Genco Shipping & Trading Limited
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Second Quarter 2013 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 at 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 at any time during the next 2 weeks by dialing [phone] or [phone] and entering the passcode of 3132802. At this time, I will turn the conference over to the company. Please go ahead.

[Unknown Executive:]

Good morning. Before we begin our presentation, I'll 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 a 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, 2012, and the company's subsequent reports filed with the SEC. At this time, I would like to introduce Gerry Buchanan, the President of Genco Shipping & Trading.

[Robert Gerald Buchanan:]

Good morning, and welcome to Genco's second quarter of 2013 conference call. With me today is Peter Georgiopoulos, our Chairman; and John Wobensmith, our Chief Financial Officer. I will begin today's call by discussing our second quarter highlights as outlined on Slide 3 of the presentation. I will then turn the call over to John to review our financial results for the 3 months period ended June 30, 2013. Following this, I will discuss the industry's fundamentals. John, Peter and I will then be happy to take your questions. During the second quarter, Genco continued to operate a large and modern drybulk fleet and a cost effect of mining [ph] while preserving the ability to capitalize on positive long-term industry fundamentals on providing high-quality service for our leading customers. During the second quarter, we continued to employ a majority of our vessels on short term or spot market related contracts with credit-worthy counterparties. This opportunistic tank charter approach positions Genco to benefit from a rising freight rate environment and combined with our efficient cost structure, expand the company's future earnings potential when the market conditions improve. Moving to Slide 6. We provide a summary of our fleet. Genco's diversified approach of owning and operating a modern, high-quality fleet across the entire bulk sector strengthens the company's ability to deliver superior customer service to multi-national charters and take advantage of the long-term demand for essential commodities in China, India and other developing countries. Excluding Baltic Trading fleet, we currently own a fleet of 53 drybulk vessels, consisting of 9 Capesize, 8 Panamax, 17 Supramax, 6 Handymax and 13 Handysize vessels, with a total carrying capacity of approximately 3,810,000 deadweight. I will now call -- turn the call over to John.

[John C. Wobensmith:]

Thank you, Gerry. Turning to Slide 8. I will begin by providing an overview of our financial results for the second quarter and 6 months ended June 30, 2013. Please note that we are reporting our financials on a consolidated basis as a result of our equity ownership in Baltic Trading. For the 3- and 6-month period ended June 30, 2013, we recorded total revenues of $45.8 million and $86.2 million, respectively. This compares to the revenues for the second quarter of 2012 and 6 months ended June 30, 2012, of $62.9 million and $122.8 million, respectively. The decrease in total revenues for the second quarter of 2013, compared to the prior year period is primarily due to lower charter rates achieved by the majority of our vessels. The net loss attributable to Genco for the second quarter of 2013 was $45.4 million or $1.05 basic and diluted loss per share. The net loss attributable to Genco for the 6 months ended June 30, 2013, was $93.5 million or $2.17 basic and diluted loss per share. This compares to a net loss attributable to Genco of $27.7 million or $0.65 basic and diluted loss per share for the second quarter of 2012 and a net loss attributable to Genco of $60.8 million or $1.50 basic and diluted loss per share for the 6-month period ended June 30, 2012. Next, on Slide 9. You will see the income statement effects of Baltic Trading's consolidation with Genco Shipping & Trading. This will provide you with a more detailed breakdown of the financial performance of the 2 separate companies. Key consolidated balance sheet and other items, as presented in Slide 10, include the following. Our cash position, including restricted cash, was $79.7 million as of June 30, 2013. Excluding that consolidation of Baltic Trading, Genco's cash position was $56 million. Our total assets as of June 30, 2013, were $2.8 billion, consisting primarily of our current fleet, cash and cash equivalents. Current liabilities as of June 30, 2013, were $1.5 million, as compared to $25.7 million for December 31, 2012, due to the reclassification of our long-term financing arrangements as short term in our consolidated balance sheet as of March 31, 2013, as we discussed in our last earnings call. Moving to Slide 11. Our utilization rate was 99.5% for the second quarter of 2013 compared to 99.6% in the year earlier period. Our time charter equivalent rate for the second quarter of 2013 was $7,526. This compares to $11,067 recorded in the second quarter of 2012. The decrease in time charter equivalent rates resulted from lower charter rates achieved in the second quarter of 2013 versus the same period last year for the majority of the vessels in our fleet. For the second quarter of 2013, our daily vessel operating expenses were $4,744 per day versus $5,232 per day for the second quarter of 2012. Daily vessel operating expenses for 6 months ended June 30, 2013, were $4,802 per day versus $5,082 per day for the 6 months ended June 30, 2012. The decrease in daily vessel operating expenses for the second quarter of 2013 compared to the prior year period is primarily due to lower maintenance-related expenses. As we have stated in the past, we believe daily vessel operating expenses are best measured for comparative purposes over a 12-month period in order to take into account all the expenses that each vessel in our fleet will incur over a full year of operation. We are pleased that our daily vessel operating expenses had been below management's budget for each of the past 4 quarters. Based on estimates provided by our technical managers on management's expectations, our daily vessel operating expense budget from the second half of 2013 is $5,250 per vessel per day on an average weighted basis for the 53 vessels in our fleet, excluding vessels owned by Baltic Trading Limited. Moving to Slide 12. We present our anticipated expense levels for the third quarter 2013. Genco's status as one of the lowest cost operators in the industry is reflected in our low breakeven levels, which enhance our ability to operate in an uncertain rate environment as we remain focused on effectively managing the company through the current drybulk shipping cycle. We expect our daily free cash flow expense rate to be $10,388 and our daily net income expense rate for Genco consolidated to be $16,669. I will now turn the call back to Gerry to discuss the industry fundamentals.

[Robert Gerald Buchanan:]

Thank you, John. I'll start with Slide 14, which points to the drybulk indices. Represented on this slide is the overall drybulk index. During April and May, the BDI remained at similar levels to those experienced during the first quarter. We believe this was predominantly due to excess vessel supply exasperated by the front-loaded nature of the order book, lower iron ore output from Brazil and the winding down of the South American green season. As the second quarter progressed, the pace of newbuilding vessel deliveries continued on a downward trajectory. As fleet growth flowed and more fixture activity surfaced in the market, the BDI began to ascend. The index increased from June 6 through the end of the second quarter reaching a 213 [ph] -- a high of 1,179, a level not seen since January 2012. On Slide 15, we summarize some of the contributing factors to the rise in the BDI, as well as other recent developments in the drybulk freight market. Starting on the supply side, we have seen ongoing deceleration of newbuilding deliveries since the peak in June of 2012. For the first half of 2013, deliveries were 43% lower as compared to the same period last year. Partially offsetting vessel deliveries to date as being demolition, which although has not been as robust this period compared to the record-setting year of 2012, it still actively contributes to reducing vessel supply growth. 13.2 million deadweight were scrapped through the first half of 2013, helping to lower net additions by 50% as compared to the first half of 2012. Furthermore, although the number of newbuilding orders has increased since the beginning of the year, the overall drybulk order book as a percentage of the fleet remains at 18%, its lowest level in over 8 years. Slippage continues at a fairly constant rate with approximately 28% not delivering in the first half of 2013. On the demand front, although iron ore cargoes out of Brazil hit their seasonal lows in the first half of 2013, we believe the return of these long ton mile cargoes in the beginning of June, along with the firm coal and green fixtures, helped improved short-term fundamentals and pushed Capesize rates above to $10,000 per day. Freight rates also find support towards the end of the second quarter as a result of higher commodity exports out of Australia. June coal shipments from the 3 major points of Queensland reached their record monthly total of 15.6 million tons, their second highest month after June 2010. Combined exports of coal and iron ore for the second quarter of 2013 also reached a quarterly record, coming in at 234 million tons. As discussed on previous calls, we continue to believe that the incremental capacity of iron ore from the major miners will positively affect the demand for the transportation of commodities over a 5-year period. Expansion plans from the major Australian ore miners are well underway, with Fortescue recording a nearly 80% production increase and Rio Tinto recording a 7% increase in the second quarter. Iron ore inventories at Chinese ports have fought the increase to 72.7 million tons, but still stand 25 million tons lower than the same time last year. Iron ore prices have recovered to $130 a ton after reaching a bottom of approximately $110 per ton in June of this year, but remained well below their annual peak of $159 per ton. Although the arbitrage opportunity between international and Chinese domestic ore at these price levels has reduced, the spread could widen with the onset of higher iron ore capacity. Fortescue expects prices to stay in the $110 to $130 region on the back of a stable demand from Chinese steel mills. And lastly, we believe that as global growth prospects and sentiment in the rest of the world are beginning to improve, existing vessel availability could be absorbed by traditional raw material import -- or portals like Japan, Europe and South Korea. Indicatively, manufacturing activity in Japan expanded at its highest level in 2 years to a seasonally adjusted 52.3 PMI in June. At the same time, the Euro zone flash manufacturing PMI came in at 50.1, beating estimates and certainly potential growth. Turning to Slide 16. We believe that a number of short- and long-term catalysts will impact the drybulk market. The low Brazilian ore exports are down slightly year-on-year. Quarter 2 exports increased 13% compared to quarter 1. This is a trend that we feel will continue into the second half of this year. Looking at recent historical data, Brazilian iron ore exports have risen dramatically in the second halves of both 2011 and 2012, posting increases of 24% and 23% when compared to the first half of the respective years. Construction of China's infrastructure projects could potentially support higher needs for steel. The Chinese government just raised its fixed asset investment target for railways over the next 3-year period. Overall targeted rail spending is to increase by CNY 500 billion from the prior plan. The 2013 target was raised by 6% to CNY 690 billion, signaling that the government is actively trying to maintain its GDP growth target of 7.5%. The majority of this increase, however, will be felt over the next 2 years as CNY 460 billion had been added to planned spending for 2014 and 2015. On the coal front, China's proposal to ban low calorific imports could result in a greater ton miles, as sourcing from Indonesia could be displaced by Australia and Colombia. We believe that the Indian coal trade will also be a significant catalyst moving forward. To date, India has experienced substantial increases in steaming coal imports as electricity needs arise. Going forward, we believe that India's increased steel production could result in higher coking coal imports due to a lack of high-quality domestic reserves. On the supply side, as volatility and charter rates continues and scrapping steel prices remain at decent levels, we believe scrapping of additional vessels could continue in 2013, following the trend of the prior 2 years. 2011 and 2012 were recorded years -- were record years for vessel deliveries. As the weight of the order book lessens, more newbuilding vessels either getting delayed or canceled, the supply growth experienced over the past few years could slow -- likely slow down, allowing demand to catch up. On Slide 17, we talked more about the demand side fundamentals. Global steel production was up 2% in the first 6 months of the year. Leading the way in Asian steel production were China, India and Japan. Although Chinese steel production in June was the lowest since February, CISA reported that production has rebounded in mid-July as daily steel production increased to 2.13 million tons, up slightly from the 2.08 million tons during the first 10 days of the months. With regard to India, steelmaking capacity is targeted to rise from 80 million tons per annum to 200 million tons per annum by 2020 as more projects are geared towards expanding steel and power plants. In Japan, the war [ph] again has boosted export demand, which is in ton lifted steel output. Moving to Slide 18. On the left of the page, which show the expansion plans of key iron ore producers, as recently revised by the respective companies. The combined expansion plans through 2017 aggregate to 410 million tons per annum or approximately 37% of 2012 seaborne ore trade. Most of the projected growth in iron ore export capacity in 2013 is expected to come from Australia, specifically minus Rio Tinto, Fortescue and BHP Billiton. All 3 have been producing iron ore at aggressive levels and expect to continue to ramp-up mining projects as the year progresses. As a result, Australia's Bureau of Resources and Energy Economics forecast an increase in iron ore exports of 16% in 2013 and 2014. As more iron ore comes to the market and the price advertised potentially widens, Chinese domestic producers are going to have a difficult time competing internationally, particularly due to their high production costs and low grade of domestic ore. Increased exports from Australia, combined with reduced Indian exports and lower dependency on China's domestic supplies, are expected to lead to iron ore trade growth accounting for approximately 1/3 of the total increase in drybulk trade in 2013. On Slide 19, we discuss the trends and supply side fundamentals, which remained mixed. As seen at the bottom left of the page, the remaining order book for 2013 stands at approximately 54.5 million deadweight. Of that total, however, 11.3 million deadweight or 21% on the remaining 2013 order book has a contract date before 2009 and in our opinion, isn't likely to deliver. In terms of the total order book, 18.2 million deadweight or 14% of the total order book has a contract date before 2009. Although there have been more newbuilding orders this year compared to last, the order book after 2013 is still relatively low when comparing it to the peak ordering years. Additionally, it's our view that availability for 2015 deliveries at high-quality shipyards is limited as there are few slots remaining in any of the current kind. This development would help to the selling in the order book through 2015 and limit fleet growth to just existing orders over the next 2 years. Although the first 6 months of the year the drybulk fleet has grown by 3%, a much more manageable figure than what has been experienced over the past few years. Scrapping totals will likely come up short of last year's pace. However, newbuilding vessel deliveries are likely to do the same, leading to less overall fleet growth. A positive trend has continued in the demolition of younger tonnage, particularly in the Capesize sector. The 2 vessel classes that experienced the slowest fleet growth so far this year have been the Capesize and Handysize sectors. Capesize net additions have come down 60% from last year, enabling the BCI to rally as the figure of volume increased over the last 2 months. The Handysize fleet shrunk by 9 vessels through June as all the tonnage were scrapped. The supply side fundamentals for the Handysize sector remain encouraging as 20% of the fleet is over 25 years old and the current order book is only 14% on the Handysize fleet. Lastly, we note that although supply side fundamentals remain uncertain, slowing fleet growths, coupled with the projected demand growth, are encouraging signs towards reestablishing a more balanced, long-term demand equation. This concludes our presentation. I will now be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question will come from Doug Mavrinac of Jefferies.

[Douglas J. Mavrinac:]

I just had a handful of follow-up questions. First, as we've seen, the market has firmed up significantly since the second quarter. Capesize rates today are back above $12,000 per day. As you look at the state of the market, the drybulk shipping market right now, in the middle of the summer, what does it tell you about how it should respond to some of the upcoming events, like increasing iron ore production capacity, this seasonal grain trade? At $12,000 a day in the middle of the summer, does that tell you that the market is pretty tight and should react well? Or what's your take on the current state of the market?

[John C. Wobensmith:]

Yes, I mean -- Doug, this is John. Yes, I mean, clearly, we usually have a lull during the summer. I think what's different this year is that, I think, one, you've had a very large tail off in newbuilding deliveries and net deliveries, that's one -- been one positive aspect. Also the inventory numbers at the port from China for iron ore are actually rather low. So you are seeing mining or fuel companies buying ahead of what would typically be a strong late third quarter, fourth quarter season, so that's going on as well. I think it actually bodes pretty well. I mean, if you look at what the FFA curve is showing for fourth quarter, I think it's around $17,000 today for Capesize rate, it's encouraging. I still think we have a little ways to go, but clearly, the dropoff in the number of deliveries that we've seen so far this year and then -- and project to going into next year is a big factor because demand growth continues to run at 6% to 7%.

[Douglas J. Mavrinac:]

Right. And actually, that's kind of the segue into my second question, is when we look at kind of some of the things that are being said about the market, kind of reading the tea leaves, obviously, rates are strengthening, showing some resiliency in the market, FFAs are in contango, showing that rates are going to be increasing into the end of the year, are you guys sensing any sentiment change on the part of some of the market participants like the charters, that for the last 4, 5 years, have been at this mindset that, "Hey, the drybulk market's going to continue to languish"? Now that we're starting to see signs of improvement not just in rates, but in other things, have you sense any sort of kind of getting over the hump sentiment change for some of the guys on the other side of the negotiating table, the charterers?

[John C. Wobensmith:]

Yes, definitely. I mean, I think -- look, the interesting thing is that you've been seeing some 3-year charters being done and conclude in the market, which -- that part of the market has been absent for quite a while and I think we've seen 2 of those done over the last couple of months.

[Douglas J. Mavrinac:]

Got you. And then just one final question on this topic. As it relates to that sentiment change and although -- almost daily we're reading positive headlines about expectations for the Cape market recovering in 2014, you guys actively talked with a lot of commercial lenders, your own commercial lenders. Would you say that those guys too are seeing the headlines, reading the headlines? And are they kind of believing as well that the market is on the cusp of doing better?

[John C. Wobensmith:]

I mean, I don't want to speak necessarily for banks. But what we have seen is certainly more appetite to look at drybulk again from some of the existing strong lenders, some of the larger banks. Clearly though, there is a -- there have been a lot of banks that have just exited shipping. But yes, I think the larger banks, it seems, are more positive on drybulk.

[Douglas J. Mavrinac:]

Got you. And then just a couple of questions on the supply side before I turn it over. First, people earlier in the year, were talking about all the increase in newbuilding order activity. But as you guys pointed out, the order book is still quite small. If you had to place -- so my question is if you had to place an order today for a new Capesize carrier at a reputable yard, one where you're going to get a refund guarantee and all that stuff, when would you expect to most likely see that delivery?

[John C. Wobensmith:]

Yes. And you just hit on the key point, the reputable yard. Even in China, to be at a reputable yard, you're probably -- maybe end of 2015, you could get a slot. I think it's more likely early 2016. And listen, the guys on the product carrier side, the gas carrier side, container ships, even the crew tankers, have helped that out by filling up slots.

[Douglas J. Mavrinac:]

Got you. That's helpful. And then final question, Gerry talked about it in his industry comments. We have seen scrapping slowing this year just because the market outlook has gotten better. But the Chinese, a couple of weeks ago, introduced another initiative. Not only they're trying to stimulate their economy through rail spending, but they're also trying to support some of the domestic shipowners by requiring ships, Chinese flag ships that are 20 years of age or older to be scrapped, would that affect the global market? Or how would that affect the global market in your view if you see a lot of older Chinese ships leaving the trade?

[John C. Wobensmith:]

Yes. I mean, Doug, first of all, I had -- I'm still a little fuzzy on the specifics of that, but I certainly have read the same news report, I think, that you're referring to. If it does -- in fact, there is a subsidy program for that. Keep in mind, a lot of those 20-year-old ships came from the international flag fleet to begin with. So as those ships leave, it stands to reason that more ships -- because obviously, the Chinese domestic trade is still thriving. It seems to reason that more ships can come out of the international trade and go in 15-year-old ships and go into that Chinese domestic trade, which would be helpful.

[Operator:]

Our next question will come from Christian Wetherbee of Citi.

[Seth Lowry:]

This is Seth in for Chris. If I could start out with the strength you've seen in the period markets, should we expect you to take a more proactive approach in chartering for the longer term going forward, or could you guys still make sense to keep things -- keep charters more short term duration and position yourselves for a potential further run up in rates, as mentioned previously, if we get a little bit of a seasonal uptake? Are you holding back or should we expect a bit more longer-term chartering going forward?

[John C. Wobensmith:]

No, we're holding back. We still think there is room going -- certainly going into 2014.

[Seth Lowry:]

Okay. I'll just switch to the supply side. I think that we have seen a fairly robust pace of newbuild orderings this year and it definitely seems like July was a bit of a stronger month, with some carriers taking a more speculative position in purchasing tonnage. Just curious to get your take, do you think that's sustainable or do you think it could give an increase with the uptick in rates? It just feels like the pace of new supply orders has increased and was wondering how you see that trended over the next -- through the back of the year.

[John C. Wobensmith:]

Well, I mean, listen, you're right. I mean, obviously, going from a virtual standstill to some newbuilding orders is -- it makes people stand up and take notice. But if you look at Slide 19 in our presentation, in the lower left, the current newbuilding order book is in there, and it basically doesn't move the needle in terms of percentages of fleet growth in '15 and '16. As I said earlier, I don't think there's a lot of room to do much more until the end of '15. I obviously think it's positive that some people are ordering and obviously have some sort of support from banks to do this. But I still think, on the second hand side, there's plenty of tonnage to buy. And the nice thing about buying secondhand tonnage today is that you can capture the potential upside for '14 and '15, which you're not going to be able to do with new builds.

[Seth Lowry:]

Maybe -- that's a good point, maybe you could comment on that. It seems like, at the beginning of the year, the incremental tonnage being ordered was a bit more consolidated amongst the smaller number of carriers. Now, the new orders are seemingly coming from a wider base of carriers. What is -- what do you think the compelling reason is for the wider number of industry participants to go into the newbuild, new tonnage market instead of the sale and purchase market?

[John C. Wobensmith:]

I mean, look, it's hard to speak. I think everybody has their own rationale as to why to go into [ph] newbuildings. Newbuilding is just like the secondhand tonnage that are at historically lows from a value standpoint. On the Capesize sector, we're definitely seeing some ordering there. And I think that probably had to do with the fact that there aren't a lot of secondhand Capes that are available for sale. So the way to get exposure to that market today is to order new builds. But it's hard for me to speak individually on what people are -- what their agenda is.

[Seth Lowry:]

Okay. And lastly, a follow-up. It seems like you had a bit of a boost from -- in financing cash flows during the quarter. Could you just remind us what that was? I think it was like $20 million.

[John C. Wobensmith:]

Yes, I assume that you're referring to the offering from Baltic. I assume that's what that would be.

[Seth Lowry:]

Yes. Okay. I just wanted to make sure I wasn't missing something within the cash flow statement.

[Operator:]

[Operator Instructions] We'll go next to Justin Yagerman of Deutsche Bank.

[Joshua Katzeff:]

It's actually Josh Katzeff on for Justin. I guess a lot has happened since last quarter's call. In the drybulk market, we saw one public company follow [ph] but investor sentiment in rates have certainly materially improved. We're seeing a lot more investment in this space. Can you maybe provide us an update with some of your conversations with your traditional or nontraditional lenders?

[John C. Wobensmith:]

Well, I mean, at Genco, we've obviously been very straightforward that we need to sit down and speak to our lenders because we're going to have some issues in the first quarter, potentially, with covenants and amortization. As I said in the last call, those conversations are ongoing. I don't really have a specific update at this point. So that's how it is at Genco. And at Baltic, you saw that we raised additional bank debt that to fund 2 acquisitions that we have going on there.

[Joshua Katzeff:]

Great. And just to clarify, the only covenant test that you currently have is just a minimum cash test, and you still have significant headroom there, right?

[John C. Wobensmith:]

That is correct. We have a -- it's basically $39 million is the minimum cash requirement under that covenant, and we also have a debt to net worth test or debt to total capital test, which we're also inside of.

[Joshua Katzeff:]

Got it. I guess, maybe switching to the broader market. I know this was at Baltic, but you guys acquired some Handysize ships. Can you maybe talk about the rationale with purchasing Handysizes versus the larger Capes?

[John C. Wobensmith:]

I'm not going to say that it's necessarily a rationale. We're positive on Capesize as well. I think we're reasonably positive again, going into '14 and '15 on the overall market. That was a transaction that was done off market, privately. We're pleased with it. And at Baltic, we hopefully expect to take advantage of more of those types of transactions.

[Joshua Katzeff:]

Got it. And just one question before I turn it over. You've mentioned that you've seen some pictures for some 3-year time charters, so maybe talk about what rates those were done at.

[John C. Wobensmith:]

Yes, sure. Let me just -- give me one second here. Just one second, Josh. Capes, there were -- that was one done, I think, around 14.5 and there was another one done slightly higher than that, 14.750.

[Operator:]

Great. Thank you. And that does conclude today's Genco Shipping & Trading Limited conference call. You all have a great day.

[Robert Gerald Buchanan:]

Thank you.