Genco Shipping & Trading Limited (GNK) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Genco Shipping & Trading Limited 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. [Operator Instructions]. A replay of the conference will be accessible any time during the next 2 weeks by dialing 888-203-1112 or 719-457-0820 and entering the pass code 7623966. At this time, I will turn the conference over to the company. Please go ahead.

Good morning. Before we begin our presentation, I note that in this conference call, we'll 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, 2020, 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.

Good morning, everyone, and thank you for joining us today. These are very exciting times in the drybulk shipping industry with freight rates off to their best start to a year in over a decade. And these are also very exciting times for Genco. Over the last 4 years, we have worked tirelessly to transform this company from the bottom up, including revamping the way in which we generate revenue through the implementation of our active commercial operating platform, continued cost optimization as well as rejuvenating our asset base through divestitures of non-core tonnage and purchases of modern fuel-efficient vessels. Our new comprehensive value strategy that we announced yesterday mark yet another important milestone in the evolution of the company. As outlined on Slides 3 and 4, this new strategy is centered on low financial leverage and 3 key tenets: attractive quarterly dividends based on cash flow after debt service; less a reserve; further debt reduction and growth. We believe that this strategy will enable the company to create significant shareholder value and be a key differentiator for Genco over the long term. In executing this strategy over the balance of the year, we will draw on our robust balance sheet as well as cash flow generation in this strong market environment to pay down debt through regularly scheduled debt amortization and prepayments by opportunistically growing our fleet on a low leverage basis. Furthermore, we plan to refinance our credit facilities to increase flexibility, improve key terms and lower cash flow breakeven rates. We are targeting Q4 2021 results for the anticipated first dividend under the new corporate strategy, which would be payable in Q1 of 2022. Once implemented and seasoned, we expect growth to be led by utilizing our shares at a premium valuation to act as a consolidator of the industry on an accretive basis for Genco shareholders. In the near term, as shown on Slide 5, we plan to reduce our net loan-to-value to approximately 20% by year-end, which compares to approximately 28% currently. We also anticipate a cash balance of approximately $75 million, with cash above that level used to pay down debt ahead of the refinancing. Importantly, already this year, we reduced our debt balance by $48 million or 11% during the first quarter through a combination of scheduled debt repayments as well as the prepayment of our revolving credit facility. This was a key initial step in executing our new strategy, and we look forward to making further progress as we advance towards our anticipated first dividend as part of the new approach. Turning to Slide 6. We outlined our dividend framework. We intend to pay a quarterly dividend based on operating cash flow, less debt repayments, capital expenditures for drydocking and a reserve. The quarterly reserve is targeted to be based on future quarterly debt repayments and interest expense. However, the uses of the reserve remain in Genco's option and include vessel acquisition, debt repayments and other general corporate purposes. Maintaining a quarterly reserve as well as optionality for the use of the reserve are important elements of the corporate strategy as it enables Genco to be flexible depending on market conditions and provide a more tailored approach to Genco's overall business model. We also believe this approach provides more transparency to the market to assist in forecasting the dividends along with our breakeven and time charter equivalent guidance that we already provide on a quarterly basis. For the payout strategy, we highlight illustrative cash flow sensitivity on Slide 7. For a frame of reference, current 1-year time charter rates as quoted by Clarkson's stand at approximately $25,000 and $17,000 a day for Capesize and Supramax vessels, respectively. Based on the illustrative time charter equivalent rates shown and the potential cash flow generated, Genco expects to be well positioned from a net loan-to-value perspective, resulting in potentially meaningful quarterly dividends in 2022. Furthermore, over the long term, we plan to continue to reduce our debt balance with an ultimate goal of 0. Our existing low net leverage position, as highlighted on Slide 8, is a clear differentiator of Genco, uniquely positioning us relative to the peer group to deliver on the low leverage, attractive dividend yield strategy. For quarterly dividends to be meaningful and sustainable in what has been a historically cyclical business, low to net leverage is paramount in maintaining a low cash flow breakeven rate in order to provide visibility and sustainability to our quarterly dividend. Slide 9 highlights the importance of low leverage in managing the various cycles as the illustrative cash flow breakeven rate prior to debt service is below the fleet-wide time charter rate nearly 100% of the time over the last 2 decades. Therefore, if debt can be paid down to at or near 0, the company cannot only withstand the market cycles but can thrive by taking advantage of countercyclical opportunities. Importantly, Genco's barbell approach to fleet composition ideally integrates with this low financial leverage model, given the meaningful upside and operating leverage from the ownership of Capesize vessels, together with the more stable cash flows from the minor bulk fleet. Concluding on Slide 10, we believe that now is an opportune time to execute this strategy. Genco is uniquely positioned with our already solid financial foundation in place, together with our strong commercial operation platform to become a company that pays a sizable quarterly dividend across diverse market environments while maintaining the balance sheet strength to further delever and renew and grow our fleet. The implementation of our new corporate strategy also closely aligns with our favorable view of the drybulk supply and demand fundamentals in both the short and long term underpinned by a record low order book, unprecedented economic stimulus and a recovery in demand for drybulk commodities globally. This concludes our presentation, and we would now be happy to take your questions.

[Operator Instructions] Our first question comes from Omar Nokta with Clarksons Platou Securities.

John, first of all, congratulations on the shift in dividend policy and, I guess, overall capital allocation strategy. Then it sounds like you guys are going to be focusing these next few months in really fine-tuning things to get Genco to those targets by year-end. A question about the target leverage, maybe to start, you've outlined 20% as where you want to be at year-end. And it seems like you're probably pretty close there already, and just a little bump up in asset values gets you there, well ahead of potentially the fourth quarter. What keeps you from moving ahead sooner with the implementation of this new policy?

So we're currently probably somewhere around 28% on a net basis. And again, as you said, the goal is to get to 20%. Those numbers are based on 0 asset appreciation going forward. And I agree with you, I think asset values are going to continue to move up into the end of the year. But what is -- in our mind, what this is about Omar is lowering the cash flow breakeven, which really has to do with paying down debt further. And we think if we pay down the debt further to get down to that net 20% basis today's asset values, we can put in place a very attractive credit facility refinancing what we have in place today. And as I can't stress enough, driving the actual cash flow breakeven rate down so that the company is set up for runway going forward. I -- look, we always assess the dividend on a quarterly basis, but the plan right now is to stick with paying our first dividend based on fourth quarter earnings, bringing the leverage down, bringing the cash flow breakeven down, and as I said, giving us clear runway going forward. So we're not looking back.

John, that makes sense. And you've got the $164 million of cash as of end of March, and you're targeting the $75 million. Is that -- $75 million, is that basically the cash balance you look to have long-term on an ongoing basis?

I think so basis the size of the fleet today, the $75 million is what we feel we need in place to cover working capital needs to have a reserve. And again, make sure the company is in a place to always play offense and not play defense. As we grow the company, my guess is that cash will -- that minimum cash will move up a little bit. But for the time being, we've run our models and we think $75 million is the right number.

Got it. And John, one final one. Maybe just back to the target leverage at year-end of the 20%. Is that the aim to keep 20% as the leverage ratio going forward through the cycle -- or the LTV ratio going forward through the cycles or do you have a different figure in mind? Does that go up or down or what do you think about that 20% over the long term?

I think it continues to go down. It may not go down as fast as what we're talking about right now, 28% to 20%, but the 20% is where we felt comfortable implementing the strategy. But I would say -- and as I said -- actually, as I said in my remarks, the overall goal is to get to -- is really to get to 0. But I think the 20% -- the net leverage 20% number and getting down to that cash flow breakeven is where we feel comfortable starting this. And I can't stress enough that one of the nice things about this is we can do this with cash flow from operations. We do not need to go out, and we're not going to go out, and raise equity to pay down debt. We're, again, in a very unique position where we're already lowly levered, but we can rely on cash flow from operations through the end of the year to get this company to a point where it can implement this strategy easily.

Our next question comes from Randy Giveans with Jefferies.

Congrats on the structural change. Looking at 2 things, first, on the year-end targets. With the goal set of this 20% and the $75 million in cash, how do you feel that kind of maybe handcuffs to you or provides you some opportunities for acquisitions? Or it kind of at this point going forward, really the focus on delevering the balance sheet?

Well, why don't -- okay. So let me talk about the short-term and then give you a little longer term -- some commentary on the longer term. So short term, we're still looking on acquiring assets. And in fact, I can tell you we are actively looking at ships right now. And we have capacity to do that and still implement this strategy. We're -- we have, I think, $41 million escrow [Technical Difficulty] and on our balance sheet. So we -- I do see us drawing on that. We have built in -- though I don't want to go into specifics, but we have built in some further vessel acquisitions before the end of the year into this model. So on the short term, I think you're going to see us add a few vessels over the next couple of months. In the longer term, what we believe is that when we're able to show that we have a consistent quarterly dividend, we believe that the stock will start to trade more on a dividend yield basis than on -- than just pure shipping exposure. And we are optimistic that we will, again, consistently trade above net asset value, and we will be able to use equity in order to acquire ships going forward, keeping the company lowly levered, keeping that breakeven rate down, but also doing accretive transactions for -- to continue to grow the dividend.

Got it. Okay. That makes sense. And then second question, just looking at the dividend policy, right? I guess in the near term, is the plan to continue paying out the current dividend, the $0.02 a quarter? And then on the new policy, how did you get to kind of those levels with reserve as opposed to maybe a percentage of net income, 40%, 50%, 60% of net income as the payout policy?

So okay. I mean, we've spent a lot of time on this. We've had several Board meetings before we got the ultimate unanimous sign off from the Board. And what we wanted to do was try to keep this as simple and as transparent as possible. And operating cash flow, to start with that, seems to be what investors want. It's a very straightforward number. And then backing off the very obvious deductions, such as CapEx and then -- drydocking CapEx and then the reserve. I'll come back to the reserve in just one second. But how this will work realistically is the Board each quarter will set the dividend, basis the formula, but then they will also set the reserve for the next quarter. So we will tell you, tell the market what the reserve will be for the next quarter. And you couple that with the cash flow breakeven that we always put out for the following quarter, our coverage and our rates in terms of what we book for the next quarter. And it becomes about as transparent as possible to predict the dividend for the following quarter. The reserve -- the idea there at least for 2022 is to put aside a year of principal and interest broken up quarterly. And if you think about how we have set up not only our current credit facility, but where we plan on putting the new credit facility in place, we can always make prepayments on the credit facility. Those prepayments do not go to the back end. They go to the front end. So you can actually prepay out more. So if we build up 12 months of a reserve and market -- we have cyclicality in the market, we can always take that reserve, prepay debt for a year, and you've got a cash flow breakeven rate in the low 7s, which if you look on Page 9 of the presentation, again, very few time periods where the market got below that even in 2015 and 2016. So that is the genesis of that reserve. But having said that, I think that reserve, once it builds up, there's a lot of optionality there. We can pay down debt. If we need to -- if we have -- let's say, we have another COVID-19 situation, right, or a black swan event, where you have a soft quarter, but you're looking forward and you get comfortable with the market, you might use some of that reserve to smooth out the dividend for that weaker quarter. Clearly, general corporate purposes, but that could be -- it could be share buybacks, it could be future growth. It could be a whole host of things and we maintain the optionality on that reserve. But the way that reserve was crafted was, okay, how do we bullet proof this company? How do we drive down our breakeven rate to -- into the low 7s, and that's how we got there.

Got it. Yes, I think the transparency around the reserve would certainly be important. So other than that, sounds a good -- solid policy.

And our next question comes from Liam Burke with B. Riley.

John, you talked about your objective to have a net 0 debt to total capital. You are operating in a high fixed cost business where some leverage is -- can be efficient in terms of driving your cost of capital. How do you balance -- obviously, lower financial risk would implicitly lower your cost of capital, but 0 debt in a high fixed cost business will raise it. How do you reconcile the two?

I mean, look at it this way. Low debt or no debt allows you to pay a higher dividend. And you start placing yields on these higher dividends, and it's pretty compelling. Again, I go to -- the goal is to have our stock trading at a consistent premium to NAV. That in itself will drive down your cost of capital. And again, we want this company to always be on the offense and not ever play defense going forward. And I would also tell you, this is shipping. There is plenty of operating leverage in the business alone, just by the nature of the shipping industry. And it's, again, one of the reasons why we have this strategy of the minor bulk fleet, which provides relatively sustainable earnings, but also the upside, and in some markets can be pretty significant on the Capesize sector. And I think we're actually just starting to see that. I think we're just starting to see it really start to move, and I expect that to go further. So I think the fact that all the operating leverage in the business by itself creates plenty of upside. And if we can have the equity trading at a premium to NAV consistently, that in itself gives you a much lower cost of capital.

Fair enough. And on your cash cost per vessel, I mean, that's part of the operating cash flow expectations. How much low-hanging fruit or how much lower can you make it even though you've had a great success in the past getting it down to the current levels?

I don't think there's any more room on operating expenses, Liam. I think we've done a very good job of optimizing it. We -- look, safety regulations, those are all at the very top of the list, and you don't ever want to get to a point where you're compromising any of that. And so I think we're sort of at where we need to be on the OpEx side.

[Operator Instructions] Our next question comes from Poe Fratt with NOBLE Capital Markets.

John, I'm trying to appreciate just how much the dividend will fluctuate. And to that end, can you just highlight some of the -- below the operating cash flow lines that might fluctuate, like debt amortization, the CapEx on the drydock? And then maybe if possible, just based on the scenarios that you put out, highlight what the reserve, that $30 million of reserve right now for -- at $15,000 for TCE rate, what that reserve actually consists of?

Sure. So on the moving parts, I mean, obviously, we have the operating cash flow, which is going to be very market-driven, freight rate-driven. Our drydocking CapEx, as you know, we put out our CapEx at least 12 months in advance. So we tell everyone which ships need to be drydocked and go through a special survey and our budget for those ships. So I think that's fairly transparent. And then we have the reserve. I'll let Apostolos talk about the reserve. But again, the genesis of that reserve was to build up 12 months of P&I on a gradual basis. But Apostolos, do you want to take that one?

Yes, sure. I mean -- and let me also address the question about sensitivity. We have included illustrative cash flows and what the yield -- sorry, what the illustrative dividend could be on a per share basis on Slide 7 of the presentation. Essentially, we're presenting 3 different scenarios, starting with $15,000 a day on a fleet-wide TCE basis and going all the way to $20,000 a day. I'd point out that the current spot market is over $23,000 a day, if you were to blend rates for our fleet specifically. So all of these scenarios are below that. And also just to give you some perspective, the FFA curve would be about $21,000 a day through the end of the year. So as you will see at -- pretty much everything is constant throughout all of this. Obviously, the difference is the revenue and then your quarterly debt amortization, on that slide, the quarterly debt amortization is obviously driven by how much debt you're able to pay from now until the end of the year, and then that will set what your amortization is for the balance of the facility. And then that will also play into the reserve in the sense that we are building -- as John mentioned, we are building that reserve based on what our debt service is going to be on a go-forward basis. I don't know, having said all of that, the only other sort of moving pieces on a year-to-year basis could be the CapEx, drydocking and ballast water treatment systems' CapEx, we expect them to be $11 million for 2022, about the same levels for 2021, and then 2023 is a little bit lighter. Look, importantly, what all of that means is illustrative dividend per share and it went from $1.10 to $3.34 per share depending on the ratios -- the scenario.

Yes. I guess, Apostolos, if you could just clarify on the reserve at a $15,000 TCE rate, the cash flow available for dividends is of $46 million or $1.10 a share. That reserve, if you look at the difference between net operating cash flow and cash flow available for dividends, it's reserve of $30 million. What -- can you highlight what actually is in that $30 million right now so that we could sort of calibrate how much the reserve is going to fluctuate going forward?

Yes, sure. It would be the quarterly debt amortization. So approximately about $20 million and then interest expense. So just debt service in total.

Okay. And then, John, you've highlighted a couple of times you're trying to create visibility for the next quarter or so as far as the dividend. Is there anything you could do for my commercial strategy to extend that visibility out beyond the next quarter? Will you change your commercial strategy at all to try to lock in more than a quarter worth of cash flow?

Yes. Well, that's a great question, Poe. I think it's likely, and I believe I've said this in public forums before, the Capes are highly volatile. And I do think there comes a point where we do put some of the capes away under time charter coverage to lock in rates. And I think this market, particularly in the Capesize is just beginning to move. We're obviously at healthy rates right now, but I think they're going to get even better. And I think there'll be good opportunities to take some exposure off the table, particularly on the Capesize. That's where I see us doing some longer-term fixtures and giving some more visibility.

Great. And if I could just do one last one. You've already alluded to your acquisition strategy that you have a couple of potential acquisitions lined up. Where are you seeing the best value right now? And in the context of your dividend strategy, are you going to be more inclined to look at the Ultras and Supras as a way to build the base of business with less volatility? Or are you going to be looking at incrementally adding some rate volatility through the Capes?

Without going into specifics in terms of what we're focused on right this second and actively working on, I continue to see us focus on the barbell approach. We like this strategy. So I think you're going to see us grow in both sectors, the large size, but also in the midsize. We -- again, we think both sectors have a lot of opportunity going forward. In terms of vessel values, I still believe that they are lagging significantly in terms of what is happening in the freight rate markets and what the forward expectations are, which is probably the most important thing in the freight market. If you look at values for, say, 2015, 2016 eco vessels, we are still at a point where we're in the lower part of the second quartile looking over the last 10 years. And so I still think it's a compelling time to acquire assets, both from just a pure value standpoint, but also in terms of return on capital and the fact that vessel values have not caught up with this freight rate market yet.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.

Thank you.