Genco Shipping & Trading Ltd

Good morning, ladies and gentlemen, and welcome to the JNCO Shipping and Trading Limited First Quarter 2021 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 JNCO's website at www.jncoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's website, www.jinkoshipping.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 at any time during the next two weeks by dialing 888-203-1112 or 719- 4570820 and entering the passcode 4187387. At this time, I will turn the conference over to the company. Please go ahead, gentlemen. Good morning.

Before we begin our presentation, I note that in this conference call, we'll 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 management's current expectations and observations. For discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday, 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, the year ended December 31, 2020, and the company's reports on Form 10-Q and Form 8-K, exceptionally filed with the SEC. At this time, I would like to introduce John Bobensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

John Bobensmith, Chief Executive Officer of Genco Shipping and Trading Limited. Good morning, everyone. Welcome to Genco's first quarter 2021 conference call. I will begin today's call by reviewing our year-to-date highlights, providing an update on our new comprehensive value strategy, financial results for the first quarter, and the industry's current fundamentals before opening the call up for questions. For additional information, please also refer to our earnings presentation posted on our website. The dry bulk market has experienced its best start to a year in over a decade, with capeside spot rates currently over $40,000 per day and supermaxes at over $20,000 per day. In addition to the current firm market conditions, we view the outlook favorably. The order book as a percentage of the fleet is at a historical low, limiting net fleet growth, while unprecedented stimulus, as well as the Brazilian iron ore export recovery, have combined to create improving supply and demand dynamics. Our positive market outlook, together with our robust balance sheet, has positioned Genco well to implement our new comprehensive value strategy. on low financial leverage and three key tenets attractive quarterly dividends throughout the shipping cycles based on cash flow after debt service less a reserve further debt reduction and growth of our asset base we believe that this strategy will enable the company to create significant shareholder value and be a key differentiator for genco over the long term As for our new dividend framework, we intend to pay a quarterly dividend based on operating cash flow, less debt repayments, capital expenditures for dry docking, and a reserve. The quarterly reserve is targeted to be based on future quarterly debt repayments and interest expense. However, the uses of the reserve remain in GENCO's option and include vessel acquisition, debt repayments, and general corporate purposes. Maintaining a quarterly reserve, as well as optionality for the uses of the reserve, are important elements of the corporate strategy as it enables Genco to be flexible, depending on market conditions, and provide a more tailored approach to Genco's overall business model. We also believe this approach provides more transparency to the market to assist in forecasting the dividend, along with our breakeven and time charter equivalent guidance that we already provide on a quarterly basis. We are targeting Q4 2021 results for the anticipated first dividend under the new corporate strategy, which would be payable in Q1 2022. During the first quarter of 2021, we began to execute this new corporate strategy as we reduced our debt balance by $48 million. Furthermore, in April, we agreed to purchase a modern fuel-efficient Ultramax vessel, marking the fourth Ultramax we have agreed to acquire since December of last year. We've also taken advantage of the strong market to book time charter coverage as part of our portfolio approach to revenue generation. We have fixed the Genco Liberty at 2016 built Cape size vessel for 10 to 13 months at $31,000 per day, while also booking a Supermax and Ultramax vessel for $23,000 and $25,000 per day, respectively for five to seven months. We are pleased to lock in these attractive rates while also maintaining significant operating leverage in a strengthening market. In addition to capitalizing on the firm market, we also intend to continue to opportunistically purchase assets on a low-levered basis as we further position the company to increase its dividends. These are key initial steps in executing our new strategy, and we look forward to making further progress as we advance towards our anticipated first dividend as part of this new approach. In the interim, for the first quarter of 2021, we have increased our quarterly dividend to $0.05 per share from $0.02 per share paid during each of the previous four quarters. In light of Genco's strong financial position, the current rate environment, as well as our go-forward market expectations. In executing our strategy over the balance of the year, we plan to draw on our robust balance sheet as well as cash flow generation in this strong market environment to pay down debt through regularly scheduled debt amortization and prepayments while opportunistically growing our fleet on a low leverage basis. Furthermore, we plan to refinance our credit facilities to increase flexibility, improve key terms, and lower cash flow breakeven rates. By the end of this year, we are targeting a net loan-to-value ratio of 20%, which we are currently on track towards achieving. Based on current fixtures, as well as the forward curve, we estimate a net loan-to-value position of approximately 11% based on the current market values and a fleet of 40 vessels. As detailed in our presentation, we highlight cash flow sensitivity regarding various scenarios for next year. For a frame of reference, current one-year time charter rates, as quoted by Clarkson, stand at approximately $30,000 and $19,000 per day for Cape size and supermax vessels, respectively. Based on the illustrative time charter equivalent rates shown and the potential cash flow generated, Genco expects to be well positioned from a net loan-to-value perspective resulting in potentially meaningful quarterly dividends in 2022. Furthermore, over the longer term, we plan to continue to reduce our debt balance with a goal of zero net debt. Importantly, Genco's barbell approach to fleet composition closely integrates with this low financial leverage model, given the large upside and operating leverage from the ownership of the Cape-sized vessels, together with the more stable cash flows from the minor bulk fleets. While we hedged a portion of our fleet wide available days in Q1 in anticipation of a seasonally softer first quarter, the market did experience a counter seasonal rise in freight rates. Going forward, we plan to maintain our opportunistic spot oriented chartering approach along with select longer term fixtures for our Cape size fleet. As such, we have started to see the impact of our fleet's operating leverage in the second quarter as estimated by our daily TCE based on current fixtures for the quarter of over $20,000 per day, which is nearly 70% greater than our Q1 daily TCE and would mark the company's highest daily TCE for a quarter since 2010. Importantly, we will have seven of our Cape size vessels open for fixing in the coming weeks to take advantage of the meaningful increase in rates we have recently seen. With respect to the market liquidity of our shares, since mid-December, ownership of large shareholders has been reduced from 58% down to 20% currently. While we believe these stock sales have contributed to Genco's trailing stock performance compared to a number of our peers in the short term, we view this as a positive in the long term due to increased overall liquidity and free flows. Specifically, our 30-day average trading volume has increased substantially to approximately 800,000 shares per day from approximately 200,000 shares per day prior to the recent large shareholder sales. At this point, I will turn the call over to Apostolos Sifolios, our Chief Financial Officer.

Apostolos Sifolios Thank you, John. For the first quarter of 2021, the company recorded net income of $2 million or $0.05 basic and diluted earnings per share. Excluding a non-cash loss and sale of vessels of $700,000, adjusted net income for the quarter was $2.7 million or basic and diluted adjusted earnings per share of $0.06. A 25% year-over-year increase in our fleet YETCE to $12,197 per day was a primary driver resulting in increased adjusted EBITDA of $20.6 million for the quarter. During the quarter, we continued to further strengthen our balance sheet through operating cash flows from fair market conditions together with opportunistic vessel sales, bringing our cash position to $164 million, including $40.5 million of restricted cash related to vessel sales as of March 31, 2021. We also reduced our debt balance by 11% to a combination of scheduled debt repayments, as well as a prepayment of our evolving credit facility. As a result, our debt-advancing growth of deferred financing costs is $401 million as of the end of the first quarter, which, after considering our cash position, results in net debt of $237 million. Furthermore, as of April 30th, we have reduced our net debt position further to approximately $220 million, or 27% net LTV, as we have built our cash position to $181 million. The low net debt balance and strong market fundamentals provide a solid foundation for us to execute on our new comprehensive value strategy. We also declared our seventh consecutive quarterly dividend, having increased the payout to $0.05 per share. This brings total dividends declared to over $0.80 per share since the third quarter of 2019. As part of our fleet renewal program, during the first quarter, we completed our exit from the hand-to-side sector through the completion of the vessel swap transaction, in which we also acquired three modern, fuel-efficient Ultramax vessels. Subsequent to the first quarter, we also delivered the Baltic Leopard, a 2009-built 53,000-deadweight-ton Supermax vessel, to our buyers in April. The Janko Lorraine is also expected to deliver to her buyers in June, concluding the divested portion of our fleet renewal program. Our net income break even for the second quarter of this year is estimated to be approximately $11,900 per vessel per day. With regard to dry docking, we anticipate two of our Cape size vessels to go into dry docking during the second quarter for approximately 45 days of estimated off-hire during this period. In relation to our Cape-sized vessels, we also continue to position our fleet better to better capture potential market improvements. We expect to have seven Cape-sized vessels available to be fixed in the coming weeks, of which we expect to balance two of them to the Atlantic Basin. I will now turn the call over to Peter Allen, our SVP of Strategy, to discuss the industry fundamentals.

Thank you, Postolos. During the first quarter of this year, freight rates experienced a counter-seasonal rally led by minor bulk vessels. Spot Supermax earnings exceeded $20,000 per day in March, a level not seen since 2010. Subsequently, during the second quarter, Supermax earnings have remained firmed above the $20,000 threshold, while Cape size earnings have increased meaningfully to over $40,000 per day. Capesize rates continue to be led by iron ore demand from China. After a 10% year-over-year increase in iron ore imports in 2020 to record levels, Q1 2021 imports are up by 8% year-over-year. Furthermore, steel production in China is up by 16% year-over-year in Q1, among all-time highs seen in 2020. While China's demand remains strong, it is also anticipated that steel output and iron ore demand will recover in the rest of the world, as the World Steel Association forecasts a 9% year-over-year increase in ex-China steel demand in 2021. Together with this strong demand picture, iron ore prices have exceeded $190 per ton, greatly incentivizing iron ore miners to ship as much of the commodity as possible. Specifically, Brazilian iron ore exports, which came into the air on much stronger footing than in 2020, given Valley's recovering operations in a more moderate rainy season, have risen by 17% year-over-year in Q1. The continued recovery and growth of Brazilian iron ore exports is expected as Valley is targeting run rates of 350 million tons per annum and 400 million tons per annum by the end of 2021 and 2022, respectively, as compared to 320 million tons seen at the end of last year. On the minor bulks, supermax rates have been driven by strong grain demand from China, led by a recovery from the swine fever outbreak in 2018 and 2019, as well as continued inventory building and the phase one trade deal. Additionally, we continue to see increased shipments of minor bulk commodities, closely linked to global GDP growth and economic activity. Regarding the vessel supply side, net fleet growth in Q1 2021 was an annualized 3.6%. However, with deliveries front-loaded, we anticipate this level will normalize over the course of the year, as 2021 net fleet growth is forecast to be approximately 2%. The order book as a percentage of the fleet is now below 6%, which compares to 6% of the fleet that is greater than or equal to 20 years old. Although we have now seen a firm drive off market since June of last year, new building vessel ordering in the sector has been relatively low over that period. Specifically, we've only seen approximately 200 new building contracts since June of last year, despite a $20,000 CAPE size market and $13,000 Supermax market on average during that time. As a point of reference, similar rates were seen from the second half of 2013 to Q1 2014. The ordering back then was six times higher, exceeding 1,100 new building contracts. We believe these positive supply-side dynamics provide a solid foundation for drivable market fundamentals. to lead to a low leverage, a low threshold for demand to exceed to improve fleet-wide utilization and, in turn, freight rates. For this year and next, we view the supply and demand trends as favorable as global trade flows improve further while the Brazilian iron ore trade continues its recovery and growth trajectory. This concludes our presentation, and we would now be happy to take your questions.

Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask a question, you may do so by pressing star 1 now. If you're using a speakerphone, please make sure that your mute function is disabled to allow your signal to reach our equipment. Again, if you would like to ask a question, please press star 1 now. And our first question comes from Randy Gibbons with Jefferies.

Howdy, gentlemen. How's it going? Morning, Randy. Good. I think it's going well. So the rates earned for the remainder of the first quarter and obviously the second quarter, quarter-to-date rates, they're pretty good, but not great, at least relative to this epic market we're seeing. So I'm assuming that was due to some hedging, maybe some repositioning of the fleet. Was that the case? And then I guess looking ahead, more importantly, any further hedging or repositioning, or will you be able to fully capture this strong market we're currently seeing?

So, first of all, the first quarter and the early part of the second quarter, we definitely did hedging in both the CAPE size as well as the minor bulks. We are on the back end of most of that. I think an overall comment, and then I'll come back to some specifics, an overall comment is in a rapidly rising market, whether it's CAPEs or the ultra-supras, it's very difficult to keep up with it because you're usually fixing anywhere from 15 to 30 days ahead of time. So there's always a lag effect on that. Having said that, you know, as we mentioned, we have seven ships, so call it 40% of our Cape Side suite that's coming open during the month of May. So we should be able to capture the firm rates that we're currently seeing. Just to give you a sense, though, We've fixed three ships on a spot basis over the last week or so. We did one at $49,000 a day for an Australian round, one at $44,000 a day, which was a NOPAC round, Western Canada to China. And then we also did a $44,000 a day trip from South Africa to China. So We are capturing this. And, yeah, first quarter we hedged, and, you know, we were pleasantly surprised with the rapid spike in rates. Sure, that's fair.

Good deal. And then, you know, I read through some of your charters once the release first came out last night, saw some good numbers. Then I realized the $23,000 and $25,000 a day, were not for capes, but for a Supra and an Ultramax, right? So very solid on those. With that, will you kind of look to lock in more time charters in the coming months as rates remain high or play it out in the spot market?

A little bit of both. I think you'll see some more time charters in the Cape side fleet. We're certainly not going to put the entire fleet away, but we do think it's a prudent portfolio approach, particularly in the Capes, because of the volatility to take advantage of the high market when you can. So, yeah, I expect a couple more longer-term fixtures in the Cape side sector. The minor bulks, those five to seven months, that was very opportunistic. They're obviously good rates. But, you know, we've got a well-built-up trading platform on the minor bulk side. So, in general, we think we can do better than the overall indices and the overall market. But those were great rates, as you pointed out, so we wanted to take advantage of it.

Got it. And then I'm going to sneak in a quick one here on the surprise dividend increase. How was that kind of five cents determined? And should we expect kind of gradual increases as you work towards this new policy or stagnant five cents until the end of the year and the new policy kicks in?

Look, great question. Obviously, we're determining this every quarter with the board, so it's hard for me to make any promises going forward. Having said that, the five cents, I think, was done because of our confidence in the market going forward, as well as being ahead of plan in terms of hitting our targets. And so I can't directly answer your question, but as you know, we are moving towards an approach that returns a substantial portion of cash to shareholders. So we'll see how the market turns out. But like I said, at this point, we're ahead of plan, Randy.

That's fair. A little appetizer before the evening entree. Thanks so much.

Thanks, Randy. Thank you. Our next question comes from Omar Nakda with Clarkson's Plateau Securities.

Thanks. Hi, John. Good morning. Yeah, good to hear. Good morning. Good to hear the, you know, obviously the time charters from yesterday that you had disclosed and then, you know, some of the 40,000 a day plus rate you just discussed. Clearly some very, very strong incoming cash flow. you know, it looks like you guys are well underway on your new capital allocation strategy. And, you know, one thing is you bought an Ultramax recently, and it sounds like you'll be quite a bit more acquisitive here in the coming months. You know, maybe just first question, and I apologize if you addressed this already, but the Ultramax that you just bought or are taking delivery of soon, was that funded 100% with cash? And The next question is, for whatever you buy here in the interim until we get to the new strategy, will those all be funded with cash as well?

Right. So the Ultramax that we just bought will deliver most likely in July, early August. We will use a combination, and I may have a post-lose jump in here, but we will use a combination of cash and low-levered debt, if you will. We have, as you know, monies on our balance sheet that are escrowed for, particularly for vessel purchases, as well as the ability to borrow under our current credit facilities to fund those. We have already... as we mapped out this uh this new strategy we had already assumed internally some some vessel acquisitions so um you know we've already sort of planned for this uh i know that logical questions well how many are you going to do that that we'll have to see because that's very market determinant but we are still looking at at transactions uh i still believe this is a very attractive time to acquire in terms of the fact that values have not caught up with freight rates. They're still well below historical averages. So, yeah, I do intend to continue to be acquisitive, and we'll be using cash and available debt off the balance sheet.

Okay, got it, John. And I guess you've been a bit more active on the Ultramaxes recently. Are you leading that way here looking ahead, or are you also looking at capes?

Listen, we've been very upfront. The barbell approach strategy that we have in place, it depends on what comes our way. But we do want to keep relatively balanced capes.

um as we have in the past between the capes and and the ultras so i do expect us to look at both sectors got it and then maybe one for for apostolos just regarding the uh you know the planned refinance of the existing debt just wanted to ask if you could share if you started that process officially and uh and sort of what what does the lender appetite look like for a refinance

Yeah, Omar. Yeah, we have started the process. We have ongoing discussion with lenders, and I'd say that, generally speaking, the lender update has been pretty strong. As you may realize, this is a good structure for banks coming in with a particularly low LTV and a very strong balance sheet for the company.

Okay, very good. So more to come on that front then.

Yeah, more to come. I'll just add to that. I mean, one of the key factors that Apostolos is working on is because of the low net LTV driving down the amortization as low as possible to get that break-even rate very low. And obviously, at some point, we're targeting, and at some point, we want to get to really a zero net LTV, if you will. to get down into those low $7,000 a day cash flow break evens.

Yeah, that would be very interesting. Cool. Well, thanks, John, and thanks, Apostle.

Thanks, Omar. Thank you. Again, if you'd like to ask a question, press star 1 at any time. Our next question comes from Liam Burke with B Reilly. Thank you. Good morning, John. Good morning, Apostle.

Good morning, Liam. Good morning, Liam. John, on your fixtures on the time chart, is it running between, we'll say, six months to a year? Is there any thought to extend further, or are you just going to take the rates as they come and make your decision accordingly?

We'll take the rates as they come and make our decision accordingly. I will tell you, when we fixed the Cape Sides vessel, we took a very hard look at the one-year market as well as the two-year market. And while there is liquidity coming more and more into that two-year market, we just did not feel we were getting paid enough for taking the discount. The two-year, just to give an example, you know, the Liberty was done at $31,000 a day. At that point in time, the two-year market was in the low 20s. And we have higher expectations for 2022. than even this year. So we felt just from a technical and a financial standpoint, it was better to do the one-year rate. I do think, you know, as rates continue to firm, you'll see more two-year deals being done. But again, it was a pure math exercise, and the one-year rate was better for us at this point.

Okay. Now, when you're looking into 2022 and you're feeling, you know, you feel comfortable as to where the rates are going, is that just a function of the tighter supply or are you comfortable with the macro environment will continue to unfold well in your favor?

Yeah, it's both. I, you know, the supply is pretty well laid out at this point, at least through the end of 2023. You know, and I'll point out what Peter Allen was saying earlier, 2023 and onwards is only 0.6% of fleet growth. 0.6% is to put a fine point on it. So we're talking about very low fleet growth over the next sort of two years at a minimal. So you take that against the backdrop of demand growth. You just don't need a lot of demand growth to have rates continue to be firm and even move higher. So I would say it's a function of both the very low supply but continued demand growth going into next year.

Great.

Thank you, John. I should also mention, I mean, a lot of this, at least on the CAPES, has to do with the continued demand recovery and ramp up from valet and their production guidance, not just this year, but ramping up to a run rate of 400 million tons by the end of 2022 on the iron ore front.

Great. Thanks, John.

Thanks, Liam. Thank you. Our next question comes from Poe Fratt with Noble Capital Markets.

Hey, John. Good morning, Poe. Can I just go through the, you know, just to go straight to two-year, and I just want to make sure we're sort of on the same page. You say it's not worth it to take the two-year at 20 when you get the one-year at 31, right? I mean, if you take a two-year at 20, that means you're taking the second year for essentially 10,000 a day. And, you know, that just doesn't, I just want to make sure we're sort of thinking about it in the same terms.

Well, if you're taking two years at 20, you're losing $11,000 a day for the first year, right? So $11,000 a day for 12 months, and then with our belief that next year is going to be higher than 20, it's pretty straightforward.

Yeah, I was looking at it the other way. You're making $30,000 for the first year, and then all you have to do to be whole is make $10,000 the second year.

Yeah, no, that's the other way. That's another way to look at it. And I can just tell you, you know, when we – I don't want to get too specific here because I think it will bore people. But when you start looking at what the vessel should be earning in terms of load factors, we just were not getting paid for a two-year deal. We were certainly getting paid for the one-year deal.

And then on your supers, do you have a like number for a two-year? You said $19,000 for one year. What's the two-year looking like that you think you could have gotten a deal done if you had looked into that?

I haven't really seen two-year supermax deals done yet. There's been a lot of focus on the five to seven in the market, and then there have been 12-month deals done. I haven't really seen much liquidity in the two-year market yet.

Great. And then, you know, it's pretty bad when you talk about rates and it's boring, but can you just talk about, you know, what could potentially go wrong, not to rain on the parade, but what could potentially go wrong? Rates historically have been extremely volatile. And what do you think are the things that you're worried about over the next six to 12 months that might push rates down from current levels?

Look, I don't think we're out of the woods yet from the global pandemic. And while it's While it's easy for us in the U.S. to fight that because of the high vaccination rates and everything opening up, the reality is Europe is still, with the exception of the U.K., is effectively closed. We're seeing major issues in India, unfortunately, with a COVID outbreak. So that risk element, I think, is still there. And quite frankly... you know, Genco just because of its low leverage profile, if we do, and I, and I say it's a big if, um, but if we do have a, another short-term demand shock, we can go right through that. And by the way, still execute on our, on our, uh, on our new dividend strategy. Um, you know, India is, um, India is, as I said, it's a very unfortunate situation. Um, I guess the good news from a market standpoint is that India is not locking down like they did in the past. And I do think they're going to see somewhat of a slowdown in their steel industry. But the reality is dry bulk shipping is really more focused on thermal coal going into India. And their thermal coal stockpiles are down to 12 days coming into monsoon season. So I think there's actually a healthy story there to continue importing on the thermal coal side.

Great. Thanks for the color, John.

Thanks, Paul. Ladies and gentlemen, this concludes the JNCO Shipping and Trading Limited Conference Call. Thank you for participating and have a nice day.