Q2 2023 Genco Shipping & Trading Ltd Earnings Call

Participants

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

Peter Allen; CFO; Genco Shipping & Trading Limited

Gregory Robert Lewis; MD & Energy and Infrastructure Analyst; BTIG, LLC, Research Division

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 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 conference is being recorded and is now being webcast at the company's website, www.gencoshipping.com. (Operator Instructions) A replay of the conference will be accessible any time during the next 2 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.

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 today, 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 Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

John C. Wobensmith

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 continued 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 $0.15 per share, representing our seventh dividend payment under our value strategy with cumulative dividends declared to date of $3.54 per share over those 7 quarters. Since Q3 2019 (technical difficulty) $0.0595 per share or 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 $10.75 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 dividend. 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 0, consistent with our compelling risk reward model.
Regarding the current drybulk 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 drybulk 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 newbuilding prices.
On the ESG front, Genco, for the third year in a row, was ranked #1 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 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.

Peter Allen

Thank you, John. For Q2 2023, the company recorded net income of $11.6 million or $0.27 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 paydown 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 30, 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 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 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, had been firming, increasing by 8% and 93% through June, respectively. China's iron ore port inventories also remained 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 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 market.
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 any [Korean] 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 drybulk market given the various demand catalysts highlighted together with historically strong supply side fundamentals. This concludes our presentation, and we'll now be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) First question comes from Omar Nokta at Jefferies.

Omar Mostafa Nokta

I 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. I just wanted to ask, clearly, Capesize 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? Any triggers or seasonality-wise that could drive the midsize segment to start to push higher here in the near term?

John C. Wobensmith

Yes. 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 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 Cape should be earning more than Ultra, Supra, 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 flows on Cape's, 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 midsized 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. 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 on 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.

Omar Mostafa Nokta

It seems like just a little nudge here or there could drive things. 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. Seen you toggle the reserve, which is quite conservative in the first place given how strong the balance sheet is. But I 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 payout?

John C. Wobensmith

No, we haven't necessarily discussed the floor. 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. But 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. 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.

Operator

The next question comes from Liam Burke at B. Riley.

Liam Dalton Burke

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

John C. Wobensmith

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. 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 -- continuing to improve the age of the fleet and improving fuel efficiency of the overall fleet.

Liam Dalton Burke

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 way down. Is there anything else in there besides just not repeating the onetime costs related to COVID and Cruise?

John C. Wobensmith

No. I mean -- and as you said -- yes, unfortunately, 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.

Operator

(Operator Instructions) Next question comes from Greg Lewis at BTIG.

Gregory Robert Lewis

John, I was hoping you could talk a little bit about how you're thinking about your chartered-in fleet, just looking at 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 bullish on the overall market, 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. Any kind of view on how you think the chartered-in portfolio looks?

John C. Wobensmith

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. Again, expect it to be short term in nature, but it's for a variety of reasons. So it's because commodity prices have come down. It's -- interest rates are up, so it's more expensive to carry inventory. So I think people right now or at least [cargoers] right now, for the most part, are doing transactions that are more spot-related and current. 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.

Operator

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.