Genco Shipping & Trading Ltd

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited Second Quarter 2020 Earnings Conference Call and Presentation. Before we begin, please note there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's website, www.jenkoshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference will be accessible anytime during the next two weeks by dialing 888-203-1112 or 719-457-0800. and entering the passcode 6606629. At this time, I will turn the conference over to the company. Please go ahead.

Good morning. Before I begin our 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, 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 limitation, the company's annual report on Form 10-K for the year-end of December 31, 2019, and the company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC. This time, I would like to introduce John Robensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Good morning, everyone. Welcome to Genco's second quarter 2020 conference call. I will begin today's call by providing an update on Genco's response to COVID-19. We will then review our year-to-date highlights, discuss our financial results for the quarter, and the industry's current fundamentals before opening the call up for questions. For additional information, please refer to our earnings presentation posted on our website. Since the onset of the pandemic, Genco has continued to prioritize the health and safety of both our crew members and our onshore teams. As a result, we have undertaken a number of proactive measures, specifically centered around ensuring the continuity of our business and protection of our crew while maintaining effective and safe headquarter operations. Since transitioning to a remote work environment in March, our office operations have continued as usual, and we have not experienced any disruptions to date. In addition, we continue to provide customers with the high-level service and support that has become a hallmark of our operations. Our teams onshore in New York and Singapore continue to work from home while our team in Copenhagen has returned to the office. Regarding our crew members, our focus remains on taking proactive actions to safeguard these individuals. To this end, we have provided crew with the necessary PPE, limited access of shore personnel boarding vessels, and have prominently posted COVID-19 safety instructions onboard vessels to supplement ongoing safety training. Over the last several months, the primary challenge of the industry has been executing crew rotations. Due to the COVID-19 pandemic, government-imposed port restrictions, difficulty arranging travel and safeguarding the health of the on- and off-signing crew have all posted unique challenges that have prevented many ship owners from being able to undertake crew rotations in a safe and effective manner. As crew members worldwide have in many cases exceeded the duration of their contracts, there is an increased urgency to work towards completing more crew rotations in the coming months. We have taken proactive measures by implementing industry-leading protocols, which have resulted in successfully completing crew rotations involving approximately 70% of our fleet in recent months. Completing these has proven extremely difficult. This is due to COVID-19-related restrictions worldwide and a resurgence of restrictions in certain ports around the world, including Singapore and and Hong Kong that had been more accommodating recently. We continue to work diligently to repatriate more of the dedicated mariners on board our vessels. Furthermore, the global outbreak of COVID-19 resulted in meaningful slowdown in global economic activity levels through much of the first half of the year, leading to a decline in demand for certain raw materials that our vessels transport. Commencing in June, as countries began to ease restrictions, we have seen increased activity levels, together with augmented demand for commodities that we carry, translating into higher freight rates over the last two months. Despite recent market improvements, we continue to focus on preserving the strength of our balance sheet and our sizable liquidity position. As such, we closed on a $25 million evolving credit facility to further supplement our already substantial cash balance. Our strong balance sheet, along with an improving dry bulk market, has enabled Genco to declare our fourth consecutive quarterly dividend, highlighting our efforts to return capital to shareholders. This brings the total dividends declared to 71.5 cents per share since the third quarter of 2019. Going forward, effectively deploying our capital will remain a top priority and something that we will continuously evaluate as the dry bulk market and macro events further evolve. Looking ahead to the third quarter, freight rates have experienced a meaningful uplift as highlighted in our forward pictures today, which are nearly 75% higher than our second quarter time chart or equivalent rates. Our barbell approach to fleet composition consisting of owning both major and minor bulk vessels has once been proven to be a significant component of our business model as capeside freight rates demonstrated their upsides potential, crossing the $30,000 per day threshold at the end of June, while minor bulk earnings have risen steadily to year-to-date highs. Going forward, we believe the outlook is favorable for the dry bulk market for the balance of the year and into 2021, as the order book as a percentage of the fleet is at an all-time low, limiting net fleet growth while global economic activity levels continue to recover, coinciding with a seasonal uplift in cargo volumes. With our leading and sizable dry bulk platform, we believe we're in a position of strength to benefit from these positive fundamentals during a time in which we have further solidified our balance sheet and continue to return capital to shareholders. I will now turn the call over to Apostolos Sifolios, our Chief Financial Officer.

Thank you, John. For the second quarter of 2020, the company recorded a net loss of $18.2 million, or $0.43 basic and diluted loss per share, and generated EBITDA of $2.9 million. Additionally, during the quarter, we utilized our low leverage profile to close on a $25 million revolving credit facility, which is collateralized by the vessels in our $133 million credit facility. This prudent step enabled us to further strengthen our already solid balance sheet, providing us with increased optionality and flexibility to adapt to rapidly changing market conditions. We drew down $24 million under the revolver in June, helping bring our cash balance to $142.9 million, including approximately $15 million of restricted cash as of June 30, 2020. Our debt outstanding gross deferred financing costs is $494.5 million as of the end of the second quarter, which after considering our cash position results in a net debt position of $351.6 million. The continued support of our world-class bank group during these unprecedented times highlights our confidence in our platform, team, approach to capital allocation, and long-term strategy. Subsequent to the second quarter, we delivered two vessels to their respective buyers in July. The sales of the Baltic Wind and the Baltic Breeze, a 2009 and a 2010 built handy-sized vessel, closed on July 7th and July 31st, respectively. Additionally, we expect the sale of the Jenko Bay, a 2010 built handy-sized vessel, to close during the third quarter as well. The gross proceeds for these vessels are $23.6 million. and the sale of these vessels will also result in savings of $1.4 million in dry docking capex for 2020. Our cash flow breakeven rate for the third quarter of this year is estimated to be approximately $11,763 per vessel per day. Included in our breakeven rates is our Q3 2020 DVOE budget figure of $4,900 per vessel per day weighted across our current fleet. We note that during the first half of the year, our daily vessel operating expenses per day were approximately $200 lower than budget due to lower crewing and dry docking related expenses. As we complete more crew rotations in the coming months, we expect our vessel operating expenses to increase as a result, but we are maintaining our full year vessel operating expense budget of $4,590 per vessel per day as set out at the beginning of the year. Furthermore, deviation time associated with positioning our vessels to ports in which we can undertake a crew rotation due to virus travel and the governmental restrictions related to COVID-19 has resulted in days in June of 2020 and the third quarter in which our vessels have been unable to earn revenue and may continue to do so. With regard to dry docking, we anticipate approximately 60 days of estimated off-hire time during the third quarter. We anticipate our second half dry docking schedule to be lighter relative to the first half as we actively manage the timing of our dry dockings with a plan of taking vessels out of service during lower market periods. Additionally, with our active commercial trading strategy currently geared towards spot market employment, together with the absence of any scheduled dry dockings in the balance of 2020 for our cave-sized vessels, we believe that we are in a position to capture the strengthening market fundamentals in the second half of the year as compared to the first. We will have the majority of our Cape-sized vessels with contracts expiring in August and September. Rates achieved for the unfixed portion of the quarter are susceptible to market conditions at the time, which have been volatile to date, and furthermore, we may elect to ballast certain Cape-sized vessels to the Atlantic in an effort to maximize earnings over the longer term. I will now turn the call over to Peter Allen, our dry bulk analyst, to discuss the industry fundamentals. Thank you, Apostolos.

As highlighted in the slides in the market updates section of our earnings presentation, the freight market during April and May was largely impacted by Brazilian iron ore supply constraints, together with various nationwide lockdown measures taken to slow the spread of COVID-19, which reduced industrial activity globally. However, during June, the Baltic Dry Index significantly recovered, led by Cape-sized spot rates, which rose from a year-to-date low of under $2,000 per day on May 14th to over $30,000 per day on June 30th. The sharp rise in Cape-sized rates was primarily a result of several factors, including a 40% increase in Brazilian iron ore exports in June versus May, coincided with a push from Australian iron ore miners to hit their June 30th fiscal year-end shipment targets while capturing iron ore prices of over $100 per ton. Going forward, Brazilian miner Vale reiterated its 2020 iron ore production guidance of 310 to 330 million tons, stating that it will likely fall towards the lower end of this range. This implies an uplift in iron ore production of 44% or 56 million tons in the second half of the year versus the first half. Overall, the iron ore trade continues to be supported by China as imports rose by nearly 10% year over year, led by a strong June which saw imports top 100 million tons for only the fourth time on record. While China's steel production has been resilient, rising by 1.4% through the first half of the year, steel output ex-China is down by 14.3% over that period. However, output in key countries such as India has been increasing off of the April lows. In terms of minor bulks, the grain trade has remained firm, largely due to a robust Brazilian grain season. The strong South American grain trade has helped strengthen Supermax earnings, which now stand at close to year-to-date highs. Demand drivers going forward remain peak Black Sea export season in August, as well as the North American grain season in Q4. While China has purchased large amounts of agricultural products from the U.S. in recent weeks, we note that a strong export season remains dependent on U.S.-China trade relations. Regarding the vessel supply side, Increased vessel demolitions from mid-May, together with increased port congestion, 14-day quarantine periods, and deviations for crew changes have led to a decline in fleet productivity. Lastly, we note that the order book as a percentage of the fleet is at approximately 7%, which marks an all-time low. This also compares to 7% of the fleet that is greater than or equal to 20 years old. We believe these positive supply-side dynamics provide a solid foundation for dry bulk market fundamentals. Looking ahead to 2021, we view the supply and demand trends as favorable as global trade flows further improve off of the trough level seen earlier this year, while Valley's iron ore output is expected to continue to recover towards the company's forward expectations. As such, we anticipate demand growth to outpace supply growth next year. This concludes our presentation, and we would now be happy to take your questions.

If you would like to signal for questions, you can signal by pressing the star key. followed by the digit 1 on your telephone keypad. Keep in mind, if you're using a speakerphone, make sure the mute function has been released to allow the signal to reach the equipment. Once again, star 1 for questions. We'll take our first question from Randy Givens with Jefferies.

Howdy, gentlemen. How's it going? Morning. Morning, morning. All right, so yeah, nice to see you're making progress on the handy-sized sales in this obviously tough environment. So kudos for that. Now, to that point, you sold, I guess, 24 million of assets, and they have about 14 million in debt, so more than 9 million increase in liquidity. You have ample cash on the balance sheet, lowest leverage ratios across dry bulk, trading at a steep discount to NAV. So all that being said, what are your plans for this cash? Assuming day rates stay relatively firm in the coming quarters, is it further debt repayments? share repurchases, secondhand acquisitions. What are your thoughts?

Yeah, so Randy, as you know, we have amortizing debt. So clearly we're going to continue paying our quarterly amort, which is already in place. So there will be debt, continued debt reduction. In terms of capital allocation, which is what I think you're really referring to, I would say our thoughts have not changed since last quarter in that we feel it's important to have the dividend in place. Um, we obviously moved it down, um, because of, of COVID-19. Um, and we'll, we'll obviously review that policy every, every quarter at, you know, with management and at the board level. Um, I think we're still in, in what I said last quarter, we're in a little bit of a, of a wait and see. Yes, we're, we're very positive in that, uh, we've seen third quarter rates strengthened quite significantly and we have a, we have a good forward book for third quarter and we're, you know, we are optimistic for the rest of the year going into next year, but we still do have the backdrop of COVID-19. And I think we all need to appreciate that. So from a capital allocation, I would say it's still a little bit of wait and see, and we want to get a little more further on the other side of COVID-19 and have our thesis proved out that, you know, that rates are going to continue to remain firm.

Sure. All right. Well, yeah, I'm a, I'm just glad you didn't say new buildings, especially wind turbine installation, so good to hear that. Now, turning to your case sizes with scrubbers, how have those been performing? Any plans to hedge some of your fuel needs through some spreads or some financial derivatives?

No, I don't see us hedging anything. Keep in mind, we had all of the scrubbers in place before the end of last year, so we were able to capture... a pretty significant part of the high premium that existed from really early November through February. So we've actually paid off, if you look at the fuel differential from when they were installed, we paid off about 40% of our capital cost on that. And with the spreads around, call it $70, that's still a 25% to 30% cash on cash. So while the spreads are certainly lower than what we would have anticipated, and I think COVID-19 has a lot to do with that and the issues surrounding that, I do think the spread will move back up, and I think it will get above 100. So we don't see any reason to certainly hedge at these levels and keeping in mind that we've paid off a decent chunk of the original CapEx.

Sure. We have a similar view on the $100 there. All right, last quick question. Looking at the market, clearly iron ore trade is strong, especially with Dolly ramping production, ramping exports. You mentioned that in your prepared remarks. So I guess around that, are you positioning your fleet to have more exposure in the Atlantic Basin? And how do you compare the strong iron ore trade with the more tempered outlook for coal?

So let's talk about fleet positioning for a second. So Again, as you know, the second half of last year, because we were doing scrubber installations, we were pretty much forced to trade almost exclusively in the Pacific. This year, happy to be able to go back to our normal strategy of trading both in the Atlantic Basin as well as the Pacific Basin on the Cape. So that has been ongoing. I would say it's... You know, maybe it's a 50-50, 60-40 split, Australia and Brazil. You know, don't lose sight of the fact that, yeah, Brazil is definitely, we think, going to be strong and Valley is going to continue to ramp up. But that also does affect the Australian market. So the Australian market has been firm as well. And so, you know, you want to have a balance between some shorter-term voyages, which you can do in the Pacific, but also those long-haul voyages that that lock away decent rates for longer periods of time. So, again, it's back to our original strategy that we laid out, and I would say it's split between the two basins. Perfect. And then quickly on coal. Yeah, so on the coal side, I mean, look, China is, as we've always talked about, is the black box. in terms of putting quotas in place and then lifting quotas. From what I understand, there has been a positive move where they're looking at these quotas more on a monthly basis rather than a yearly basis. So it actually should smooth things out. But I do still believe that the Chinese are very interested in high-quality coal, which really leans towards imports. So while I do see some volatility, I don't see any, you know, medium-term issue with China importing coal, and they're certainly importing a lot of met coal as well. What I would focus on, though, is India. India has been slower to come back on the coal import side. Their inventory numbers are on the high side. Their production is still, you know, not efficient and is lagging. But we certainly haven't seen a true recovery yet in thermal coal imports going into India. We have seen pickup of MEC coal. In fact, there's even been some shipments, again, of MEC coal from the U.S. to India, which is a long-haul trade and certainly what we like to see. So I would – you know, I'd be watching India to see when they really start to – when their inventory levels come down on the thermal coal side and they start importing in a meaningful way again. Now, having said that, again, Vietnam, Philippines, Turkey, Pakistan are all growing on the thermal coal import side. Vietnam in particular, you know, the growth numbers are actually getting to the point where they're a meaningful player in the thermal coal market. So, you know, that area seems to be positive.

Cool. Well, hey, that's it for me. Thanks again, and looking forward to the much-improved 3Q results. Thank you, Randy.

And again, to ask a question, please press star 1. Again, that is star 1 to ask a question. We'll take our next question from Omar Nocta with Clarkson's Plateau Securities.

Hi, thank you. Hey, guys. Just a couple follow-ups.

Morning. Hi, guys. I just wanted to follow up to some of Randy's topics and questions, and maybe the first one on capital allocation. John, you guys have about $80 million of debt due over the next year. How do you think about those payments? Clearly, you have a substantial cash position. You've got a lot of cash. You've got the proceeds coming from the Handy fleet, and the third quarter, as Randy left, it's going to be a very strong influx of earnings. Do you see yourselves... needing to discuss deferrals with your lenders on those amortization payments, or are you comfortable with how things are based on the cash position and the market?

I don't see any need to discuss deferrals right now. I think we're in a very fortunate position from a liquidity standpoint. while we certainly did not predict the second quarter volatility due to COVID-19, you know, several years ago, we put into place a strategy of making sure that we had a strong balance sheet and low leverage and plenty of cash. That's obviously paid off. I think that if you, yeah, I mean, just to be clear, 100% pointed. I see no reason to even think about talking to banks about deferrals right now. I know there may be some other companies that are doing that, but I definitely don't see a need, and I think it's advantageous to continue to reduce debt and bring the leverage down.

That's very pointed, and I appreciate that. It's clearly a topic of discussion last earnings season, this earnings season, where a lot of companies are... discussing deferrals and whatnot, but, uh, you know, you guys do have a lot of cash and relatively low leverage, so you're definitely a different position. Um, I did want to maybe just ask also the, um, you know, maybe on the crew changes, separate topic, the you've done 70% or so of the, of your fleet, uh, since the pandemic began, you know, I know that costs are going to be going up due to the logistical complexities of getting, you know, things moving. How do you think that plays out? Clearly, there's a lot of uncertainties with COVID-19 and a vaccine and whatnot, but how long do you think these higher costs will continue? Is this sort of something for basically the second half of the year? Do you see that slipping into next year? And then also, have you seen things thaw a bit and relax where you're able to navigate these crude changes a bit more than you were earlier on? Okay.

Well, Listen, on the cost side, Omar, the cost side, I think, is tough to predict for next year. Just like everyone else, I would say the availability of a vaccine and the effectiveness of PPE and lockdowns, that's going to really determine how things are next year in terms of what jurisdictions are open. I mean, keeping in mind, most crew changes are done during cargo operations. There is no deviation typically. There's no having to book extraordinary flights. That's unfortunately not the world we live in right now where most crew changes are not done right now during cargo operations. They're having to be done in an extraordinary fashion. There's some deviation that occurs because of that. I say some. We're talking three to four days, so we're not talking about large blocks of time here, but but it is important to watch. And flights are quite a bit more expensive. That's where the real expense comes in from an operating expense standpoint. For Genco, if you look at, you know, we gave guidance for the third quarter to have higher operating expenses than our yearly budget, but that's on the back of not really doing any crew changes many in the first half. We've done a bunch in the third quarter, in sort of June and July, and that's how we've gotten up to 70% of the fleet, which is, I've got to tell you, it was a Herculean effort to get to those numbers, and the team at Genco had to be very creative and spend a lot of late nights trying to make sure we orchestrate these crew changes in a very safe fashion. So it's not just a matter of getting... crew members on and off, it's doing it safely and making sure you're not introducing COVID-19 to the vessel with onboarding crew members. So we have quarantines in effect. We have testing in effect. So going to your, and let me just to be clear on our OPEX, while we expect some higher expenses in the third quarter, we do expect for the year to still be within the budget number that we put out at the beginning of the year. Going to your second part of your question, I actually think things are getting more difficult now. There was a good window in June and July, particularly with Singapore. As you know, we did the first full crew change in Singapore since COVID-19. And we did quite a few in Singapore. We've done some in India. We've done some in Sri Lanka, South Korea. Hong Kong. But unfortunately, I think the world is closing up again for crew changes, particularly in Hong Kong, which is now shut down. Singapore is effectively shut down except for emergency situations. And we're having again to assess where we're going to do things. But I can't stress it enough. We were fortunate that we were on top of this and we really pushed out and we're proactive in doing a lot of crew changes during June and July so that this will not be a factor for us right now. Got it. Thanks, John. Long answer. I know it was a long answer, a lot of information, but from an operations standpoint, you know, the team is just working almost nonstop on this issue.

Yeah, clearly, well done on that, and I guess it's definitely a situation that requires consistent – we'll have to keep our eyes on it to see how things progress, but hopefully it starts to ease from here. Maybe just one more, John, as a follow-up. You just mentioned the technical side of the business has been very active and focusing on this nights and weekends. On the commercial side, the charter in, charter out business that you guys had built up, it's obviously slowed a bit this year. How do you think about that business, especially now with the market picking up? Do you see picking up that freight business a bit or keeping it where it's been at the past couple of quarters?

No, I see it picking up. And quite frankly, we did a lot of forward fixtures at the very end of last year and into first quarter on the minor bolts. So If you – you know, we haven't published these numbers, but if you look at the number of cargos and arbitrage opportunities that we've taken advantage of, we're well ahead of even where we were last year. So while second quarter, you know, you wouldn't be booking forward cargos in a really down market, but as we get into – a little more into the third quarter and the fourth quarter, I definitely see us, you know, replicating what we've done in years past and, and moving on things. Um, the other interesting thing is, you know, our number of fixtures are continue to move up the, and the, and we're doing, I bet we're close to 80, 85% of our fixtures are direct voyage fixtures, um, with, with customers. So that business is, uh, is alive and well. Um, and, um, We've even looked at some COA business as well, particularly on the backhaul trades, to lock those up so that we can take advantage of the very strong fronthaul trades. So everything is going well. And on the capes, it's been very fortunate that we've been able to take advantage of the market. We definitely had a lot of ships that were open and available to fix as rates moved up in the latter part of June.

Great. Okay. Thanks, John. Thanks for that call. Very helpful. I'll leave it there. Okay. Thanks so much.

This concludes the Junko Shipping and Trading Limited conference call. Thank you and have a nice day.

Thank you.