Q1 2022 Genco Shipping & Trading Ltd Earnings Call
Dividends of $2 51, and a half cents per share.
On an aggregate basis since the start of 2021, we have paid down $252 million.
Or 56% of our debt leading to a low net loan to value of only 12%.
Importantly, we are now in a position in which the current scrap value of our fleet is nearly two five times our debt outstanding. This has resulted in lower overall cash flow breakeven rates, which we believe is essential for paying dividends across diverse rate environments and is a key differentiator of genco versus its peers.
In January we completed the acquisition of the two remaining 2022 built ultra Max vessels, we agreed to acquire an early last year. These acquisitions have enabled our core ultra Max fleet to more than double in size since Q4 2020. These.
These measures together with those executed in 2021 have led genco to create the most compelling risk reward model in the Drybulk public markets through a combination of low financial leverage high operating leverage and industry low cash flow breakeven rates.
Continuing to pay down debt during a time that we do not have any mandatory debt repayments is consistent with our medium term goal to reduce our net debt position to zero, we continue to be focused on rewarding shareholders through compelling dividends, while continuing to delever supporting sustainable dividends over the long term.
We view this deleveraging as prudent to further improve our financial standing over time to ensure genco as an even stronger position to take advantage of attractive growth opportunities as markets develop.
From an earnings perspective, we generated a strong time charter equivalent rate during the quarter of $24093 per day, an increase of 98% from the same period of 2021 as we benefited from our past success fixing forward cargoes and period time charters ahead of a seasonally source.
After first quarter rate environment.
Looking ahead to the second quarter of 2022, we expect a sequential rise in time charter equivalent rates as we have approximately 68% of our available days booked at over $27500 per day, highlighting our significant operating leverage to improving market conditions, our sizable fleet are.
Best in class commercial platform and barbell approach to fleet composition.
In terms of current market trends Russias War in Ukraine has led to higher commodity prices a redirection of cargo flows, particularly those for grains and energy, resulting in growth in tonne mile demand.
Higher fuel prices have also led to a slowdown in the sailing speeds of the dry bulk fleet. Despite.
Despite general uncertainty regarding the longer term impact of the war, particularly in respect to the global grain trade. We continue to have a positive outlook for drybulk rates due to the low order book that we believe will enable demand to continue to exceed supply.
Notably logo forward net supply growth increased port congestion and fleet inefficiencies together with upcoming environmental regulations have resulted in as good of a supply side picture as we have seen in decades.
A consequence demand growth does not have a high threshold to exceed in order to outpace supply growth to further tightened market fundamentals.
At this point I will now turn the call over to our postal its affiliates, our chief financial Officer.
Thank you John during the first quarter, we maintained our commitment to reducing leverage in breakeven levels. During a time when we have demonstrated the operating leverage of the fleet and ability to return significant capital to shareholders.
For the first quarter of 2022, the company recorded net income of $41 7 million or <unk> 99, basic and 97 diluted earnings per share our first quarter EBITDA was $58 million as compared to $20 million for the same period last year.
During the quarter, we continued to further strengthen our balance sheet through increasing operating cash flows by taking advantage of a fair market conditions and time charter coverage.
Our cash position as of March 31, 2022 was $49 $1 million following 48 $75 million of debt repayments during the quarter as well as $40 8 million paid to acquire the two vessels in January .
Our revolver availability as of March 31 is $222 million, resulting in a total liquidity position of $271 million.
In Q1, 'twenty, two we voluntarily paid down that totaling $48 $75 million, which consisted of $8 $75 million of our run rate quarterly voluntary debt repayment together with an additional prepayment of the revolver of $40 million, which was part of our working capital management exercise.
To save interest expense without impacting the dividend calculation. These funds can be withdrawn again as needed in accordance with the terms of the revolver.
Importantly, we did not have any mandatory debt amortization payments until 2026, when the facility matures.
Even with this favorable mandatory amortization schedule, we do plan to continue to voluntarily de lever with our medium term objective of reducing our net debt to zero.
Following our substantial deleveraging our debt outstanding was $197 million to $5 million as of the end of the first quarter, which results in net debt of $148 million and a net loan to value of 12% as of May three.
Looking ahead, we plan to voluntarily paid down $8 $75 million of debt during.
During the second quarter, representing an annualized run rate of $35 million of voluntary debt repayments over a year.
As John mentioned, our board of directors declared a dividend of <unk> 79 per share for the first quarter of 2020 due in line with our value strategy calculation walking down our dividend Formula. This consisted of operating cash flow of $55 $7 million less debt repayments of $8 $75 million.
Dry docking ballast water treatment system and energy saving device cost of $2 8 million and the previously announced reserve of $10 $75 million.
Going forward, we will continue to communicate our TCE estimates for the fixed portion of our fleets available days estimates on the expense side as part of our cash flow breakeven disclosure and the anticipated level of the reserve.
On slide nine we have also provided an illustration of the of the expense estimates for the second quarter of 2022 in relation to dry dock expenses with strategically planned the dry docking of our capesize vessels during a seasonally softer freight rate environment within the year and anticipate completing the majority of our dry docking related capex for the year.
During the current quarter this will enable us to maximize capesize utilization and earnings in the second half of the year, which has historically outperformed as higher iron ore volumes are shipped out of both Brazil, and Australia and.
In total the expense and the reserve side of the equation is estimated to be $76 8 million for Q2 2022. The reserve is expected to be $10 seven $5 million, which is based on the $8 $75 million of voluntary debt repayments expected to be made in the second quarter as well as estimated cash.
Interest expense.
I will now turn the call over to Peter Allen, our SVP of strategy to discuss the industry fundamentals.
Thank you apostolos during the first quarter of 2022 freight rates initially came under pressure due to seasonal factors remain firm on a relative basis. These factors included weather related cargo disruptions timing of new building deliveries as well as the lunar new year in China in the Beijing Olympics. Furthermore, in January Indonesia temporarily temporarily banned coal X.
Of course to ensure domestic supply.
All of these factors subsided Capesize and Super Max rates have increased off of the earlier year lows and currently stand at over 22000 and $30000 respectively. As we look ahead, we anticipate an uplift in seaborne iron ore cargo availability as full year guidance from the major iron ore miners points to a meaningful rise in shipments in Q2 to Q4.
We expect this rise in shipments to coincide with China's economic policy is moving towards a more accommodative stance as the year progresses in the very near term various regions in China remain under Lockdown, which has impacted demand. However, we do note that steel mill utilization has improved to 87% from as low as 75% in February .
We continue to see tightness in the energy markets globally as demand was initially driven by low stockpiles and strong economic growth and has now been exacerbated by Russia's where in Ukraine. We have seen a rerouting of coal cargo flows as Russia exports more coal to China, and India, While Europe has sourced more calls from the U S, Colombia, and Australia, which has increased ton miles on the grain side.
Ukraine accounts for 13% of global wheat, and corn trade, while we're seeing marginal incremental exports out of neighboring ports no shipments are occurring out of Ukraine. As we approach what is typically their peak export season in the third quarter. We are however, seeing end users accelerated procurement of commodities and as a result prices have increased significantly.
The supply side higher fuel prices led to a slowdown in the fleet producing available capacity. This reduction together with augmented port congestion and a low order book bode well for the Drybulk supply side of the equation. Our current positive 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 6%, which compares to seven eight <unk>.
Cent of the fleet that is greater than or equal to 20 years old implying fleet renewal rather than material net fleet growth in the coming years. 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 tough to exceed in order to improve fleet wide utilization and freight rates. This concludes our presentation and we would now be happy.
To take your questions.
Thank you and if you would like to ask a question.
One on your telephone keypad, if you're on a speakerphone. Please pick up your handset and make sure. Your mute function is turned off.
It now reaches their equipment.
Kevin.
One if you would like to ask a question.
And we'll go ahead and take our first question from Magnus <unk> with H C. Wainwright. Please go ahead.
Yes, good morning, and congratulations to a great quarter.
Just.
A question on <unk> been reducing debt near significantly over the last year.
Part of your strategy as fleet replacement.
Recent developments.
Capes being.
Maybe just temporarily at a discount to the smaller ships changed your.
Final thoughts going forward, where you want to expand and replace the fleet or just curious to see your thoughts there.
Good morning Magnus so.
We think it's an opportunity right now because what we've seen our ultra Max values move up faster than than Cape values.
Now in the <unk> sector, you are still getting very good cash on cash returns, particularly if you put something away for a year or two.
So I still think values have not caught up with what the current trade environment, but because of an argue because of the lockdowns that have occurred in China. There has been a little bit of.
Seasonal maybe not seasonal softness, but the typical Q1 softness has extended by a couple of months because of those lockdowns and I think that because of that values in the case of not run as much. So I still think theres a catch up to occur there, we're starting to see the Cape market play out like we like.
We've been talking about for the last month in public forums.
It doesn't change our strategy, we still like having that direct exposure on the iron ore front and the capes, but also.
Running our minor bulk commercial platform and having ships for that so I think youll see us keep a similar balance.
But I do think it's important to note that the capes, probably do have some catch up to do and we believe that's going to happen over the next month or so.
Alright, Thank you and I mean, as part of reducing that Youre getting close to zero debt here.
I guess it gives them some flexibility for acquisitions, but.
Would you see that as kind of a long term focus on be down at that level or could we see that level pick up here with potential acquisitions.
But our medium term goal is to get to net debt zero. So we are not there yet, but we've also laid out.
Our plans in terms of prepayments.
For this year.
I think if you use that run rate, we might get down to a net debt zero.
By the end of 2023, depending on what that what the right scenario is but and what values do.
We have a large revolver in place Magnus and if clearly if the right transaction.
Comes we will we will use it.
But what we don't want to do is lever up and.
And for the sake of our of this value strategy dividend strategy. So I think right now youre going to see US do more fleet replacement, we obviously would like to get to a point, where our shares are trading at a good premium to NAV, which we think will occur and then you have the ability to use your shares as currency as well.
For transaction.
Okay, and then the main time with the stock trading at pretty big discount to NAV any thoughts on buying back shares here rather than reducing debt.
I'm not so sure if it's trading much at a discount to NAV I think it's got some I'm not sure what your NAV is but.
It's actually improved quite a bit.
And we're getting back to the levels that probably being close to.
Close to NAV not yet though.
What again, what I'm more focused on and I've said this in the past is dividend yield and getting getting the equity. So it's trading in that 8% to 10% range and also getting to an EBITDA multiple that should be in the five to six range in terms of trading so and we're not there yet that implies quite a bit of.
Of upside.
And once you start to get into that you should be you should be well above NAV.
Alright, great. Thanks for taking my question.
Thank you Matt.
And we'll go ahead and move on to our next question from Chris Robertson with Jefferies. Please go ahead.
Hey, gentlemen, thanks for taking my questions.
Yes. Please go ahead Chris.
Yes, so yes Magnus brought out of pocket fleet renewal. So I just wanted to follow up with a question related to the older end of your fleet. So John are you thinking about kind of the vessels built prior to 2010.
Lastly, monetizing those assets to help offset some of the cost with just some basic fleet renewal of some second hand acquisitions, a more modern tonnage.
Yes, I think again as we've said in the past the 55000 deadweight ton ships.
Those would be the next ones that we would concentrate on four for fleet renewal and yes, we would we would redeploy that capital into newer more fuel efficient vessels.
I would tell you is.
Vessels.
They're earning about a 46% cash on cash return over 12 months, we've gone back and looked at what the earnings power of those shifts were in terms of actual fixtures. So youre.
You are paying off 50% of the value of those ships.
I think it's up there is no urgent need to do anything there, but it's certainly something that that were going to do and I would.
Wood base at around more market timing and opportunistic.
At this point just because of the return numbers.
Okay, that's fair.
Along those lines looking into 2023 and beyond in terms of <unk> regulations and compliance.
I'm, assuming there'll be a very minimal capex outlay to kind of upgrade some of these systems and energy efficiency systems on the vessels could you talk about that a little bit.
I will I'll, let <unk> address that we have a budget for 2022, which is part of our Drydocking budget, which we broke out a postal she wanted to give the details on yes. So of course.
Generally speaking for the for the full year, we have about $14 million of fuel efficiency upgrade costs.
That's broken out again heavy in the second quarter at $6 $8 million, and then $2 million for the balance of the year.
Great Thanks for possible and just yeah.
Yes.
Chris what that entails is putting.
So said the energy saving devices. So it is going to be.
Very high grade high spec paint systems.
Epl's four.
Engine RPM management.
Data collection devices. So so we finished round the fleet out so we have real time.
Look at fuel burn and we can manage that fuel efficiency quite a bit and as I've as I've said in the past, while we're while we're spending capex of 2000 $14 million to $15 million a share. There is a pretty quick return on that there is a payback of about a year to a year and a half.
Because we will truly be saving on fuel.
Got it that's good color John Thank you.
And as a reminder.
Star One if you will.
To ask a question sorry.
Star one to ask a question we will take our next question from Liam Burke with B.
B Riley. Please go ahead thank.
Thank you and good morning, John Good morning Apostolos.
Good morning.
John .
Going into the second half.
There is a potential supply constraint of grain out of Ukraine. How are you looking at that in terms of the risks of the business.
Yes.
I still again have the opinion not a lot of grain is going to flow out of that.
Out of Ukraine I.
I do think there is a possibility that the U S.
We will be able to make up for some of that I think Brazil as it comes into its growing season later in the year. We will also be able to make up for some of that.
There will be.
On mild expansion most likely on the grain trades because of that also I think it's difficult to determine whether it's a net gain or a net loss in terms of ton miles overall right now so.
I look at it as.
As a risk I'm not sure if it's upside or downside right now.
So the way we're positioning things is we are we are doing some hedging for for the second half of the year, particularly in the third quarter on the grain side.
And.
I would tell you just to be clear, we don't think anything is yes.
We're not going to have this massive downward volatility there is still a lot of coal flowing there's still a lot of minor bulks flowing obviously the U S grain season will be up and going and we will be strong.
But in terms of taking some risk off the table, we're going to do that at some very good rates.
Fair enough.
And do you see any on the order book side do you see any motivation on the market.
Increased orders on some of the larger vessels, one capesize or.
Do you anticipate that that supply or that capacity pretty tight even after 2024.
Well I mean right now, it's obviously very tight as you pointed out for almost 2024 is even difficult to get slots right now a lot of the orders are getting pushed into 2025.
But I still think.
New building prices continue to move up.
Basis input costs, particularly on the steel side as well as just pure demand for for the birth. So I think that's positive.
It continues to displace the newbuild parity versus second hand values. So I think just from a financial standpoint, it's hard to get your head around ordering.
But also you.
You can't I can't say it enough with the environmental regulations that are coming.
I think it's very difficult to.
Makes sense of ordering.
New ships today basis conventional fuel.
And not knowing the fuel of the future are having a real sense of.
Is it going to be ammonia is it going to be hydrogen we believe it will be but we're not 100% on it yet.
And I think you're also seeing even LNG.
Is starting to lose favor.
Globally in terms of.
New fuel.
I think people look at it is purely a stepping stone and that might get phased out much quicker than one might think as ammonia and hydrogen becomes more available over the next 10 years. So I think that's I think there's quite a few factors that are keeping a ceiling on our newbuild orders today.
Alright, Thank you Josh.
Thanks Lee.
And with that that does conclude the genco shipping and trading conference call. Thank you for your participation.
Now disconnect.
Okay.
[music].