Genco Shipping & Trading (GNK) Q1 2020 Earnings Call Transcript

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Genco Shipping & Trading (GNK 1.54%)
Q1 2020 Earnings Call
May 07, 2020, 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 first-quarter 2020 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, and instructions will be given 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 5989226. [Operator instructions] At this time, I would like to turn the conference over to the company. Please go ahead.

Unknown speaker

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

For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday, the materials relating to this call posted on the company's website and the company's filings with the Securities and Exchange Commission including without limitation the company's Annual Report on Form 10-K for the year ended December 31, 2019, 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 -- Chief Executive Officer

Good morning everyone. Welcome to Genco's first-quarter 2020 conference call. I will begin today's call by providing an update on Genco's response to COVID-19. We will then review our year-to-date highlights, discuss our financial results for the quarter, and the industry's current fundamentals, before opening the call up for questions.

For additional information, please also refer to our earnings presentation that is posted on our website. Genco's main focus remains on the health and safety of both our crew members and our onshore team. As a result, we have undertaken various proactive measures as a response to the onset of COVID-19, specifically centered around ensuring that continuity of our business and protection of our crew while maintaining effective and safe headquarter operations.As our vessels continue to trade commodities around the world, we have worked toward preventing the spread of COVID-19. As part of this effort, we have provided crew members with gloves, face masks, hand sanitizer, goggles, and handheld thermometers.

We also continue to monitor CDC and WHO guidelines, and our limiting access of shore personnel boarding our vessels. We have implemented industry leading protocols with regard to crew rotations which includes PCR testing for COVID-19, as well as a 14-day quarantine period prior to boarding a vessel for our crew members. Genco is performing crew changes where permissible, determined by regulations of the ports, and origin of our mariners. In addition to strict protocols that safeguard our crews against COVID-19 exposure.

Our business continuity plans onshore for our three global offices in New York, Singapore, and Copenhagen have allowed for an efficient transition to a remote working environment. Additionally, we have also placed a ban on all non-essential travel. We are proud of the dedication of the entire Genco team and how they have demonstrated professionalism and a commitment to excellence during this challenging time. We sincerely thank them for their efforts.

The global outbreak of COVID-19 has resulted in a meaningful slowdown in global economic activity levels, any decline in demand for certain other raw materials that our vessels transport. Unprecedented times like these highlight the importance of our strong balance sheet, as a low net leverage which we view as key differentiators of Genco. From a financial perspective, our position remains strong as we hold a $149.5 million of cash on our balance sheet as of March 31, 2020. While the first quarter of the year tends to be softer from an earnings perspective, the downward move in rates was accentuated this year by the onset of COVID-19, and anticipation of a seasonally weaker first quarter, we booked several forward cargoes, and selectively fixed short period time charters to cover this period.

Additionally, our timely execution of our scrubber program of our Capesize vessels enabled us to capture fuel spreads that are at their widest in the earliest stages of compliance with IMO 2020. The combination of these factors resulted in a firm Q1 time charter equivalent rate of $9,755 per day led by $16,660 per day on our Capesize vessels. Given the level of uncertainty in the global economy in the months ahead which is largely tied to the trajectory of COVID-19, management and the board of directors believe that it is prudent to protect our strong balance sheet, conserve cash, and attempt to insulate the company as much as possible from these macro events at this time. To that end, as we look to supplement our already substantial cash position, we are currently working with our existing lenders on a revolving credit facility for up to $25 million.

At the same time, we are pleased to have declared a dividend for the first quarter of 2020 highlighting our commitment to returning capital to shareholders. Review amending our first-quarter dividend as a prudent action taken by management in the board of directors, aimed at balancing preservation of the company's liquidity position with a return of cash to shareholders. We know that we have now paid and declared a total of $0.695 per share to our shareholders since Q3 2019. Effectively deploying our capital remains a top priority for us and something that we will continuously evaluate as these macro events further evolve.

We believe that over the medium to long term, the outlook for the dry-bulk industry is favorable. We believe supply side fundamentals are beneficial given the historically low new-building order book. While on the demand side, we anticipate activity gradually recovering as nations begin to slowly lift the countrywide lockdowns. I will now turn the call over to Apostolos Zafolias, our chief financial officer.

Apostolos Zafolias -- Chief Financial Officer

Thank you John, for the first quarter of 2020, the company recorded a net loss of $120.4 million with $2.87 basic and diluted loss per share excluding a $112.8 million in non-cash vessel impairment charges and a $0.5 million loss on sale of vessels, the adjusted net loss for the quarter was $7.1 million. During the first quarter, we generated adjusted EBITDA of $16.9 million. In February and March, we delivered the Genco Charger, a 2005-built Handysize vessels and the Genco Thunder, a 2007-built Panamax vessel to their respective buyers. With the sale of the Genco Thunder, the company exited the Panamax sector as we continue to execute our barbell approach to fleet composition and create a more focused fleet.

The debt associated with these two vessels, as well as the Genco Raptor which was sold during the fourth quarter of 2019 amounts to $14.9 million. This amount is currently recorded on our balance sheet as restricted cash. In February, the company determined to expand its previously announced fleet optimization renewal plan aimed at modernizing its fleet. The company made the strategic decision to opportunistically pursue the sale of 10 handysize vessels that were not already part of the fleet renewal plan and are viewed as non-core vessels within our fleet.

Given this decision, the estimated future on discounted cash flows for each of these vessels did not exceed their net book values, we adjusted the value of these vessels to the respected fair market value during the first quarter and incurred a non-cash impairment charge of $85.8 million. Separately, during the first quarter, we also recorded a non-cash vessel impairment charges totaling $27 million on four of our 55,000 deadweight ton Supramax vessels. As a result of the lower earnings environment in 2020 to date primarily due to COVID-19, we do not expect -- we do not anticipate the estimated future undiscounted cash flows for each of these vessels to exceed their netbook values over the vessels remaining useful life. As such, we adjusted the values during the first quarter.

In addition to opportunistic vessel sales drawing upon our low leverage profile. We are in the process of negotiating a revolving credit facility for up to $25 million which we have expect will be collateralized by the vessels in our $108 million credit facility. This facility will be incremental to our already solid cash position as of March 31, 2020 of $149.5 million including restricted cash. Our debt outstanding growth of deferred financing cost is $488 million at the end of the first quarter which results in a net debt position of $339.3 million.

Given the macroeconomic uncertainty, we believe this is a prudent steps to bolster our already strong liquidity position, as we remain focused on maintaining our balance sheet strength in order to be able to continue to adapt to rapidly changing market conditions. Our cash flow break-even rate for the second quarter of this year is estimated to be approximately $11,940 per vessel per day. Included in our breakeven rates is our 2020 DVOE budget figure of $4,590 per vessel per day, weighed across the current fleet. Furthermore, we anticipate approximately 150 days of estimated off-hire time relating to vessel dry dockings during the second quarter.

Also we will have the majority of our Capesize vessels with contracts expiring in May and June. Depending on market conditions, we may elect to balance certain Capesize vessels to the Atlantic Basin and an effort to maximize earnings over the longer term. For our minor bulk fleet, we have utilized the current downturn and Supramax and Handysize rates to reposition vessels throughout April and May. To date the two key regions ahead of a potentially improving market later in the year.

I will now turn the call over to Peter Allen, our dry bulk market analyst to discuss the industry fundamentals.

Peter Allen -- Senior Vice President, Strategy and Finance

Thank you Apostolos. During the first quarter, the dry-bulk earnings environment was already trending lower in part due to Brazilian iron ore supply constraints. While the onset of COVID-19 further exacerbated this decline. Brazilian iron ore exports decreased by 16% year over year in the first quarter of 2020 marking the lowest quarter since Q1 2013 as heavy rainfall impacted export activity.

On top of this, the COVID-19 pandemic resulted in reduced industrial activity in China, most notably in January and February. However since March, the world's second largest economy and largest importer of dry-bulk commodities has shown signs of improvement as various economic indicators such as fixed asset investment and industrial production rose as compared to the previous months of the year. As China's economy begins to recover, economic output in regions outside of China have declined meaningfully due to various forms of nationwide shutdowns being imposed to prevent the spread of COVID-19, most notably in India, Japan, Europe, and the US. We are beginning to see a recovery in iron ore shipments together with farm grain exports.

The coal trade and certain minor bulk trades are currently being impacted due to the reduction in global economic activity. Looking ahead, as countries worldwide begin to gradually recover and reopen their economies, we anticipate augmented trade flows and demand for raw materials which could support increased dry-bulk earnings from current levels. On the supply side, earlier in the year there is a proper response to market conditions. Demolition activity increased to 5 million dead-weight tonnes compared to 8 million dead-weight tons all of last year.

However scrapping activity of the Indian subcontinent has come to a halt in the nationwide closures due to COVID-19. When scrap yards reopen, we believe there will be plenty of demolition candidates as 90 Capesizes on the water are 18 years or older. Vallley recently announced that they will be phasing out operation of 25 older VLOC conversions. Lastly, we note that the order book, as a percentage of the fleet, is at approximately 8% which marks the lowest point since mid 2002.

This also compares to 7% of the fleet that is greater than or equal to 20 years old. Of the duration and impact of COVID 19 remains uncertain at the current time, 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 will now take the first question from Randy Giveans from Jefferies. Please go ahead.

Randy Giveans -- Jefferies -- Analyst

Howdy, gentlemen. Hope you're doing OK during this time?

John Wobensmith -- Chief Executive Officer

Thanks Randy. Good morning.

Randy Giveans -- Jefferies -- Analyst

Good morning. Say, you know, Q2 second quarter quarter-to-date rates relatively in line with our expectation, our Capesize, kind of surprised to the upside a little there that said, how are rates in the last maybe week or so, compared with these kind of quarter-to-date numbers, just trying to get a sense for kind of rest of the quarter outlook or performance.

John Wobensmith -- Chief Executive Officer

So on the Capesize sector, I would say things have had softened over the last seven to ten days. We do expect that probably in the next few weeks, to the turn back around and as you know, we're looking toward a more favorable second half of the year. We have seen the Supramax rates stabilize and start to -- to move up slightly, but I think our view is we really need to see India open back up again on the coal import side, both thermal and met. We need to see Colombia really gear up on the mining side, again on the coal side.

South Africa is showing some good signs of opening back up, but I think in general, we need to see these economies start to -- to get back on track in the medium term and then we should see a lift on rates. I would add in, I know I'm probably going beyond the scope of your question, but China has been recovering and their economy has been -- has been opening up, so we definitely seeing strength on the iron ore front both out of Brazil and Australia. But it's the ancillary commodities, particularly in the Capes, such as coal and bauxite, that we -- that we need to seek again in the market.

Randy Giveans -- Jefferies -- Analyst

Got it. OK that makes sense. And then looking obviously at the dividend reduction, certainly understandable to kind of battened down the hatches in this environment. But looking ahead, where rates are now, where your expectations are possibly for 2Q maybe 3Q? What should we expect for a dividend, is kind of $0.02 the floor, with kind of upside as earnings rebound? And then also what are your plans for the proceeds from the sale of the vessels?

John Wobensmith -- Chief Executive Officer

So yeah, I'll take the vessels first. I mean, right now, we would put that cash on the balance sheet. And in terms of dividend and capital allocation, I think it's -- I think it's pretty prudent to respond to your question that on it. We're going to look at this quarter by quarter right now, just due to the situation adds in terms of COVID-19 and all the closures that have taken place for -- for some of the economies that the dry bulk depends on.

I think that -- I think it's fair to say that there is no doubt our No. 1 priority right now is conserve cash. But we also remain committed to returning capital to shareholders. So it's a balancing act between those two.

And like I said, right now, where we are, we have a -- we have a positive thesis and analysis for the second half of this year going -- certainly, going into 2021, because of the low supplies -- in particular and the fact that this really has been an unprecedented demand shock which we -- which we do believe will eventually ride itself. But what we want to see is just the beginning of that thesis without analysis to start to play out. And then you can start assessing what -- what you're going to do in terms of staying, even increasing what have you won on the dividend.

Randy Giveans -- Jefferies -- Analyst

Sure. And as you show on Slide 20, of histories, a guide, we expect a great improvement here in the coming months. So thanks again. Stay well.

John Wobensmith -- Chief Executive Officer

Thank you Randy. You too take care yourself.

Operator

[Operator instructions] We will now take the next question from Liam Burke from B. Riley FBR. Please go ahead.

Liam Burke -- B. Riley FBR -- Analyst

Good morning John. Good morning Apostolos.

John Wobensmith -- Chief Executive Officer

Good morning Liam.

Apostolos Zafolias -- Chief Financial Officer

Good morning Liam.

Liam Burke -- B. Riley FBR -- Analyst

John, I know it was mentioned in your prepared statements about scrapping and how it's been held up by coronavirus and you'd expect that to continue or be stronger after the COVID-19 resides. But do you anticipate scrapping to accelerate, to the point where it will help you meaningfully on the supply side of the equation.

John Wobensmith -- Chief Executive Officer

Look, I think -- I think there are quite a few owners that would like to be scrapping ships right now. We've seen just the beginning. There was a case that one of our peers agreed to scrap, and it looks like they have a buyer for that here in India. So we are starting to see the wheels turn again on that, though I want to be a little cautious.

We really need to see India and Bangladesh, in particular open up and -- and yes, I do think scrapping is going to pick up in a meaningful way, particularly on the larger ships, though these VLOCs that are old DLC conversions, there are 25 of those that really need to go and some of the older, some of the older capes. I mean there -- there is still, I think Peter Allen pointed out, we still have 7% of the entire dry bulk feed that's 18 years and older, and I don't think anything has changed in terms of IMO 2020 challenges for those older ships. As well as the softer market right now, and just the lack of availability in financing for smaller owners. So yes, I -- we expect a quite a -- quite a pickup in scrap as we get into the second half of the year, and India and Bangladesh open back up.

Liam Burke -- B. Riley FBR -- Analyst

And I know that's a difficult question with your priority right now is to conserve cash but you've identified your Handysize as no longer core assets. Looking at the rest of your fleet, looking past the current market, looking into a market improvement, how do you look to manage the fleet?

John Wobensmith -- Chief Executive Officer

Look, we're going to work, and to continue our fleet renewal program, I think -- I think it's fair to say we're a little bit on pause, I mean, yes, we've -- we've signed MLAs on three Handysize vessels. I would say is, they vary difficult market to execute sales right now. So we're not -- we're not jumping in with both feet and to selling ships. I think I mentioned on even the last conference call, we're very being very opportunistic about this, and this is certainly not a situation where we just want to sell vessels at any price.

We want to do what's best for for the company and shareholders. So I don't see us doing large -- large scale sales right now. Hopefully, as the market comes back toward the latter part of the year. More liquidity will come back into the -- into the sale and purchase market, and these countries will open up and we can -- we can have vessel inspection began and crew changes and the like.

Liam Burke -- B. Riley FBR -- Analyst

Thank you John.

John Wobensmith -- Chief Executive Officer

Thanks Liam.

Operator

There are no further phone questions. [Operator instructions] [Operator signoff]

Duration: 23 minutes

Call participants:

Unknown speaker

John Wobensmith -- Chief Executive Officer

Apostolos Zafolias -- Chief Financial Officer

Peter Allen -- Senior Vice President, Strategy and Finance

Randy Giveans -- Jefferies -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

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