GNK (2019 - Q3)

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Third Quarter 2019 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. I'd like to inform everyone that 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. And instructions will follow at that time. A replay of the conference will be accessible at any time during the next two weeks by dialing 888-203-1112 or 719-457-0820 and entering the passcode 370213.At this time, I would like to turn the conference over to the Company. Please go ahead. Unidenti

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 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 and 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, 2018 and the Company's report subsequently filed with the SEC.At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.

Good morning, everyone. Welcome to Genco's third quarter 2019 conference call. I will begin today's call by reviewing our third quarter and year-to-date highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals and then ultimately open the call up for questions. For additional information, please also refer to our earnings presentation posted on our website this morning.In the year-to-date, we have taken important steps to strengthen our future prospects. Specifically we advanced our comprehensive IMO 2020 strategy and further strengthened our fleet profile and earnings power. We also improved our credit facilities enabling Genco to implement the next phase of our capital allocation strategy.As announced in earnings press release yesterday, management and the Board of Directors have initiated a regular quarterly cash dividend policy with a dividend of $0.175 per share for the third quarter of this year. On top of this, we declared a special dividend of $0.325 per share utilizing net cash proceeds from four recently agreed upon vessel sales after the repayment of the associated debt. Following the payment of the aggregate dividend of $0.50 per share, we intend to maintain the strength of our industry leading balance sheet, which we believe is a key differentiator of the company. We also will concentrate on maintaining net leverage positions in terms of one of the lowest in our peer group.Effectively allocating capital for the benefit of our shareholders has been a significant focus of ours. Following last year's attracted acquisitions of high quality fuel efficient vessels and given Genco's industry leading balance sheet, strong liquidity position of over $166 million and a strengthening drive off market, we are pleased to now begin to return cash to shareholders. We believe that this decision is well time as we aim to create shareholder value throughout the drive off market cycle, which is strengthened sequentially in each of the last three years. This announcement marks an important milestone in achieving a key capital allocation objectives under our long term strategic plan. This is also a testament to the development of our platform and the strong group of professionals that make up the Genco team.Regarding the progress of our IMO 2020 strategy, we have installed scrubbers on 12 of our 17 Capesize vessels today, representing a completion rate of 71%. Additionally, we have three vessels in the shipyard being fitted with scrubbers currently, and expect to have the remaining 2 Capesize vessels enter the shipyard in the coming weeks to commence installation.A primary operational objective for this year remains to complete our scrubber installation program ahead of the January 1st, 2020 compliance date. This important effort is aimed at ensuring that these systems are fully functional, up to our operational standards and to provide ourselves with experience operating systems prior to regulations entering into force. With our entire Capesize suite of 17 vessels entering the shipyards this year for scrubber fitting in addition to scheduled special surveys and ballast water treatment system installations, 2019 has represented a year of substantial capital expenditure in this core portion of our fleet. We view that as an investment in our Capesize suite this year as we seek to maximize Capesize utilization in 2020, since we will have no scheduled dry docking for these vessels, positioning Genco to capture market upside potential going forward.During the third quarter, our fleet lifetime charter equipment increased by 58%, compared to the previous quarter, while estimated Q4 fixtures today imply another 20% increase from third quarter levels. This increased earnings trajectory over both quarters’ highlights the improvement of the drybulk market since the first half of the year, and for Genco specifically reflects more normalized trade patterns particularly on Capesize vessels.Furthermore, we've continued our fleet modernization efforts having agreed to sell 4 older vessels. In October 2019, we completed the sales of two handy sized vessels. We have also agreed to sell our 2 remaining Panamaxs, which are expected to deliver to their new owners during the fourth quarter. Following the completion of the sales, Genco will have fully exited the Panamax sector, as we continue to execute our barbell approach to fleet composition and create a more focused fleet.I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.

Thank you, John. For the third quarter of 2019, which represented the most significant drybulk in quarter in Genco's history, the Company recorded a net loss of $14.6 million or $0.35 basic and diluted loss per share. Excluding $4.2 million in non-cash vessel impairment charges, adjusted net loss for the quarter was $2.4 million.Cash including restricted cash and debt outstanding gross of deferred financing costs are $166.2 million and $518.6 million, respectively as of September 32,019.To date, we have incurred $24.7 million of scrubber related expenses through the first nine months of this year, and have drawn down $21.5 million under the scrubber tranche over $495 million credit facility. We estimate that we have an additional $13.5 million of cash installments remaining under our scrubber program, while we have remaining capacity of approximately $11.5 million to draw down under the balance of our credit facility.Supporting our strong balance sheet is our competitive cash flow breakeven rate, which we estimate at approximately $11,667 per vessels per day for the fourth quarter. We've also provided further detail on these breakeven rates in the appendix of our presentation for your reference.As John mentioned earlier, we have initiated a regular quarterly cash dividend policy. In relation to this dividend policy, we have amended restrictions on dividends in our credit facilities, enabling Genco to capitalize on its strong liquidity position to return cash to shareholders. We have amended the dividend covenants in our credit facilities, such that Genco may pay dividends and/or repurchase shares under the following circumstances. First, we may pay dividends to the extent our total cash and cash equivalents is greater than $100 million and 18.75% of total indebtedness whichever is higher. Second, we can pay dividends if the collateral maintenance debt ratio is more than 200%. And then if neither of those to apply, Genco can pay dividends, but will be limited to 50% of the previous quarter's net income.Payment of dividends is also subject to customary conditions in the agreements of our credit facilities, Marshall Islands law and the discretion of our Board of Directors.I will now turn the call over to Peter Allen, our Drybulk Market Analyst to discuss the industry fundamentals.

Thank you, Apostolos. The Baltic Dry Index has improved significantly in the second half of this year with freight rates reaching multi-year highs in the process. The Capesize market in particular has been driven by increased iron ore shipments out of Brazil at a time in which vessel capacity has been constrained, due to the global fleet’s preparation ahead of IMO 2020.The strength of the Capesize market has filtered down to the smaller class vessels, providing an overall uplift to the earnings environment relative to the first half of the year. A record amount of seaborne iron ore volumes were imported by China during third quarter as the country fueled it's near double digit growth rate in steel output and partially rebuilt previously drawn down inventory levels.On the supply side, net fleet growth to-date is approximately 3%. However, overall fleet wide productivity has declined, due to a large portion of beyond the water tonnage higher [ph] to discover retrofitting.In terms of the order book vessel contracting has been relatively limited so far this year despite a strong market in the second half, leading to a stable order book as a percentage of the fleet at approximately 10%, which compares to 7% of the fleet that is greater than or equal to 20 years old. We believe these positive supply side dynamics provide a solid foundation for drybulk market fundamentals going forward.This concludes our presentation and we'd be happy to take your questions.

Thank you. [Operator Instructions] We can take our first question from Randy Giveans from Jefferies. Please go ahead.

Howdy gentlemen, how's it going?

Good morning, Randy.

Yeah, first and foremost, you know, obviously, congrats on the dividend outspent. I think it's the first one since 2008 or something like that. So nice to see the return of capital there. So look at the dividend. You know, I understand the special dividend was based on kind of the incremental cash proceeds from some vessel sales. But how did you determine kind of the regular quarterly dividend of $0.175? You know, clearly, you're comfortable with your balance sheet, bullish on the market outlook. So following this kind of new sustained dividend is the next use of free cash to purchase modern second hands, renewing your fleet or to further repaid debt? So kind of a two part question there.

Look, the $0.175 per share regular dividend policy really came out of looking at where the NAV of the company is and putting a yield on not today's current share price, but the much higher NAV value. So that's how we determine the per share basis. We obviously also look at the sustainability of that $175 and we look at our balance sheet, we look at our cash position, we look at runway models, and that was the number that we felt comfortable putting forward and was sustainable.In terms of other uses of a capital, look, our number one goal right now is to increase the valuation of the shares. They are trading below NAV along with their peers, and we've looked at a number of capital allocation strategies to get that valuation up. We've looked at share repurchases. We came to the conclusion after quite a few of our peers that have done this that it has no effect on the share price. We have looked at well, does it make sense to increase the fleet in terms of asset acquisitions. I do believe there are still good return on capital numbers in terms of asset acquisitions, but the market does not seem to be giving any credit, at least right now to that. So then when we looked at dividends, we felt that this was the best way and the best tool in our belt to try and move the valuation stock closer to where it should be from an NAV standpoint.

That's fair. And you mentioned NAV a few times there, so what is that kind of NAV, I am sure above $10?

Yeah, I mean, it's well above $10. I mean, it's – look on any given day, it changes, but our – you know, when we look at brokers values, our cash position, our GAAP position, it's somewhere in the mid-14.

Okay. Second question. Look at the general kind of market and your 3Q verse 4Q rates, you know, obviously Capesize have improved, currently still above your fourth quarter to date bookings. Whereas the smaller asset classes are relatively flat, both from 3Q, 4Q's picked up a little but kind of current spot rates are flat to slightly down from your quarter date rates. So how you see the Capesize market as well as the smaller asset classes kind of performing the rest of the quarter right. How's the back half of the quarter look for those two segments?

Well, look, the fourth quarter in general is you know, we're estimating is going to be 20% higher than the third quarter. And that's an uptick across the Capesize sector as well as our minor bulk fleet. The Panamax is our index deals. And as I mentioned earlier, they are going to be sold before the end of the year.In terms of, you know, where we see things. I mean, I think we spoke about before that there was a lot of disruption with respect to installation of scrubbers. And what I mean by that is, we had the majority of our fleet trading in the Pacific, so that we can make sure we hit the timing right on our slots at the shipyards for our scrubber installation program. And then coupled with the fact that we had a rising of – rapidly rising market, certainly in the Capes and also in the minor bulks as well. And so it's always difficult to capture that real time though, now that the market is has stabilized and even tick down a little bit. You'll see better and you are seeing better fixtures in the fourth quarter. And we're also saying 71% of the way through our scrubber program, which is very important. So, it should be a much more efficient chartering, if you will for the fourth quarter, which is represented in the numbers.

Sounds good. Makes sense. Well, hey, thanks again and congrats on the dividend.

Thank you.

Thank you. We can take our next question from Jon Chappell from Evercore. Please go ahead, your line is open.

Hi, guys, this is Shaun Morgan [ph] on for Jon.

Hi, Jon.

I think the big news on this call seems to be the dividend and the fact that you guys were able to successfully, show shareholders that you’re going to do a sustainable dividend going forward. And I noticed that you were able to also work with the banks to come up with a series of covenants that I assume would have enough headroom to be able to do this doing going forward. You’re targeting 17.5. Looks like the first two covenants are kind of the first test and then that’s the third covenant, the 50% of the previous quarter’s net income. So, I guess – I’m just trying to understand is that because if you don’t meet the first two, then you’re able to, if you have positive income during the quarter, then you can pay 50% of that and if that meets the 17.5, then you’ll continue that? And then if those three conditions are not 100%, then you’d basically have some floating component to it, so where you’d pay less than 17.5?

Right, yeah, we haven’t talked about the floating component. But just look on the covenants, the key covenant is they have a minimum of $100 million in cash pro forma, or 18.5% of the debt outstanding. So, if you look at where we are today, we have $166 million in cash at the end of on September 30. So, there’s quite a bit of cash there before we get down to the $100 million minimum if you will. The 50% of net income that’s always been in place in the credit facility, so that was not in add. We wanted to make sure we kept that in place as sort of a third tier. But I’d be much more focused on the minimum cash number that of $100 million then than anything else.

Okay, I see. So, you’re saying that with the first two covenants, there’s enough headroom that you feel like you have sustainability on the $0.175, shouldn’t really think of that is like, some of your, I guess, not your peers, but some of the tanker companies have a floating type dividend. So, this is really going to be more of a fixed of them going forward?

Yeah, this is this is a regular $0.175 dividend policy per quarter.

Okay, great. Yeah, that’s a good signal going forward I think for confidence. And then regarding the sales, I think obviously makes sense that the non-core, Panamax is getting removed from the fleet and then the age of the other two smaller ships sort of make sense in terms of your vessel sales. Is there anything else, any other vessels that you can kind of point to in the fleet that you think might attract candidates to try to generate shareholder returns of cash that would kind of follow that mold?

Look, we have one older Handysize ship left to 2005. I would say that’s something that we’re looking to sell. It’s no secret that we’ve also looked at disposing of the 53,000 deadweight on ships. So, nothing has changed on that front in terms of disposals targeted. We’ll look at how things are after we sell those. And again, you’re looking at everything in your tool about it at the time, right, depending on the equity valuation and do we want to distribute those funds in terms of dividends? Do we want share buybacks? Do we want to put cash on the balance sheet? Or do we want to do vessel acquisitions? It’s definitely something that you look at in real time. And we will. And I think we’ve demonstrated, particularly with this last special dividend, that there’s a lot of time and effort, a lot of thought, and, to get to the right place, which is where we are today.

Yeah, I agree. I think that this nimble opportunistic strategy that really show investors you have confidence in returning capital is look, so, I’m going to turn it over to the next caller. Thanks.

Okay. Thanks, Shaun.

Thank you. [Operator Instructions] We can take our next question from [indiscernible] from Clarksons Platou Securities. Please go ahead.

Hi, thank you. Hey guys. Congrats on the dividend announcements. Obviously, a big deal. I am sorry, I’m joining the call a bit late. But just wanted to maybe ask you may be bigger picture, with the dividend now, clearly to us it looks like you said that a sustainable level over the long term. Do you think – do you feel, with the company having been so spot exposed and we think it’s obviously a good time to be exposed to the spot market, just having a different policy now, kind of compel you to want to seek more longer term contracts for the fleet. Does that come into play at all?

I don’t think that’s comes into play basis a dividend. I mean, we’re constantly looking at period opportunities and managing it as a portfolio. We have put some charters in place on some of the smaller ships over the last couple of months. The other thing in our tool because of the fact that we’ve revamped the commercial platform is we can do a quite a bit of forward cargo booking, which we started to do for the first part of the year, which is typically a little slower period. So, we’re not just limited to two time charters. We have quite a few trading opportunities in terms of forward cargoes that we can also do. But to answer your question, but just very concretely, I wouldn’t say it necessarily because of the dividend, but in general, if we see a good opportunity on locking something in at a healthy rate, we’re definitely going to do it.

Okay, sounds good. Thanks for that color. Other question is and sorry if you addressed it already. You have to have $100 million of cash to maintain the dividend and you’ve got 65 plus million above that, and not saying you need to spend it. But as you think about it, do you feel if you were going to deploy the capital, you’ve got the nice chart in the presentation that shows the focus on Capes, Ultras and Handy, but mainly Capes and Ultra, where do you think you spent an incremental dollar it’s on the Capes are Ultra?

Look, I think it’s both. We definitely want to continue the barbell approach. If you look at what we did on our last acquisition in June, we did some Capes and we did some Ultras that the exact same time to maintain that. And as you pointed out, we do look at the Capes and the Ultras as much more of the core fleet rather than the Handysize. But again, the whole concept of the regular dividend is clearly to return cash to shareholders, but it’s also to allow the company utmost optionality. So, we still with a strong balance sheet, we can still do acquisitions. We can – we obviously can still do share buybacks we – so it’s all about maintaining optionality. And that’s really why we chose the level of dividend that we did. And obviously, we feel that returning cash to shareholders right now is the best move.

Got it. That’s helpful. John. Thanks so much for that and congrats again on the dividend.

Thanks so much.

Thank you. We can now take your next question from Amit Mehrotra from Chris Snyder - Deutsche Bank. Please go ahead.

Hey guys, this is Chris Snyder on for Amit. Sorry, I hopped on a bit late as well. So, I apologize of this has been touched on but. So it feels like 2020 should be a stronger year for cash generation than 2019, that’s supplies moving lower and the scrubber investments turning from a cash head headwind into a pretty considerable cash tailwind of spreads, hold that current levels. So, I guess the question is, what does this mean for the dividend outlook? Should we expect to see growth on the back of this kind of expected ramp in cash generation? Or does the current dividend just kind of reflect the anticipation of that, stronger cash environment?

So, the one thing I’ll add to your list of positive factors in 2020 is, it is 2019 as I said before was the biggest year this company’s ever had in its history of drydockings, meaning next year, is a very low drydocking year in fact, zero of our Capes are drydocking next year. So, we will have very high utilization. But going back to your question, look the dividend is right now at this point, our policy is $0.175 a quarter. There is no reason why if things continue to move up and are positive that we won’t revisit that. But again, these things are all looked at in real time. We have a lot of things at our disposal right now, increasing the dividend, share buybacks, vessel acquisitions. The main point is, is that this company continues to have that optionality and will make the right move at the right time.

Appreciate that. And then kind of looking at the Cape market. So, rates in the market in general has been supported by increase out of service time for scrubbers. Installations are taking longer than expected, I guess kind of how long or how into 2020 could this kind of tailwind for the Cape market remain just as long as we’ve seen this highest service time?

From what we can tell is least through the first quarter, I think a lot of people who felt they were going to get scrubbers installed in the third quarter that’s all – a lot of that’s been pushed into the fourth quarter and the fourth quarter is getting pushed in the first quarter. There’s definitely still big waiting times, disruptions, and if you were to arrive on the scene today and try to install scrubber, you’re well into next year to even think about getting a slot, which is again, why we wanted to get all this done before the end of this year. And then there’s the whole operational side. I mean, this is a brand new piece of equipment for most companies. And you need to get that operational experience and run the traps if you will on these before you get comfortable that you’re using at long term. So, that’s why it’s so important for us to get all this done this year.

Thank you for the color on that. And then just one last one if I could. So, earlier this year, China announced coal import quotas for 2019 that they were going to keep it flat at 2018 levels. And through the first nine months of the year, I believe coal imports are running about 10% higher year-on-year. So, that implies a pretty sharp decline into Q4. Are you seeing this in the market and kind of what’s your outlook for that as we head into year end?

Yeah, I mean, look, we are seeing coal being cut back, which is, it’s all predicted, right. We’ve been talking about this for probably six months because of the quotas. So yeah, I think we could see a softening as we get into the end of the year. But let’s also keep in mind that Southeast Asia, particularly Vietnam, those numbers continue to move up double digit rates and Indian coal imports also continued to move up significantly. So, it’s not just about China. And even if we have a little softness on the Chinese side, we’ll see that pick up again in the first and second quarters. And the other thing you got to keep in mind is that it’s not just coal, I mean the major commodity is iron ore, right. And in particular given guidance that would show 5% more imports in the fourth quarter over the third quarter, which was a pretty strong quarter. So, I think they’re mitigating factors on a little bit of cut back on the Chinese coal imports.

Well, I appreciate the time. That’s it for me. Thanks, guys.

Okay. Have a good day.

Thank you. There appears there are no further questions in the queue. At this time, I would like to hand the call back to your host for any additional or closing remark.

Well, thank you very much, everyone. This concludes the call. Everyone have a nice day.

Thank you. This concludes the Genco Shipping & Trading Limited conference call. Thank you for your participation, ladies and gentlemen. Have a nice day.