Genco Shipping & Trading Limited (NYSE:GNK) Q1 2024 Earnings Call Transcript

Genco Shipping & Trading Limited (NYSE:GNK) Q1 2024 Earnings Call Transcript May 9, 2024

Genco Shipping & Trading Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 C. 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.gencoshipping.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 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 powers 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 a 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 U.S. 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.

Operator: Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] And, we’ll take our first question from Omar Nokta with Jefferies. Please go ahead.

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Q&A Session

Omar Nokta: Thank you. Hey, guys, good morning. Nice quarter.

John C. 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 the 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 kind of on how that market or 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 influence things from your perspective here over the past few quarters or so?

John C. Wobensmith: Well, I think, 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, I mean, 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, sort of, Atlantic market, iron ore tends to be, obviously big chunk of, kind of, drybulk trade but it 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 kind of eyes or your lens on bauxite, does that exhibit 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. There’s in Q3, there tends to be the rainy season. So, there is that seasonality. It gives, 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 C. 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, kind of, 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, kind of, that versus what we see day-to-day in the in the Baltic?

John C. Wobensmith: Sure. Well, look, 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 a recover over the last two weeks. That would be a difficult rate to recreate today. However, look 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.

Omar Nokta: Yes. No, definitely. Yes, agree with it. Well, thanks, John. Very, very helpful context. I’ll turn it over.

John C. Wobensmith: Thanks, Omar.

Operator: We’ll take our next question from Liam Burke with B. Riley. Please go ahead.

Liam Burke: Thank you. Good morning, John. Good morning, Peter.

John C. Wobensmith: Good morning, Liam.

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