Genco Shipping & Trading Ltd

NYSE:GNK

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Second Quarter 2024 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. Instructions will follow at that time. A replay of the conference will be accessible anytime during the next 2 weeks by dialing [phone] and entering the passcode 636 5548.



At this time, I will now turn the conference over to the company. Please go ahead.

[Unknown Executive]

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

[John Wobensmith, executive]

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 5. 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 charter 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 6, we highlight the compelling dividends we have provided to shareholders. The second quarter dividend marks our 20th consecutive quarterly dividend payment. It also represents 5 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 $5.915 per share in dividends or approximately 33% of our share price as of August 6, 2024.



Complementing shareholder returns. During Q2, we continued to priorities fleet renewal following the timely acquisition of 2 modern high-specification Capesize vessels in Q4 2023, we divested 3 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 barbell approach to fleet composition, as shown on Page 7. We own both Capesize and Ultramax, Supramax vessels, enabling Genco to have access to sectors with distinct and attractive characteristics. Capesize 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 earnings streams, operate on diverse trade routes and are more closely linked with global GDP growth. We believe owning shifts 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 head weight ton Supramax 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 Capesize vessel for $25 million, with deliveries 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 noncore 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 noncore 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 8. 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 breakeven rate.



Turning to Slide 9. 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, opportunistically 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 bauxite 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 and 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.

[Peter Allen, executive]

Thank you, John. On Slides 11 through 13, we highlight our second quarter financial results. Genco recorded net income of $23.5 million or $0.54 basic and diluted earnings per share. Adjusted net income amounted to $19.9 million or basic and diluted earnings per share of $0.46. 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 Capesize 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 0 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 a 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 the 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 drydocking and a voluntary reserve. The nature of our variable quarterly dividend and our fleet 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 $0.34 per share represents an annualized yield of 8% on our current share price, double the 2-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 drydocking 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 or 67% fixed led by our Capesize 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.

[Michael Orr, executive]

Thank you, Peter. As depicted on Slide 17, the dry bulk market remained at elevated levels during the second quarter. The BCI 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 was 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 Capesizes and Supramaxs, respectively. Capesizes and Supramaxs 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 tonnes, 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 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 steel exports have grown by 22% in the year-to-date and are on pace for their strongest year in 2016.



On Slides 19 through 20, we highlight the growing long-haul ton mile story that we believe is quite encouraging for the Capesize segment. [ Massive ] Simandou iron ore project in Guinea is on track to begin production in late 2025, which is expected to ramp up over the 30 months, eventually hitting annualized production of 60 million tons. There is also significant bauxite growth in this region with an 8% annual growth rate over the past 10 years.



Bauxite and iron ore expansion in West Africa as well as incremental production growth from Vale bodes well to the Capesize segment given the origins of these export volumes as these routes have 3x the ton mile impact of Australia to China cargo.



In terms of the grain trade, while we're in between peak North and South American grain season, 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 for our constructive view of the dry bulk market going forward.



This concludes our presentation, and we would now be happy to take your questions.

[Operator]

Ladies and gentlemen, we'll now conduct the question-and-answer session. [Operator Instructions] And your first question comes from the line of Omar Nokta of Jefferies.

[Omar Nokta, analyst]

Just a couple of questions on my end. And maybe 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. I wanted to ask, once you get to that 0 level, does that change anything for you guys at Genco whether it strategically or from a capital allocation perspective?

[John Wobensmith, executive]

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. And I think we'll take a look at quite a few things once we get to that net debt 0, which as you said, we're approaching pretty quickly now.

[Omar Nokta, analyst]

So we look forward to seeing how things progress from there. I wanted to also just ask about the -- you sold the 3 Capes last year, you replaced them. Here recently, you sold an older Cape, which you mentioned is noncore, and same for the Supra. What are your thoughts on replacing them in this market? Do you -- is there a plan on your part to replace those 2 ships? And would you do so via the S&P market? Or would you do a chartering approach?

[John Wobensmith, executive]

No, I think -- well, first of all, we would do it in terms of the S&P market. I anticipate we will replace those 2 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, particularly the older ships, take advantage of that high market, and then we're redeploying capital for the long term with the newer ships, and we think that makes a lot of sense. So we'll continue to do that. And again, I'll just say the intention is to put those funds back to use in a relatively short period of time.

[Omar Nokta, analyst]

And I guess, just in terms of putting that capital to good use here in a short amount of time. 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 has been fairly busy for the past almost, I guess, year plus. Has there been any sort of slowdown in S&P activities are still fairly active and being able to get a deal done is just as slow as it has been?

[John Wobensmith, executive]

I would -- 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 [ on ] prices as well. So we haven't really seen any softening on the price front.

[Operator]

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

[Liam Burke, analyst]

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 chartering out any of your other capes that are trading in the spot market?

[John Wobensmith, executive]

I would say at the -- where rates are and particularly that we're in the summer, I would say liquidity is a little lower on the 1-year TCE market. I mean 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. So I think assessing it is better left for another month or so.



Having said that, the -- 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 of options available, a couple of levers to pull. If -- 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.

[Liam Burke, analyst]

You talked about redeploying the proceeds of your vessel sales, the higher return opportunities that should come to pass pretty soon. You have a few older vessels. Specifically, you've got 2 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 here?

[John Wobensmith, executive]

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

[Operator]

Your next question comes from the line of Ben Nolan of Stifel.

[Benjamin Nolan, analyst]

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?

[Peter Allen, executive]

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 2 line items into 1. So that's how you get to the $19.5 -- but essentially, again, like I mentioned earlier, it is fully discretionary in terms of Board and management's view of it. And in the past, we have that reserve as well.

[John Wobensmith, executive]

Ben, keep in mind, that was -- we gave that guidance at the beginning of this year. And as Pete said, we've lowered it in 2023 to pay dividends in the second and third quarter when the formula may have produced a 0, 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 the net debt 0 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.

[Benjamin Nolan, analyst]

And then my next question really is just more for [indiscernible] modeling. But in general, as you think about the OpEx, I know it looks like the Capesize OpEx came up a little bit this year. Are you seeing much in the way of inflation at all in terms of that OpEx and or maybe was it just -- I know that sometimes things can be a little lumpy from quarter-to-quarter.

[Peter Allen, executive]

Yes, that's exactly it. So Q2, sure, it was higher. We were guiding to a higher DVOE figure for the quarter. But yes, to your point, when you do look at OpEx over a 3-month period, it does get very lumpy. We kind of -- we like to look at least 12 months. I mean if you stretch it out for the last 6 quarters, last 18 months, our DVOE 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 $61.50 per vessel per day compared to the $68.50 in Q2. So on a year-over-year basis, maybe slightly higher with typical inflation. Crew wages is obviously a large part of the overall DVOE mix. But yes, nothing out of the ordinary and more timing in Q2.

[John Wobensmith, executive]

Ben, as we typically do, as we get above the 90% fixture rate on the TCE, we'll continue to put out guidance for that. And we'll also -- we'll put a guidance out for Q3 OpEx as well at that time.

[Operator]

Your next question comes from the line of Bendik Nyttingnes of Clarksons Securities.

[Bendik Nyttingnes, analyst]

Just back to capital allocation and your balance sheet. You have a lot of liquidity at hand with your CF 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 fleets you want to operate or sort of brief from an operational perspective?

[John Wobensmith, executive]

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, 2 to 3 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 Supramaxes as well and replace those.



And if -- again, we continue to look for the right transaction to grow on a bigger scale, but not the easiest thing to find. And we certainly -- we certainly don't want to -- we've worked very hard to get to net debt 0. And so we certainly are not going to lever up, so to speak, 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 and those types of things make more sense. So longer answer to your question.

[Operator]

Your next question comes from the line of Poe Fratt with Alliance Global Partners.

[Charles Fratt, analyst]

John, where do stock buybacks fit in your capital allocation program or strategy?

[John Wobensmith, executive]

Sorry, say that again, Poe?

[Charles Fratt, analyst]

Where do the stock buyback fit within the capital allocation strategy?

[John Wobensmith, executive]

Look, buybacks, as you're aware, we've talked about these 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 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 NAVs and where our share price is trading, clearly, we're going to look at that and make a decision. I mean there's a discount right now. If 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 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. So -- but yes, it's definitely in our tool belt Poe, and there is a time to put that in place.

[Charles Fratt, analyst]

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?

[Peter Allen, executive]

No, I don't think that's the case, Poe. 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're going to -- we'll take a deep dive on our capital allocation strategy. So it's not far away.

[Charles Fratt, analyst]

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?

[John Wobensmith, executive]

I don't know if there's a -- I'm not so sure if it ebb and flows, so to speak. It's -- yes, I mean when you're -- obviously, when you have wider discounts on NAV, it becomes more difficult. So maybe we have added a little bit here. But we're always looking at transactions. And hopefully, we will be able to execute on some time in this market. I wish I had a better answer for you, but it's -- they're not easy transactions to do, as you're well aware.

[Operator]

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.