Genco Shipping & Trading Ltd

Good morning ladies and gentlemen and welcome to the Genco Shipping and Trading Limited second 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 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 anytime during the next two weeks by dialing 1-877-674-7070 and entering the passcode 028452. At this time, I will now 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 Security 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 today, 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 31, 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 Bobensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Good morning, everyone. Welcome to Genco's second quarter 2023 conference call. I will begin today's call by reviewing our Q2 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 website. During the second quarter, we continue to execute our value strategy, providing shareholders with a sizable dividend while continuing to voluntarily pay down debt. At the same time, we drew upon our best in class commercial platform and scalable fleet to generate solid financial results. For the second quarter, we achieved a time charter equivalent rate of $15,556 per day, which was approximately $2,500 a day above our scrubber adjusted benchmark. This led to net income for the quarter of $11.6 million and adjusted EBITDA of $30 million. For the second quarter of 2023, we declared a dividend of 15 cents per share, representing our seventh dividend payment under our value strategy with cumulative dividends declared to date of $3.54 per share over those seven quarters. Since Q3 2019, 59.5 cents per share or approximately 33% of our current share price. We believe our track record of meaningful and sustainable dividends over the last four years through varying cycles speaks to the strength of the company's balance sheet and our prudent approach to capital allocation. While our stated formula with a quarterly reserve of $10.75 million produced a $0.13 per share dividend for the quarter, we utilized a portion of our quarterly reserve to declare the $0.15 per share dividend. Importantly, we continued to prepay debt during the quarter on a voluntary basis, paying down $8.75 million during Q2. Genco's industry-leading low cash flow breakeven rate and low financial leverage together with our view of an improvement in freight rates from current spot levels gives the company confidence to utilize part of their quarterly reserve to declare a larger quarterly dividend. Consistent with our previously announced intention to maintain flexibility under our dividend policy, we reduced our reserve from $10.75 million to $9.92 million for the second 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 quarterly dividends. Importantly, we relied on applying our formula with a reduced reserve without dipping into cash generated in previous quarters, without raising debt, and without selling assets in order to pay our latest quarterly dividends. In addition to seeking to pay meaningful dividends, we continue to focus on proactively paying down debt as we progress towards our medium-term goal of reducing our net debt position to zero, consistent with our compelling risk-reward model. Regarding the current dry bulk market, while cargo volumes particularly into Asia have been strong, we have seen softness in demand in developed countries, which has been met with an unwinding of port congestion in recent months, which has increased effective vessel capacity. While this has impacted freight rates in the near term, we remain constructive on the overall dry bulk market as the new building vessel order book remains near historical lows. Given these capacity constraints, demand growth has a low threshold to exceed in order to outpace low supply growth to further tighten market fundamentals and move freight rates up over time. Despite the temporary softening of the freight rate environment, asset values have remained firm, only marginally declining from earlier year levels. We believe this is due in part to the strength seen in the new building prices. On the ESG front, Genco for the third year in a row was ranked number one in the Weber Research ESG report out of a total of 64 publicly traded shipping companies. We are honored to once again be recognized for our industry leadership in sustainability transparency, and overall capital stewardship. At this point, I will now turn the call over to Peter Allen, our Chief Financial Officer.

Thank you, John. For Q2 2023, the company recorded net income of $11.6 million, or 27 cents basic and diluted earnings per share. During the second quarter, we paid down $8.75 million of debt on a voluntary basis, bringing our cumulative debt pay down since the start of 2021 to $296 million or 66% of our debt levels. This has enabled the company to achieve a low net loan to value ratio of 11% currently. As of June 30th, our cash position was $54 million and our debt outstanding was $153.5 million. Furthermore, we have $207 million of undrawn revolver availability, bringing our total liquidity position to $261 million. Looking ahead to Q3 2023, we anticipate our cash flow breakeven rate to be $9,715 per vessel per day, which remains well below our Q3 TCE estimates to date of $12,262 per day for 61% fixed. During the second quarter of 2023, the Baltic Cape Size Index crossed $20,000 per day in early May before pulling back. Spot Cape Size rates currently stand at approximately $15,000 per day. Regarding supermax rates, the Baltic supermax index began the second quarter at approximately $13,000 per day and has since declined to approximately $8,000. On the demand side, cargo volumes, particularly of iron ore and coal, into China have been firming, increasing by 8% and 93% through June, respectively. China's iron ore port inventories also remain well below last year's peak levels. As we enter a seasonally strong period for iron ore volumes from Brazil and Australia, which we believe will provide China an opportunity to restock depleted inventory levels. On the macro front, China's Q1 GDP growth surprised the upside, resulting in the government prematurely easing policy support. Lending declined by approximately 50% in Q2 versus Q1, and China's PMI declined back into contractionary territory. However, at China's Politburo meeting in July, the government signaled a pro-growth shift in policy, particularly to assist its property markets. Regarding the Black Sea Grain Initiative, as has been widely reported, Russia exited the deal, which has seen 33 million tons of agricultural products shipped since inception. Various attacks have materialized thereafter on Ukrainian ports and infrastructure leading to significant damage, which has impacted grain supplies and led to volatility in wheat and corn pricing. Regarding the supply side, annualized net fleet growth in the year to date is 3.3%, primarily due to the front-loaded nature of the delivery schedule and low scrapping levels. The historically low order book as a percentage of the fleet as well as near term and longer term environmental regulations are expected to keep net fleet growth low in the coming years. Overall, we have a constructive outlook on the dry bulk market given the various demand catalysts highlighted together with 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 touch tone you will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Omar Nocta at Jefferies. Please go ahead.

Thank you, operator. Hi, John. Hi, Peter. Good morning. Morning. Just wanted to ask a bit about the market and sort of the near-term outlook. You obviously laid out the kind of what's been going on and driving things here recently. We just wanted to ask, you know, clearly capes have outperformed, I think, as many of us expected coming into the year. But, you know, the ultras and the supers have clearly been a bit softer. What do you think could be coming up on the horizon? Any triggers or seasonality-wise that could drive the midsize segment to start to push higher here in the near term?

Yeah, I mean, look, one of the things is I think over the last couple of years, we've gotten so used to the midsize sector, you know, being at or even slightly outperforming the capes, which is, you know, from a historical standpoint, it's sort of unnatural, right? So I think we've seen a more, you know, a more historical market in the sense of, you know, capes should be earning more than ultra supers, right? Because of the capital cost and the larger ships. So first of all, I just think things have gone back to normal, right? prospects. Having said that, if you look at the cargo flows on capes, iron ore and coal and bauxite have been very strong. And as I said before, it's been more of an unwinding of congestion. When you get into the midsize ships, I think a lot of the softness and steel production in Europe, lack of commodities going into Europe, certainly the Black Sea And the unwinding of that congestion has had a little bit of an effect as well. Um, but I, I think you need to really see global GDP growth start to, uh, to pick up a little bit more. Uh, there's more of a correlation with the midsize ships on global GDP, where the capes are more focused on, uh, on China. But, you know, look, Omar, having said all that, you know, the supply side is, is clearly our friend and we just don't need much demand growth and recovery. to have the next leg up.

Thanks, John. Yeah, it seems like just a little nudge here or there could drive things higher. And then just maybe on the dividend, clearly you have the capital allocation policy has been in place for some time now, and you stuck with it. Seeing you toggle the reserve, which is quite conservative in the first place, given how strong the balance sheet is, But just wanted to ask, you know, should we think about, you know, given 3Q is looking likely to be a bit softer than this past quarter, can we expect a bit more of that topping off of the dividend potential where, I know it's a board decision, but is the intention or the aim to maintain, say, 15 cents as the floor for the payout?

No, we haven't necessarily discussed a floor. I think what you have to keep in mind is that, you know, we only have a little bit more than 50% fixed right now. So we have a ways to go before we're going to start looking at, you know, what we're going to do on the dividend front. But I can certainly make an overall comment, which, you know, which I've made before. And when we installed the value strategy, the dividend is very important. to the company and shareholders. So we, our intention is, you know, no matter what the market throws at us to keep the dividend going. And the balance sheet and the low cash flow break even allows us to do that without putting any stress on the balance sheet.

Yeah, absolutely. Okay. Thanks, John. That's it for me.

Thanks, Omar.

Thank you. The next question comes from Liam Burke at B Reilly. Please go ahead.

Thank you. Good morning, John. Good morning, Peter. Hi, Liam. John, asset values are pretty healthy in the sector. How are you looking at managing the fleet at this point?

So we are continuing to look at fleet renewal. And we've identified our 55s, which eventually we will sell and redeploy that capital into newer assets. So none of that has really changed. It's about finding the right transaction. The good news is, as I said before, asset values have held up, which you just reiterated, which is interesting considering where our freight rates are. I think that's a positive. um and there are certainly transactions being done uh particularly in the in the sort of 10 year old cape size sector and we've seen those prices hold up pretty well but just going back to your question right now it's it's more of a focus on fleet renewal improving uh you know continuing to improve the age of the fleet and improving uh fuel efficiency of the overall fleet got it

And last year, obviously, you had COVID-related and crew costs in your operating expenses. It does look like they're repeating OPEX per vessel is way down. Is there anything else in there besides just not repeating the one-time costs related to COVID and crews?

No, I mean, and as you said, yeah, I mean, fortunately, COVID costs are behind us at this point. We did a little better than budget for this quarter. I think we expect a little higher OPEX in the third quarter, which is purely timing. And on the purchasing side, you really have to look at OPEX over a 12-month period to get the full number versus budget. But we've put out guidance for the third quarter on the OPEX. And like I said, it's just slightly higher. But we plan on being on budget for the entire year.

Great. Thank you, John.

Thanks, Liam.

Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. Next question comes from Greg Lewis at BTIG. Please go ahead.

Yeah, thank you. And good morning. And thank you for taking my questions, John. I was hoping you could talk a little bit about, um, you know, how you're thinking about the, your chartered and fleet, just, you know, just looking, it's kind of scaled down a little bit, um, this last quarter versus where it's been, you know, over the last year. Um, you know, you know, clearly the spot market is down. It seems like there's some, you know, a little bit of softness in the charter on the time charter market. Um, kind of as the market unfolds, clearly you're still bullish on the overall market. Is there kind of a disconnect between where potential charter out owners are and where chartering is right now, just given the fact that spot is where it is versus maybe where it'll be in three or six months and really just kind of curious You know, as we sit here today versus maybe where we are in six to nine months, you know, and this will help us with modeling also. Any kind of view on how you think the chartered in portfolio looks?

Yeah, so what has happened there is there's been a shift in the market in terms of people booking, willing to book forward cargos. That has tailed off. um i again expect it to be short-term in nature but but it's for a variety of reasons so it's because commodity prices have have come down it's um you know interest rates are up so it's more expensive to carry inventory so i think people right now or at least cargo owners right now for the most part are you know doing transactions that are you know more spot related and and current so that's why you you know you don't see us doing as many chartered in opportunities with cargo. But again, I expect all that to settle in once everyone gets used to the higher interest rate environment, commodity prices should recover, and you'll see us back to the levels we've done historically. Again, I think it's a short-term phenomenon. But again, if you look at Look at our numbers. We continue to create arbitrage opportunities, irrespective, because we continue to outperform the benchmarks by quite a bit.

Super helpful. Thank you for that. Have a great day. Okay. You too, Greg.

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