Genco Shipping & Trading Ltd

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 800-770-2030 and entering the passcode 636-5548. 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 will be making certain forward-looking statements pursuant to the safe harbor provisions of the Private Security Litigations 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 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 for the year ended December 31st, 2023, 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 Wilbensmith, Chief Executive Officer of Genco Shipping and Trading Limited.

Good morning, everyone. Welcome to Genco's second quarter 2024 conference call. I will begin today's call by reviewing our Q2 2024 and year-to-date highlights. Additionally, we will provide an update on our value strategy, discuss our financial results for the quarter, as well as 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. Starting on slide five, Q2 2024 marked another strong quarter for Genco. We drew on our sizable dry bulk fleet and firm market conditions to generate nearly $40 million of EBITDA, led by our time chart equivalent rate of just under $20,000 per day for the fleet. Q2 represented another quarter of execution of our differentiated value strategy focused on dividends, deleveraging, and growth. In terms of shareholder returns, we declared a Q2 dividend of $0.34 per share as our strong earnings flowed into our dividend consistent with our transparent policy. During the quarter, we also further improved our risk-reward balance as we voluntarily paid down debt and improved our net leverage position to 2% on a pro forma basis as we approach our goal of net debt zero. On page six, we highlight the compelling dividends we have provided to shareholders. The second quarter dividend marks our 20th consecutive quarterly dividend payment. It also represents five uninterrupted years of providing shareholders with dividends, which is the longest period of consecutive dividends in our peer group. Over this time, we have declared $5.91 per share in dividends, or approximately 33% of our share price as of August 6, 2024. Complementing shareholder returns, during Q2, we continued to prioritize fleet renewal. Following the timely acquisition of two modern high specification Cape size vessels in Q4, 2023, we divested three 2009 to 2010 built vessels to buyers in Q1 and early Q2, 2024. Through these transactions, we have improved the fuel efficiency of our fleet, increased our earnings power, reduced our fleet's average age, and saved approximately $10 million in dry docking capex for 2024. With the execution of this phase of our fleet renewal plan, we have further advanced our viable approach to fleet composition, as shown on page 7. We own both Cape size and Ultramax Supermax vessels, enabling Genco to have access to sectors with distinct and attractive characteristics. Cape size vessels provide high operating leverage and upside potential with a focus on the iron ore, coal, and bauxite trades, while the minor bulk vessels provide more stable earning streams, operate on diverse trade routes, and are more closely linked with global GDP growth. We believe owning ships in both of these sectors contribute to Genco's value strategy. Moving forward, we continue to evaluate further opportunities in the sale and purchase market to further renew our fleet. To that end, we have sold the Genco Warrior, a 2005 built 55,000 deadweight ton supermax for $11.95 million and delivered the vessel to buyers in July. Additionally, we have agreed to sell the Genco Hadrian, a 2008 built 169,000 deadweight ton Cape-sized vessel for $25 million with delivery scheduled in mid-October. This later delivery date has enabled us to capture the firm S&P market today while continuing to trade the vessel over the next several months in what is a solid freight market. The sale of the Genco Hadrian completes the exit from the non-core 169,000 subsector of Capes. Collectively, the sale of the Genco Warrior and the Genco Hadrian save approximately $5 million in dry docking capex in 2025. We believe the sales of these older, less fuel-efficient vessels were well-timed given the firm prices achieved, enabling us to take advantage of cyclically higher asset values to monetize non-core assets. We intend to reinvest these proceeds in high-quality fuel-efficient ships to improve our earnings capacity and further modernize the fleet. Turning to slide eight, we continue to generate strong TCE performance. In Q2, our fleet-wide TCE increased 28% on a year-over-year basis. Looking ahead to third quarter, 67% of our available days are fixed to date at $19,291 a day, pointing to another firm quarter as this is well above our cash flow break-even rate. Turning to slide nine, we believe Genco remains in a highly advantageous position moving forward. Specifically, we have an industry low net loan-to-value, a low cash flow breakeven rate, and nearly $330 million in undrawn revolver availability. This provides significant financial flexibility and optionality for the company going forward. Given the volatility and cyclicality of dry bulk shipping, we also believe it creates a favorable risk-reward balance to provide sizable returns to shareholders, opportunities to grow the fleet and enhance our earnings power, through dry bulk cycles. While the dry bulk market has experienced a strong first half of the year, and Genco has booked over 65% of our Q3 days at nearly $20,000 per day, freight rates have pulled back in recent weeks. We view this as affected by temporary factors, including vessel positioning in the Atlantic and the Q3 wet season in Guinea impacting bulk site trade flows. We believe these factors will dissipate, and we maintain a positive outlook for the Q4 market. Looking ahead, there are a number of drivers that are supportive of the dry bulk freight market in what is already a balanced, if not tight, market. This includes the relatively low order book, ongoing environmental regulations, continued commodity demand, policy easing cycles, and geopolitical factors. I will now turn the call over to Peter Allen, our Chief Financial Officer.

Thank you, John. On slides 11 through 13, we highlight our second quarter financial results. Jenco recorded net income of $23.5 million, or 54 basic and diluted earnings per share. Adjusted net income amounted to $19.9 million, or basic and diluted earnings per share of 46 cents. Adjusted EBITDA for Q2 totaled $40 million, approximately 33% higher than the total from Q2 2023. For the first half of 2024, adjusted EBITDA amounted to $81.6 million, an increase of 64% year over year, putting the company on pace to well exceed last year's full year adjusted EBITDA of $101.5 million. During Q2, our net revenues increased by 22% on a year over year basis. The strong level and the strong boost in revenue was led by our Cape size vessels, which earned a TCE of $29,145 per day in Q2 2024, nearly $10,000 per day higher than the same period of last year, highlighting the operating leverage and upside potential of that sector. On slide 14, we show the trajectory of our debt outstanding and our continued voluntary debt repayments. Since the end of 2020, we have paid down nearly 80% of our debt or $349 million which has resulted in a pro forma net loan to value ratio of only 2%. The company is currently on track to achieve our goal of net debt zero in the short term, a metric that we have been targeting since the announcement of our value strategy in April 2021. Specifically this year, we have voluntarily paid down $100 million of debt under our revolving credit facility. We estimate these voluntary debt repayments in the year to date, will reduce interest expense by $5 million on an annualized basis or approximately $350 per vessel per day on our cash flow breakeven rate. This highlights the importance and significant flexibility that our current 100% revolver structure offers us and that we can pay down debt to actively manage interest expense in this still high interest rate environment without losing borrowing capacity to capture accretive growth opportunities. Moving to slide 15, we highlight our quarterly dividend policy, which targets a distribution based on 100% of excess quarterly cash flow, excluding dry docking and a voluntary reserve. The nature of our variable quarterly dividend and our fleet's operating leverage enables shareholders to directly benefit from freight rate increases, as we've seen over the last couple of quarters. Our Q2 2024 dividend of 34 cents per share represents an annualized yield of 8% on our current share price, double the two-year U.S. Treasury rate of approximately 4%. Looking ahead to Q3 2024, we anticipate our cash flow breakeven rate to be $10,911 per vessel per day, which includes $2,324 per vessel per day of dry dock and capex for the quarter. Additionally, we expect our daily vessel operating expenses in Q3 to decline from Q2 levels. During the second quarter, our DVOE was $6,855 per vessel per day, primarily due to higher expenses related to maintenance, as well as the timing of spares and stores purchases. In Q3, we anticipate DVOE to decline to a budgeted figure of $6,150 per vessel per day. Lastly, our Q3 TCE estimates to date are $19,291 per day, for 67% fixed, led by our cape-sized vessels, which are currently fixed at nearly $28,000 per day for 58% of the quarter. I will now turn the call over to Michael Orr, our dry bulk market analyst, to discuss industry fundamentals.

Thank you, Peter. As depicted on slide 17, the dry bulk market remained at elevated levels during the second quarter. The DCI averaged over $22,000 per day as Australian miners pushed to achieve their fiscal year-end guidance targets by the end of June. While rates have pulled back recently, July still represented the second strongest month of the year at $25,500 per day. Q3 rates this year, on average, are approximately 80% and 50% higher than their Q3 2023 for CAPE sizes and supermaxes, respectively. CAPE size and supermax rates are currently $20,000 and $14,000 per day, respectively. Regarding the steel complex, several of the indicators that we track are highlighted on slide 18. China's iron ore imports rose by 7% through July year-over-year, led by strong export volumes in the seaborne market, most notably from Brazil. A portion of China's higher imports have replenished previously drawn-down inventories. Iron ore port inventories currently stand at 151 million tons, an increase of 23% year-over-year. However, these levels remain below the 2022 highs in absolute terms and are only marginally higher than historical average levels on a days-on-hand basis. Augmented seaborne iron ore supply, together with higher inventories, have been factors behind the decline in the iron ore price to approximately $100 per ton currently. Furthermore, China's steel production is 1% lower year over year through the first half of 2024. As China's property sector has impacted domestic steel demand, China's steel exports have grown by 22% in the year to date and are on pace for their strongest year since 2016. On slides 19 through 20, we highlight the growing long-haul ton-mile story that we believe is quite encouraging for the Cape Side segment. The massive Simundu iron ore project in Guinea is on track to begin production in late 2025, which is expected to ramp up over 30 months, eventually hitting annualized production of 60 million tons. There's also significant bauxite growth in this region with an 8% annual growth rate over the past 10 years. The bauxite and iron ore expansion in West Africa, as well as incremental production growth from Valley, bodes well for the Cape-sized segment given the origins of these export volumes as these routes have three times the 10-mile impact of Australia to China cargoes. In terms of the grain trade, while we're in between peak North and South American grain seasons, we are seeing firm corn export volumes from Brazil as is typically the case this time of year. Regarding the Ukrainian grain trade, shipments have been firm despite the Black Sea Grain Initiative no longer being in place. August and September are typically peak grain export months from the Black Sea, and market expectations are for exports to reach their highest levels since the war began in early 2022. Regarding the supply side, outlined on slides 22 to 23, net fleet growth in the first half of 2024 was 3.3%. 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. While we expect volatility in the freight market, the foundation of a low supply growth picture provides a solid basis our constructive view of the dry bulk market going forward. This concludes our presentation, and we would now be happy to take your questions.

Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please simply press star 1 again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Omar Nocta of Jefferies. Please go ahead.

Thank you. Hey, guys. Good morning. Thanks for the update. Just a couple questions on my end, and maybe, you know, John, Peter, you mentioned LTV, or net LTV is now down to 2%, and you're set to be at 0% here fairly soon. And this was your target from the get-go starting in 21 when you went down this capital allocation path. Wanted to ask, you know, once you get to that zero level, does that change anything for you guys at Genco? Is it, whether it's strategically or from a capital allocation perspective?

Yes, that's a great question, and good morning, Omar. I think it gives us even more flexibility to take a look at what we want to do from a dividend standpoint, what we want to do for continued growth. So I don't have a specific answer, but there's no doubt that that is a mild zone. you know, I think we'll take a look at quite a few things once we get to that net dead zero, which, as you said, we're approaching pretty quickly now.

Okay, yeah, so we'll look forward to seeing how things progress from there. I wanted to also just ask about, you know, you sold the three CAPEs last year. You replaced them. Here recently you sold an older CAPE, which you mentioned is non-core, same for the Supra. What are your thoughts on replacing them in this market? Is there a plan on your part to replace those two shifts, and would you do so via the S&P market, or would you do a charter-end approach?

No, I think, well, first of all, we would do it in terms of the S&P market. I anticipate we will replace those two vessels in a relatively short period of time. values are firm in both the older vessels, which is why we elected to sell the Hadrian particularly right now. And they continue to be firm in the newer and the eco vessels. But we still think the cash on cash returns are justified. And so we like the idea of being able to know particularly the older ships take advantage of that high market and then we're redeploying capital for the long term with the uh with the newer ships and we think that makes a lot of sense so we'll continue to do that and i i again i'll just say the intention is to put those funds back to use in a relatively short period of time okay yeah and then i mean that makes sense and i guess just in in terms of putting that capital to good use here in a short amount of time the

You mentioned seasonality and some repositioning of vessels, and the broader market has impacted freight rates, although they're still fairly decent and relatively healthy. Has there been any kind of impact on the sale and purchase market? Has there been a – I mean, it seems like that market's been fairly busy for the past almost, I guess, year, year plus. Has there been any sort of slowdown in S&P activities or still fairly active in being able to get a deal done is – It's just as slow as it has been.

A few things. One, I would say it's still active. Having said that, we're in the month of August, and S&P deals do tend to slow down a little bit just from a pure seasonal summer standpoint. But there's still transactions being done, and they're being done at last-done prices as well. So we haven't really seen any softening on the price front.

Okay. Yeah, so firm, as you say. Yeah, great. All right, John. Thank you. I'll pass it over. Great.

Thanks, Omar.

Your next question comes from the line of Liam Burke from B. Riley. Please go ahead.

Yeah, thank you. Good morning, John, Peter, Michael. Good morning. Good morning. John, you've got a time charter on one of your CAPEs at 35,000 a day, which is a pretty healthy rate. Has there been any interest in the market of time charting out any of your other capes that are trading in the spot market?

I would say where rates are, and particularly that we're in the summer, I would say liquidity is a little lower on the one-year TC market. You could certainly do one today, but we think rates are actually going to improve as we get into late third and early fourth quarter. I think assessing it is better left for another month or so. Having said that, we've done some index deals. And as you're aware, those index transactions allow us to fix at any time within the index period. And so we have a couple options available, a couple levers to pull. When things firm up in the latter part of the year, if it makes sense, we'll take some exposure off the table. But I think right now, during the summer, what I would call more of a traditional summer lull, I think waiting is the best strategy.

Okay. You talked about redeploying the proceeds of your vessel sales to higher return opportunities that should come to pass pretty soon. You have a few older vessels, specifically Specifically, you've got two non-CAPEs that are similar to the Warrior. Is there any interest to move them out and to redeploy it to higher return opportunities, or are you just going to maintain it right here?

No, look, on the supers, as you pointed out, there are 205s that are there that are 55s. Those are definitely... in the box to move out and redeploy. And then there's some of the, you know, maybe the 09s and 10 Supras we'll also look at. So I think you'll continue to see more of the same until we can, you know, until we can find a larger transaction, which as you know, we're always trying to uncover.

Great.

Thank you, John. Thanks, Liam.

Your next question comes from the line of Ben Nolan of Stifo. Please go ahead.

All right, thanks. Hey, good morning, guys. So I have a couple. First of all, and this maybe goes back to Omar's question a little bit, can you maybe walk me through the calculus as to sort of how you come up with that $19.5 million of effective reserve when you're allocating capital towards the dividend? Just maybe... What's the math behind that, or how do you think about that going forward now that you really don't have any debt? Hey, Ben.

Yeah, I'll take that one. Thanks for the question. So the $19.5 million voluntary reserve is, just to be clear, it's 100% in the board's discretion in terms of the use of that, and we have moved it up or down in previous quarters. But to answer your question, to get to the calculus of it, When we first announced the value strategy, we had a debt repayment line item of 8.75 million, and then we had a voluntary reserve of 10.75 million. And since we now have no mandatory debt amortization and we actively manage the debt with the RCF that we put in place last Q4, we decided to simplify the calc and consolidate those two line items into one. So that's how you get to the 19 and a half. But essentially, again, like I mentioned earlier, it is fully discretionary in terms of board management's view of it. And, you know, in the past, we have flexed that reserve as well. So hopefully that answers your question.

Yeah, Ben, keep in mind that was, you know, we gave that guidance at the beginning of this year. And as Pete said, we've... We've lowered it in 2023 to pay dividends in the second and third quarter when the formula may have produced a zero, which we still have that flexibility going forward, depending on freight rates. But that reserve gets assessed at least once a year. So we'll be looking at it again towards the end of this year to give forward guidance for the following year. And as I said earlier on the call, Getting down to net debt zero, you know, is a milestone. So I think we'll be looking at quite a few things as we get in towards the end of the year.

Okay. I appreciate that color there. And then my next question really is just more for modeling. But in general, as you think about the OPEX, I know it looks like the Cape Size OPEX came up a little bit this year. Are you seeing much in the way of inflation at all in terms of that OPEX? Or maybe was it just, you know, I know that sometimes things can be a little lumpy from quarter to quarter.

Yeah, that's exactly it. So Q2, sure, it was higher. We were guiding to a higher DBOE figure for the quarter. But yeah, to your point, When you do look at OpEx over a three-month period, it does get very lumpy. We like to look at at least 12 months. I mean, if you stretch it out to the last six quarters, last 18 months, our DBOE average is about 6,200, which is in line with our Q3 guidance that we provided. So it does get a little bit lumpy, and Q2, a lot of it was timing-related. But when we look ahead to Q3, we're guiding for a lower number of 6,150 per vessel per day compared to the 6,850 in Q2. Um, on a year over year basis, maybe slightly higher with typical inflation, uh, crew wages is obviously a large part of, uh, of the overall DBOE mix, but, um, yeah, nothing out of the ordinary and more timing in Q2.

Yeah. And then, you know, as we, um, you know, as we typically do, as we get, um, above the 90% fixture rate on the TCE, we will, um, you know, we'll continue to put out guidance for that. And, and we'll also, uh, we'll put a guidance out for, uh, for Q3 OPEX as well at that time. Great. I appreciate it. Thank you, guys.

Thanks, Ben.

Your next question comes from the line of Bendic Neatingness of Clarkson Securities. Please go ahead.

Thank you. Morning, guys.

Morning.

Just back to capital allocation and your balance sheet. You have a lot of liquidity at hand with your CS structure and you're also at I think it's now 41 vessels. Do you have any sort of sweet spot in terms of how many vessels you want to operate or sort of a brief from an operational perspective?

I wouldn't say there's a sweet spot, but we are net down in terms of what we have sold. So we definitely are going to be adding, as I said, in the short term, two to three ships to replace what we've recently sold. So that will definitely occur. We're going to continue with the fleet renewal approach for some of the older Supermaxes as well and replace those um and if you know again we we continue to look for the right transaction to to grow um you know on a on a bigger scale um but you know not not the easiest thing to uh define and we certainly we certainly don't want to we've worked very hard to get to net debt zero and so we certainly are not going to lever up so to speak um in in this market with firm asset prices but Again, the right transaction, if you can figure out a way to do NAV to NAV type transactions with shares, then those types of things make more sense. So, longer answer to your question. Thank you. Thank you.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Paul Fratt with Alliance Global Partners. Please go ahead.

Yeah, good morning. John, you know, where do stock buybacks fit in your capital allocation program or strategy?

Sorry, say that again, Paul. It just broke up a little bit.

Yeah, sorry. Where do stock buybacks fit within the capital allocation strategy?

Look, you know, buybacks, as you're aware, we've talked about these, you know, rather recently quite extensively. It's in our tool belt. There's no doubt there's a time to do those. We discuss it with the board continuously. And, you know, right now I would say we're not in that mode, but that doesn't mean that there becomes a wider disconnect between where vessel values are and nabs and where our share price is trading clearly we're gonna we're gonna we're gonna look at that and and make a decision i mean it's there is you know there's there's a discount right now you know if you you actually look at where vessel values are today they'd have to come down i think somewhere around 25 to actually justify today's share price so which is um doesn't make a lot of sense to us but There's a lot of things in the equity markets right now that are with dislocation and don't make a lot of sense. But yes, it's definitely in our tool belt, Poe, and there is a time to put that in place.

Great. And Peter, if you could just clarify, it sounds like the reserve is going to be reviewed on an annual basis, not a quarter-to-quarter basis.

I don't think that's the case, Paul. I mean, I think we're always looking at the reserve every single quarter. But in terms of giving real guidance to the market, and we said this since the beginning of the strategy, we wanted to give at least a 12-month look. But that doesn't mean we don't, again, look at it on a quarter-by-quarter basis. But We're very quickly coming into the end of the year where we'll take a deep dive on our capital allocation strategy. So it's not far away.

And then, John, you mentioned the share-to-share transaction. Have you seen any pickup in interest in a share-to-share transaction over the last quarter or so?

I don't know if there's that. I'm not so sure if it ebb and flows, so to speak. it's um yeah i mean it you know when when you're obviously when you when you have wider discounts on uh on nav it's it becomes more more difficult so maybe maybe we have ebbed a little bit here but we're always looking at transactions and um hopefully uh hopefully we will uh be able to execute on you know sometime in this market i i i wish i had a better answer for you but but it's um They're not easy transactions to do, as you're well aware.

Sounds good. Thanks for your time.

Thanks, Poe.

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