Yahoo Finance Genco Shipping & Trading Limited (NYSE:GNK) Q4 2023 Earnings Call Transcript
Genco Shipping & Trading Limited (NYSE:GNK) Q4 2023 Earnings Call Transcript February 22, 2024
Genco Shipping & Trading Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Fourth Quarter 2023 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’ll 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 two weeks by dialing in 1-877-674-7070 and entering the passcode 373966. At this time, I will now turn the conference over to the company. Please go ahead.
Peter Allen: Good morning. Before we begin our presentation, I note that in this conference call, we’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 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, 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, 2022, 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: Good morning, everyone. Welcome to Genco’s fourth quarter 2023 conference call. In addition to reviewing our Q4 2023 and year-to-date highlights, we want to use this opportunity to provide an update on the progress we are making three years into our comprehensive value strategy, as well as on the industry's current fundamentals. We will then open up the call for questions, for additional information, please also refer to our earnings presentation posted on our website. Starting on page five, 2023 marked another strong year for Genco. We took concrete steps to drive sustainable long-term value, while achieving the top corporate governance rating across 64 public shipping companies for the third consecutive year.
We also made progress enhancing the company's ability to thrive through all industry cycles as we executed across the three pillars of our comprehensive value strategy focused on dividends, de-leveraging, and growth. We ended 2023 with our strongest quarter of the year as outlined on slide six. For the fourth quarter we achieved adjusted net income of $0.43 per share and declared a $0.41 per share dividend representing a 173% quarter-over-quarter increase to the dividend. Complementing the sizable returns we provided shareholders during the quarter we also continued to de-lever, while executing several key strategic growth initiatives. This included increasing our earnings capacity by implementing the next phase of our fleet renewal program.
Additionally, we closed out a $500 million revolving credit facility that meaningfully increased our borrowing capacity, reduced margin, extended maturities, and enhanced our ability to take advantage of opportunistic growth. Turning to the fleet, performance was strong in the fourth quarter and underscores the meaningful operating leverage of Genco’s asset base and the importance of our barbell approach to fleet composition. During the quarter, our operating leverage was evident as Capesize rates spiked to multi-year highs in December, enabling us to increase Q4 TCE by 44% and achieve our highest TCE of the year at over $17,000 per day. We also generated our lowest cash flow break-even rate for the year, resulting in significant margin expansion and an increased Q4 dividend, which I mentioned a moment ago.
Notably, in the fourth quarter, we once again achieved the time charter equivalent benchmark outperformance and are pleased to have seeded our internal benchmarks for the year by $1,300 per day, while generating adjusted EBITDA of over $100 million. Looking ahead, we expect the positive momentum and our strong performance to continue in the first quarter. For Q1, 81% of our available days are fixed at over $18,700 per day, an increase of 34% versus Q4 levels. This strong performance is notable, especially considering that Q1 has historically been the seasonal low point in the dry bulk freight market. On page seven, we look back on the development of our comprehensive value strategy based on our ongoing progress in 2023. In April 2021 management and the board laid out a clear path and related objectives to transport Genco into a low leverage, high dividend yielding company with significant financial flexibility to provide shareholders with returns and opportunistically grow through the dry bulk shipping cycles.
Since that time we have made significant progress towards these goals and importantly have balanced our capital allocation priorities having paid $170 million in dividends, acquired [Technical Difficulty] declared compelling dividends over the last 4.5 years including nine since the announcement of our value strategy. Over this 18 quarter period cumulative dividends to shareholders amount to $5.155 or 29% of the current share price. Further supporting our ability to pay sustainable dividends is our recent success executing the next steps of our fleet renewable strategy as displayed on slide nine. In November 2023, we purchased two 2016-built scrubber-fitted Capesize vessels for $86 million, while divesting three 2009 and 2010 Capesize vessels.
This trade further modernized our Capesize fleet and reduced the risk profile, while also increasing 2024 earnings in cash flow capacity. Following the sales of the three older Capes, we expect 2024 dry dock savings of approximately $10 million as we avoided the expensive third special surveys for these ships. In line with our barbell approach to fleet composition noted on slide 10, we'll continue to evaluate further opportunities in the sale and purchase market to renew our fleet. Turning to slide 11, we believe Genco is in a highly advantageous position going forward. Specifically, based on our success lowering our debt outstanding by 55% over the last three years, we have an industry-low net loan to value, an industry-low cash flow break even [Technical Difficulty] fleet value and taking into consideration our scale and operating leverage, we expect Genco's fleet to significantly benefit from a rising market.
With that said, and given our access to capital, we are also able to take advantage of counter cyclical opportunities to buy vessels to increase our earnings power, much like we did prior to the recent capesize rally in early Q4. Going forward, a key priority for Genco is continuing to be good stewards of capital for shareholders and continuously evaluating capital allocation priorities. On slide 13, we summarize the key tenants of our approach to capital allocation. First, maintain low financial leverage [Technical Difficulty] Supermax vessels with a more stable earnings stream. We believe our low leverage, high dividend payout model executed in scale is industry leading in the dry bulk shipping public markets. Given the volatility and the cyclicality of dry bulk shipping, we also believe it creates the optimal risk-reward balance to provide sizable returns to shareholders, opportunistically grow the fleet, and enhance our earnings power through the cycles.
I will now turn the call over to Peter Allen, our Chief Financial Officer.
Peter Allen: Thank you, John. On slides 15 through 17, we highlight key financial metrics of the company, specifically for Q4 2023 Genco recorded net income of $4.9 million or $0.12 and $0.11 basic and diluted earnings per share respectively, which includes a non-cash special impairment charge of $13.6 million relating to the agreed upon sale of three older, less fuel efficient capsize vessels. Excluding this non-cash charge, adjusted net income was $18.6 million or $0.43 basic and diluted earnings per share. Adjusted EBITDA for Q4 totaled $37.1 million, bringing the full-year 2023 total to $101.5 million. During Q4, our net revenues increased by 50%, as compared to Q3, while a recurring cost structure remained approximately flat over the period, illustrating the high degree of operating leverage inherent in the business.
This operating leverage is best displayed by our capesize vessels, specifically those on index length contracts. These ships achieve an average TCE of over $33,000 per day in Q4, 91% higher than in Q3, directly benefiting from the rapid rise in the capesize market at year-end. With such operating leverage, there is less of a need for financial leverage to achieve strong returns. On slide 18, we highlight the trajectory of our debt outstanding over the last three years and our continued voluntary debt repayments. Through the end of 2023, we have paid down nearly $250 million of debt meaningfully reducing our leverage. Given our 100% revolving credit facility we will continue to actively manage our debt balance to save on interest expense, while opportunistically drawing down for vessel purchases given our nearly $300 million of undrawn capacity.
During the fourth quarter, we close on a $500 million revolving credit facility, which is a key step in the continued development of our capital allocation approach. This facility increased our borrowing capacity by over $150 million, lowered pricing on margin by 30 to 60 basis points from the previous facility and extended maturity to the end of 2028. This 100% revolving credit facility structure provides further flexibility and aligns well with our value strategy as the RCF structures enables Genco to continue to voluntary pay down debt in line with our medium term goal of zero net debt without losing the capacity to draw down to fund growth. To this point, we took advantage of the company's meaningful liquidity position to opportunistically acquire two modern high-specification capesize vessels.
We'll continue to assess additional sale and purchase transactions in the market in line with our fleet renewal strategy. As of December 31, 2023, our cash position was about $47 million and our debt outstanding was $200 million, bringing our net debt level to $153 million and net loan-to-value ratio to 15%. With $295 million of undrawn revolver availability, our total liquidity position at the end of the year was $342 million. Following the completion of the agreed upon vessel sales in the first quarter, we anticipate our net loan to value ratio to reduce to 10%. Moving to slide 19, we highlight our transparent dividend policy, which targets a distribution based on 100% of excess quarterly cash flow excluding maintenance and withholding for future investment.
The nature of our variable quarterly rate of approximately 4.7%. Looking ahead to Q1 2024 on slide 20, we anticipate our cash flow break even rate excluding extraordinary annual meeting related expenses to be $9,752 per vessel per day, well below our Q1 TCE estimates to-date of $18,724 per day for 81% fixed, pointing to another strong quarter. I will now turn the call over to Michael Orr, our Dry Bulk Market Analyst, to discuss industry fundamentals.
Michael Orr: Thank you, Peter. As depicted on [Technical Difficulty] leading up to Lunar New Year in February. Capesize rates reached a 15-year high for this time of year, driven by continued tightness in the Atlantic basin. Currently, capesize and supermax rates remain at firm levels of approximately $23,000 and $13,000 per day, respectively. Slides 23 and 24 highlight the aforementioned seasonality of the dry bulk freight market, which has historically seen a reduction of cargo availability, particularly from Brazil, due to poor weather conditions and scheduled maintenance coupled with the timing of new building deliveries and the later New Year. However, various geopolitical events continue to impact the dry bulk freight market as highlighted on slides 25 and 26.
In October, low water levels in the Panama Canal impacted the number of ships that could transit resulting in heavy delays and rerouting of vessels. One of these options was to divert vessels through the Suez Canal. However, in December, attacks on commercial vessels in the region led many shipping companies to no longer transit the Southern Red Sea and Gulf of Aden area, further disrupting the efficiency of the global dry bulk fleet. Approximately 7% of dry bulk trade transits through the Suez Canal. Larger scale tonnage routing over an extended period of time could increase ton-mile demand for dry bulk shipping, all else equal. Regarding the Chinese steel complex on slides 27 and 28, China's iron ore port inventories have been building over the last several months from very low levels, but still remain well off of 2022 highs.
China's iron ore imports rose by 7% in 2023 year-over-year, supporting iron ore prices, which remain firm at approximately $120 per ton. China's steel production was flat year-over-year in 2023. However, India grew substantially at 12%, while ex-China output increased on a year-over-year basis for the last six months. Looking ahead to 2024, the World Steel Association forecasts China's production to remain at 2023 levels, while the rest of the world is expected to see growth of 4%, potentially signaling an increase in demand from developed countries and support from the secondary trade routes outside of Asia. In terms of the grain trade, the end of Q1 represents the start of the South American grain season, which typically sees an increase in Brazilian soybean exports, which is supportive to minor bulk rates.
As shown on slide 29, the USDA is forecasting another strong crop out of Brazil. Regarding the supply side outlined on slides 30 to 32, net fleet growth in 2023 was 3%. The historically low order book as a percentage of the fleet, as well as near-term and longer-term environmental regulations are expected to keep net fleet growth low in the coming years. While we expect volatility in the freight market, the foundation of a low supply growth picture provides a solid basis for our constructive view of the dry bulk market going forward. I will now turn the call back over to John for closing remarks.
John Wobensmith: Thank you, Michael. Before we turn to Q&A, there are a few key points that I'd like to highlight. First, we are executing a clear plan and doing so with a commitment to strong corporate governance. We've made demonstrable progress executing across the three pillars of our comprehensive value strategy. Second, our strong operating and financial results for the fourth quarter and full-year demonstrate the strength of our industry-leading commercial platform and our significant operating leverage. We are pleased to outperform benchmarks and increase the TCE by 44% from third quarter levels. Finally, we believe the key steps we are taking are positioning us to create value both today and for the long-term. This concludes our presentation and we would now be happy to take your questions.
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