Genco Shipping & Trading Ltd

Good morning, ladies and gentlemen, and welcome to the Genco Shipping and Trading Limited first quarter 2023 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 at 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 1-877-674-7070 and entering the passcode 959617. At this time, I will turn the conference over to the company. Please go ahead.

Good morning. Before we begin our presentation, I note that in this conference call, we've been making certain forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 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 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, 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 ended December 31st, 2022, 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 Woebensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Good morning, everyone. Welcome to Genco's first quarter 2023 conference call. I will begin today's call by reviewing our Q1 2023 and year-to-date highlights, providing an update on our comprehensive value strategy, financial results for the quarter, and the industry's current fundamentals before opening the call up for questions. For additional information, please also refer to our earnings presentation posted on our websites. Following a year during which we generated sizable earnings and returned significant capital to shareholders, we continued to execute our value strategy for the benefit of shareholders. During the first quarter of 2023, Genco continued to achieve solid financial results in what has historically been a seasonal low period for dry bulk freight rates. We achieved the time charter equivalent rate for the quarter of $13,947 per day, which was nearly $3,000 a day above our scrubber adjusted benchmarks as we drew upon our best in class commercial platform. This led to net income for the quarter of $2.6 million, the company's 11th straight quarter of profitability. While dry bulk cycles have historically been approximately one to two years in duration, I note that Genco has now achieved adjusted net income for nearly three consecutive years, highlighting what has been a longer and sustained period of profitability due to favorable market fundamentals. Given the visibility we have currently with the order book near historical lows and the time in which new capacity can come online, we expect this cycle will continue to be extended. Looking ahead, our earnings power remains strong as our Q2 time chart or equivalent guidance of $16,679 per day. represents a 20% increase versus the Q1 level and well above our estimated cash flow breakeven rate for the quarter of approximately 9,400 hours per vessel per day. Importantly, we have a light dry docking schedule for the balance of this year, enabling the company to increase fleet-wide utilization during what we view as a firming market period. For the first quarter of 2023, we declared a dividend of 15 cents per share While our stated formula with a quarterly reserve of $10.75 million did not produce a dividend for the quarter, the Board of Directors on management's recommendation to utilize a portion of our quarterly reserve to declare the 15% per share dividend. A central component of JNCO's value strategy is maintaining a quarterly reserve as well as the optionality for the use of the reserve when appropriate as Genco seeks to pay sizable dividends in diverse market environments. During the first quarter, the dry bulk shipping markets experienced seasonal volatility in freight rates. However, Genco continued to voluntarily pay down debt. The dry bulk market realized a significant rebound since March, and our positive outlook for the balance of the year underpinned by minimal supply growth, together with Genco's industry low cash flow breakeven rate and low financial leverage gave the company confidence to reduce the quarterly reserve for the first quarter to declare a meaningful quarterly dividend. This represents our sixth dividend payment under our value strategy with cumulative dividends declared to date of $3.39 per share over those six quarters. Consistent with our previously announced intention to maintain flexibility under our dividend policy, we reduced our reserve from $10.75 million to $2.19 million for the first quarter of 2023. This is a lever we've highlighted since inception of our value strategy back in April of 2021 to utilize the reserve to smooth out periods of downward volatility. Importantly, we did not dip into amounts reserved in previous quarters, raise debt, or sell assets in order to pay the quarterly dividend. We relied solely on reducing the reserve for the first quarter. Periods like this, Q1 2023, highlight Genco's key market differentiators, which are industry low cash flow breakeven rate, strong balance sheet, and low financial leverage position. Despite a temporarily softer rate environment in the first half of Q1, we were still able to voluntarily repay debt and declare a sizable dividend, two key pillars of our capital allocation strategy. Since Q3 2019, we have now declared a total of $4.44 per share in dividends, or approximately 31% of our current share price. We believe our track record of meaningful and sustainable dividends, almost over four years through varying cycles, speaks to the strength of the company's balance sheet and our prudent approach to capital allocation. In addition, in addition to seeking to pay meaningful dividends, we continue to focus on proactively paying down debt, continuing to pay down debt during a time in which we have no mandatory debt repayments is consistent with our medium term goal to reduce our net debt position to zero, having created a compelling risk reward model. Regarding the current dry bulk market, freight rates have rebounded meaningfully since the February lows and currently stand at year-to-date highs for Cape sizes at over $19,000 per day on the non-scrubber fitted Baltic Cape size index. We remain positive for the balance of the year given the reopening in China and the impact this has on the dry bulk market, which continues to be geared towards not only the world's second largest economy, but also developing Asia. The new building order book remains near historical lows, which will limit net fleet growth over the coming years, providing a solid foundation for an improving market. Given constraints in fleet capacity, demand growth has a low threshold to exceed in order to outpace supply growth to further tighten market fundamentals and move freight rates up. Before I close, I'd like to point out that this is the last earnings call for our CFO, Apostolos Sifoulias, as he will be leaving the company in mid-June and will then serve as a consultant through year-end. On behalf of the management team and the board of directors, I once again thank Apostolos for the outstanding job he did over the course of nearly two decades at Genco Shipping. We wish him and his family all the best going forward. At this point, I will now turn the call over to Apostolos, our Chief Financial Officer.

Thank you, John. During the first quarter, we continue to record solid earnings and voluntarily pay down debt as we maintain a commitment to further reducing financial leverage. On a cumulative basis, since the start of 2021, we have paid down $287 million of debt, or 64% of our debt levels since 21, enabling Genco to achieve a low net loan to value of 11%. Notably, The current scrap value of our fleet is nearly two and a half times our debt outstanding balance. For Q1 2023, the company recorded net income of $2.6 million, or six cents basic and diluted earnings per share, while our first quarter adjusted EBITDA was $19.9 million. As of March 31, our cash position was $50.4 million, which when combined with our revolver availability of $210 million, provides total liquidity of approximately $260 million. This substantial liquidity position, together with the fact that five of the Ultramax vessels that we acquired through 2021 remain unencumbered, provide significant flexibility for us to continue delivering under the three pillars of our comprehensive value strategy, which is focused on dividends, deleveraging, and growth. In the meantime, we continue to make good progress on our medium-term objective of reducing our net debt to zero. Following our substantial deleveraging, our debt outstanding was $162 million as of the end of March, or $112 million of net debt. For the first quarter, our board of directors declared a dividend of 15 cents per share. Walking down the dividend formula, we had operating cash flow of 21.2 million, less debt repayments of $8.75 million, dry docking, ballast water treatment system, and energy saving device costs of $3.8 million. As a formula with a quarterly reserve of $10.75 million wouldn't have resulted in a dividend, the Board elected to utilize a portion of our quarterly reserve to declare this quarter's dividend. To reiterate what John mentioned, the Board's decision was based on the significant rebound in the dry bulk market since March and our positive outlook for the balance of the year. Looking ahead to the second quarter, we anticipate our cash flow break-even rate to be around $9,400 per vessel per day. Within that figure, we expect our vessel operating expense to be $6,250 per vessel per day, primarily due to the timing of crew changes and purchases of spares and stores. We continue to focus on cost optimization while seeking to continue to meet stringent safety and vessel maintenance standards. We do anticipate our vessel operating expenses in the second half of the year to be below those of the first half. Before I hand the call over, I would like to take this time to thank John and the Genco team once again for all the support and the great experiences over the last 18 years. I would also like to thank the equity analysts that have covered us, our bank group, and the investor community as a whole. Thank you all. I will now turn the call over to Peter Allen, our SAP of Strategy and Finance, to discuss the industry fundamentals. Thank you, Postalos.

During the first quarter of 2023, the Baltic Cape size and Supermax indexes hit lows in mid-February of approximately $2,200 and $6,800 per day, respectively. However, these rate levels have since significantly rebounded to $19,000 and $12,000 per day, highlighting the significant operating leverage of these asset classes. We've seen positive dry bulk indicators for much of the last two months. In addition to freight rates, we've witnessed asset values rise as well. Iron ore and coal imports into China were up meaningfully in Q1. while steel materialization increased from 81% to over 90% currently. This has translated into China's steel output being 6% higher year over year, while iron ore prices have pulled back recently. They remain approximately 30% greater than the end of October 2022 levels just prior to China's COVID pivot. China's Q1 GDP growth of 4.5%. It was also ahead of consensus estimates of 4% and puts them in line to potentially exceed the 5% GDP growth target, a figure which we view as more as a floor at this stage. As we look ahead, we expect China's continued reopening to coincide with seasonally stronger dry bulk shipment volumes, particularly for iron ore and coal, which we believe will be supportive for capesize rates in the second half of the year. Regarding the supply side, annualized net fleet growth in Q1 2023 was 3.5%. primarily due to the front-loaded nature of the delivery schedule. The historically low order book is a percentage of the fleet of just 7%, as well as the near and long-term environmental regulations are expected to keep net fleet growth low in the coming years. Overall, we have a constructive outlook for the dry bulk market given the various demand catalysts highlighted, together with the historically strong supply-side fundamentals. This concludes our presentation, and we would now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. One moment, please, for your first question. Your first question comes from Omar Nocta from Jefferies. Please go ahead.

Thank you. Hey, guys. Good morning. Yeah, yeah. Wishing you best of luck and definitely will miss working with you. You've been there since the very beginning. Thank you very much, Robert. Yeah, yeah. Yeah, so I just wanted to ask, you know, broadly, you guys talked about the dry bulk market and how, you know, we bounced off of the lows that we saw earlier in the year. And, you know, we're sitting basically at highs for the year at 19,000 for the non-eco capes. Just wanted to maybe ask kind of what you're seeing in the market because, you know, it This is almost like the quietest run-up in CAPE rates in a long time. There doesn't seem to be that much fanfare, per se. There's a lot of talk about China reopening being a bit slower than anticipated, not being maybe as industrially intensive as perhaps the service side of things. But yet, we're seeing CAPE rates at 19 and seeing much better support than we would have thought, at least given the backdrop of weaker steel prices, weaker iron ore of late. What do you think is going on in the market at the moment? What is it telling us, I guess, that rates are at this level given this backdrop?

You know, Amar, I look at it pretty positive. Anytime you see CAPE rates, you know, scrubber adjusted over 20, which is where we are today, that feels pretty healthy, particularly on the back of we've seen values firming both for CAPEs and Ultramaxes over the last four months. I guess I would go back to, we started talking about a China reopening recovery, I believe in October of last year. Our thesis at the time was that you probably wouldn't really see a meaningful recovery until the second half of this year, 2023. We've been pleasantly surprised. I will still stick to that prediction on the back of I think what we're seeing right now in China is really recovering demand, you know, after COVID lockdowns. I still don't believe the stimulus efforts that have been put into place over the last several months are grabbing yet. And, you know, those tend to lag. So I see that hitting more of the second half of this year. We're also going to see a very large slowdown in vessel deliveries as we get into the second half of this year and certainly into 2024 and 2025. So it's funny how we've become complacent enough that $20,000 a day CAPE rates are sort of ho-hum. And maybe you're right about that. But internally, we like it. It's very good cash flow. It's more than $10,000 a day above our cash flow break even. longer longer answer to your question but um you know i i still think again as we get into the second half of the year and then going forward for the next 24 months after that um things things look pretty good um and it's also interesting it's interesting to see how flat the ffa curve is right now in in both cape size and um and the ultra supermax and

may be flat but they're still again they're at pretty healthy levels you know some hovering around uh you know 19 to 23 on on the capes yeah thanks john that that's helpful i mean it's just interesting yeah you've got a very firm rates here uh well above your break even and you just it's just interesting to see that perhaps the supply picture is much tighter than maybe we give it credit for uh yeah One just follow up. You guys mentioned the reserve and a separate topic, but just on the reserve, clearly, you know, Genco is in very strong financial condition. You've got a good amount of cash, low leverage overall. You pay down so much debt over the past couple of years. You've got the formulaic approach to the dividend where you've got the dry dock reserve, you have debt repayment reserve, and then you have this additional reserve, which you toggled this past quarter. Kind of given how strong Genco is at the moment, What are your thoughts on, does that additional reserve of that 10.75, do you think that's actually, do you think that's still needed or are you being overly conservative with that?

Look, the 10.75 is basically off of our quarterly debt repayment plus interest. I do think it's important to have a reserve for fleet renewal going forward. These are depreciating assets. So you do need to hold back so, so that we can, you know, move into newer tonnage as, as the market dictates. But, and clearly we've kept the $35 million a year in principal repayment in place. So the goal of getting down to net debt zero over the medium term is still, is still there. So I, I think it's, I think it'll be really interesting once we get down to that net debt zero and continue to have no mandatory amortization. There's obviously additional cash flow that can be returned to shareholders. But just to put a fine point out, I do believe the reserve is important. We've got to make sure that we're continuing to set the company up for the future from a fleet renewal standpoint.

Perfect. Thanks, Sean. Very, very helpful. I'll turn it over.

Thank you, Elmar.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Liam Burke from B. Riley. Please go ahead.

Thank you. Good morning, John. I'll post it to Peter.

Good morning.

John, your time charters in a rising rate environment, how are you looking at that? Do you want to capture more of the spot market opportunity, or do you see opportunities to time out some of these other charters?

Yeah. So, you know, where we tend to focus more heavily when we're doing time charter coverage is on the CAPEs because of the volatility. Having said that, we're not in the mood, so to speak, to put anything away for long term on a fixed rate basis, just because we do believe firmer rates in a market is coming. What we have done, and we did quite a bit of this in first quarter when rates were really low, is we did put um, vessels away, Cape size vessels in particular on index charters at some very good premiums, uh, above and beyond the, uh, the multi Cape size index, anywhere from 125 to 127% over the BCI plus a scrubber premium on top of that. So, you know, from a portfolio standpoint, um, that's actually paid off really well as, as again, we're approaching $20,000 a day. on the BCI. But I think in terms of fixed rates, we're holding back for the time being.

Great. Thank you. Peter, China steel production has bounced back pretty nicely in the first quarter. There have been rumblings about environmental initiatives. How are you looking at steel production, obviously the derivative of iron ore demand?

Thanks, Liam. Good question. You know, steel production has obviously been really strong in the year to date, up 6% in Q1. Steel utilization in China has been rising almost every week this year, so there's been a lot of positive indicators there. You know, peak steel production in China tends to happen in Q2. So, you know, right around now, actually, but peak iron ore exports from Brazil and Australia, which is really what drives dry bulk rates and capes as rates in particular, that peaks in the second half of the year. And we do think that China needs to restock iron ore inventories. They've been drawn down significantly from peak levels. There's probably another 30 million tons they need to restock to get back to those highs last year. So that's actually what we're focused on more of the commodity flows on the iron ore side because steel production in China typically peaks during spring construction season right about now. So, yeah, we're very focused on Brazil and Australia really ramping up iron ore exports in the coming months.

Great. Thanks, Peter. Thank you, John. Thanks, Liam.

As there are no further questions at this time, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.