Genco Shipping & Trading (GNK) Q3 2019 Earnings Call Transcript

Genco Shipping & Trading (GNK 0.05%)
Q3 2019 Earnings Call
Nov 07, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited third-quarter 2019 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. I would like to inform everyone that today's conference is being recorded and is now being webcast on the company's website at www.gencoshipping.com.

We will conduct a question-and-answer session after the opening remarks, and instructions will follow at that time. A replay of the conference will be accessible at any time during the next two weeks by dialing (888) 203-1112 or (719)457-0820 and entering the passcode 370213. At this time, I would like to turn the conference over to the company. Please go ahead.

Peter Allen -- Vice President, Finance

Good morning. Before we begin our presentation, I note that in this conference call, we will be making certain forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe and other words in terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance. These forward-looking statements are based on management's current expectations and observations.

For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday, the materials relating to this call posted on the company's website and the company's filings with the Securities and Exchange Commission, including, without limitation, the company's annual report on Form 10-K for the year ended December 31, 2018, and the company's reports 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 -- Chief Executive Officer

Good morning, everyone. Welcome to Genco's third-quarter 2019 conference call. I will begin today's call by reviewing our third quarter and year-to-date highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals, and then ultimately open the call up for questions.

For additional information, please also refer to our earnings presentation posted on our website this morning. In the year-to-date, we have taken important steps to strengthen our future prospects. Specifically, we advanced our comprehensive IMO 2020 strategy and further strengthened our fleet profile and earnings power. We also improved our credit facilities, enabling Genco to implement the next phase of our capital allocation strategy.

As announced in our earnings press release yesterday, management and the Board of Directors have initiated a regular quarterly cash dividend policy with a dividend of $0.175 per share for the third quarter of this year. On top of this, we declared a special dividend of $0.325 per share, utilizing net cash proceeds from four recently agreed upon vessel sales after the repayment of the associated debt. Following the payment of the aggregate dividend of $0.50 per share, we intend to maintain the strength of our industry-leading balance sheet, which we believe is a key differentiator of the company. We also will concentrate on maintaining net leverage positions in terms of one of the lowest in our peer group.

Effectively allocating capital for the benefit of our shareholders has been a significant focus of ours. Following last year's attractive acquisitions of high-quality, fuel-efficient vessels, and given Genco's industry-leading balance sheet, strong liquidity position of over $166 million and a strengthening dry bulk market, we are pleased to now begin to return cash to shareholders. We believe that this decision is well-timed as we aim to create shareholder value throughout the dry bulk market cycle, which has strengthened sequentially in each of the last three years. This announcement marks an important milestone in achieving a key capital allocation objective under our long-term strategic plan.

This is also a testament to the development of our platform and the strong group of professionals that make up the Genco team. Regarding the progress of our IMO 2020 strategy, we have installed scrubbers on 12 of our 17 Capesize vessels to date, representing a completion rate of 71%. Additionally, we have three vessels in the shipyard being fitted with scrubbers currently and expect to have the remaining two Capesize vessels enter the shipyard in the coming weeks to commence installation. A primary operational objective for this year remains to complete our scrubber installation program ahead of the January 1, 2020 compliance date.

This important effort is aimed at ensuring that these systems are fully functional, up to our operational standards and to provide ourselves with experience operating these systems prior to regulations entering into force. With our entire Capesize suite of 17 vessels entering the shipyard this year for scrubber fitting, in addition to scheduled special surveys and ballast water treatment system installations, 2019 has represented a year of substantial capital expenditure in this core portion of our fleet. We view this as an investment in our Capesize fleet this year as we seek to maximize Capesize utilization in 2020 since we will have no scheduled drydocking for these vessels, positioning Genco to capture market upside potential going forward. During the third quarter, our fleetwide time charter equivalent increased by 58% compared to the previous quarter, while our estimated Q4 fixtures to date imply another 20% increase from third-quarter levels.

This increased earnings trajectory over both quarters highlights the improvement of the dry bulk market since the first half of the year and Genco specifically reflects more normalized trade patterns, particularly on our Capesize vessels. Furthermore, we have continued our fleet modernization efforts, having agreed to sell 4 older vessels. In October of 2019, we completed the sales of two Handysize vessels. We have also agreed to sell our two remaining Panamaxes, which are expected to deliver to their new owners during the fourth quarter.

Following the completion of these sales, Genco will have fully exited the Panamax sector as we continue to execute our barbell approach to fleet composition and create a more focused fleet. I will now turn the call over to Apostolos Zafolias, our chief financial officer.

Apostolos Zafolias -- Chief Financial Officer

Thank you, John. For the third quarter of 2019, which represented the most significant drydocking quarter in Genco's history, the company recorded a net loss of $14.6 million or $0.35 basic and diluted loss per share. Excluding $4.2 million in noncash vessel impairment charges, adjusted net loss for the quarter was $2.4 million. Cash, including restricted cash and debt outstanding growth of deferred financing costs, are $166.2 million and $518.6 million, respectively, as of September 30, 2019.

To date, we have incurred $24.7 million of scrubber-related expenses through the first nine months of this year and have drawn down $21.5 million under the scrubber tranche of our $495 million credit facility. We estimate that we have an additional $13.5 million of cash installments remaining under our scrubber program, while we have remaining capacity of approximately $11.5 million to draw down under the balance of our credit facility. Supporting our strong balance sheet is our competitive cash flow breakeven rate, which we estimate at approximately $11,667 per vessel per day for the fourth quarter. We've also provided further detail on these breakeven rates in the appendix of our presentation for your reference.

As John mentioned earlier, we have initiated a regular quarterly cash dividend policy. In relation to this dividend policy, we have amended restrictions on dividends in our credit facilities, enabling Genco to capitalize on its strong liquidity position to return cash to shareholders. We have amended the dividend covenants in our credit facilities, such that Genco may pay dividends and/or repurchase shares under the following circumstances. First, we may pay dividends to the extent our total cash and cash equivalents is greater than $100 million and 18.75% of total indebtedness, whichever is higher.

Second, we can pay dividends if the collateral maintenance test ratio is more than 200%. And then if neither of those two applies, Genco can pay dividends, but will be limited to 50% of the previous quarter's net income. Payment of dividends is also subject to customary conditions in the agreement of our credit facilities, Marshall Islands law, and the discretion of our board of directors. I will now turn the call over to Peter Allen, our dry bulk market analyst, to discuss the industry fundamentals.

Peter Allen -- Vice President, Finance

Thank you, Apostolos. The Baltic Dry Index has improved significantly in the second half of this year with freight rates reaching multi-year highs in the process. The Capesize market, in particular, has been driven by increased iron ore shipments out of Brazil at a time in which vessel capacity has been constrained due to the global fleet's preparation ahead of IMO 2020. The strength of the Capesize market has filtered down to the smaller class vessels, providing an overall uplift to the earnings environment relative to the first half of the year.

A record amount of seaborne iron ore volumes were imported by China during the third quarter as the country fueled its near double-digit growth rate in steel output and partially rebuilt previously drawn down inventory levels. On the supply side, net fleet growth to date is approximately 3%. However, overall fleetwide productivity has declined due to a large portion of the on-the-water tonnage being off higher due to scrubber retrofitting. In terms of the order book vessel, contracting has been relatively limited so far this year despite a strong market in the second half, leading to a stable order book as a percentage of the fleet at approximately 10%, which compares to 7% of the fleet that is greater than or equal to 20 years old.

We believe these positive supply side dynamics provide a solid foundation for dry bulk market fundamentals going forward. This concludes our presentation, and we would now be happy to take your questions.

Questions & Answers:

Operator

[Operator instructions] We can take our first question from Randy Giveans from Jefferies. Please go ahead.

Randy Giveans -- Jefferies -- Analyst

Howdy gentlemen, how's it going?

Apostolos Zafolias -- Chief Financial Officer

Good morning, Randy.

Randy Giveans -- Jefferies -- Analyst

So yeah, first and foremost, obviously, congrats on the dividend announcement. I think it's the first one since 2008 or something like that. So nice to see the return of capital there. So looking at the dividend, I understand the special dividend was based on kind of the incremental cash proceeds from some vessel sales, but how did you determine kind of the regular quarterly dividend of $0.175? Clearly, you're comfortable with your balance sheet, bolus on the market outlook.

So following this kind of new sustained dividend is the next use of free cash to purchase modern second-hands, renewing your fleet, or to further repay debt. It's kind of a two-part question there.

John Wobensmith -- Chief Executive Officer

Well, look, the $0.175 per share regular dividend policy really came out of looking at where the NAV of the company is and putting a yield on not today's current share price, but the much higher NAV value. So that's how we determine the per-share basis. We obviously also look at the sustainability of that $0.175. And we look at our balance sheet, we look at our cash position.

We look at runway models, and that was a number that we felt comfortable putting forward and was sustainable. In terms of other uses of capital, look, our No. 1 goal right now is to increase the valuation of the shares. They're trading below NAV, along with our peers, and we've looked at a number of capital allocation strategies to get that valuation up.

We've looked at share repurchases. We came to the conclusion after quite a few of our peers that have done this that it has no effect on the share price. We have looked at, well, does it make sense to increase the fleet in terms of asset acquisitions? I do believe there is still a good return on capital numbers in terms of asset acquisitions, but the market does not seem to be giving any credit, at least right now, to that. So and -- so then when we looked at dividends, we felt that this was the best way and the best tool in our belt to try and move the valuation of the stock closer to where it should be from an NAV standpoint.

Randy Giveans -- Jefferies -- Analyst

All right. That's fair. And you mentioned NAV a few times there. So what is that kind of NAV? I'm sure above $10.

John Wobensmith -- Chief Executive Officer

Yes. I mean, it's well above $10. I mean it's -- look, on any given day, it changes, but our -- when we look at brokers' values, our cash position, our debt position, it's somewhere in the mid-14s.

Randy Giveans -- Jefferies -- Analyst

OK. Kind of in line with ours. All right. Second question, looking at the general kind of market in your 3Q versus 4Q rates, obviously, Capesize has improved.

Currently still above your fourth quarter-to-date bookings, whereas the smaller asset classes are relatively flat, both from 3Q to 4Q, has ticked up a little, but kind of current spot rates are flat to slightly down from your quarter-to-date rates. So how do you see the Capesize market, as well as the smaller asset classes kind of performing the rest of the quarter, right? How's the back half of the quarter look for those two segments?

John Wobensmith -- Chief Executive Officer

Well, look, the fourth quarter, in general, is -- we're estimating it's going to be 20% higher than the third quarter. And that's an uptick across the Capesize sector, as well as our minor bulk fleet. The Panamaxes are on index deals and, as I mentioned earlier, they're going to be sold before the end of the year. In terms of where we see things, I mean, one of -- I think we spoke about before that there was a lot of disruption with respect to installation of scrubbers.

And what I mean by that is we had the majority of our fleet trading in the Pacific, so that we can make sure we hit the timing right on our slots at the shipyards for our scrubber installation program. And then coupled with the fact that we had a rising -- a rapidly rising market, certainly in the Capes and also in the minor bulks as well. And so it's always difficult to capture that real-time. Though now that the market is -- has stabilized and even ticked down a little bit, you'll see better, and you are seeing better fixtures in the fourth quarter.

And we've also -- we're also 71% of the way through our scrubber program, which is very important. So it should be a much more efficient chartering, if you will, for the fourth quarter, which is represented in the numbers.

Randy Giveans -- Jefferies -- Analyst

Sounds good. Makes sense. Well, hey, thanks again, and congrats on the dividend.

John Wobensmith -- Chief Executive Officer

Thank you.

Operator

Thank you. We can take our next question from Jon Chappell from Evercore. Please go ahead, your line is open.

Sean Morgan -- Evercore ISI -- Analyst

Hi, guys. This is Sean Morgan on for Jon.

Apostolos Zafolias -- Chief Financial Officer

Hi, Jon.

Sean Morgan -- Evercore ISI -- Analyst

I think the big news on this call seems to be the dividend. And the fact that you guys were able to successfully show shareholders that you're going to do a sustainable dividend going forward. And there's -- I noticed that you were able to also work with the banks to come up with a series of covenants that I assume would have enough headroom to be able to do this dividend going forward. You're targeting $0.175.

It looks like the first two covenants are kind of the first litmus test and then the third covenant, the 50% of the previous quarter's net income. So I guess, I'm just trying to understand, is that because if you don't meet the first two, then you're able to -- if you have positive net income during the quarter, then you can pay 50% of that? And if that meets the $0.175, then you'll continue that? And then if that -- if those three conditions are not 100%, then you would basically have some -- a floating component to it? So where you'd pay less than $0.175?

John Wobensmith -- Chief Executive Officer

Yes. We haven't talked about the floating component. But just, look, on the covenants, the key covenant is to have a minimum of $100 million in cash pro forma or 18.5% of debt outstanding. So if you look at where we are today, we have $166 million in cash at the end of -- on September 30.

So there's quite a bit of cash there before we get down to the $100 million minimum if you will. The 50% of net income, that's always been in place in the credit facility. So that was not an ad. We just didn't -- we wanted to make sure we kept that in place as sort of a third tier.

But I'd be much more focused on the minimum cash number of $100 million than anything else.

Sean Morgan -- Evercore ISI -- Analyst

OK. I see. So you're saying that you -- with the first two covenants, there's enough headroom that you feel like you have sustainability on the $0.175. So I shouldn't really think of that as like some of your -- I guess, not your peers, but some of the tanker companies have a floating type dividend? So this is really going to be more of a fixed dividend going forward?

John Wobensmith -- Chief Executive Officer

Yes. This is a regular $0.175 dividend policy per quarter.

Sean Morgan -- Evercore ISI -- Analyst

OK. Great. Yes, that's a good signal going forward, I think, for covenants. And then regarding the sales, I think it obviously makes sense that the noncore Panamax is getting removed from the fleet, and then the age of the other two smaller ships sort of makes sense in terms of your vessel sales.

Is there anything else -- any other vessels that you can kind of point to in the fleet that you think might -- may contract the candidates to try to generate shareholder returns of cash that would kind of follow that mold?

John Wobensmith -- Chief Executive Officer

Well, look, we have one older Handysize ship left into 2005. I would say that's something that we're looking to sell. It's no secret that we've also looked at disposing of the 53,000 deadweight ton ships. So nothing has changed on that front in terms of disposals targeted.

We'll look at how things are after we sell those. And again, it's -- you're looking at everything in your tool belt at the time, right, depending on the equity valuation. And do we want to distribute those funds in terms of dividends? Do we want to do share buybacks? Do we want to put cash on the balance sheet? Or do we want to do vessel acquisitions? It's definitely something that you look at in real time, and we will. And I think we've demonstrated, particularly with this last special dividend, that there's a lot of time and effort, a lot of thought and -- to get to the right place, which is where we are today.

Sean Morgan -- Evercore ISI -- Analyst

Yes. I agree. I think that this nimble opportunistic strategy that really show investors you have confidence in returning capital is a good look. So I'm going to turn it over to the next caller.

Thanks.

John Wobensmith -- Chief Executive Officer

OK. Thanks, Sean.

Operator

[Operator instructions] We can take our next question from Omar Nokta from Clarks and the Plateau Securities. Please go ahead.

Omar Nokta -- Clarks and the Plateau Securities -- Analyst

Hi. Thank you. Hey, guys. Congrats on the dividend announcement.

Obviously, a big deal. And I'm sorry, I'm joining the call a bit late. But just wanted to maybe ask a big -- maybe bigger picture. With the dividend now, and, clearly, to us, it looks like you said at a sustainable level over the long term.

Do you think -- do you feel -- with the company having been so spot-exposed, and we think it's obviously a good time to be exposed to the spot market. Does having a dividend policy now kind of compel you to want to seek more longer-term contracts for the fleet? Does that come into play at all?

John Wobensmith -- Chief Executive Officer

I don't think it necessarily comes into play basis a dividend. I mean we're constantly looking at period opportunities and managing it as a portfolio. We have put some charters in place on some of the smaller ships over the last couple of months. The other thing in our tool belt, because of the fact that we've revamped the commercial platform, is we can do quite a bit of forward cargo booking, which we've started to do for the first part of the year, which is typically a little slower period.

So we're not just limited to time charters. We have quite a few trading opportunities in terms of forward cargoes that we can also do. But to answer your question just very concretely, I wouldn't say it's necessarily because of the dividend. But in general, if we see a good opportunity unlocking something in at a healthy rate, we're definitely going to do it.

Omar Nokta -- Clarks and the Plateau Securities -- Analyst

OK. That's good. Other question is -- and sorry if you addressed it already. You have to have $100 million of cash to maintain the dividend.

And we've got $65-plus million above that, and not saying you need to spend it. But if -- as you think about it, do you feel -- if you were going to deploy the capital -- you've got a nice chart in the presentation that shows the focus on Capes, Ultras and Handys. But mainly Capes and Ultras, where do you think you spend an incremental dollar? Is it on the Capes or Ultras?

John Wobensmith -- Chief Executive Officer

Look, I think it's both. We're -- we definitely want to continue the barbell approach. If you look at what we did in our last acquisition in June, we did some Capes and we did some Ultras at the exact same time to maintain that. And as you pointed out, we do look at the Capes and the Ultras as much more of the core fleet rather than the Handysize.

But again, the whole concept of the regular dividend is clearly to return cash to shareholders, but it's also to allow the company the utmost optionality. So we still, with the strong balance sheet, we can still do acquisitions. We can -- we obviously can still do share buybacks. We -- so it's all about maintaining optionality.

And that's really why we chose the level of dividend that we did. And obviously, we feel that returning cash to shareholders, right now, is the best move.

Omar Nokta -- Clarks and the Plateau Securities -- Analyst

Got it. That's helpful. John. Thanks so much for that, and congrats again on the dividend.

John Wobensmith -- Chief Executive Officer

Thanks so much.

Operator

We can now take our next question from Amit Mehrotra from Deutsche Bank. Please go ahead.

Chris Snyder -- Deutsche Bank -- Analyst

Hey, guys. This is Chris Snyder on for Amit. And sorry, I hopped on a bit late as well, so I apologize if this has been touched on. But -- so it feels like 2020 should be a stronger year for cash generation than 2019.

Vessel supply is moving lower, and the scrubber investment's turning from a cash headwind into a pretty considerable cash tailwind of spreads hold at current levels. So I guess the question is, what does this mean for the dividend outlook? Should we expect to see growth on the back of this kind of expected ramp in cash generation? Or does the current dividend just kind of reflect the anticipation of that stronger cash environment?

John Wobensmith -- Chief Executive Officer

So the one thing I'll add to your list of positive factors in 2020 is it is, 2019, as I had said before, was the biggest year this company has ever had in its history of drydocking. Meaning, next year, is a very low drydocking year. In fact, zero of our Capes are drydocking next year. So we will have very high utilization.

But going back to your question, look, the dividend at -- right now, at this point, our policy is $0.175 a quarter. There's no reason why if things continue to move up and are positive that we won't revisit that. But again, these things are all looked at in real time. We have a lot of things at our disposal right now, increasing a dividend, share buybacks, vessel acquisitions.

The main point of this is that this company continues to have that optionality, and we'll make the right move at the right time.

Chris Snyder -- Deutsche Bank -- Analyst

Appreciate that. And then kind of looking at the Cape market. So rates in the market, in general, has been supported by increased out-of-service time for scrubbers. Installations are taking longer than expected.

I guess kind of how long or how into 2020 could this kind of tailwind for the Cape market remain just as long as we're seeing this high out-of-service time?

John Wobensmith -- Chief Executive Officer

From what we can tell, at least through the first quarter, I think a lot of people who felt they were going to get scrubbers installed in the third quarter, that's all -- a lot of that's been pushed into the fourth quarter, and a lot of the fourth quarter is getting pushed into the first quarter. There's definitely still big waiting times, disruptions. And if you are to arrive on the scene today and try to install a scrubber, you're well into next year to even think about getting a slot, which is, again, why we wanted to get all this done before the end of this year. And then there's the whole operational side.

I mean, this is a brand-new piece of equipment for most companies. And you need to get that operational experience and run the traps, if you will, on these before you get comfortable that you're using it long term. So that why -- that's why it was so important for us to get all this done this year.

Chris Snyder -- Deutsche Bank -- Analyst

All right. And then just one last one, if I could. So earlier this year, China announced coal import quotas for 2019 that they were going to keep it flat at 2018 levels. And through the first nine months of the year, I believe coal imports are running about 10% higher year on year.

So that implies a pretty sharp decline into Q4. Are you seeing this in the market? And kind of what's your outlook for that as we head into year end?

John Wobensmith -- Chief Executive Officer

Yes. I mean, look, we are seeing coal being cut back, which is -- it's all predicted, right? We've been talking about this for probably six months because of the quota. So yes, I think we could see a softening as we get into the end of the year. But let's also keep in mind that Southeast Asia, particularly Vietnam, those numbers continued to move up at double-digit rates, and Indian coal imports also continued to move up significantly.

So it's not just about China. And even if we have a little softness on the Chinese side, we'll see that pick up again in the first and second quarters. And the other thing you've got to keep in mind is that it's not just coal. I mean the major commodity is iron ore.

Right? And Vale, in particular, has given guidance that would show 5% more imports in the fourth quarter over the third quarter, which was a pretty strong quarter. So I think there are mitigating factors on a little bit of cutback on the Chinese coal imports.

Chris Snyder -- Deutsche Bank -- Analyst

Well, I appreciate the time. That's it for me. Thanks, guys.

John Wobensmith -- Chief Executive Officer

OK. Have a good day.

Operator

There appears there are no further questions in the queue at this time. I would like to hand the call back for our hosts -- to our hosts for any additional or closing remarks.

John Wobensmith -- Chief Executive Officer

Thank you very much, everyone. This concludes the call. Everyone, have a nice day.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Peter Allen -- Vice President, Finance

John Wobensmith -- Chief Executive Officer

Apostolos Zafolias -- Chief Financial Officer

Randy Giveans -- Jefferies -- Analyst

Sean Morgan -- Evercore ISI -- Analyst

Omar Nokta -- Clarks and the Plateau Securities -- Analyst

Chris Snyder -- Deutsche Bank -- Analyst

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