Aug 8, 2019
Operator
Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Second 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.
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. 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 3272187.At this time, I would like to turn the conference over to the Company. Please go ahead.
Unidentified Company Representative
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, 2018 and the Company's report 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 second quarter 2019 conference call.
I will begin today's call by reviewing our second quarter and year-to-date highlights. We will then discuss our financial results for the quarter and the industry's current fundamentals and then open up the call for questions.Turning to Slide 5, we review Genco's second quarter and year to date highlights.
During the first half of the year, we continue to outperform our benchmarks, advanced our comprehensive IMO 2020 strategy and further strengthened our fleet profile and earnings power. In the year-to-date, our focus remained undrawn [ph] upon our active commercial strategy and our barbell approach to fleet composition, maintaining exposure both the major and minor bulk commodities.The benefits of this approach have been evident throughout 2019 as the relative stability of the minor bulks supported earnings earlier in the year.
While towards the end of Q2 and into Q3 we have begun once again to realize the upside potential of our modern Capesize fleet.An important differentiator of Genco is that we maintain the upside potential of the iron ore trade through the ownership of 17 Capesize vessels, while the remaining fleet of 41 minor bulk vessels that primarily transport commodities such as grain, bauxite fertilizers and cement, among various other commodities is expected to provide us with a steadier stream of cash flows.Regarding the progress of our IMO 2020 strategy, we have completed the fitting of scrubbers on four of our Capesize vessels to-date, and anticipate the balance of our Capesize fleet to be fitted with scrubbers by year end before the deadline of January 1, 2020.Furthermore, we've continued our fleet modernization efforts. Following the sale of our last 1990s built vessel in Q1, we agreed to sell our oldest remaining vessel the Genco Challenger, a 2003 built Handysize vessel.
Our success in completing two separate acquisitions of modern fuel efficient vessels last year, while divesting older tonnage has reduced the average age of our fleet by approximately two years, while growing our fleet by nearly 10% on a deadweight ton basis.Turning to Slide 6, we have outlined our commercial operating platform. Our active commercial strategy which incorporates Voyage charters and direct cargo listings, while leveraging our in house relationships and commercial expertise has led to strong results through the first half of the year.
Specifically over this period, our time charter equivalent of $8,341 per day has resulted in an outperformance of the relevant adjusted Baltic exchange benchmark subindices by approximately $700 per day, leading the incremental net income of approximately $7 millionThrough June, our global commercial platform based in New York, Copenhagen and Singapore booked over 200 fixtures on our 58 vessel fleet, which equates to over 400 fixtures on an annualized basis. Additionally, we increased our time chartered-in-business to 640 days from just under 50 days in the prior year period.
We've also added an additional lever to our commercial strategy, which now encompasses chartering-in vessels for short periods. We've booked two such time charter-ins today.Regarding our chartering strategy to-date, for our Capesize vessels, we chose to maintain a short-term fixture approach in anticipation of a recovery in freight rates to ensure that we did not lock-in longer term coverage at softer levels.
As contracts expire, vessels are being fixed in what has been a strong third quarter today. We note that we have mostly been trading our Capesize vessels in the Pacific, instead of our usual approach of maintaining exposure to both the Atlantic and Pacific basins as we set up ships for dry docking and scrubber installation.As for our minor bulk fleet, we have outperformed our benchmarks by approximately $900 per day.
While strategically repositioning select vessels, the key regions in anticipation of a stronger third quarter market and rebalancing our positional exposure, given our upcoming drydockings. These measures together with a stronger market have led to an improved fixture so far in Q3 at $11,640 per day, and 57% above second quarter time charter equivalent results, highlighting the operating leverage of the Company as well as our opportunistic charter strategy.Furthermore, as the drybulk market has significantly improved in recent months, we continuously evaluate all of our capital allocation options.
While we are positive on the supply and demand fundamentals of the drybulk industry as outlined on Slide 7, we do feel it is important to put into perspective that we are only two months into this upward move in freight rates. We continue to believe that maintaining our strong balance sheet is prudent for the benefit of the Company and shareholders.Separately, as outlined on Slide 8, we point out that 2019 is our heaviest operational year, with 35 of our 58 vessels representing 60% of our fleet, entering the shipyard at some point during the year for scheduled dry dockings, as well as the installation of scrubbers and ballast water treatment systems.
Part of these capital expenditures will be funded from existing cash on-hand. We view these investments in our fleet, as initiatives that we believe will be beneficial over the long-term for both the Company and shareholders.As outlined on Slide 9, as shipping accounts for approximately 90% of global trade, and is an essential link of the global economy, the upcoming environmental regulations represented important shift to dramatically reduce air emissions.
As the maritime industry works collectively to accomplish this goal, at Genco we're also doing our part to reduce our greenhouse gas emissions and promote sustainable shipping as presented on Slide 10.As one of the largest owners of drybulk vessels in the world, we understand the need to run a safe and responsible business built for the long-term. As such, we have taken several steps over the last few years including the installation of Muse docks, and trim optimization software on many of our vessels, leading to considerable fuel savings, as well as the collection of real time speed and consumption data for our fleet to optimize performance.Additionally, we have added modern fuel efficient vessels that reduce fuel consumption while selling older, less efficient fuel tonnage.
This will be a continued emphasis for the Company as we seek opportunities to further grow our fleet going forward. In terms of our current fleet, 93% of our vessels are rated 4 or better by Rightship, while 95% of our fleet has an A through E greenhouse gas environmental rating.Furthermore, we partner with various organizations to move the shipping industry forward, while striving to make a difference in our local communities.
From a corporate governance perspective, as a US filer, we focus on being transparent and accountable and maintaining no related party transactions.I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer to go through our financials.
Apostolos Zafolias
Thank you, John. Turning to Slide 12, our financial results were presented.
For the three and six months ended June 30 2019, the Company generated revenues of $83.6 million and a $177 million respectively. This compares with revenues for the three and six months ended June 30 2018 of $86.2 million and $163.1 million respectively.Second quarter of 2019 the Company recorded the net loss of $34.5 million or 83 basic and diluted loss -- $0.83 basic and diluted loss per share.
Excluding $13.9 million in noncash vessel impairment charges, as well as a $0.2 million noncash impairment of the operating lease rate of use asset adjusted net loss for the quarter was $20.4 million. This compares the net loss of $1.1 million or $0.03 basic and diluted loss per share for the second quarter of 2018.For the six months ended June 30, 2019, the Company recorded the net loss of $42.3 million or $1.01 basic and diluted loss per share.
This compares to a net loss of $56.9 million or $1.62 basic and diluted loss per share for the six months ended June 30, 2018.Turning to Slide 13. We present key balance sheet items as of June 30, 2019.
Our cash position including restricted cash was $165.4 million. Our total assets were $1.6 million, and consist primarily of the vessels in our fleet and cash.
Our total debt outstanding gross of $15 million of unamortized debt issuance costs and inclusive of the current portion of long-term debt was $513.7 million as of June 30, 2019.Moving to Slide 14, our utilization rate was 97.7% for the second quarter. Our TCE for the second quarter was $7,412 per vessel per day, which compares to $10,964 per vessel per day recorded in the same period of last year.
The decrease in TCE was primarily due to lower rate achieved by the majority of the vessels in our fleet during the second quarter of this year versus last year.As previously highlight we have scenes benefited from the improving market fundamentals having fixed the TCE of $11,640 per vessel per day, 64% of our Q3 available days or 57% higher than our second quarter TCE.Daily vessel operating expenses were $4,615 per vessel per day for the second quarter, and $4,518 per vessel per day for the first half of the year, which is slightly below our budget of $4,525 per vessel per day for the year.Turning to Slide 15, we highlight our favorable debt structure which consists of two credit facilities. These two facilities have enabled us to simplify our capital structure, while providing Genco added flexibility in regard to additional indebtedness, potential dividends and vessel acquisitions.Additionally, we provide balance sheet items reflecting our strong liquidity position of $165 million.
Of note, we include $10.4 million of scrubber related expenses through the first six months of this year, of which approximately $9 million can be drawn down under our $495 million credit facility to further strengthen our position. We evaluate our capital allocation strategy on an ongoing basis within both the short and long term impact of liquidity uses.Our strong balance sheet and barbell approach to fleet composition have been a differentiating factor for Genco in 2019 and remain key pillars to the Company's strategy.Moving to Slide 16, we outline our third quarter estimated cash breakeven rates.
We anticipate Genco's cash breakeven rate to be approximately $12,600 per vessel per day for the third quarter of 2019. Included in this figure is a drydocking associated with 20 of our vessels for the quarter.
In addition we expect to incur one-time cost of $3.2 million associated with installation of ballast water treatment systems on certain of our vessels during the third quarter. We've also provided further detail on these breakeven rates in the appendix of our presentation for your reference.I'll now turn the call over to Peter Allen our Drybulk Market Analyst to discuss the industry fundamentals.
Peter Allen 1415
Thank you, Apostolos. I'll begin with Slide 18, which represents the daily spot rates for the sub-indices of the Baltic Dry Index.
During the second quarter of 2019, there was an overall uplift in freight rates relative to the first quarter with the improvement accelerating rapidly towards the end of June and subsequently into Q3 to date.Specifically, Capesize rates rose from an early April low of approximately $3,500 to a five year highs nearly $33,000 a 9.5 times increase in less than four months. We do note that freight rates have pulled back from recent highs of late but still stand at strong levels at over $23,000.Several factors have led to the two vastly different markets we've experienced in the first and second halves of this year as outlined on Slide 19.
In particular, earlier in the year, seasonal developments such as increased new buildings deliveries the Lunar New Year celebration and weather related cargo disruptions that traditionally lead to a weaker Q1 market were exacerbated by the Vale dam incident.The combination of these factors resulted in a meaningful decline in cargo availability hampering the iron ore trade and Capesize rate specifically. These market conditions led to a sharp increase in vessel scrapping, keeping a lid on net fleet growth and disincentivizing owners to ballast their shifts to the Atlantic due to the lack of Vale iron ore cargoes.Towards the end of June and into the second half of 2018 operations at the Brucutu mine restarted, leading to an improvement in iron ore volumes from Vale.
The aggregate impact of more iron ore cargoes and shortage of vessels in the region resulted in a squeeze in the Atlantic basin, and a subsequent spike in Capesize rates.Of note Vale has indicated a substantial improvement in sales volume in the coming months having reiterated 2019 sales guidance of approximately 320 million tons. Based on the Company's actual sales are in the first half of the year and their full year guidance this implies that 42 million tons more iron ore will be sold in the second half of 2018 as compared to the first half, an increase of over 30%.Turning to Page 20, driving the demand level for iron ore has been record steel output in China with steel production having increased by 10% in the year to date and the tightness of seaborne iron, a major drawdown on iron ore port inventories occurred in China to fill the supply gaps.
These inventory levels fell to as low as 115 million tons from over 160 million tons last year.Limited iron or supply led to prices reaching well over $100 per ton further incentivizing iron or minors to ship more of the commodity to take advantage of these multiyear high prices. We note that recently the price of iron ore has retreated to just over $90 per ton.
In terms of a potential iron ore restocking appear in China we believe this could occur when the price of the commodity stabilizes.Moving to Page 21 we touch on some key catalysts of the minor bulk trade. We are now in South American grain season, during which Brazil is expected to continue its strong soybean shipments to China.
We expect Brazil along with Argentina to continue to increase market share of China's soybean shipments given uncertainties around the US, China trade relationships. We also believe that any potential demand destruction due to the African swine flu currently affecting the half [ph] population in China to be netted off US soybean shipments when North American grain season typically ramps up in Q4 and Q1.On Slide 22, we highlight the supply side of the equation.
Earlier in the year, there was a sponsor market conditions to increase scrapping and slippage of new building deliveries. Scrapping in the year to date has risen to 5 million deadweight tons already surpassing last year's total, resulting in net fleet growth of approximately 3% on an annualized basis.Additionally, overall fleet wide productivity has been impacted by owners' preparation ahead of the January 1, 2020 IMO compliancy in which a substantial portion of the global fleet is undergoing scrubber retrofitting.
In terms of the order book vessel, contracting has been relatively limited so far this year, leading to a stable order book as a percentage of fleet at approximately 11%, which compares to 7% of the current on the water drybulk fleet that is greater than or equal to 20 years old.Since 2010 new building deliveries have fallen by nearly 25% in the second half of the year as compared to the first half. On top of this, traditionally tightening supply picture since 2010 iron ore volumes from Australia and Brazil have increased by 12% on average in the second half of the year as compared to the first half.
That these two factors have historically helped contribute to tighter markets towards year-end and appear to be planning once again this year.This concludes our presentation and we would be now happy to take the questions.
Operator
Thank you very much. [Operator instructions] Our first question will come from Randy Giveans, Jefferies.
Randy Giveans
Gentleman how's it going?
John Wobensmith
Good morning Randy.
Randy Giveans
A few question for me. The first one is going to be multifaceted.
I know you appreciate that. The incredible rally in drybulk spot rates as obviously been evident this summer.
But how has that impacted the one year time charter rates and asset values in recent months?For example, you recently agreed to sell the challenger for looks like $5.3 million, what would this price have been back in May? And also for the time charter rates, are you seeing any premiums for those with scrubbers on the Capesizes?
And if so is it 2000, 4000, 6000 a day?
John Wobensmith
Okay. So let's talk about asset values for a second.
The difference between May and now and the Handysize market, I don't think values have moved all that much, maybe. What I would say is there's more liquidity that's come back into the market, so you're not having to take a discount from last done.We felt that was a pretty strong sale that we're able to get on that age of a ship that has drydocking and a ballast water treatment system that still needs to be installed.
I think in general, though, asset values particularly in the larger ships have started to move back up again. And I would anticipate as people get more and more comfortable with the recovery going into the second half, and then into 2020 those asset values will continue to move up.On the time charter market in terms of Capes, I still think it's a little too early.
We haven't seen too much -- too many time charters that have been done bases a scrubber fitted ship. And I think as you get closer to the end of the year, and you have the IMO 2020 fuel switchover that's when you'll start to see the premiums in the time charter market, versus a ship that is -- that does not have a scrubber on board.But so to put into perspective, the time charter market today for say a five year old Cape is probably somewhere between $19,000 and $20,000 a day for a year.
And you would expect that when you do get into looking at charters with scrubbers, you should hope -- you should be able to get a $4,000 to $5,000 premium because of the scrubber install.
Randy Giveans
Perfect. Okay.
So seems -- certainly seems like asset values on larger stuff, it's been a very illiquid market. So it seems like the current prices should be higher than last done in July, June, for that matter.Alright, second question…
John Wobensmith
I think..
Randy Giveans
There have been … Go ahead.
John Wobensmith
I was just going to say, I think you're right, Randy. And I think the one of the more important things is that there is liquidity back in the S&P market.
There are transactions being done, Capes all the way down to Handysize which a few months ago, it was pretty stagnant.
Randy Giveans
Got you. And then one more question here.
So there have been obviously some headlines of excessive delays for scrubber retrofits recently. But looking at your scrubber CapEx timing for retrofits, you're still guiding to all 17 Capesizes being completed this year.
So I guess two part question. What's causing the delays for others, is it equipment, is it shipyard space?
And then what makes you confident that those delays, won't push you into 2020?
John Wobensmith
Look, I think there's a few things that are effect -- that are causing the delays. I think some of the yards probably overbooked their slots and waiting periods maybe a little bit longer.
And so I think there's been some over promising on the yard front. I think there have been -- there's also been some equipment procurement issues, particularly on the piping, discharge piping and getting logistics set up in China.You've also got some a lot of these scrubbers are coming from Europe.
So there are logistical issues with that. I think in China in particular where a lot of these are installations are being done.
There has been a lot of rain over the last couple months, there's been currently a lot of heat and hot weather, which has affected the working conditions there.As it pertains to Genco, we are highly confident we will have all of our scrubbers installed by the end of the year, as we have done four so far. In pretty -- we actually did those in pretty quick succession.
Those were done really in the late June through July time period, four off the ships were done. And we're very confident on the other 13 getting done before the end of the year.That doesn't mean that -- within the scheduling, there have been some delays by a week or two, but we've been able to logistically work around that from a commercial standpoint and work with the yards.
And that's why I have the confidence that everything will be done before year end.
Randy Giveans
Sure. Thanks.
Sounds good. We're looking forward to seeing the next few months here.
Thank you.
John Wobensmith
You’re welcome.
Operator
Thank you. Our next question will come from Amit Mehrotra, Deutsche Bank.
Chris Snyder
Hey, good morning. This is Chris Snyder on from Amit.
So the first question is just what do you think caused the Cape recovery to be so strong and so sharp? Obviously we have Vale ramping, but overall export volumes out of Brazil are still down year-on-year and really below expectations heading into the year.
So it was like the really aggressive ramp just the result of Capes being positioned in the Pacific for scrubber installations or maybe just a global fleet got spread out as other regions are maybe juicing production to take advantage of high prices?
John Wobensmith
Look, I think it's a few things. I think it's Vale coming back online, quicker than what was anticipated in the market, both in terms of Brucutu coming online, but also their logistical system being able to shift production more into S-11D.
I think that took people by surprise. And because of that, there were not a lot of ships positioned in the Atlantic.
And so the Atlantic market got squeezed and really pushed the index rates up.I agree with you. I think a lot of the ships are trading in the Pacific because of the Vale situation but also because of scrubber installs.
And we really had started to see the beginning of a big push, and a lot of activity in the yard on the scrubber side, which is taking ships out of the market also.So from a from a simple supply standpoint, supply of shifts, being able to lift cargos that number's being reduced because of the scrubber installs. And we certainly expect that to continue through the end of the year.
So, I think it's a combination of things. But I think one of the big things is Vale coming back online quicker.
Chris Snyder
So the Cape market has pulled back here over the last couple of weeks, just as some of that supply is now returning back into the Atlantic. Can you maybe just talk about where the -- how the fundamentals in the Atlantic stand right now?
Do you see there still become this more downward pressure or do you think that the market now maybe in the low to mid 20-range is kind of starting to be more of a stable environment?
John Wobensmith
It seems to be settling out. If you look at the FFAs, that paper will certainly tell you that things are stable.
I -- we still anticipate another push upwards on rates before the end of the year. I also would tell you, we're -- from a seasonal standpoint, I think we're taking an overall pause in the iron ore market.
And with the price of iron or having dropped pretty quickly over the last couple weeks. That's usually a short term phenomenon in the sense that people pull back on their purchases.So as soon as that price stabilizes again, I think you're going to see more buyers come back into the market and Cape rate should continue to move back up.
But I -- we do feel that there's a fairly stable floor right now that is set in on the Capesize sector.
Chris Snyder
Thanks for that. And then next question.
And sorry if you touched on this already, but just around fleet positioning.And I believe last summer you repositioned a chunk of the midsized fleet. It's kind of weight on Q2 results that set you guys up for a better second half.
Did you undertake similar repositioning this summer? And is it really or mostly just superheroes [ph] in anticipation of the grand season?
John Wobensmith
Yes. Okay.
So a few things. So if you if you look at last year, we actually did quite a bit of that repositioning and backhauling in Q3, which set up for a very strong fourth quarter.
This year, we've done a lot of that in the second quarter and anticipation of a strong Black Sea Med region, which has panned out and you can see it in the ford fixtures in the mid-size and smaller ships going into Q3.And on the cape, as I said because of the scrubber installs, we have been trading those ships exclusively in the Pacific as those ships come out of the yard with their scrubber installed will go back to a more balanced approach in the Capesize sector of having some exposure in the Atlantic and some exposure in the Pacific.I mean, I look at what we did for the first half of the year, which compared to the index is very strong. And we have a stated goal of beating the index of $500 per day for over a calendar year and we still have all the all the confidence that that's going to pan out as we get to December 31st.
But I think if you look at the forward fixture, if you look at the forward fixtures, they're very strong for Q3.
Chris Snyder
Yeah. And then if I could just ask one more on the grain trade and especially because you guys have kind of did the repositioning a little earlier.
If I remember correctly, last year as South America took share from the US and international grain market, we saw a lot of that grain trade pulled forward into Q3 and then the Q4 volumes kind of disappointed. Is that maybe why you reposition a little earlier this year?
And do you think that's the way the markets setting up for this year?
John Wobensmith
I think there's a little bit of a difference this year over last year. So the Black Sea and Med has -- that has come a lot earlier than what we saw last year, which is again, why we were repositioning in the second quarter to hopefully capture that, which is proven successful.The other difference this year, versus last year, is that last year Argentina went through a drought, so there was not a lot of soybean and there was not a lot of corn, that was exported out of Argentina.
That situation has reversed this year, where there is more soybean and a lot more corn availability for export out of Argentina. And I would tell you Brazil on the soybean front is probably flat to slightly below last year's numbers.So we still expect East Coast of South America to remain strong for quite some time.
Chris Snyder
Well, I appreciate all that color. And that's it for me.
Thank you.
John Wobensmith
Thanks, Chris.
Operator
Thank you very much. [Operator Instructions] Thank you.
Our next question will come from Eric Jobe, Clarksons [ph]. Eric Jobe, your line is open.
If you're on mute, would you please unmute your line now?
Conference Call Participant
Sorry about that. Hi, guys.
John Wobensmith
Hi, Eric. Good morning.
Conference Call Participant
Good morning. So you talked about the repositioning into the Pacific or discovery installations and bulk coming back in line.
So regarding the Capesize market for the remainder of the year, it's now looks to me like it is going to do the same transition over to the Pacific basin to the pitch scrubbers. How is that in your view going to affect the market for the remainder of the year?
John Wobensmith
On the on the Vale VLOCs?
Conference Call Participant
Yeah.
John Wobensmith
Yeah, look, I mean, most of those vessels are under contract. So clearly, taking those ships out of service will most likely require more spot fixtures coming out of Vale.
You couple that, again, with the fact that you've got a recovery, that that's going on volumes overall. We obviously expect that to be a positive.I look at those VLOCs in terms of the entire Capesize fleet and looking at the numbers that are going to be coming off line, basically that started in July all the way through the first quarter of next year to have scrubber installs.
But particularly those VLOCs that in the Atlantic should be very helpful to the to the Cape market.
Conference Call Participant
And you guys are also getting at way, I guess with the Capesizes and going back into the market, hopefully turning stronger due to multiple factors there so.
John Wobensmith
Yeah. And we are ….
Conference Call Participant
And…
John Wobensmith
Well, the only thing I was going to say was, we're obviously talking about the second half of the year which is fine. But -- and we're positive on that.
But we're also looking forward to 2020 from just a pure supply and demand standpoint where demand is projected to outstrip the number of ships delivering by 1 point to 2 points. That is setting up also for a nice part of the recovery going into next year.
Lot of that is driven again by Vale continuing to ramp up and will probably most likely get back to at least 2018 levels in terms of tons of iron ore shipped.
Conference Call Participant
That's helpful. Thank you.
Operator
Thank you very much. Ladies and gentlemen, at this time, this now concludes today's conference.
Thank you for joining us. You may disconnect your phone lines and have a great rest of the week.
Thank you.