Q1 2024 Genco Shipping & Trading Ltd Earnings Call

Participants

Peter Allen; Chief Financial Officer; Genco Shipping & Trading Ltd

John Wobensmith; President, Chief Executive Officer, Secretary, Director; Genco Shipping & Trading Ltd

Michael Orr; Assistant Vice President, Finance; Genco Shipping & Trading Limited

Omar Nokta; Analyst; Jefferies

Liam Burke; Analyst; B. Riley Securities, Inc.

Sherif Elmaghrabi; Analyst; BTIG

Poe Fratt; Analyst; Alliance Global Partners

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited first-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 two weeks by dialing 800-938-2487 and entering the passcode 24967.
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 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 and 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

Good morning, everyone. Welcome to Genco’s first-quarter 2024 conference call. In addition to reviewing our Q1 2024 and year-to-date highlights, we want to use this opportunity to provide an update on the progress we are making three years into our comprehensive value strategy as well as on the industry’s current fundamentals. We will then open up the call for questions. For additional information, please also refer to our earnings presentation posted on our website.
Separately from our earnings release, we issued a press release yesterday with the news that leading proxy advisory firm, ISS, made recommendations consistent with those of our Board for all of the items to be voted on at our Annual Meeting of Shareholders this year. While we are pleased with this result, the focus of our call this morning will be over the results for the first quarter of 2024 and the ongoing implementation of our comprehensive value strategy. If you wish to see more information regarding matters to be voted on at our annual meeting, please refer to the press release I mentioned or our website at www.voteforgenco.com.
Beginning on slide 5, during the first quarter, we further executed our value strategy, which is aimed at driving returns through the drybulk cycles and creating sustained long-term shareholder value. Building on a solid end to 2023, Q1 2024 marked another strong quarter for Genco. We drew on our leading commercial platform and significant operating leverage to generate Q1 net income of $18.8 million driven by a fleet-wide time-charter equivalent rate of $19,219. Notably, Q1's TCE increased relative to Q4 for the first time in over 15 years.
In terms of shareholder returns, we increased the Q1 dividend quarter over quarter to $0.42 per share as our strong Q1 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 7% as we approach our goal of net debt zero.
Turning to slide 6, we provide a snapshot of how our approach to capital allocation centered around dividends, deleveraging, and growth has developed since implementing our value strategy a little over three years ago. In 2021, we laid out a clear path and related objectives to transfer Genco into a low-leverage, high-dividend yielding company with significant financial flexibility to provide shareholders with returns and opportunistically grow through the drybulk shipping cycles.
Since that time, we have paid down $279 million of debt while distributing nearly $200 million to shareholders in the form of dividends and investing $236 million in our fleet. As we implemented the strategy in 2021, we prioritized vessel acquisitions and debt pay downs to reduce our cash flow breakeven when the cyclical turn in the market began, creating a strong foundation for the execution of our value strategy. Since 2022, we have continued to voluntarily pay down debt, while increasing our focus on dividends.
On page 7, we highlight the compelling dividends we have provided to shareholders. The first-quarter dividend marks our 19th consecutive quarterly dividend payment, representing the longest period of consecutive dividends in our peer group. Over this time, we have declared $5.57 per share in dividends or approximately 25% of the current share price.
Complementing shareholder returns during Q1, we continue to prioritize fleet renewal, as highlighted on page 8. Following the timely acquisition of two high-specification Capesize vessels in Q4, we divested three 2009 to 2010 built vessels that delivered 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 drydocking CapEx for 2024.Importantly, we also increased utilization in the current strong market.
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 9. Capesize vessels provide high operating leverage and upside potential, with a focus on the iron ore coal and oxide trades, while the minor bulk vessels provide more stable earnings streams, operate on diverse trade routes, and are more closely linked to global GDP growth. We believe owning ships in both of these sectors support Genco’s value strategy. Moving forward, we continue to evaluate further opportunities in the sale and purchase market to further renew our fleet.
Turning to slide 10, we continue to generate strong TCE performance. In Q1, our fleet-wide TCE increased by 38% on a year-over-year basis. Looking ahead to Q2, 65% of our available days are fixed to-date at over $20,000 a day, pointing to another firm quarter as this is well above our cash flow breakeven rate of approximately $10,000 per day.
Turning to slide 11, we believe Genco remains in a highly advantageous position moving forward. Specifically, we have an industry low net loan-to-value and cash flow breakeven rate and nearly $300 million in undrawn revolver availability. This provides significant financial flexibility and optionality for the company going forward.
We believe our low leverage, high dividend payout model executed in scale is industry leading in the drybulk shipping public markets. Given the volatility and cyclicality of drybulk 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 the cycles.
I will now turn the call over to Peter Allen, our Chief Financial Officer.

Peter Allen

Thank you, John. On slides 13 through 15, we highlight our first-quarter financial results. Genco recorded net income of $18.8 million or $0.44 and $0.43 basic and diluted earnings per share, respectively. Adjusted net income amounted to $21.4 million or basic and diluted earnings per share of $0.50 and $0.49, excluding other operating expenses of $1.8 million, loss on sale of vessels of $1 million, and unrealized fuel gains of $0.2 million. Adjusted EBITDA for Q1 totaled $41.9 million, more than double the total from the same period of 2023.
During the first quarter, our net revenues increased by 44% on a year-over-year basis, while our recurring cost structure remained approximately flat over the period, illustrating the high degree of operating leverage inherent in the business. This operating leverage is best displayed by our Capesize vessels, which earned a TCE of $25,600 per day in Q1 2024, nearly $10,000 per day higher than the same period of last year. With such operating leverage, there is less of a need for financial leverage to achieve strong returns.
On slide 16, we highlight the trajectory of our debt outstanding and our continued voluntary debt repayments. In the year to date, we have utilized the built-in flexibility of our $500 million revolving credit facility to voluntarily pay down $85 million of debt so far this year, primarily utilizing proceeds from vessel sales. On a go-forward basis, we estimate these debt pay downs will reduce interest expense by approximately $5 million on an annualized basis or approximately $350 per vessel per day on our cash flow breakeven rate. We have now paid down nearly 75% of our debt or $334 million, resulting in a pro forma net loan-to-value ratio of 7%.
Given our 100% revolving credit facility, we plan to continue to actively manage our debt balance to save on interest expense while opportunistically drawing down for vessel purchases, given our nearly $300 million of undrawn capacity at the end of Q1.
Moving to slide 17, we highlight our transparent dividend policy, which targets a distribution based on 100% of excess quarterly cash flow, excluding maintenance and withholding for future investment. The nature of our variable dividend policy and our fleet’s operating leverage enables shareholders to directly benefit from freight rate increases as we’ve seen over the last couple of quarters.Our Q1 2024 dividend represents an annualized yield of 7.4% on the current share price, well above two-year US treasury rate of approximately 4.8%.
Looking ahead to Q2 2024, we anticipate our cash flow breakeven rate, excluding incremental annual meeting related expenses, to be $10,207 per vessel per day, well below our Q2 TCE estimates to date of $20,126 for 65% fixed, pointing to another strong quarter. These incremental annual meeting related expenses will also be excluded from the Q2 dividend calculation.
I will now turn the call over to Michael Orr, our drybulk market analyst, to discuss the industry’s current fundamentals.

Michael Orr

Thank you, Peter. As depicted on slide 19, the drybulk market remained at elevated levels during the first quarter. These strong rates occurred during the historically softest quarter of the year for freight rates. However, Q1 Capesize rates reached a 15-year high for the period, driven by continued tightness of vessel supply in the Atlantic Basin and relatively dry weather in Brazil, enabling increased iron ore exports.In Q2 to date, Capesize and Supramax rates remain at firm levels, experiencing a strong push in recent days to approximately $28,000 and $16,000 per day, respectively.
With a well-balanced drybulk market as we have seen in recent years, events that impact the supply of ships can have an effect on the freight market. As highlighted on slides 20 and 21, low water levels in the Panama Canal impacted the number of ships that could transit, resulting in heavy delays in rerouting of vessels. Initially, vessels were diverted through the Suez Canal. However, attacks on commercial vessels in the region led many shipping companies to no longer transit the Southern Red Sea and Gulf of Aden area, further disrupting the efficiency of the global drybulk fleet.
Regarding the Chinese steel complex on slides 22 and 23, China’s iron ore imports rose by 5% in Q1 2024 year over year, while iron ore port inventories have been building since October. In terms of steel production, the World Steel Association forecast China’s output to remain at around 2023 levels, while the rest of the world is expected to see growth of 4%, led by 8% growth from India, pointing to an increase in demand from developed countries and support from secondary trade routes.
In terms of the grain trade, we are currently in the midst of the South American grain season. The USDA is forecasting substantial increase in exports from both Brazil and Argentina. An additional 25 million tons of corn and soybeans are expected to be shipped this marketing year, helping support minor bulk rates.
Regarding the supply side outlined on slides 25 to 27, net fleet growth in 2023 was 3%. 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 drybulk market going forward.
This concludes our presentation, and we would now be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Omar Nokta, Jefferies.

Omar Nokta

Thank you. Hey, guys, good morning. Nice quarter.

John Wobensmith

Good morning. Thank you.

Omar Nokta

Yes. So, I mean, obviously, we’re seeing a strong Cape market and your averages so far point to solid earnings continuing into the second quarter. You talked a bit here on the market. There’s been a lot of discussion on bauxite over the past several months, or quarters really, as a new trade in the market that’s really supportive of Capes.
Maybe could you just give a little bit more color how that trade has been developing? Because in the past, it’s always been Capes and iron ore, and those are two kind of married at the hip. How has bauxite come in and influenced things from your perspective here over the past few quarters or so?

John Wobensmith

Omar, I wouldn’t necessarily call it a new trade, because it’s been around for a few years. But it’s now getting to the point where it’s meaningful in terms of ton miles. And so there’s a significant amount of bauxite that’s, as you said, coming out of West Africa, it’s going to Asia. So it’s a relatively long route creating ton miles.
The nice thing about the bauxite trade also is there’s still growth that is projected for this year and next year, and it clearly is supplementing the iron ore trade coming out of Brazil. So you’re getting more of a balanced Atlantic Basin versus what’s happening in Australia in terms of the iron ore trade.
And just going back to the growth numbers, we’re projecting in 2024, this year, 8% year-on-year growth on a tonnage basis.

Omar Nokta

Okay. Thanks, John. And I guess maybe just on that, you mentioned the balanced Atlantic market. Iron ore tends to be -- obviously, a big chunk of the total drybulk trade tends to have volatility, especially kind of Brazil being a bit more of a swing perhaps, especially in the beginning of the year usually, although we haven’t seen it this year. From your eyes or your lens on bauxite, does that exhibit a similar type of volatility normally or is it more of a consistent, as you mentioned, just gradual growth in terms of cargo?

Peter Allen

Yes. Hi, Omar. I’ll take that one. So yes, you’re definitely right. There is a certain amount of volatility on the bauxite trade. In Q3, there tends to be the rainy season. So there is that seasonality. It’s important on the Capes to have that extra option within the Atlantic Basin this year. And particularly in Q1, we saw Brazilian iron ore exports up 12% year over year in Q1. Also saw strong bauxite exports. That just gives more optionality within an already tight Atlantic Basin. But yes, there is that additional seasonality in Q3 with the rainy season with bauxite, and then it picks up sequentially in Q4.

John Wobensmith

And obviously, Q3 and Q4 are strong periods for Brazilian iron ore traditionally.

Omar Nokta

Got it. Okay. Thank you. And then maybe just one final one for me, guys. Thanks for that color. Noticed you’ve fixed the Genco Liberty for one year here at $35,000, which is clearly above what I would say the market averages we’ve seen recently. It’s also seemingly above the forward FFA curve. It’s above, at least visibly, the one-year time charter assessments from various broker houses. What’s happened, I guess? Is the market stronger than headline rates or index rates or assessments? Is this repeatable, this $35,000? Any color you can give perhaps just on that versus what we see day to day in the Baltic?

John Wobensmith

Sure. As perspective, we did that a little while ago. And so at least the FFA market was a little bit higher than what it is today, though we’ve certainly seen it recover over the last two weeks. That would be a difficult rate to recreate today. However, it shows you how we think in terms of -- and we’ve said this. From time to time, when we see good rates and there’s liquidity in the market, particularly in the Capes, we’ll take the opportunity to take some risk off the table from a portfolio approach, and that’s exactly what we did with the Liberty.So we’re going to keep an eye on the market and make those decisions going forward.
But the Cape market is strong. And I think we talk about supply and the low supply situation all the time and it’s very much still the case with the low order book. I think the biggest change that we’ve seen over the last few years is that, because of that low supply when you do have incremental demand movements to the upside, you immediately see it in the freight markets.
And I’m sure you can remember back in 2015 and 2016 when we had a oversupply situation and you could have had massive amounts of new iron ore come in and freight rates would move. It’s just not the case today. There’s a very good supply and demand balance. So when you have incremental up movements in demand, you see it in the freight market.

Operator

Liam Burke, B. Riley.

Liam Burke

Thank you. Good morning, John. Good morning, Peter.

John Wobensmith

Good morning, Liam.

Liam Burke

John, you balanced your barbell strategy on the fleet. You’re always looking to manage your assets. With asset value so high, what does it look like for your ability to add more vessels?

John Wobensmith

So I kind of look at it in terms of maybe three buckets. From a fleet renewal standpoint, we’re going to continue to do that. We’re going to continue to dispose of our older ships and redeploy that capital into newer, more fuel-efficient assets, which obviously increase our potential earnings power and potential dividend payout.
When you look at just buying vessels for cash these days, I do think values are in the 90th percentile which is great. But obviously, there’s an elevated level of risk at buying at those levels. I am hopeful, optimistic that our better equity will continue to really close the gap on NAV. I mean, we’re pretty close now. So that you can then start using if -- for the proper deal, you can use your equity as currency. And I think that will make sense if you’re buying assets in this market. So those are sort of the three ways I look at it.

Liam Burke

Great. Thanks, John. And on the Capesize time charters, with the index, you’re really over-earning on those assets. Do you see more opportunities to time charter the Capesize or is there any thought where you can do some longer-term charters on your non-Capesize vessels?

John Wobensmith

Look, the index deals are obviously great. We’ve picked some pretty good spots on timing, on when to pull the trigger on the index deals. And as you said, they are earning quite a premium to the BCI plus scrubber economics on top of it. In terms of fixed rate, I talked about the Liberty earlier on the call. From time to time, as this market continues to exhibit volatility, we’ll take the advantage of putting a ship away and taking exposure off the table in the Capesize.
I wouldn’t say -- it’s not as much of a focus on the minor bulks. That is a robust commercial trading platform where we’re creating arbitrage opportunities and really outperforming our benchmarks because of that platform. That doesn’t mean to say that if we see a really good rate on the one year side, that we won’t do it. But I think it’s more of a focus on Capes just because of the volatility that exists.

Liam Burke

Great. Thank you, John.

John Wobensmith

Thanks, Liam.

Operator

Sherif Elmaghrabi, BTIG.

Sherif Elmaghrabi

Hi, good morning. Thanks for taking my question.

John Wobensmith

Good morning.

Sherif Elmaghrabi

Okay. First on the debt, Genco doesn’t have scheduled amortization, but you have been regularly paying down almost $9 million until this year where repayments have stepped up. So my question is, how are you thinking about voluntary repayments going forward, especially now that the debt per vessel is so low?

Peter Allen

Thanks, Sherif. Yes, debt per vessel is under $3 million per ship, which is pretty remarkable when you think of where scrap value is in that sense and also where the vessel value are as well. So it’s a very low leverage situation, as you alluded to.
In terms of our debt, our voluntary debt repayments, because we don’t have any scheduled debt amortization until facility maturity in 2028, with the full RCF structure that we have currently, we’re really managing our debt balance to save interest expense and essentially reduce our breakeven and increase our dividend capacity.
So we’re really focused on paying down whatever debt we do have. But we did sell $65 million worth of ships this year to date. So we took that cash and paid down the RCF, knowing full well that, if we do need it, we can redraw. So on a go-forward basis, it’s still that $8.75 million target, $35 million for the year. But we’ll actively manage it with the RCF structure, knowing that we won’t lose our borrowing capacity.

John Wobensmith

Yes. And I would add. That $8.75 million is part of the overall reserve, which includes paying down the debt, but also keeping monies held back for fleet renewal as, obviously, in shipping, you have depreciating assets. But look, from time to time, we’ll obviously look at that reserve, make sure it’s appropriate based on our capital allocation. We’ll continue to look at all avenues within capital allocation and make the right decision at the Board level. But we are obviously getting closer to our target of net debt zero, so we’re looking at quite a few things these days.

Sherif Elmaghrabi

Thanks. That’s really good color. And then on fleet management, what sort of specs do you look for in a vessel that you might acquire? You sold three older ships, added two in Q4, but especially given where values have climbed to, and I’m curious also how numerous are those opportunities in the sale and purchase market.

John Wobensmith

So we’re solely focused on what I would refer to as eco-vessels which are really, in the end of the day, 2015 and newer that carry the much more fuel-efficient engine designs. That’s paramount for us. I would say in the Capesize market, it’s not as easy. Those ships do not come up for sale as often. The deal that we were able to do in December was just a fantastic deal. The timing was good, but also the ability to get our hands on those two modern Capesize ships. It’s quite a bit easier in the Ultramax sector. There’s just more liquidity, more assets available for sale. But patience pays off, as you saw what we did in December. So I’m confident that we’ll be able to continue the fleet renewal strategy.

Operator

(Operator Instructions) Poe Fratt, Alliance Global Partners.

Poe Fratt

Good morning, John. Good morning, Peter. Sorry about that.

John Wobensmith

Hi, Poe.

Poe Fratt

Hey. You mentioned, John, on the S&P market, that as your stock moves up closer to NAV, it potentially becomes an arrow in the quiver, so to speak. Have you turned any deals down in the past because of your equity value where the seller has been looking for equity?

John Wobensmith

I wouldn’t go so far as to say we’ve turned things down. It’s probably more of we’ve opted not to do things with equity. Clearly, issuing equity below NAV is dilutive and that’s not something we’re looking to do. But yes, as I said before, we’re getting very close to NAV and I’m cautiously optimistic that we’ll get there and hopefully above that as the value strategy continues. And then as you said, you have that arrow in your quiver in terms of an option to use it as hopefully a large piece of the purchase price.

Poe Fratt

Okay, great. And then when you look at your forward cover, really strong on Capes, a little more muted on the Ultra and Supras, can you give me an idea of how the rest of the quarter looks? I mean, where are you currently booking takes versus the Ultras and Supras? My sense is that the Cape market’s down a little bit relative to the first, when you would have been booking in March and April and the Ultra and Supras is up a little bit. Is that directionally correct? Or can you just give me sort of a flavor of where you’re booking right now?

John Wobensmith

Well, spot rates for Capes are around $29,000 a day today, right? And keeping in mind, we have those index deals that are earning significant premiums above that BCI number that I just quoted. I think when you look at the Atlantic Basin, the numbers are a little bit higher. And we do tend to break the fleet up a little bit. We do have a couple of ships that are ballasting to the Atlantic right now, that we haven’t fixed them.
So I think what you’re referring to is the market definitely softened up, few weeks ago. But then the last two weeks, we’ve seen strengthening again, right? And I think we were in a pretty good position a few weeks ago because we just didn’t have a lot of ships open, whereas, now, we have ships that are opening up again in a little bit of a stronger market. But it’s all relative, Poe. I mean, these numbers are all pretty good, right?

Poe Fratt

No, no (multiple speakers)

John Wobensmith

Even the softness that we saw a few weeks ago, we were still very high numbers on Capes in particular.

Poe Fratt

Yes, no. No, reason to complain. Can you talk about the Ultra and Supras, where you see the rest of the quarter there and where the current rates are?

John Wobensmith

Well, as I said, the spot rates -- for getting any adjustments for scrubbers or our fuel efficiency of vessels, spot rates in the Capes are somewhere around $29,000; spot rates on the Ultra, Supras are $14,500, $15,000 today. It’s hard to predict what the next 25% or 35% of fixtures is going to be. But as you also know, we’re very good that once we get into sort of the low to mid-90s on a percentage basis of fixing for the quarter, we put out the average fleet rate on a TCE basis to give guidance for people for that quarter, which we’ll continue to do that.

Poe Fratt

I’ll wait for that then. And then, Peter, can we just clarify. Two questions on the cost side, one’s a clarification. But I think I heard you say that the Annual meeting costs, it looks like, of around about $5.5 million next quarter will be excluded from the dividend calculation, so that won’t impact your dividend payout.

Peter Allen

Yes. Hi, Poe, that’s correct. So for Q2, it’ll be estimated about $4.5 million and that would be excluded from the dividend calculation. That’s correct. Just like it was in Q1.

John Wobensmith

Meaning it will not take away from the dividend payout potential.

Poe Fratt

Understood. Sorry, I had written down $4.5 million. And then can you just talk about your cost guidance on page 39 in the appendix? It looks like you’re running a little bit higher on the OpEx side and the G&A side. Are those just first-half cadence and that we should potentially see OpEx and G&A come down over the second half of the year? Could you just give me a flavor of those two cost components?

Peter Allen

Yes. Sure. So on the OpEx side, it’s more timing related. First quarter, this number is actually not too far off from what our Q1 actuals were, but it is more timing related than anything else. We like to look at this stuff over a 12-month period, typically than just three months quarter to quarter. On the G&A side, a lot of that stuff is front loaded as well, and we would anticipate that not really moving much, but there is a front loaded nature to the G&A side as well.

Poe Fratt

Okay. Great. Thanks for your time.

John Wobensmith

Thank you, Poe.

Operator

Thank you. And 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.