Genco Shipping & Trading Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

Key Takeaways

  • An achieved Q2 time charter equivalent (TCE) rate of $15,556/day—approximately $2,500/day above the scrubber-adjusted benchmark—drove net income of $11.6 million, adjusted EBITDA of $30 million, and a $0.15 per share dividend.
  • Prudent capital allocation continued with $8.75 million of voluntary debt prepayments in Q2 (totaling $296 million since 2021), maintaining a low net loan-to-value of 11%, $54 million in cash, and $261 million of total liquidity.
  • Despite short-term freight rate softness from unwound port congestion and dampened developed-market demand, management remains constructive on dry bulk markets given historically low newbuilding order books and tight supply growth.
  • Key demand drivers include year-to-date increases in China’s iron ore (+8%) and coal (+93%) imports, low port inventories heading into peak restocking, and a recent pro-growth shift in Chinese policy.
  • For the third consecutive year, Genco was ranked #1 in the Weber Research ESG report, highlighting its leadership in sustainability, transparency, and overall capital stewardship.
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Earnings Conference Call
Genco Shipping & Trading Q2 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

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.

Operator

Instructions will follow at that time. A replay of the conference will be accessible anytime during the next 2 weeks by dialing 1-eight 70seven-six 74 7,070 and entering the passcode 28,452. At this time, I will now turn the conference over to the company. Please go ahead.

Speaker 1

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, 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 ks for the year ended December 31, 2022, and the company's reports on Form 10 Q and Form 8 ks subsequently filed with the SEC.

Speaker 1

At this time, I would like to introduce John Bowensmith,

Speaker 2

Good morning, everyone. Welcome to Genco's Q2 2023 conference call. I will begin today's call by reviewing our Q2 2023 year to date highlights, providing an update on our comprehensive value strategy, Please also refer to our earnings presentation posted on our website. During the Q2, we continued to execute our value strategy, For the Q2, 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 $11,600,000 and adjusted EBITDA of $30,000,000 For the Q2 of 2023, we declared a dividend of $0.15 per share, representing our 7th dividend payment under our value strategy with cumulative dividends declared to date of $3.54 per share over those 7 quarters.

Speaker 2

Since Q3 2019, we will be making $0.55 per share We're approximately 33% of our current share price. We believe our track record of meaningful and sustainable dividends over the last 4 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 $10,750,000 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 $8,750,000 during Q2.

Speaker 2

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 $10,750,000 to $9,920,000 for the Q2 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 dividend. In addition to seeking to pay meaningful dividends, we consistent with our compelling risk reward model.

Speaker 2

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 newbuilding 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 3rd year in a row was ranked number 1 in the Weber Research ESG report out of a total of 64 publicly traded shipping companies.

Speaker 2

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.

Speaker 1

Thank you, John. For Q2 2023, the company recorded net income of $11,600,000 or $0.27 basic and diluted earnings per share. During the Q2, we paid down $8,750,000 of debt on a voluntary basis, bringing our cumulative debt pay down since the start of 2021 to $296,000,000 or 66 percent of our debt levels. This has enabled the company to achieve a low net loan to value ratio of 11% currently. As of June 30, our cash position was $54,000,000 and our debt outstanding was $153,500,000 Furthermore, we have $207,000,000 of undrawn revolver availability, bringing our total liquidity position to $261,000,000 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.

Speaker 1

During the Q2 of 2023, the Baltic Capesize index crossed $20,000 per day in early May before pulling back. Spot Capesize rates currently stand at approximately $15,000 per day. Regarding Supramax rates, the Baltic Supramax Index began the 2nd 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 seasonally strong period for iron ore volumes from Brazil and Australia, which we believe will provide China 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.

Speaker 1

Lending declined by approximately 50% in Q2 versus Q1 and China's PMI declined back into contractionary territory. However, at China's Pollock Borough Meeting in July, the government signaled a pro growth shift in policy, particularly to assist its property market. Regarding the Black Sea Grain Initiative, as has been widely reported, Russia exited the deal, which has seen 33,000,000 tons of agricultural products shipped since inception. Various attacks have materialized thereafter in 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.

Speaker 1

The historically low order book as a percentage of the fleet as well as near term and longer term environmental regulations are expected 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'd now be happy to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. First question comes from Omar Khachta at Jefferies. Please go ahead.

Speaker 3

Thank you, operator. Hi, John. Hi, Peter. Good morning.

Speaker 2

Good morning.

Speaker 3

Just wanted to ask a bit about the market and sort of the near term outlook. You obviously laid out Kind of what's been going on and driving things here recently. We just wanted to ask, clearly Capes have outperformed, I think as many of us expected coming into the year. But the ultras and the Supras have clearly been a bit softer. What do you think Could be coming up on the horizon.

Speaker 3

Any triggers or seasonality wise that could drive the midsize segments to start to push higher here in the near term?

Speaker 2

Yes. I mean, look, one of the things is I think over the last couple of years, we've gotten so used to the midsized sector being at or even slightly outperforming the Capes, which is From a historical standpoint, it's sort of unnatural, right? So I think we've seen a more Historical market in the sense of 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 prospects. Having said that, if you look at the cargo you get into the midsize ships, I think a lot of the softness in 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.

Speaker 2

But I think you need to really see global GDP growth start to pick up a little bit more. There's more of a correlation with the midsized ships Global GDP where the capes are more focused on China. But look, Omar, having said all that, The supply side is clearly our friend, and we just don't need much demand growth and recovery to have the next leg up.

Speaker 3

Thanks, John. Yes, it seems like just a little nudge, A little nudge here or there could drive things higher. And then just maybe on the dividend, clearly, you have Capital allocation policy has been in place for some time now and you stuck with it. I've seen you toggle the reserve, which is quite conservative in the first place, Given how strong the balance sheet is, but just wanted to ask, should we think about, 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, $0.15 as the floor for the

Speaker 2

payout? No, we haven't necessarily discussed the Flora, I think what you have to keep in mind is that 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 what we're going to do on the dividend front. Well, I can certainly make an overall comment, which I've made before. And when we install the value strategy, the dividend is very important to the company and shareholders.

Speaker 2

So we our intention is no matter what the market throws at us to keep the dividend going. And the balance sheet and the low cash flow breakeven allows us to do that without putting any stress on the balance sheet.

Speaker 3

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

Speaker 2

Thanks, Omar.

Operator

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

Speaker 4

Thank you. Good morning, John. Good morning, Peter.

Speaker 3

Hi, Liam.

Speaker 4

John, asset values are pretty healthy in the sector. How are you looking at managing the fleet at this point?

Speaker 2

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.

Speaker 2

And there are certainly transactions being done, particularly in the sort of 10 year old Capesize sector, and we've seen those prices Hold up pretty well. But just going back to your question, right now, it's more of a focus on fleet renewal, improving Continue to improve the age of the fleet and improving fuel efficiency of the overall fleet.

Speaker 4

Got it. And last year, obviously, you had COVID related and crew costs in your operating expenses. It does look like a repeating OpEx per vessel is way down. Is there anything else in there besides just not repeating the one time costs related COVID and cruise?

Speaker 2

No, I mean, and as you said, yes, 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 Q3, 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 Q3 on the OpEx and like I said, it's just slightly higher, but We plan on being on budget for the entire year.

Speaker 4

Great. Thank you, John.

Speaker 2

Thanks, Liam.

Operator

Thank you. Next question comes from Greg Lewis at BTIG. Please go ahead.

Speaker 5

Yes, thank you and good morning and thank you for taking my questions. John, I was hoping you could talk a little bit about how you're thinking about your chartered in fleet. Just looking, it's kind of scaled down a little bit This last quarter versus where it's been over the last year, clearly the spot market is down. It seems like there's some A little bit of softness in the charter on the time charter market. Kind of as the market unfolds, clearly, you're still You know, bullish on the overall market.

Speaker 5

So are we is there kind of a disconnect between where Potential charter out owners are and where chartering in is right now, just given the fact that Spot is where it is versus maybe where it will be in 3 or 6 months. And really just kind of curious, as we Sit here today versus maybe where we are in 6 to 9 months. And this will help us with modeling also. And any kind of view on how you think the chartered in portfolio looks?

Speaker 2

Yes. So what has happened there is, there's been a shift in the market in terms of People booking, willing to book forward cargoes. That has tailed off. I again It's Interest rates are up, so it's more expensive to carry inventory. So I think people right now or at least cargoes right now for the most part are doing transactions that are more spot related and current.

Speaker 2

So that's why 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 if you again, if you look at our numbers, we continue to create arbitrage opportunities, Irrespective, because we continue to outperform the benchmarks by quite a bit.

Speaker 5

Super helpful. Thank you for that. Have a great day.

Speaker 3

Okay. You too, guys.

Operator

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

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