Q1 2023 Genco Shipping & Trading Ltd Earnings Call

Participants

Apostolos Zafolias; CFO & Executive VP of Finance; Genco Shipping & Trading Limited

John C. Wobensmith; CEO, President, Secretary & Director; Genco Shipping & Trading Limited

Peter Allen; SVP of Strategy & Finance; Genco Shipping & Trading Limited

Liam Dalton Burke; MD; B. Riley Securities, Inc., Research Division

Omar Mostafa Nokta; Equity Analyst; Jefferies LLC, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & 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 2 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.

Peter Allen

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, 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 a 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 31, 2022, and the company's reports on Form 10-Q and Form 8-K supplement filed with the SEC.
At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

John C. Wobensmith

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 website.
Following a year during which we generated sizable earnings and returned significant capital to shareholders, we continue 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 drybulk freight rates.
We achieved a 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 drybulk cycles have historically been approximately 1 to 2 years in duration, I note that Genco has now achieved adjusted net income for nearly 3 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 charter 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 per vessel per day.
Importantly, we have a light drydocking 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 $0.15 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 Genco'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 drybulk shipping markets experienced seasonal volatility in freight rates. However, Genco continued to voluntarily pay down debt.
The drybulk 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 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 6 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 $4.445 per share in dividends or approximately 31% of our current share price. We believe our track record of meaningful and sustainable dividends, almost over 4 years through varying cycles, speaks to the strength of the company's balance sheet and our prudent approach to capital allocation.
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 0, having created a compelling risk-reward model.
Regarding the current drybulk market, freight rates have rebounded meaningfully since the February lows. We currently stand at year-to-date highs for Capesizes at over $19,000 per day on the non-scrubber-fitted Baltic Capesize Index. We remain positive for the balance of the year given the reopening in China, and the impact this has on the drybulk 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 Zafolias, 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 2 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.

Apostolos Zafolias

Thank you, John. During the first quarter, we continued to record solid earnings and voluntarily paid 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 2.5x our debt outstanding balance.
For Q1 2023, the company recorded net income of $2.6 million or $0.06 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, provides 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 0. 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 $0.15 per share. Walking down the dividend formula, we had operating cash flow of $21.2 million, less debt repayments of $8.75 million. Drydocking ballast water treatment system and energy saving device cost 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 drybulk market since March and our positive outlook for the balance of the year.
Looking ahead to the second quarter, we anticipate our cash flow breakeven 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 SVP of Strategy and Finance, to discuss the industry fundamentals.

Peter Allen

Thank you, Apostolos. During the first quarter of 2023, the Baltic Capesize and Supramax indexes hit lows in mid-February of approximately $2,200 and $6,800 per day, respectively. However, these rate levels have been significantly rebounded to $19,000 and $12,000 per day, highlighting the significant operating leverage of these asset classes.
We've seen positive drybulk indicators for much of the last 2 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 similar utilization 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 [figure]. China's Q1 GDP growth of 4.5% 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 drybulk 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. Historically low order book as 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 drybulk market given the various demand catalysts highlighted, together with historically strong supply-side fundamentals.
This concludes our presentation, and we will now be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from Omar Nokta from Jefferies.

Omar Mostafa Nokta

Wishing you best of luck. And definitely, we'll miss working with you. You've been there since the very beginning.

Apostolos Zafolias

Thank you very much, Omar.

Omar Mostafa Nokta

Yes. Yes. Yes. So I just wanted to ask you. Broadly, you guys talked about the drybulk market and how we bounced off of the lows that we saw earlier in the year. And we're sitting basically at -- highest for the year at $19,000 for the non-eco Cape.
Just wanted to maybe ask kind of what you're seeing in the market. Because it's -- this is almost like the quietest run-up in Cape rates in a long time. There doesn't seem to be that much funfair 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 cap 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 point -- at this level given this backdrop?

John C. Wobensmith

Omar, I look at it pretty positive. Any time you see Cape rates, 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 Ultramax's over the last 4 months.
I would -- I guess I would go back to -- we started talking about a China reopening recovery, I believe, in October of last year. And our thesis at the time was that you probably wouldn't really see a meaningful recovery until the second half of this year, 2023.
So 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 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 those tend to lag. So I see that hitting more in 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 become complacent enough the $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 breakeven.
So longer answer to your question, but 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, things look pretty good. And it's also interesting -- it's interesting to see how flat the FFA curve is right now in both Capesize and the Ultra and Supramax. And it may be flat, but there's still -- again, they're at pretty healthy levels. So hovering around 19 to 23 on the Capes.

Omar Mostafa Nokta

Yes. That's helpful. I mean it's just interesting. Yes, you've got a very firm rates here, well above your breakeven. And you just -- it's just interesting to see that perhaps the supply picture is much tighter than maybe we give it credit for.

John C. Wobensmith

Yes.

Omar Mostafa Nokta

One just follow-up. You guys mentioned the reserve. And a separate topic, but just on the reserve, clearly, Genco is in a very strong financial condition. You've got a good amount of cash, low leverage overall. You paid down so much debt over the past couple of years.
You got the formulaic approach to the dividend, where you've got the drydock 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 million, do you think that's actually -- do you think that's still needed? Or are you being overly conservative with that?

John C. Wobensmith

The $10.75 million 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 that we can move into newer tonnage as the market dictates.
But -- and clearly, we've kept the $35 million a year in principal repayments in place. So the goal of getting down net debt to zero over the medium term is still there. So I think it's -- I think it will be really interesting once we get down to that net debt to 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 on it, I do believe the reserve is important. We've got to make sure that we're setting -- continuing to set the company up for the future from a fleet renewal standpoint.

Operator

(Operator Instructions) Your next question comes from Liam Burke from B. Riley.

Liam Dalton Burke

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?

John C. Wobensmith

Yes. So where we would -- 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 the 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 vessels away, Capesize vessels, in particular, on index charters at some very good premiums above and beyond the Baltic Capesize Index, anywhere from 125% to 127% over the BCI, plus a scrubber premium on top of that.
So from a portfolio standpoint, that's actually paid off really well, 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.

Liam Dalton Burke

Great. 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?

Peter Allen

Thanks, Liam. Good question. 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.
Peak steel production in China tends to happen in Q2. So right around now, actually. But peak iron ore exports from Brazil and Australia, which is really what drives drybulk rates and keep 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 yes, we're very focused on Brazil and Australia, really ramping up iron ore exports in the coming months.

Operator

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.

John C. Wobensmith

Thanks, Liam.