Q3 2022 Genco Shipping & Trading Ltd Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Genco shipping <unk> trading limited third quarter 2020 to your earnings conference call and presentation. Before we begin. Please note that there will be a slide presentation, a companion today's conference call that presentation.
It can be obtained from <unk> website at Www Dot Genco shipping dotcom to inform everyone. Today's conference is being recorded and is now being webcast at the company's website at Www Dot Genco shipping Dot com.
Conduct a question and answer session. After the opening remarks instructions will follow at that time.
Play of the conference will be accessible at any time during the next two weeks by dialing 8885831035, I repeat 8885831035 and entering the passcode 874 zero to seven four I repeat $8 74.
There are $2 74 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've been making certain forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 90 to 95, such forward looking statements use words, such as anticipate budget estimate expects projects 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 the materials relating to this call posted on the company's website and the company's filings with the Securities and Exchange Commission, including without.
<unk> company's annual report on Form 10-K for the year ended December 31, 2021, and the company's reports on Form 10-Q and form 8-K subsequently filed SEC at this time I would like to introduce John Logan Smith, Chief Executive Officer of Genco shipping and trading limited.
Good morning, everyone welcome to <unk> third quarter 2022 conference call.
I'll begin today's call by reviewing our Q3 2022 and year to date highlights providing an update on our 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 web site.
Right.
During the third quarter of 2022, Genco continued to achieve strong financial results. Our earnings were supported by our sixth consecutive quarter of fleet TCE greater than $20000 per day combined with the sequential decline in operating costs.
Notably we declared a dividend of <unk> 78 per share for the third quarter of 2022, representing an increase of 56% compared to Q2 and an annualized yield of 22% based on our current share price. We have now paid 13 consecutive quarterly dividends totaled $3 79.
And one half cents per share.
Implementing our value strategy, which is focused on paying a meaningful and sustainable dividends throughout the cycles deleveraging and positioning genco to capitalize on compelling growth opportunities. We have declared four quarterly dividends totaling $2 74 per share for a yield of 22% during the <unk>.
Quarter, we continued to successfully execute core pillars of our value strategy as we proactively pay down debt and further reduced our cash flow breakeven levels for the benefit of shareholders continuing to pay down debt. During the 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 and has enabled us to achieve significant balance sheet strength and industry low cash flow breakeven levels.
We believe we have the most compelling risk.
The reward.
Model in the Drybulk public markets irrespective of the broader macro environment, we remain in a strong position to take sizable dividends to shareholders, while seeking opportunities to take advantage of attractive growth opportunities as markets develop for.
For the third quarter, we drew on our significant operating leverage generating a solid time charter equivalent rate of $23624 per day as we capitalized on the cargo and time charter coverage, we put in place during a strong Q2 market.
Prudent approach of taking forward cargo coverage during a period of market strength, and then significant benchmark freight outperformance during Q3 2022, particularly on our minor bulk fleet, specifically, our ultra Maxim Supermac TCE. During Q3 2022 was approximately $7000 per.
A day higher than the Baltic Supermax index average for the quarter.
Looking ahead, our estimated TCE for the fourth quarter based on fixtures to date represents coverage of over 75% of available days at approximately 20.
$500 per day, well above current spot rates of 12000.
And $14000 a day for Capesize and Super Max vessels, respectively. It is also significantly higher than our breakeven rate of approximately $9000 per day.
In terms of 2023 market trends, we expect continued low net fleet growth given the historically low order book, which together with <unk> team has 20.
23, environmental regulation are expected to be supportive for freight rates as a direct result of the low order book demand growth has a low 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 postpaid portfolio, our Chief Financial Officer.
Thank you John during the third quarter, we continued to record strong earnings and voluntarily pay down debt as we maintain our commitment to reducing financial leverage and our cash flow breakeven rates on.
On a cumulative basis since the start of 2021, we paid down $270 million of debt, where 60% of our debt levels, enabling <unk> to achieve a low net loan to value of 11%, notably the current scrap value of our fleet is over two times our debt outstanding.
For the third quarter of 2022, we declared a <unk> 78 per share dividend, representing an annualized yield of 22% while revenues remain firm that 56% increase in the quarterly dividend from Q2 to Q3 reflected lower operating expenses in the latter period.
Specifically dry dock and Capex declined to $7 8 million from $22 6 million in the second quarter. Furthermore, our vessel operating expenses decreased by 25% to $22 $1 million in Q3.
Despite the large quarter over quarter decline, we continue to invest in upgrading select vessels within our fleet, while the overall operating environment related to cost remains challenging and difficult to predict given various microeconomic factors. Our success in completing the transition of our fleet out of Chinese cruise and the progress in upgrading select vessels fall.
Knowing our technical manager transition will help in maintaining comparatively lower crew change expenses, including COVID-19 costs as well as spare and store expenses for the balance of the year.
For Q3 2022, the company recorded net income of $40 8 million or.
Or 90, 96 basic and 95 diluted earnings per share adjusted net income for the quarter was a dollar per share when excluding unrealized losses on fuel hedges of $1 $9 million.
Our third quarter EBITDA adjusted was $60 $3 million, bringing our nine months 2022, adjusted EBITDA to $181 million.
As of September 32020 to our cash position was $71 $5 million, which when combined with our revolver availability provides total liquidity of approximately $290 million.
This substantial liquidity position combined with the fact that five of the ultra <unk> vessels that we acquired through 2021 remained unencumbered provides significant flexibility for us to continue delivering under the three pillars of our comprehensive value strategy. In Q3, 2022, we paid down debt totaling $8 $75 million representing.
Quarterly run rate with voluntary debt repayment.
Although we have no mandatory debt amortization payments until 2026, we plan to continue to voluntarily delever as John mentioned, given our medium term objective of reducing our net debt to zero.
Following our substantial deleveraging since the beginning of 2021, our debt outstanding was $180 million is at the end of the third quarter, which resulted in a net debt of $108 million. We note that we also have interest rate caps in place with varying durations through March 2024, which limit our exposure to rising interest rates.
I mentioned, our board of directors declared a dividend of <unk> 78 per share for the third quarter in line with our value strategy calculation walking down the dividend Formula. This resulted from operating cash flow of $64 million less debt repayments of $8 $75 million dry dock and ballast water treatment system and energy saving device cost of $7 $8 million.
And the previously announced reserve of $10 $75 million.
We expect our expense levels in the fourth quarter to continue to remain lower than the first half of the year as we have completed the transition of our fleet to our new technical management joint venture and completed the heaviest drydocking period of our vessels during the second quarter. We continued to focus on cost optimization, while seeking to continue to meet stringent safety and.
Vessel maintenance standards.
Total the expense and reserve side of the equation are estimated to be approximately $56 million for Q4.
And then during that figure is expected reserve at $10 $75 million, which is based on the run rate voluntary debt repayments expected to be made in the fourth quarter as well as the estimated cash interest expense.
I will now turn the call over to Peter Allen, our SVP of strategy to discuss the industry fundamentals. Thank.
Thank you apostolos during the third quarter of 2022, Capesize and Super ex freight rates counter seasonally declined from Q2 levels of development that hasnt materialized. Since 2012, despite the decline in freight rates remained at firm levels overall with non scrubber fitted capesize and <unk> indices, averaging nearly $14000 $20000 per day, respectively. During Q3.
We believe the primary drivers behind the street rate development, we're restricted COVID-19 related policies imposed in China. The lack of the usual Ukrainian grain export season, and unwinding of congestion in certain ports and underperforming Brazilian iron ore shipments at the start of Q4, we saw capesize rates strengthened over $20000 per day for the first time since July is incremental.
Whether in China delayed vessel schedules, resulting in a shortage of tonnage availability. We believe this type of market reaction seemingly minor weather related events highlights the overall tightness in the supply and demand balance prevalent in the Drybulk freight market. We expect this dynamic to persist in the years to come given the low level of capacity additions expected over the next two years.
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Regarding energy markets, we continue to see tightness globally as more regions turning towards coal imports.
We have seen a rerouting of cargo flows as Russia exports more coal to China, and India, While Europe is sourced more coal from the U S, Colombia and Australia.
Furthermore, after unexpected contraction of steel demand in 2020 to the World Steel Association forecast a return to growth next year, which we believe will support demand for key commodities, such as iron ore and coal on.
On the grain side, the third quarter typically represents a period in between the south and North American export seasons in which the Black Sea region augment its shipments in July UN brokered deal saw the establishment of a green corridor to allow for grain shipments from the region, which has resulted in shipments of approximately 10 million tonnes debate.
However at the end of October Russia temporarily ceased their participation in the agreement only to rejoin days later with the initial 120 day agreement set to expire on November 19th negotiations for an extension continuing there remains uncertainty around exports from the black sea going forward regarding the supply side net fleet growth in the year to date is approximately two four.
<unk> historically low order book as a percentage of the fleet of just 7% as well as near term and longer term environmental regulations are expected to keep net fleet growth low in the coming years. Additionally, high scrap prices continued to be attractive to owners of older tonnage considering the increased level of investment in ships require in light of these upcoming regulations overall, we believe.
These positive supply and demand dynamics provide a solid foundation for the Drybulk market and lead to a low threshold for demand growth to exceed in order to improve fleet wide utilization and freight rates. This concludes our presentation and we'd now be happy to take your questions.
Thank you, Sir ladies and gentlemen, if you wish to ask a question at this time. Please signal by pressing star one if you wish to cancel your request. Please press star two.
<unk> comes from Omar <unk> from Jefferies. Please go ahead.
Hi, Thank you hey, guys good morning.
Just a couple of questions. Maybe just first off I did want to ask about the ultra Super performance during the quarter I would say, it's pretty strong and it comes without the benefit of having scrubbers and so at first I thought it was maybe related to the time charters you guys had put in place, but it does feel like maybe you had a pretty solid spot performance can you maybe just kind of go over that.
And how you drove.
Such and such upside in the quarter.
Yes, Thanks Omar.
Good morning.
Youre correct, our ultra Super sector.
Did very well.
Bye bye about $7000 a day.
Over and above the.
The industry rates for that for the BSI for the quarter.
If you if you actually look at the numbers.
I think our spot rates on our ultra is where 26668.
The benchmark was somewhere around $19000 a day.
We did have some period coverage on the ultra supers, but that was actually at a lower rate of 23 878.
So what actually drove that that particular spot rate outperformance.
I believe we talked about this a little bit on that on the last call, but when we went on we saw obviously the unfortunate situation happening in Ukraine.
We're very skeptical as to what grain movements would be happened in the third quarter, which is typically a high season for the black Sea and so we purposely.
Again, taking forward coverage for the third and fourth quarter because we.
We didn't really believed that there was going to be a lot of grain coming out. Unfortunately for the grain side that that has occurred Fortunately for us.
We saw it ahead of time and we took action on it so.
That's really what led to lead to that outperformance and as you know we have a very active commercial platforms.
So we have the ability to take this forward cargo listings.
Which we obviously did this quarter and we have done in the past and we'll continue to do when the opportunities arise.
Thanks, Tom Okay, Yes, I recall that makes sense.
And then maybe just more broadly wanted to ask about capital allocation as we go into next year. The past couple of years <unk> been pretty diligent about paying down debt reserving cash and also paying out a healthy dividend.
23 of the dry dockings are supposed to come down I think you have in the release $5 7 million, which comparison I think $40 million for this year.
Even that decline do you see yourselves adjusting the reserve.
For 'twenty three in terms of how much a hold back from from the payout.
Yes so.
Couple of things.
<unk>.
There is.
And maybe I'll go into a little detail and let you know how the sausage is made so to speak.
We look at projections going into 2023, which is always a little bit of a dangerous thing to do to try to actually project freight rates I think I think we have a pretty good sense Directionally, where things will go but trying to predict day to day rates can be can be difficult. So we look at a variety of things as we look forward.
We look at the SFA curve, we have a series of third party data providers that we use and right now there is a big discrepancy between where the FFA curve is versus the data providers name. The data providers are significantly higher we tend to.
We feel that FFA curve is too low at this point and so what we're what we're doing it.
Towards the end of the year as we get into December .
And we will have another board meeting to assess our views on 2023 and at that point, we'll take a look at that reserve as well as what debt prepayments, we wanted to give because keeping keep in mind.
Have any mandatory debt repayments right now.
So we will.
We will assess at the end of the year and my my goal is to let the market know where we come out.
Really at the very beginning.
Next year, so we're not going to wait until we announce earnings sometime in late February with beforehand. It let the market both.
Both on what we plan on prepaying in 2023 as well.
Reserves.
Okay, great. So hopefully that answers your question, but look I agree with you on the Capex.
Very light year for us.
And.
Interestingly enough.
$103 24, and 25 for the overall Capesize, we are actually very high drydocking in years for the fleet overall, but not for US that's an industry status, so that could actually be interesting in helping push rates up by having large percentage of the fleet and drydock for those years.
That's interesting.
Yeah, Okay, great. Thanks, John .
Look forward to early next year and then.
I will turn it back into the queue.
Great. Thanks similar.
Greg Lewis <unk>. Please go ahead.
Hi, Thank you and good morning, everybody and thanks for taking my question.
John John I guess, I'll follow up a little bit on <unk>.
<unk> question around capital allocation.
Little different way.
I think you guys have been pretty upfront about managing returning cash to shareholders, but also managing the fleet.
And I guess, what I'm wondering is we've seen a little bit of a step down in asset prices here.
And clearly.
At least the sentiment around vessels in Q1 looks pretty.
Pretty pretty challenging we know <unk> can be a wrong just as much as the right.
I guess, what I'm wondering is as we kind of manage and good balance sheet still generating good cash flows based on as we look at.
And low breakeven.
Or could we see opportunities to kind of whether we call. It renewal are expanding the fleet here now that maybe some of the big strengths and asset prices have pulled back a little bit.
The short answer is yes, Greg.
We.
We set this company up from a balance sheet standpoint to always play offense.
Which I think we have now put ourselves in that position pretty solidly.
And we definitely have.
We definitely have an overall goal of expanding the fleet.
Even beyond just normal fleet renewal.
So I think it's a matter of finding the right transaction and it's a matter of the timing.
Youre correct asset prices have come down a little bit I still don't think they actually match where freight rates are today, but I also believe.
That will probably in a little different situation than maybe what we've seen in years past in that high <unk>.
Building prices still exist in that I don't think thats going away. So I think asset prices could be a little more sticky.
And less correlated to direct freight rates for the next few years.
Easily but.
We think theyre going to be opportunities most likely in the first part of next year.
My personal view is.
Is that.
One of the things that's holding freight rates back or is that zero Covid policy in China I do believe that that is going to soften as we get into <unk>.
Probably second quarter or so of next year.
By the way I don't have any more information than anyone else, but that's that's my personal view and so I do think there could be some opportunities as we get into the early part of next year, we'll just have to wait and see I mean, we're very focused on buying at the right time, we're very focused on not <unk>.
Buying in the in the very upper historical core titles in terms of values and you are correct. We have started to come off a little bit which for US I think is is healthy.
And I think it will give us.
I think it will give us some things to look at as we get into early next year.
Okay, great. Thank you for that now now I mean, it is interesting as you think about China and potentially reopening at some point next year. It would seem like it's a pretty opportunistic time.
I did want to follow up because one of the things that we're wondering is on.
On the asset prices realizing that the spot market is down.
But I was hoping you could maybe share some a little bit of color and realizing you guys don't have a lot of that and don't plan to have a lot of debt.
But clearly.
Borrowing rates do impact asset prices as well.
Any kind of sense for where for modern tonnage lending rates are now and maybe where they where they are today versus maybe where they were maybe six 912 months ago before we started to see interest rates heading higher.
Yes. It helps us do you want to take that.
Yes, I think.
First of all just to address our situation as I mentioned on the call. We do have interest rate caps in place for various durations through 2024.
A weighted average rate of 94 basis points. So in terms of the existing debt, we're pretty well hedged in a covered.
As far as the overall market is concerned look I think that that LIBOR and sulfur rates have moved up.
Quite significantly in terms of the margins that the banks are charging.
I mean, I think that margins could range anywhere from 2% to 4%.
And add another 4% four.
For LIBOR sulfur and Youre getting.
<unk>.
The financing cost in the high single digits and then there is obviously the alternative financing providers space, which has which has.
Higher financing costs as well.
For us it is.
Also the ability to take advantage of the existing balance sheet.
In terms of.
How we can raise that we have a revolver in place.
And when combined with our cash position that is that is closer to $290 million.
And we do have five unencumbered vessels.
Going forward Opportunistically as well.
Okay Super helpful guys. Thank you very much and have a great day.
Thank you Ware.
Greg Thank you and I'd like to remind if you wish to ask a question at this time, please signal by pressing star one.
Our next question comes from Liam Burke from Riley. Please go ahead.
Yes. Thank you good morning, John Good morning Apostolos.
Good morning Liam.
John .
A large percent of the fleet for the fourth quarter was fixed.
That would be the spot market.
And.
Tricia and declining spot market environment. It was a good call out.
How do you look at the fleet management going forward as you balance between.
Time charters.
But.
Yeah, No look I think let's take the two segments. So let's take the minor bulk segment.
And then talk about the Cape size segment.
So on the minor bulks.
We obviously have a very robust commercial operating platform, where we're doing.
90% plus of our business direct with with cargo owners and.
And we're able to book those cargos and trade around those cargoes, meaning using.
Either our shift to lift that cargo or if it makes sense and we can make more money will use somebody else's ship and chartered in short term.
So I don't think anything is going to change much there. It doesn't mean from time to time that we won't do some time charter coverage, whether it's three to five months of four to six months if it makes sense.
For where that vessel is positioned but I would look at the minor bulks as more of a.
More of a shorter duration now the case on the other hand.
It's a different animal.
What I mean by that is because of the volatility in the capesize sector, we do from time to time.
Take time charter coverage on a longer term basis anywhere from one to three years.
Right now we don't think Thats the right thing to be doing we think these rates are too low. We think again there is going to be a recovery that is going to come sometime next year on the capesize front because of the low.
Very low supply situations as well as the demand picking up once.
China.
Reopened.
When we do see the opportunity to take exposure off the table at certain rates for Capes, we do it we demonstrated that in the past with the longer term charters. We've done we've also done which have been interesting some.
Index related charters on the Capes, where.
We collect the spot rate on it on a daily basis, but we also have the ability to fix longer term within that.
Within that index charter and that has been.
That's been very successful as well and very helpful, particularly with all the volatility that has existed this year in particular.
In the Capesize sector.
<unk>.
I think we've seen more volatility in the case this year than we've seen.
In the last five six years I think we were looking at numbers the other day and I think Phil.
<unk> 50, 455%.
The days so far this year for Cape size.
Move plus or minus 5% on a daily basis, so lot of volatility this year and some of the spot index deals had been have worked well and been able to play that.
Super and.
On the <unk>.
Had a lot of one time expenses in the second quarter. We saw it down sequentially is there more to go there or is it pretty much leveling off at where we are in the third quarter.
Yeah. So look we are getting some more normalized we guided for fourth quarter, a little bit lower at $5150 per day.
So we feel good about that number and I would say that's getting into a more normalized trend on the attacks.
He is.
Inflation has certainly affected us just like it.
Just like everyone else are spare parts costs more or air freight to get those parts around the world and has cost more so than it has been some inflation there.
We've also seen some inflation on the crew side.
Because we do want to make sure that we're maintaining the best crew that we can get so.
That means paying a little more than what we did last year, but I would say when we start to get into that fourth quarter number of $51 50 a day.
Sorry to get into a more normalized level and our COVID-19 related expenses had come.
Way down.
So thats been a positive thing as well.
Great. Thank you John .
Excellent.
Thank you ladies and gentlemen.
There are no further questions in the queue I'd like to hand, the call back over to our speakers for any additional or closing remarks.
No. Thank you very much we appreciate everyone joining.
And look forward to speaking to you soon thank you.
Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Okay.
Sure.
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