Q2 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Genco shipping and trading Limited's second quarter 2019 earnings conference call and presentation.

Before we begin please note that there will be a slide presentation accompanying today's conference call.

That presentation can be obtained from Gencos website at www Dot Genco shipping <unk> dot com.

To inform everyone that today's conference is being recorded and is now being webcast at the company's website www Dot genco shipping dot com.

We will conduct a question answer session. After the opening remarks instructions will follow at that time, a replay of the conference will be accessible at any time during the next two weeks by dialing 888.

203.

111 too.

Or 7194, 570, 820 and entering the pass code.

Three to seven to 187.

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

Good morning.

You know presentation I note that in this conference call, we will 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 project intend plan believe in 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 managements.

On expectations and observations for a discussion of factors that could.

[noise] 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 limitation the Companys Andrew report.

10-K for the year ended December 31st 2018, and the Companys reports subsequently filed with the FCC at this time I would like to introduce John Wobensmith.

Chief Executive officer of Genco shipping and trading.

Good morning, everyone. Welcome to Gencos second quarter 2019 conference call I will begin todays call by reviewing our second quarter and year to date highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals and then open up the call for questions.

Turning to slide five we review Gencos second quarter and year to date highlights during the first half of the year, we continue to outperform our benchmarks advance our comprehensive IMO 2020 strategy and further strengthen our fleet profile and earnings power.

In the year to date, our focus remained on drawing upon our active commercial strategy and our barbell approach to fleet composition, maintaining exposure to both the major and minor bulk commodities. The benefits of this approach had been evident throughout 2019 as the relative stability of the minor Bulks supported earnings earlier in the year well towards the end of Q2 and into Q3, we have begun to once again to realize the upside potential of our modern Capesize fleet.

An important differentiator of Genco is that we maintain the subtype upside potential of the iron ore trade through the ownership of 17 Capesize vessels, while the remaining fleet of 41 minor bulk vessels that primarily transport commodities, such as grain bauxite fertilizers and cement among various other commodities is expected to provide us with a steadier stream of cash flows.

Regarding the progress of our IMO 2020 strategy, we have completed the fitting of scrubbers on four of our Capesize vessels today and anticipate the balance of our Capesize fleet to be fitted with scrubbers by year end before the deadline of January Onest 2020.

Furthermore, we have continued our fleet modernization efforts following the sale of our last 19 nineties built vessel in Q1, we agreed to sell our oldest remaining vessel the genco challenger a 2003 built handysize vessel our success in completing two separate acquisitions of modern fuel efficient vessels last year, while divesting older tonnage has reduced the average age of our fleet by approximately two years, while growing our fleet by nearly 10% on a deadweight ton basis.

Turning to slide six weve outlined our commercial operating platform.

Our active commercial strategy, which incorporates voyage charters and direct cargo liftings, while leveraging our in house relationships and commercial expertise has led to strong results through the first half of the year specifically over this period, our time charter equivalent of $8341 per day has resulted in an outperformance or the relative relevant adjusted Baltic exchange benchmark sub indices by approximately $700 per day, leading the incremental net income of approximately $7 million through June our global commercial platform based in New York, Copenhagen, and Singapore booked over 200 fixtures on our 58 vessel fleet, which equates to over 400 fixtures on an annualized basis.

Additionally, we increased our time chartered in business to 640 days from just under 50 days in the prior year period.

We have also added an additional lever to our commercial strategy, which now encompasses chartering in vessels for short periods, we've booked to such time charter ends today.

Regarding our chowder chartering strategy today for our Capesize vessels, we chose to maintain a short term fixture approach in anticipation of a recovery in freight rates to ensure that we did not lock in longer term coverage at softer levels as contracts expire vessels are being fixed and what has been a strong third quarter. Today. We note that we have mostly been trading our capesize vessels in the Pacific instead of our usual approach of maintaining exposure to both the Atlantic and Pacific basins, as we set up ships for dry docking and scrubber installation.

As for our minor bulk fleet, we have outperformed their benchmarks by approximately $900 per day, while strategically repositioning select vessels. The key regions in anticipation of a stronger third quarter market and the rebalancing our position all exposure given our upcoming Drydockings. These measures together with a stronger market have led to an improved fixtures. So far in Q3 at $11640 per day.

And 50, 57% above second quarter time charter equivalent results highlighting the operating leverage of the company as well as our opportunistic charter strategy.

Furthermore, as the Drybulk market has significantly improved in recent months, we continuously evaluate all of our capital allocation options. While we are positive on the supply and demand fundamentals of the dry bulk industry as outlined on slide seven we do feel it is important to put into perspective that we are only two months into this upward move in freight rates. We continue to believe that maintaining our strong balance sheet is prudent for the benefit of the company and shareholders.

Separately as outlined on slide eight we point out the 2019 is our heaviest operational year with 35 of our 58 vessels, representing 60% of our fleet entering the shipyard at some point during the year for scheduled dry dockings as well as the installation of scrubbers and ballast water treatment systems part of these capital expenditures will be funded from existing cash on hand.

We view these investments in our fleet as initiatives that we believe will be beneficial over the long term for both the company and shareholders as outlined on slide nine as shipping accounts for approximately 90% of global trade and is an essential link of the global economy. The upcoming environmental regulations represent an important shift to dramatically reduce air emissions as the maritime industry works collectively to accomplish this goal at Genco. We're also doing our part to reduce our greenhouse gas emissions and promote sustainable shipping as presented on slide 10.

As one of the largest owners of Drybulk vessels in the world, we understand the need to run a safe and responsible business built for the long term as such we have taken several steps over the last few years, including the installation of Muse Ducks and trim optimization software on many of our vessels leading to considerable fuel savings as well as the collection of real time speed and consumption data for our fleet to optimize performance.

Additionally, we have added modern fuel efficient vessels that reduce fuel consumption, while selling older less efficient.

Fuel tonnage.

This will be a continued emphasis for the company as we seek opportunities to further grow our fleet going forward in terms of our current fleet, 93% of our vessels are rated four or better by right ships why 95% of our fleet has an eighth through either greenhouse gas environmental rating. Furthermore, we partner with various organizations to move the shipping industry forward, while striving to make a difference in our local communities from a corporate governance perspective, as a U.S. filer, we focus on being transparent and accountable and maintaining no related party transactions I will now turn the call over to opposes the Folias, our chief financial officer to go through our financials.

Thank you John .

Turning to slide 12 or financial results are presented for the three and six months ended June 32019, the company generated revenues of $83.6 million and $177 million respectively.

This compares with revenues for the three and six months ended June 32018 of $86.2 million and $163.1 million respectively.

Second quarter of 2019, the company recorded a net loss of $34.5 million or 83 basic and diluted loss 83 cents basic and diluted loss per share excluding $13.9 million in noncash vessel impairment charges as well as a point $2 million non cash impairment of the operating lease right of use asset adjusted net loss for the quarter was $20.4 million. This compares to a net loss of $1.1 million or three cents basic and diluted loss per share for the second quarter of 2018.

For the six months ended June 32019, the company recorded a net loss of 40 for $2.3 million or a dollar and one cents basic and diluted loss per share. This compares to a net loss of $56.9 million or one dollar and 62 cents basic and diluted loss per share for the six months ended June 32018.

Turning to slide 13, we present key balance sheet items as of June 32019.

Our cash position, including restricted cash was $165.4 million. Our total assets were $1.6 billion and consists primarily of the vessels in our fleet and cash our total debt outstanding growth of $15 million of unamortized debt issuance costs and inclusive of the current portion of long term debt was $513.7 million as of June 32019.

Moving to slide 14, our utilization rate was 97.7% for the second quarter.

RTC for the second quarter was $7412 per vessel per day, which compares to $10964 per vessel per day recorded in the same period of last year.

The decrease in TC was primarily due to lower rates achieved by the majority of the vessels in our fleet during the second quarter of this year versus last year.

As previously highlighted we have seen is benefited from the improving market fundamentals, having a fixed having fixed the tc over $11640 per vessel per day.

64% of our Q3 available days or 57% higher than our second quarter PC.

Daily vessel operating expenses were $4615 per vessel per day for the second quarter and $4518 per vessel per day through the first half of the year, which was slightly below our budget of $4525 per vessel per day for the year.

Turning to slide 15, we highlight our favorable debt structure with which consists of two credit facilities. These two facilities have enabled us to simplify our capital structure, while providing genco added flexibility in regard to additional indebtedness potential dividends and vessel acquisitions.

Additionally, we provide balance sheet items, reflecting our strong liquidity position of $165 million of note, we incurred $10.4 million of scrubber related expenses through the first six months of this year of which approximately $9 million can be drawn down under our $495 million credit facility to further strengthen our position.

We evaluate our capital allocation strategy on an ongoing basis waiting both a short and long term impact of liquidity uses our strong balance sheet and barbell approach to fleet composition have been a differentiating factor for Genco in 2019 and remain key pillars to the company's strategy.

Moving to slide 16, we outlined on our third quarter estimated cash breakeven rates, we anticipate gencos cash breakeven rate to be approximately $12600 per vessel per day for the third quarter of 2019, including this figure is a drydocking associated with 20 over all of our vessels for the quarter.

In addition, we expect to incur onetime costs of $3.2 million associated with the installation of ballast water treatment systems on certain of our vessels during the third quarter. We have also provided further detail on these breakeven rates in the appendix of our presentation for your reference.

I will now turn the call over to Peter Allen, our Drybulk market analysts to discuss the industry fundamentals.

Thank you most loes I'll begin with slide 18, which represents daily.

Yes.

Hi index during the second quarter of 2019, there was an overall uplift in freight rates relative to the first quarter with the improvement accelerating rapidly towards the end of June and subsequently into Q3 to date.

Specifically capesize rates rose from an early April low of approximately 3500 to a five year high of nearly 33009 and a half times increase in less than four months. We do note that freight rates have pulled back from recent highs of late but still stands strong levels at over 23000.

Several factors have led to the two vastly different markets. We've experienced in the first and second halves of this year as outlined on slide 19 in particular early in their earlier in the year seasonal developments such as increased newbuilding deliveries, the new lunar new year celebration and weather related cargo disruptions that traditionally lead to a weaker Q1 market were exacerbated by the valley Damn incident.

The combination of these factors resulted in a meaningful decline in cargo availability hampering the iron ore trade and capesize rates specifically.

These market conditions led to a sharp increase in vessel scrapping keeping a lid on net fleet growth and dis incentivizing owners to balance their ships to the Atlantic due to the lack of valley iron ore cargos towards the end of June and into the second half of 2018.

Operations at the for Q2 mine restarted leading to an improvement in iron ore volumes from valley, the aggregate impact of more iron ore cargos and a shortage of vessels in the region resulted in a squeeze in the Atlantic Basin as subsequent spiking Capesize rates of note Valley has indicated a substantial improvement in sales volume in the coming months, having reiterated 2019 sales guidance of approximately 320 million tons based on the company's actual sales during the first half of the year and their full year guidance. This implies that 42 million tons more iron ore will be sold in the second half of 2018 as compared to the first half an increase of over 30%.

Turning to page 20.

Driving the demand level for iron ore has been record steel output in China with steel production, having increased by 10% in the year to date and a tightness of seaborne iron ore a major drawdown of iron ore port inventories occurred in China to fill the supply gap. These inventory levels fell to as low as 115 million tons from over 160 million tons last year limited iron ore supply led to prices, reaching well over $100 per tonne further incentivizing iron ore miners to ship more of the commodity to take advantage of these multi year high prices. We note that recently the price of iron ore has retreated to just over $90 per ton in terms of a potential iron ore restocking period in China. We believe this could occur when the price of the commodity stabilizes moving to page 21, we touch on some key catalyst of the minor bulk trade. We are now in South American grain season, during which Brazil is expected to continue its strong soybean shipments to China, We expect Brazil, along with Argentina to continue to increase market share of China's soybean shipments given uncertain.

He is around the US China trade relationship. We also believe that any potential demand destruction due to the African swine flu currently affecting the hog population in China to be netted off us soybean shipments when north American grain season, typically ramps up in Q4 into Q1.

On slide 22, we highlight the supply side of the equation.

Earlier in the year, there was a prompt response to market conditions through increased scrapping and slippage of new building deliveries scrapping in the year to date has risen to 5 million deadweight tons already surpassing last years total, resulting in net fleet growth of approximately 3% on an annualized basis.

Additionally, overall fleet wide productivity has been impacted by owners preparation ahead of the January one 2020, IMO compliancy in which a substantial portion of the global fleet is undergoing scrubber retrofitting in terms of the order book vessel contracting has been relatively limited so far this year, leading to a stable order book as a percentage of fleet at approximately 11%, which compares to 7% of the current on the water Drybulk fleet that is greater than or equal to 20 years old since 2010, newbuilding deliveries have fallen by nearly 25% in the second half of the year as compared to the first half on top of this traditionally tightening supply picture since 2010 iron ore volumes from Australia, and Brazil, and Brazil have increased by 12% on average in the second half of the year as compared to the first half. These two factors have historically helped contribute to tighter markets towards year end and appear to be playing I. Once again this year.

This concludes our presentation and we'd be now happy to take your questions.

Thank you very much.

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 press Star one to ask a question.

We'll pause for just a moment to allow everyone an opportunity to signal for questions. Thank you.

Our first question will come from Randy given Jefferies.

Howdy gentlemen, how's it going.

Good morning, Randy.

So I have a few questions.

For me this person is going to be multifaceted I know you appreciate that.

The incredible rally and dry bulk spot rates as obviously, you've been pretty evident this summer, but how is that impacting the one year time charter rates and asset values.

In recent months for example, you recently agreed to sell the challenger forward looks like $5.3 million what would this price have been back in May and also for the time charter rates.

Are you seeing any premiums for those with scrubbers on the Capesizes and if so is it 2000 4000 6000 a day.

Okay. So let's talk about asset values for a second.

The difference between May and now in the Handysize market I don't think values have moved all that much maybe at what I would say is there's more liquidity that's come back into the market.

So you're not having to take a discount from from last done.

We we felt that was a pretty strong.

Sale that we are able to get on that age of the of a ship that you know that has drydocking and a ballast water treatment system that still needs to be installed.

I think in general, though asset values.

Particularly in the larger ships.

Had started to to move back up again.

And I would anticipate as people get more and more comfortable with with the recovery going into the second half and then and then into 2020 those asset values will continue to move up.

On the time charter market in terms of Capes I still think it's a little too early we havent seen too much.

Too many time charters that have been done basis, a scrubber fitted ship.

And I think as you get closer to the ended the year end you have the IMO 2020 fuel switch over that's when you'll start to see the premiums.

In the time charter market.

Versus a ship that is that does not have a scrubber on board, but so to put it in perspective, you know the time charter market today for.

Say, a five year old Cape is probably somewhere between 19 and $20000 a day for a year and you would expect that when when you do get into looking at charters with scrubbers, you should hope you should be able to get a four to $5000 premium because of the the scrubber install.

Okay, So seeing certainly seems like asset values and larger stuff.

It's been a very illiquid market. So it seems like the current prices should be higher than last done in July June for that matter.

All right second question I think their bed occupancy.

Go ahead I was just going to say I think you're right Randy and I think the one of the more important things is there is liquidity back in the S&P market.

There are there are transactions being done capes, all the way down to the handy size, which a few months ago it was pretty stagnant.

Got it.

Okay, and then one more question here. So there's been obviously some headlines of excessive delays for scrubber retrofits recently, but looking at your scrubber capex timing for retrofits, you're still guiding call 17, Capesizes being completed this year. So I guess two part question, what's causing the delays for others is that equipment is at shipyard space and then what makes you confident that those delays wont push you into 2020.

Look I think Theres a few things that are that are effects that are causing the delay its I think some of the yards probably overbook their slots.

And waiting periods may be a little bit longer and so I think theres been some over promising on the yard front.

I think there have been Theres also been some equipment procurement issues, particularly on particularly on the on the piping discharge piping and and and getting a.

Getting logistics.

Set up in in China, You've also got some a lot of these scrubbers are coming from Europe . So there are logistical issues with that I think in China in particular, where a lot of these are installations are being done there has been a lot of.

A rain over the last couple of months there has been currently a lot of heat.

And hot weather, which has affected the.

The working conditions there.

As it pertains to Genco, we are highly confident we will have all of our scrubbers installed by the end of the year as you know we have done for so far.

In pretty eye, we actually did those in pretty quick succession. Those were done really in the late June through July time period for the ships were done.

And we're very confident on on the other 13 getting done before the end of the year.

That doesn't mean, there you know within the scheduling there have been some delays by a week or two but we've been able to logistically work around that from a commercial standpoint.

And work with the Arts and that's why I have the confidence that everything will be done before year end.

Sure thing sounds good we are looking forward to see in the next few months here. Thank you.

You're welcome.

Thank you. Our next question will come from our Medmarc Rhonda Deutsche Bank.

Hey, Good morning, this is Chris Snyder on from it.

So the first question is just what do you think caused the Cape recovery to be so strong and so sharp.

Obviously, we have valley ramping but overall export volumes in Brazil are still down year on year and really below expectations heading into the year. So it was like the.

Really aggressive ramp just the result of capes being positioned in the Pacific for scrubber installations, or maybe just the global fleet got spread out as other regions or maybe introducing production to take advantage of high prices.

Look I think it's a few things I think it's it's valley.

Coming back online.

Quicker than than what what was anticipated in the market. Both in terms of BRCA two coming online, but also their logistical system being able to shift.

Production more into SLF, Andy I think that took people by surprise and because of that there were not a lot of ships positioned in the Atlantic and so the Atlantic market got squeezed in and really push the the index rates up I agree with you I think a lot of the ships are trading in the Pacific because of the valleys situation, but also because of scrubber installs and we really had started to see the beginning of a of a big push.

And a lot of activity in the yard on the scrubber side, which is taking ships out of the market also so from a from a simple supply standpoint supply of ships being able to lift cargoes that number's being reduced because of the scrubber installs and we certainly expect that to continue.

Through the end of the year.

So I think it's a combination of things, but up but I think one of the big things is is is valley.

Coming back online quicker.

So the Cape market is kind of pulled back here over the last couple of weeks just as some of that supply is now returning back to the Atlantic.

Can you, maybe just talk about where the how the fundamentals in the Atlantic stand right now do you see could there still be some more downward pressure or do you think that the market now maybe in the low to mid 20 range is kind of starting to be more of a stable environment.

It seems to be settling out if you look at the if you look at the phase that that that paper, we'll certainly tell you that things are stable.

I.

We still anticipate another push upwards on rates before the before the end of the year.

I also would tell you where from a seasonal standpoint.

I think we're taking an overall pause in the in the iron ore market.

And with the price of iron ore having dropped.

Pretty quickly over the last couple of weeks, that's usually a short term phenomenon.

In the sense that people pull back on on their purchases. So as soon as that price stabilizes again.

I I think youre going to see youre going to see more more buyers come back into the market and Cape rates should continue to move back up but I, but I. We do feel that there is a fairly stable floor right now.

That that is that is set in on the capesize sector.

Thanks for that and then next question and sorry, if you touched on this already but just around fleet positioning and I believe last summer you're repositioned a chunk of the mid size fleet.

It's kind of weighed on Q2 results, but set you guys up for a better second half did you undertake similar repositioning this summer and is it really or mostly just super rose in anticipation of the grain season.

Yes, so okay. So a few things. So if you if you look at last year, we actually did quite a bit of that repositioning and backhauling in Q3.

Which set up for a very strong fourth quarter. This year, we've done a lot of that in the second quarter in anticipation of a strong black Sea Mad region, which is which has panned out and you can see it in the Ford fixtures in the mid size and smaller ships.

Going into Q3.

And on the Capes, you know as I said because of the scrubber installs. We have been we have been trading those ships exclusively in the Pacific as those ships come out of the of the yard with their scrubber installed we'll go back to a more balanced approach in the capesize sector of having some exposure in the Atlantic in some exposure in the in the Pacific on that.

I look at what we did for the first half of the year, which compare to the indexes is very strong and we have a stated goal of beating the index of $500 per day for over a calendar year and we still have all the all the confidence that that's going to pan out as we get to December 30 Onest.

But I think if you look at the forward fixed year. If you look at the forward fixtures there very strong for Q3.

And then if I could just ask one more on the.

Grain trade and especially because you guys are kind of did the repositioning a little earlier remember correctly last year as South America took share from the U.S. and international Green markets, we kind of saw a lot of that grain trade pulled forward into Q3 and into Q4 volumes kind of disappointed.

Is that maybe why you repositioned a little earlier this year and do you kind of think Thats the way the market setting up for this year.

Well I think theres, a little bit of a of a difference this year over last year. So the black sea in med.

Has that that has come a lot earlier than what we saw last year.

Which is again why we were repositioning in in the second quarter to hopefully capture that which is which has proven successful. The other difference this year versus last year is that last year, Argentina, one through a drought. So there was not a lot of soybean there was not a lot of corn that was exported out of Argentina that situation has reversed this year, where there is more soybean and a lot more corn availability for for export out of out of Argentina, and I would tell you Brazil on the soybean front.

It's probably flat to slightly below last year's numbers.

So we still we still expect east coast of South America to remain strong for quite some time.

Well I appreciate all that color and that's it from me. Thank you.

Thanks, Chris.

Thank you very much once again, ladies and gentlemen, if you would like to ask a question you May press star one on your telephone keypad now.

Again, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

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Thank you.

Our next question will come from Eric help me Clarksons.

And company. Your line is open if you're on mute would you. Please unmute your line now.

Sorry about that hi, guys.

Hi, and good morning, So you talk.

Good morning, So you talked about the repositioning into the Pacific when scrubber installations are symbolic coming back in line. So regarding the capesize market for the remainder of the year.

Now lets me look who's going to do the same transition over to the.

That's a big basin to the pitch scrubbers. The hope is that any RV, you've got to pick the market for the remainder of the year.

On the on the valet Violette assays.

Yep.

Yeah look I mean, I I most of those vessels are under contract. So clearly taking those ships out of service will most likely require more spot fixtures coming out of valet. You couple that again with the fact that you've got a recovery.

That that's going on on volumes overall, we obviously expect that to be to be a positive.

I look at those Vlccs in terms of the entire.

Capesize fleet.

And looking at the numbers that that are going to be coming offline.

Basically that started in July all the way through the first quarter of next year to have scrubber installs.

But particularly those vlccs that in the Atlantic should be very helpful to the to the Cape market.

Any I know and you guys are also <unk> I guess I'm getting Uh huh.

App way I guess with the Capesize to second going back into the market or hopefully attorney yeah.

Stronger due to multiple factors there so.

Yeah, and you know were in <unk>.

Well the only thing I was going to say it was you know we're we're obviously talking about the second half of the year, which which is fine, but and and where we're we're positive on that but we're also looking forward to law to 2020 from just a pure supply and demand standpoint, where demand is projected to outstrip the number of ships delivering bye bye.

A point to two points.

That is you know that is setting up also for for a nice part of the recovery going into next year lot of that is driven again by ballet continuing to ramp up and we'll probably most likely get back to at least 2018 levels in terms of tons of iron ore shipped.

That's helpful. Thank you.

Oh.

Thank you very much ladies and gentlemen at this time. This now concludes today's conference. Thank you for joining US you may disconnect your phone lines and have a great rest of the week. Thank you.

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