Genco Shipping & Trading Ltd

NYSE:GNK

Earnings Call Analysis

Genco Shipping Reports Strong Q3 2024 with Increased Dividends and Fleet Growth

In Q3 2024, Genco Shipping & Trading showcased robust performance, reporting net income of $21.5 million, translating to $0.50 per share. Adjusted EBITDA reached $36.9 million, accompanied by a 48% increase in revenue driven by Capesize vessels earning an average TCE rate of $26,951—up nearly $12,000 year-over-year. The company declared an 18% higher dividend of $0.40 per share, reflecting strong cash flow management and the removal of drydocking CAPEX from dividend calculations. As Genco aims for net debt zero, it retains significant financial flexibility, with $330 million available, positioning it well for future growth opportunities.

Strong Financial Performance in Q3 2024

Genco Shipping & Trading Limited reported impressive results for the third quarter of 2024, showcasing a net income of $21.5 million, which translates to $0.50 per share. Adjusted net income reached $18.1 million, excluding certain one-time gains and losses. The company recorded a remarkable 48% increase in net revenues year-over-year, driven primarily by their Capesize vessels, which achieved a TCE rate of $26,951 per day, up nearly $12,000 from the previous year. This performance highlights the company’s strong operating leverage and its ability to capitalize on favorable market conditions.

Elevated Dividend Policy Enhancements

As part of its ongoing commitment to returning value to shareholders, Genco enhanced its dividend policy by removing the drydocking capital expenditure from the calculation, thus increasing available cash for distributions. For Q3 2024, the company declared a dividend of $0.40 per share, an 18% increase from the previous quarter. This reflects the management's confidence in sustaining significant dividends, with a total of $6.315 per share declared over the past 21 consecutive quarters, translating to a yield of 10% against current share prices.

Strategic Debt Reduction and Future Outlook

Genco has made significant strides in debt reduction, having paid down 82% of its debt, approximately $370 million, since the end of 2020. The company is on pace to achieve its target of net debt 0 soon, which is projected to lower annual interest expenses by about $6 million. This robust financial positioning—reflected in a net loan-to-value ratio of just 5% and over $330 million available in undrawn credit—provides Genco with flexibility to pursue growth opportunities while maintaining financial stability.

Cautious Optimism in the Drybulk Freight Market

While Genco experienced strong performance in the first nine months of 2024, freight rates have pulled back recently. The company reported that rates remain above their cash flow breakeven point, allowing them to remain optimistic about the market's recovery. In Q4 2024, Genco anticipates a cash flow breakeven rate of $10,847 per vessel per day, with daily operating expenses projected to decline to $6,200 per vessel per day. With 65% of available days already booked at $18,786 per day, the outlook for sustained profitability appears promising.

Executive Insight on Market Dynamics

John Wobensmith, CEO, expressed optimism regarding the demand trajectory, suggesting that recent market pullbacks are cyclical rather than indicative of long-term weakness. He anticipates a recovery as seasonal dynamics stabilize, particularly as supply side fundamentals show strength with low newbuilding order books and increasing fiscal stimuli from key global economies, particularly China. Additionally, the company remains poised to capitalize on emerging opportunities in Capesize and Ultramax segments through strategic acquisitions and responsive operational flexibility.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Third 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.

[Operator Instructions] A replay of the conference will be accessible any time during the next two weeks by dialing [phone] and entering the passcode 6365548.

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 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, 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 Third Quarter 2024 Conference Call.

I will begin today's call by reviewing our Q3 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. Q3 2024 marked another strong quarter for Genco as we continued to advance our value strategy. Specifically, we furthered our fleet growth and renewal strategy by acquiring a high-quality, fuel-efficient 2016-built Capesize vessel that we promptly took delivery of in October. This was our third Capesize acquisition over the last 12 months. And importantly, this acquisition is part of Genco's broader fleet renewal strategy.

Earlier in the year, we completed our exit from the four smaller and older 169,000 deadweight ton vessels and have redeployed the sale proceeds and additional cash towards the acquisition of three 2016-built Capesize ships. These transactions have been accretive to Genco's earnings power as we've added premium, high-specification assets to the fleet and have also resulted in dry dock CapEx savings of $13 million in 2024 and 2025.

Turning to Slide 6. In terms of shareholder returns, we continue to provide sizable dividends to shareholders. We declared a $0.40 per share dividend for the quarter, marking a quarter-over-quarter increase of 18%. Importantly, we have now declared 21 consecutive dividends, representing $6.315 per share or 39% of the current share price as of November 5. The strong increase in the third quarter dividend coincides with firm freight rates and follows our recent decision to enhance our dividend policy and increase cash distributable to shareholders.

Notably, we removed the drydocking CapEx line item from the calculation. For the third quarter, this increased the dividend by $0.27 per share. Based on the company's achievements in executing our capital allocation strategy and approaching our goal of net debt 0, we are pleased to take this important step to reward shareholders and further strengthen returns. This enhancement to our dividend formula reflects our belief that our low financial leverage will support larger dividends to shareholders. At the same time, we continue to maintain significant financial strength to grow and renew our fleet and further improve our earnings power.

Turning to Slide 7. We continue to generate strong TCE performance. In Q3, our fleet-wide TCE increased by 59% on a year-over-year basis. Looking ahead to Q4, 65% of our available days are fixed to date at $18,786 a day, pointing to another firm quarter as this is well above our cash flow breakeven rate.

Moving to Slide 8. We believe Genco remains in a highly advantageous position moving forward. Specifically, we have an industry low net loan-to-value ratio of 5%, a low cash flow breakeven rate and over $330 million in undrawn revolver availability, providing significant financial flexibility and optionality for the company. Given the volatility and the cyclicality of drybulk shipping, we also believe our favorable risk/reward balance will allow us to provide sizable returns to shareholders and enable Genco to opportunistically grow the fleet and enhance our earnings power through drybulk cycles.

While the drybulk market has experienced a strong first 9 months of the year, and Genco has booked 65% of its Q4 days at over $18,700 per day, freight rates have pulled back in recent weeks. This has been led by questions around the impact of China stimulus and customs-related bauxite issues in West Africa, which has helped oversupply the Cape market in the Atlantic Basin. Overall, however, we maintain a constructive outlook for the drybulk freight market, primarily due to the positive supply side fundamentals as highlighted by the low newbuilding order book, firm commodity demand and the beginning of fiscal and monetary easing cycles in key global economies.

I will now turn the call over to Peter Allen, our Chief Financial Officer.

[Peter Allen, executive]

Thank you, John.

On Slides 10 through 12, we highlight our third quarter financial results. Genco recorded net income of $21.5 million or $0.50 and $0.49 basic and diluted earnings per share, respectively. Adjusted net income amounted to $18.1 million or basic and diluted earnings per share of $0.42 and $0.41, respectively, excluding a gain on sale of vessels of $4.5 million, noncash vessel impairment charges of $1 million and unrealized fuel losses of $0.1 million.

Adjusted EBITDA for Q3 totaled $36.9 million. And for the first 9 months of 2024, adjusted EBITDA amounted to $118.5 million, already higher than last year's full year mark of $101.5 million.

During Q3, our net revenues increased by 48% on a year-over-year basis. The strong boost in revenue was led by our Capesize vessels, which earned a TCE rate of $26,951 per day in Q3 2024, nearly $12,000 per day greater than the same period of last year, highlighting the operating leverage and upside potential of that sector.

On Slide 13, we show the trajectory of our debt outstanding and our continued voluntary debt repayments. Since the end of 2020, we have paid down 82% of our debt or nearly $370 million, which has resulted in a pro forma net loan-to-value ratio of only 5%. The company is currently on track to achieve its goal of net debt 0 in the short term, a metric we have been targeting since the announcement of our value strategy in April of 2021. Specifically, this year, we have voluntarily paid down $120 million of debt under our revolving credit facility. We estimate these voluntary debt repayments will reduce interest expense by about $6 million on an annualized basis or approximately $400 per vessel per day on our cash flow breakeven rate. This highlights the importance and significant flexibility that our current 100% revolver structure offers us in that we can pay down debt, actively manage interest expense in what is still a high interest rate environment without losing borrowing capacity to capture accretive growth opportunities.

Moving to Slide 14. We highlight our quarterly dividend policy, which targets a distribution based on 100% of quarterly cash flow, less a voluntary reserve. As John mentioned, we recently enhanced our dividend policy by removing the drydocking CapEx line item from our dividend formula in order to increase the amount of cash available for distribution to shareholders. Our quarterly dividend formula and our fleet's operating leverage enables shareholders to directly benefit from freight rate increases. Our Q3 2024 dividend of $0.40 per share represents an annualized yield of 10% on our current share price, more than double the 2-year U.S. treasury rate of approximately 4%.

Looking ahead to Q4 2024, we anticipate our cash flow breakeven rate to be $10,847 per vessel per day, which includes $2,278 per vessel per day of drydocking-related CapEx for the quarter. Additionally, we expect our daily vessel operating expenses in Q4 to decline from Q3 levels. During the third quarter, our DVOE was $6,423 per vessel per day. In Q4, we anticipate DVOE to decline to a budgeted figure of $6,200 per vessel per day. Lastly, our Q4 TCE estimates to date are $18,786 per day for 65% fixed, led by our Capesize vessels, which are currently booked at nearly $26,000 per day for 59% of the quarter.

I'll now turn the call over to Michael Orr, our Drybulk Market Analyst, to discuss industry fundamentals.

[Michael Orr, executive]

Thank you, Peter. As depicted on Slide 16, the drybulk market was led by the Capesize segment during the third quarter. BCI averaged nearly $25,000 per day, which was the strongest quarter of the year and the strongest Q3 since 2021. While rates have pulled back recently, rates remain above our all-in cash flow breakeven rate. Capesize and Supramax rates are currently $18,000 and $12,000 per day, respectively.

Beginning in September, the Chinese government introduced a number of monetary and fiscal policies in an attempt to support the economy as outlined on Slide 17. The measures have largely targeted housing overcapacity in the country and ensuring China's ability to hit its 5% growth target for 2024.

Regarding the steel complex, several key indicators are highlighted on Slide 18. China's iron ore imports rose by 5% through September 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 154 million tons, an increase of 37% 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. Furthermore, China steel production is 4% lower year-over-year through the first 9 months of 2024. As China's property sector has impacted domestic steel demand, steel exports have grown nearly 20% in the year-to-date and are on pace for their strongest year since 2016.

On Slides 19 through 20, we highlight the growing long-haul ton-mile developments of the iron ore and bauxite trade. Specifically, the Simandou iron ore project in West Africa is on track to begin production in late 2025, with an expected ramp-up over 30 months, eventually hitting annualized production of 60 million tons. There's also continued bauxite export growth in this region with the 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 are positive catalysts for the Capesize segment, given the origins of these export volumes as these routes have 3x the ton-mile impact of Australia to China cargoes.

In terms of the grain trade, Q4 represents peak North American grain season extending into early next year. Regarding the Ukrainian grain trade, shipments have been firm despite the Black Sea grain initiative no longer being in place. Export season for the corn harvest is now in full swing with volumes in October significantly higher than a year ago.

Regarding the supply side outlined on Slides 22 to 23, net fleet growth through the first 10 months of the year was at [ 3.2% ]. 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 a constructive view of the drybulk market going forward.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Omar Nokta with Jefferies.

[Omar Nokta, analyst]

As usual, I have just a couple of questions from my side. I guess, obviously, perhaps maybe just the first one, big question out of the gate. Obviously, you got the incoming Trump administration here in a couple of months. Just wanted to ask how you think that affects the shipping markets and -- or we get that question, obviously a lot, but specifically on to drybulk, how do you think this administration and some of the discussion points that he's made, how do you think that affects the drybulk market? And then anything you can maybe glean from the last time he was in office and how that affects the market? Any color you can give?

[John Wobensmith, executive]

Sure. Obviously, we can look back, Omar, and what happened in 2018. I think in general, our opinion is that there won't be any substantial impact in terms of ton miles. But there are always unintended consequences, right, when you start to put tariffs in place and global trade starts to be disrupted. I think in general, we've seen that goods continue to move. They may move in a more inefficient capacity. So it is possible to see a little increase in terms of ton miles on the drybulk side. If you go back to 2018 when U.S. grain had Chinese tariffs placed on it, we saw more come out of Brazil. And obviously, very quickly, once a deal was negotiated, the BSI went right back up. You can look to Russia a little bit on when the Europeans banned Russian coal, we saw greater ton-mile expansion with Russia sending coal to China and India.

So I think our view overall is, again, no substantial impact. Goods do find a way to move and get to where they ultimately need to be. I guess the only -- and I think we'll find out later this week and over the next month or so, it could cause the Chinese to up their fiscal stimulus spending. That is something that may come out of this. If the Chinese feel that the tariffs are going to be disruptive and that they need to boost domestic spending, that is something we could see, but I think we'll know that in fairly short order.

[Omar Nokta, analyst]

I appreciate that color. And then maybe you were talking just before on the market and how it's developed here recently. There's been a bit of volatility with rates coming off as we've gone into this quarter. And you mentioned a couple of the reasons for that. We have seen a bit of an improvement this week. I know it's just a few days, and it's nothing maybe to jump over about. But I just wanted to ask, can you just give a little bit of context of what do you think has put pressure on the market here recently? And then we have seen this improvement. Do you think this is just a modest bounce or perhaps the beginning of something more meaningful?

[John Wobensmith, executive]

Well, look, we're optimistic going into the end of the year on rates. We think they're going to move up. And I think what you have to do is, again, look back to what's happened over the last several weeks. So we really started with bauxite exports being cut back, and there were force majeures that were declared. So you had Capesize vessels that were intending to load bauxite be pushed back into the Atlantic Basin and which started to really push freight rates down. We saw a little bit of a slowdown in iron ore exports. So that became an issue. And again, just the normal over-tonnage situations that develop, whether it's in the Pacific Basin or the Atlantic Basin from time to time and then ultimately, those ships are filled up with either iron ore or coal and equilibrium returns. And I think that's what we're seeing right now. And so we do think things are going to firm going into late November and December.

And having said that, again, I think we'll see the normal seasonal downturn in the first quarter, nothing to be concerned about. And then as we get into second quarter, rates should recover. And we -- asset values, which I think is a pretty good bellwether have held up pretty well over the last few weeks. We've seen a little softening, but not a lot, particularly on the modern eco Capesize vessels.

[Omar Nokta, analyst]

Okay. And maybe just a quick follow-up to that. Just the force majeure issue that you highlighted on bauxite, those -- where are we now with those? Have those been lifted? And is that business as usual?

[John Wobensmith, executive]

Well, the force majeure is not an issue anymore, but I wouldn't say we're back to business as usual quite yet with the bauxite volumes. But again, we don't view that as any long-term issue. But the ships that were pushed out in the Atlantic Basin, those have been soaked up, so to speak. And again, I think that's why you're seeing rates rebound.

[Operator]

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

[Liam Burke, analyst]

John, asset prices are still relatively high, but Capesize valuations have come in. What does your acquisition pipeline look like, especially with your financial flexibility now?

[John Wobensmith, executive]

We're still looking pretty heavily at our fleet renewal program. It's funny. Yes, I mean, asset prices have come in a little bit, but not a lot. And we're still seeing Chinese buyers, in particular, gobbling up older Capesize vessels at some pretty firm numbers. In fact, even today, I saw one that's being bid on, and it's being bid up by multiple buyers. So firmness is still there. We're still in fleet renewal mode. We'll pick our lane. We think we did a really good job with acquiring the Genco Intrepid, again, at the right time. Valuations that we got on her were definitely higher than what we paid. So that's positive. And I think you're going to continue to see, again, firm prices on particularly eco vessels. And with the favorable supply side on the Capes, probably even firmer prices as we get into next year.

[Liam Burke, analyst]

Great. And right now, you're on track to become net debt 0 relatively soon. You're maintaining the revolver. Will you continue to do that to provide yourself flexibility on acquisitions?

[Peter Allen, executive]

Yes. Thanks, Liam. Yes, you're right. We have over $330 million of undrawn revolver availability as of the end of September. So certainly a lot of liquidity and capacity for accretive growth opportunities. And we've utilized a portion of that, a very small portion of it to purchase the Genco Intrepid, but the company has a significant amount of flexibility more so than probably anybody in the peer group, to be quite honest, from a liquidity perspective. So as markets continue to develop and we see opportunities, like John highlighted with this latest acquisition, there's certainly plenty of firepower to grow the company.

[Operator]

Our next question comes from the line of Sherif Elmaghrabi with BTIG.

[Sherif Elmaghrabi, analyst]

I just want to -- first one, I want to piggyback off of Liam's last question. Would you consider growing outside of the dual-pronged Ultramax Capesize fleet, especially considering there is an abundance of opportunities for quality vessels within those two segments at the moment?

[John Wobensmith, executive]

Look, I think we're going to, for the most part, stick to our knitting. We've built up substantial commercial platforms for both the Capes as well as the Ultramaxes. So that will continue. So then the question is, do you buy some Kamsarmaxes? I just don't see us doing one-off transactions. Clearly, if there's something transformative where there are Newcastlemaxes or Kamsarmaxes and we can scale up on the commercial side, that will make sense. But just to buy 1, 2, 3 ships even in a different sector that -- we don't think that makes a lot of sense. And we think we've been pretty smart about picking Capes as well as the Ultramaxes and the barbell approach. It's worked out very well for us. And I think some of the other vessels have -- vessel classes have lagged those two -- well, have lagged the Capesize and the Ultramax sector.

[Sherif Elmaghrabi, analyst]

And on the Intrepid acquisition, when you announced that acquisition, I believe the date it was expected to join the fleet was in late October or maybe early November, but it's already joined the fleet. So just for modeling purposes, how long after taking delivery of a vessel does it start generating revenue for Genco?

[Peter Allen, executive]

Sherif, yes, so absolutely, we took delivery of the Genco Intrepid October 23. So it was a very prompt delivery, which is terrific. You get the ship on hire during Q4, which is traditionally a peak earnings time. But yes, it doesn't take very long, a few days, just familiarization, getting crew, et cetera. So it's pretty much delivery and then on hire shortly thereafter.

[Operator]

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

[Bendik Nyttingnes, analyst]

You locked in a good time charter rate this quarter. Should we view that as sort of an opportunistic one-off deal? Or should we expect a higher amount of coverage from you guys going forward?

[John Wobensmith, executive]

I would -- so yes, that definitely is a very firm rate. I would call it opportunistic. We will -- from time to time, when these opportunities present themselves, particularly in the Capesize sector, we will, from a portfolio approach, lock in fixed rate charters as well as the index charters that we've done to date also. But yes, I would look at that as a one-off opportunity that presented itself, and we obviously moved quickly on it.

[Bendik Nyttingnes, analyst]

And as a bit of a follow-up, rates have come off quite a bit. You have some changing theme in terms of geopolitics. Are you seeing any change in appetite from charters on term versus spot contracts?

[John Wobensmith, executive]

I mean I think there was a little bit of a pullback. And look, time charter rates came down with spot rates and the FFA curve. And as usual, liquidity tends to decrease when you're in a declining rate environment. But again, I think sentiment has changed over the last week, which, again, you're seeing in the FFA market, and you're starting to see the spot market move back up and recover as well. So I would think liquidity in the time charter market will move in the same direction upwards.

[Operator]

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

[Unknown Analyst]

This is [ Praneilla ] on for Ben. I wanted to ask about the new dividend policy. What do you think is the right amount of leverage to have on the balance sheet? Has that changed at all? Or is it the same?

[John Wobensmith, executive]

I don't -- I wouldn't say much has changed. We're still -- we still have our goal of being net debt 0. That obviously provides us with a tremendous amount of flexibility to have that dividend policy in place. But then as Pete pointed out, we have a large revolving credit facility that we can use for growth. And for the right transaction, we will lever up. As we've said in the past, I don't see us going to 50% or anything along those lines, but levering up to -- back into the 20s for a short period of time and then paying again for the right transaction that's accretive to cash flows and dividends to shareholders, that remains a possibility. That's one of the key reasons why that revolving credit facility is in place.

[Unknown Analyst]

Right. No, that's helpful. And with some of the Capesize contracts rolling off early next year, is the plan to keep those as floating rate contracts? And then in terms of the market remaining similar to what you have now, how are you thinking about that going forward?

[John Wobensmith, executive]

Again, opportunistic on the Capes and whether we do index deals or fixed rate, we've been very successful in putting some good percentages above the BCI on the index transactions. So -- and that's a matter of, again, picking your spot and moving quickly when those percentages are available. So I think I would say more of the same, but we'll have to see where things are as these contracts roll off.

[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.