low supply situation.
Okay, great Yeah, I agree okay. Thank you for that have a great day.
Thanks, Greg.
Yes.
We will now take our last question from Liam Burke with Bailey. Please go ahead.
Thank you and good morning, John Good morning Apostolos.
Good morning.
John I know this is a high class problem, but where.
Along the capital allocation strategy would a buyback makes sense.
Terms.
Our alternatives understanding your objective is to pay a dividend.
To become debt free.
But again I think we we want to give the dividend model a few quarters to be season.
And see how that see how that reacts we do believe it takes a few quarters I think I've said before we've we've gone back and we've looked historically at companies when they start declaring big dividends and how long it takes to be season than get down into that single digit.
Dividend yield and it does take two to three quarters, so we'd like to see that as first and then if if if if there are opportunities on share buybacks, we're going to look at them. That's again, that's one of the reasons why the why the reserve is in place.
Enough.
Alright. Thank you said that you Didnt think that fleet assets have caught up with rates.
How does the potential acquisitions in terms of this year look too.
Again, it's.
I think right now we're focused more on the fleet renewal side, but as I said you can right now you are talking about in the <unk> sector.
On cash returns for one year charters and sort of the 40%.
Range.
So yeah, so it's actually called around 35% one year cash on cash returns.
I think thats pretty attractive still but.
But you've got to find the right transaction and again I think the first thing you're going to see US do is more fleet renewal.
Swapping out the older ships for newer tonnage and redeploying the capital.
Great. Thank you Joe.
Thanks Liam.
And there are no further questions at this time and this concludes today's call. Thank you for your participation.
Thank you.
Yeah.