Genco Shipping & Trading Ltd

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited First Quarter 2022 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 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.gencoshipping.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 719-457-0820 and entering the passcode 1292605. At this time, I'll turn the comments over to the company. Please go ahead.

Good morning. Before we begin our presentation, I note that in this conference call, we have been 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 and connection with the 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 31st, 2021, and the company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Good morning, everyone. Welcome to Genco's first quarter 2022 conference call. We'll begin today's call by reviewing our Q1 2022 and year-to-date highlights, providing an update on our implemented comprehensive value strategy and answer 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 website. During the first quarter of 2022, GENCO achieved its best results for the January to March period in over a decade as we continued to successfully execute our value strategy, which is focused on paying meaningful and sustainable dividends throughout the cycles, deleveraging, and growth for the benefit of shareholders. Most notably, we declared our first full dividend payout under our capital allocation policy. The 79 cents per share dividend for Q1 2022 represents an 18% increase as compared to the previous quarter and a 14% yield based on yesterday's closing share price. This marks our 11th consecutive quarterly payout, reflecting cumulative dividends of $2.51 and a half cents per share. On an aggregate basis since the start of 2021, we have paid down $252 million, or 56% of our debt, leading to a low net loan-to-value of only 12%. Importantly, we are now in a position in which the current scrap value of our fleet is nearly 2.5 times our debt outstanding. This has resulted in lower overall cash flow breakeven rates, which we believe is essential for paying dividends across diverse rate environments, and is a key differentiator of Genco versus its peers. In January, we completed the acquisition of the two remaining 2022-built Ultramax vessels we agreed to acquire in early last year. These acquisitions have enabled our core Ultramax fleet to more than double in size since Q4 2020. These measures, together with those executed in 2021, have led GENCO to create the most compelling risk-reward model in the dry bulk public market through a combination of low financial leverage, high operating leverage, and industry-low cash flow breakeven rates. Continuing to pay down debt during a time that we do not have any mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to zero. We continue to be focused on rewarding shareholders through compelling dividends while continuing to delever supporting sustainable dividends over the long term. We view this deleveraging as prudent to further improve our financial standing over time to ensure Genco is in an even stronger position to take advantage of attractive growth opportunities as markets develop. From an earnings perspective, we generated a strong time charter equivalent rate during the quarter of $24,093 per day, an increase of 98% from the same period of 2021, as we benefited from our past success fixing forward cargoes and period time charters ahead of a seasonally softer first quarter rate environment. Looking ahead to the second quarter of 2022, we expect a sequential rise in time charter equivalent rates as we have approximately 68% of our available days booked at over $27,500 per day, highlighting our significant operating leverage to improving market conditions, our sizable fleet, our best in class commercial platform, and barbell approach to fleet composition. In terms of current market trends, Russia's war in Ukraine has led to higher commodity prices, a redirection of cargo flows, particularly those for grains and energy, resulting in growth in ton-mile demand. Higher fuel prices have also led to a slowdown in the sailing speeds of the dry bulk fleet. Despite general uncertainty regarding the longer-term impact of the war, particularly in respect to the global grain trade, we continue to have a positive outlook for dry bulk rates due to the low order book that we believe will enable demand to continue to exceed supply. Notably, low go-forward net supply growth, increased port congestion, and fleet inefficiencies, together with upcoming environmental regulations, have resulted in as good of a supply-side picture as we have seen in decades. As a consequence, demand growth does not have a high threshold to exceed in order to outpace supply growth to further tighten market fundamentals. At this point, I will now turn the call over to Apostolos Sifolios, our Chief Financial Officer.

Thank you, John. During the first quarter, we maintained a commitment to reducing leverage and break even levels during a time when we have demonstrated the operating leverage of the fleet and ability to return significant capital to shareholders. For the first quarter of 2022, the company recorded net income of $41.7 million, or $0.99 basic and $0.97 diluted earnings per share. Our first quarter EBITDA was $58 million as compared to $20 million for the same period last year. During the quarter, we continued to further strengthen our balance sheet through increasing operating cash flows by taking advantage of fair market conditions and time charter coverage. Our cash position as of March 31, 2022 was $49.1 million, following $48.75 million of debt repayments during the quarter, as well as $40.8 million paid to acquire the two vessels in January. Our revolver availability as of March 31 is $222 million, resulting in a total liquidity position of $271 million. In Q1 2022, we voluntarily paid down debt totaling $48.75 million, which consisted of $8.75 million of our run rate, quarterly voluntary debt repayment, together with an additional prepayment of the revolver of $40 million, which was part of a working capital management exercise to save interest expense without impacting the dividend calculation. These funds can be withdrawn again as needed in accordance with the terms of the revolver. Importantly, we did not have any mandatory debt amortization payments until 2026 when the facility matures. Even with this favorable mandatory amortization schedule, we do plan to continue to voluntarily delever with a medium-term objective of reducing our net debt to zero. Following our substantial deleveraging, our debt outstanding is $197.25 million as of the end of the first quarter, which results in net debt of $148 million and a net loan-to-value of 12% as of May 3rd. Looking ahead, we plan to voluntarily pay down $8.75 million of debt during the second quarter, representing an annualized run rate of $35 million of voluntary debt repayments over a year. As John mentioned, our board of directors declared a dividend of 79 cents per share for the first quarter of 2022, in line with our value strategy calculation. Walking down our dividend formula, this consisted of operating cash flow of $55.7 million, less debt repayments of $8.75 million, dry docking balanced water treatment system and energy saving device costs of $2.8 million, and the previously announced reserve of $10.75 million. Going forward, we will continue to communicate our TCE estimates for the fixed portion of our fleet's available days, estimates on the expense side as part of our cash flow breakeven disclosure, and the anticipated level of the reserve. On slide nine, we have also provided an illustration of the expense estimates for the second quarter of 2022. In relation to dry dock expenses, we strategically plan the dry docking of our Cape size vessels during a seasonally softer freight rate environment within the year and anticipate completing the majority of our dry docking related topics for the year during the current quarter. This will enable us to maximize Cape size utilization and earnings in the second half of the year which has historically outperformed as higher iron ore volumes are shipped out of both Brazil and Australia. In total, the expense and the reserve side of the equation is estimated to be $76.8 million for Q2 2022. The reserve is expected to be $10.75 million, which is based on the $8.75 million of voluntary debt repayments expected to be made in the second quarter, as well as estimated cash interest expense. I will now turn the call over to Peter Allen, our SVP of Strategy, to discuss the industry fundamentals.

Thank you, Apostolos. During the first quarter of 2022, freight rates initially came under pressure due to seasonal factors, but remained firm on a relative basis. These factors included weather-related cargo disruptions, timing of new building deliveries, as well as the Lunar New Year in China and the Beijing Olympics. Furthermore, in January, Indonesia temporarily banned coal exports to ensure domestic supply. As several of these factors subside, cave size and supermax rates have increased off of their earlier year lows and currently stand at over $22,000 and $30,000 respectively. As we look ahead, we anticipate an uplift in seaborne iron ore cargo availability as full year guidance from the major iron ore miners points to a meaningful rise in shipments in Q2 to Q4. We expect this rise in shipments to coincide with China's economic policies moving towards a more accommodative stance as the year progresses. In the very near term, various regions in China remain under lockdown, which has impacted demand. However, we do know that steel mill utilization has improved to 87% from as low as 75% in February. We continue to see tightness in the energy markets globally as demand was initially driven by low stockpiles and strong economic growth and has now been exacerbated by Russia's war in Ukraine. We have seen a rerouting of coal cargo flows as Russia exports more coal to China and India, while Europe has sourced more coals from the U.S., Colombia, and Australia, which has increased ton miles. On the grain side, Ukraine accounts for 13% of global wheat and corn trade. While we are seeing marginal incremental exports out of neighboring ports, no shipments are occurring out of Ukraine as we approach what is typically their peak export season in the third quarter. We are, however, seeing end users accelerate the procurement of commodities, and as a result, prices have increased significantly. Regarding the supply side, higher fuel prices have led to a slowdown in the fleet, reducing available capacity. This reduction, together with augmented port congestion and a low order book, bode well for the dry bulk supply side of the equation. Our current positive thesis for the dry bulk market is underpinned by the historically low order book. The order book as a percentage of the fleet is 6.6%, which compares to 7.8% of the fleet that is greater than or equal to 20 years old, implying fleet renewal rather than material net fleet growth in the coming years. Overall, we believe these positive supply-side dynamics provide a solid foundation for the dry bulk market and lead to a low threshold for demand growth to have to exceed in order to improve fleet-wide utilization and freight rates. This concludes our presentation, and we would now be happy to take your questions.

Thank you. And if you would like to ask a question, please press star 1 on your telephone keypad. If you're on a speakerphone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. Again, it is star one if you would like to ask a question. And we'll go ahead and take our first question from Magnus Iyer with H.C. Wainwright. Please go ahead.

Yeah, good morning, and congratulations to a great quarter. Just a question on you've been reducing debt here significantly over the last year. Part of your strategy is fleet replacement. Have recent developments, you know, with CAPES being, you know, maybe just temporarily at a discount to the smaller ships, changed your kind of thoughts going forward where you want to expand and replace the fleet? Or, you know, just curious to see your thoughts there.

Morning, Magnus. So I actually think it's an opportunity right now because what we've seen are Ultramax values move up faster than CAPE values. Now, in the Ultramax sector, you're still getting very good cash on cash returns, particularly if you put something away for a year or two. So I still think values have not caught up with the current trade environment. But because of, in our view, because of the lockdowns that have occurred in China, there's been a little bit of seasonal, maybe not seasonal softness, but the typical Q1 softness has extended by a couple months because of those lockdowns. And I think that because of that, values in the capes have not run as much. So I still think there's a catch-up to occur there. We're starting to see the cape market play out like we've been talking about for the last month in public forums. So it doesn't change our strategy. We still like having that direct exposure on the iron ore front in the capes, but also running our minor bulk commercial platform and having ships for that. So I think you'll see us keep a similar balance, but I do think it's important to note that the capes probably do have some catch-up to do, and we believe that's going to happen over the next month or so.

All right. Thank you. And I mean, as part of, you know, reducing debt, I mean, you're getting close to zero debt here. I guess it gives you some flexibility for acquisitions, but, you know, would you see that as kind of a long-term focus on BDOWN at that level, or do we see that level pick up here with potential acquisitions?

Look, our medium-term goal is to get to net debt zero, so we are not there yet. But we've also laid out, you know, our plans in terms of prepayments for this year. I think if you use that run rate, we might get down to a net debt zero, you know, by the end of 2023, depending on what the rate scenario is and what values do. We have a large revolver in place, Magnus, and clearly if the right transaction comes, we will use it. But what we don't want to do is lever up for the sake of this value strategy, dividend strategy. So I think right now you're going to see us do more Fleet replacement, we obviously would like to get to a point where our shares are trading at a good premium to NAV, which we think will occur. And then you have the ability to use your shares as currency as well for a transaction. Okay.

And in the meantime, you know, with the stock trading at a pretty big discount to NAV, any, you know, thoughts on buying back shares here rather than reducing debt?

Yeah. I'm not so sure if it's trading much at a discount than NAV. I think it's got some. I'm not sure what your NAV is, but it's actually improved quite a bit, and we're getting back to the levels of probably being close to NAV. Not yet, though. Again, what I'm more focused on, and I've said this in the past, is dividend yield and getting getting the equity so it's trading in that 8% to 10% range, and also getting to an EBITDA multiple that should be in the 5% to 6% range in terms of trading. And we're not there yet. That implies quite a bit of upside. And once you start to get into that, you should be well above NAB.

All right, great. Well, thanks for taking my question. Thank you, Matt.

And we'll go ahead. And we'll go ahead and move on to our next question from Chris Robertson with Jefferies. Please go ahead.

Hey, gentlemen, thanks for taking my questions. Yeah, please go ahead, Chris. Yeah, so, yeah, Magnus brought up the topic of fleet renewal, so I just wanted to follow up with a question related to the older end of your fleet. John, are you thinking about kind of the vessels built prior to 2010 and possibly monetizing those assets to help offset some of the costs with just some basic fleet renewal with some secondhand acquisitions and more modern tonnage?

Yeah, I think, again, as we've said in the past, the 55,000 deadweight ton ships, those would be the next ones that we would concentrate on for fleet renewal. And yes, we would redeploy that capital into newer, more fuel-efficient vessels. But one thing I would tell you is those vessels, they're earning about a 46% cash-on-cash return over 12 months. We've gone back and looked at what the earnings power of those ships were in terms of actual fixtures. So you're paying off 50% of the value of those ships. So I think there's no urgent need to do anything there, but it's certainly something that we're going to do. And I would base it around more market timing and opportunistic at this point just because of the return numbers.

Okay, that's fair. Along those lines, looking into 2023 and beyond in terms of IMO regulations and compliance, I'm assuming there'll be a very minimal CapEx outlay to kind of upgrade some of these systems and energy efficiency systems on the vessels. Could you talk about that a little bit?

I will I'll let a post those address that we have a budget for 2022 which is part of our dry knocking budget, which we broke out of posts.

You want to give the details on Yeah, so Chris, if you are generally speaking for the for the full year we have about $14 million of fuel efficiency upgrade costs. The that's broken out again heavy in the second quarter at $6.8 million and then $2 million for the balance of the year.

Great. Thanks, Apostolos.

And just to be clear, Chris, what that entails is putting, as Postolos said, the energy-saving devices. So it is going to be very high-grade, high-spec paint systems, EPLs for engine RPM management, Data collection devices, so we round the fleet out so we have real-time look at fuel burn and we can manage that fuel efficiency quite a bit. And as I've said in the past, while we're spending CapEx of $14 to $15 million this year, there is a pretty quick return on that. There's a payback of about a year to a year and a half because we will truly be saving on fuel.

Got it. That's good color, John. Thank you.

And as a reminder, it is star 1 if you would like to ask a question. Star 1 to ask a question. And we'll take our next question from Lambert, would be Riley. Please go ahead.

Thank you. Good morning, John. Good morning, Apostolos.

Good morning, Lambert.

John, looking into the second half, there is a potential supply constraint of grain out of Ukraine. How are you looking at that in terms of the risks of business?

Yeah, I still, again, have the opinion not a lot of grain is going to flow out of Ukraine. I do think there is a possibility that the U.S., uh we'll be able to make up for some of that i think brazil as it comes into its uh growing season later in the year we'll also be able to make up for some of that um there will be ton mile extent expansion most likely on the grain trades uh because of that also i think it's difficult to to determine whether it's a net gain or a net loss in terms of ton miles overall right now so i um I look at it as a risk. I'm not sure if it's upside or downside right now. So the way we're positioning things is we are doing some hedging for the second half of the year, particularly in the third quarter on the grain side. And I would tell you just to be clear, we don't think anything is, you know, we're not going to have this massive downward volatility. There's still a lot of coal flowing. There's still a lot of minor bulks flowing. Obviously, the U.S. grain season will be up and going and will be strong. But in terms of taking some risk off the table, yeah, we're going to do that at some very good rates.

Fair enough. And do you see any – on the order book side, do you see any motivation on the market to increase orders on some of the larger vessels like Cape Size or – Do you anticipate that supply or that capacity remain pretty tight even after 2024?

Well, I mean, right now it's obviously very tight. As you pointed out, almost 2024 is even difficult to get slots right now. A lot of the orders are getting pushed into 2025. But I still think new building prices continue to move up. um, basis, uh, input costs, particularly on the steel side, as well as just pure demand for, for the birth. So I think that's positive. Um, it, it, you know, continues to display. So the new bill parity versus secondhand values. So I think this, from a financial standpoint, it's hard to get your head around ordering. Um, but also you, again, you can't, I can't say it enough with the environmental regulations that are coming. Um, I think it's very difficult to. makes sense of ordering new ships today based on conventional fuel and not knowing the fuel of the future or having a real sense of, you know, is it going to be ammonia? Is it going to be hydrogen? We believe it will be, but we're not 100% on it yet. And I think you're also seeing even LNG is starting to lose favor globally in terms of new fuel. I think people look at it as purely a stepping stone and that might get phased out much quicker than one might think as ammonia and hydrogen becomes more available over the next 10 years. So I think there's quite a few factors that are keeping a ceiling on new build orders today. Great. Thank you, John. Thanks, Liam.

And with that, that does conclude the GenCo shipping and training limited conference call. Thank you for your participation. You may now disconnect.