Mar 11, 2016
Executives
John Wobensmith - President Apostolos Zafolias - Chief Financial Officer
Analysts
Doug Mavrinac - Jefferies LLC. Sherif Elmaghrabi - Morgan Stanley & CO.
LLC.
Operator
Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Fourth Quarter 2015 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 found 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 anytime during the next two weeks by dialing 1-888 203-1112 or 1-719-457-0820 and entering the passcode 7273462.
At this time I will 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 a 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, 2014, as amended and the company’s subsequent reports filed with the SEC. At this time, I would like to introduce John Wobensmith, President of Genco Shipping & Trading Limited.
John Wobensmith
Good morning. Welcome to Genco’s fourth quarter 2015 conference call.
With me today is our Chairman, Peter Georgiopoulos; and our Chief Financial Officer, Apostolos Zafolias. As outlined on Slide 3 of the presentation, I will begin today’s call by reviewing our fourth quarter highlights.
We will then discuss our financial results for the quarter and the industry’s current fundamentals and then finally open up the call for questions. Starting with Slide 5, we review Genco’s fourth quarter highlights.
During the fourth quarter, we recorded a net loss of $49.5 million, or $0.69 basic and diluted loss per share for the period ended December 31, 2015. Against a backdrop of a challenging drybulk market, we continue to take important steps to enhance our liquidity position and increase our operating efficiency.
With respect to our liquidity position on November 10, 2015, we completed the funding of $98 million secured loan facility with funds associated with Hayfin Capital Management and Breakwater Capital Limited. Including this facility we entered into a total of $158 million in new loan facility starting in 2015.
As described in more detail on our earnings release, the current market conditions and historically low charter rates have negatively impacted our liquidity position and may continue to do so. As a result of this impact on our liquidity and a continued decline in vessel values, we face credit facility covenant compliance issues.
We are currently in communication with our banks to address such covenant compliance issues and are considering a number of options. Additionally, during the fourth quarter, we did take delivery of the Baltic Mantis, completing our Ultramax newbuilding program.
We reached an agreement to charter the vessel for 14 to 18.5 months at a rate based on a 115% of the Baltic Supramax Index. In terms our cash position as of December 31, 2015, we had $140.9 million in cash, including restricted cash.
Turning to Slide 6, we provide an overview of our fleet. With the delivery of the last Ultramax newbuilding Genco’s fleet consist of 70 drybulk vessels made up of 13 Capesize, 8 Panamax, 4 Ultramax, 21 Supramax, 6 Handymax, and 18 Handysize vessels with a total carrying capacity of approximately 5.2 million deadweight tons.
Drawing upon our increased scale, which was a direct result of our merger with Baltic Trading. In July of 2015, we reduced our direct vessel operating expenses on a per vessel basis for the year, resulting in savings of approximately $4 million.
In addition to operational efficiencies, we believe our increased scale has created a stronger global competitor strengthening both our long-term commercial prospects and ability to deliver value to shareholders. At this time, I would like to turn the call over to Apostolos.
Apostolos Zafolias
Thank you, John. Turning to Slide 8, our financial results are presented.
Before I discuss the results, I would like to reiterate that as of July 9, 2014 following the completion of the company’s restructuring, Genco adopted and applied fresh start reporting provisions to its financial statements. As a result of the adoption of fresh start reporting, the company’s consolidated balance sheet and consolidated statements of operations subsequent to July 9, 2014 will not be comparable in many respects to our consolidated balance sheets and statements of operations prior to July 9, 2014, as further discussed in our SEC filings and Forms 10-K and 10-Q.
For the three months ended December 31, 2015, the company generated revenues of $35 million versus $55.7 million for the same period of 2014. For the year-ended December 31, 2015, revenues declined by $66.9 million to $154 million, compared to the year ended December 31, 2014.
The decrease in total revenues for the fourth quarter and year-ended periods as compared to the prior year periods was primarily due to lower spot market rates achieved by the majority of the vessels in our fleet, marginally offset by the increase in the size of our fleet following the delivery of three Ultramax newbuilding vessels. For the fourth quarter of 2015, the company recorded a net loss of $49.5 million, or $0.69 basic and diluted loss per share.
This compares to a net loss of $164 million, or $2.72 basic and diluted loss per share for the fourth quarter of 2014. Turning to Slide 9, we present key balance sheet items as of December 31, 2015.
As previously mentioned by John, the current market conditions and historically low charter rates have negatively impacted our liquidity position and have resulted in a continued decline in vessel values. Although we are in communication with our banks to address covenant and compliance issues, we anticipate receiving a growing concern opinion from our independent registered public accountants to be included in our Form 10-K for the year ended December 31, 2015, and have classified our outstanding indebtedness of the current liability as of December 31, 2015.
Our cash position including restricted cash was $140.9 million as of December 31, 2015. Our total assets were $1.7 billion, which consisted primarily of the vessels in our fleet and cash.
Our total debt outstanding was $588.4 million as of December 31, 2015. As John mentioned, during the fourth quarter, we took steps to enhance our liquidity position, specifically we completed a funding of a new credit facility under favorable terms, including our repayment structure with no fixed amortization payments for the first two years and fixed amortization payments of $2.5 million per quarter thereafter, subject to prepayments based on the facility’s collateral value to loan ratio.
Moving to Slide 10, our utilization rate was 98.6% for the fourth quarter of 2015, in line with the rates in the year-earlier period. Our TCE for the fourth quarter of 2015 was $4,711 per vessel per day.
This compares to $8,310 per vessel per day recorded in the fourth quarter of 2014. The decrease in TCE was primarily due to lower spot rates achieved by the vessels in our fleets during the three months ended December 31, 2015 versus the same period last year.
For the fourth quarter of 2015, our daily vessel operating expenses were $4,954 per vessel per day versus $4,840 per vessel per day for the fourth quarter of 2014, primarily due to higher expenses related to the timing of the purchases of spare parts. Daily vessel operating expenses for the year ended December 31, 2015 were $4,870 per day per vessel versus $5,035 per day per vessel for the year ended December 31, 2014, due to lower insurance, stores and maintenance related expenses.
This year-over-year decline in a daily – in daily vessel operating expenses represent savings of over $4 million based on the 2015 ownership days. Furthermore, our daily vessel operating expense budget for 2016 is $4,820 per vessel per day, which could result an additional savings of approximately $1.3 million for this year.
I will now turn the call back to John to discuss our industry fundamentals.
John Wobensmith
Okay. I’ll start with Slide 12, which represents the Baltic Dry Index.
The Baltic Dry Index continued to come under pressure throughout the fourth quarter of 2015, including reaching a then all-time low of 471 on December 16. Since the beginning of the year, the BDI has declined further following below the 300 point threshold for the first time on record in February.
Subsequently, the BDI has marginally increased over 375 while posting gains in each trading days since the trough on February 11. Turning to Slide 13, we outlined some of the recent market developments.
We believe various seasonal factors are currently affecting the freight market, which has exacerbated the already fragile supply and demand balance. These factors include firm newbuilding deliveries, cargo disruptions, and the Chinese New Year celebration.
Specifically relating to iron ore cyclones in Australia caused Port Hedland to halt shipments through two days in January. This resulted in Australian exports declining by 3% year-on-year during the month and well below the fourth quarter of 2015 pace.
Additionally, the Brazilian government ordered the Port of Tubarão to temporarily seize shipments due to environmental issues. While through the first two months of February, Brazilian iron ore exports have increased by 13% year-on-year, the monthly export average of 27.5 million tons in 2016 to-date is far below the monthly export average of 33.9 million tons registered in Q4 of 2015.
Reduced iron ore cargo available in the international market led to China’s iron ore imports falling from a record of 96.3 million ton in December 2015 to 73.6 million ton in February of this year. Despite the decrease from the December figure, China’s iron ore imports have still been able to increase by 6% year-on-year for the first two months of 2016.
Turning to Slide 15, we highlight global steel production. We note that in 2015 China’s steel output fell by 2.3% year-on-year, the pace of decline steepened in January of 2016 with a nearly 8% year-on-year drop.
As China’s domestic steel demand has waned, steel product exports have risen meaningfully. In 2015, exports rose by over 20% year-on-year, as Chinese mills use this as a means to maintain production levels.
As China has inundated the international market with inexpensive steel, several nations including India and the U.S. have implemented measures to assist their respective domestic steel industries, which have had difficulty in competing with the lower price products from China.
Through February of this year, China steel exports have fallen marginally year-on-year. Possibly as a result of these actions, although two months of data is too small the sample size to make any conclusions at this point.
A positive development that has materialized so far in 2016 within the steel sector has been the strength exhibited in steel prices, which have risen nearly 20% in the year to-date. This rise can be attributed to a restock of depleted steel inventories, as well as the onset of peak construction season.
Steel inventories have been replenished aggressively over the past two months, as depicted on the bottom right of the slide, which is in line with historically – historical seasonality during the first quarter. Despite the recent improvement in steel mill margins, China has set out plans to cut between a 100 and 150 million tons of steel capacity over the next several years.
The planned cuts will likely be of older inefficient mills that generate greater emissions. Moving to Slide 16, we turn our attention to the coal trade.
In 2015, China’s coal imports continue to be negatively impacted by protectionist policies implemented by the Chinese government to aid domestic coal miners. Shipping of the commodity to China fell by 30% year-on-year in 2015 and by 10% year-on-year through February of this year.
Similar to the steel sector, the Chinese government has announced plans to rebalance the domestic coal sector and reduce overcapacity. On Slide 17 and 18, we outlined current supply fundamentals.
Given the underlying market conditions, supply-side measures undertaken by owners over the last several months have been encouraging. These measures consist of a record pace of vessel scrapping, limited newbuilding contracting activity, delayed delivery of newbuilding vessels and cancellations, as well as conversions of prior newbuilding contract.
We believe vessel demolition is the most direct way to impact the current trading fleet. As a result, we view over 10 million deadweight ton of tonnage scraps so far in 2016 as a highly positive development.
Furthermore, a trend that has continued into 2016 from last year has been the scrapping of relatively younger tonnage. The average age of vessels scrapped in 2016 is 24 years compared to 25 years in 2015, and 27 years in 2014.
This decline in the average age of vessels being scrapped has been propelled by the Capesize and Panamax sectors, which have an average scrap age of 21 years so far in 2016. We believe this strength could result in further scrapping, because approximately 10% of the total fleet is 20 years or older currently.
As a result of the recent market conditions, newbuilding contracting activity has been almost nonexistent. Contracting activity through the first two months of 2016 is down by 90% year-on-year, while there have been no reported orders in the Capesize and Supramax sectors since the start of the year according to Clarksons’.
Furthermore, the slowdown in ordering activity together with cancellations and conversion has been able to drive down the order book as a percentage of the fleet to 15%. This represents the lowest ratio since 2003.
Regardless of the decline in the overall order book, there’s still is firm amount of tonnage scheduled to deliver in 2016 has over 60% of the order book, or approximately 74 million deadweight tons remains earmarked for this year. Of this total, it still remains to be seen what percentage will actually deliver.
In conclusion, we note that in regard to the industry’s current supply-side fundamentals, we believe scrapping, slippage, and cancellations or additional conversions of newbuilding contracts are all essential components of reducing supply growth, which could lead to a more balanced supply demand equation going forward. This concludes our presentation, and we would now be happy to take your questions.
Operator
[Operator Instructions] And we’ll go first to Doug Mavrinac with Jefferies.
Doug Mavrinac
Thank you, operator. Good morning, guys.
John Wobensmith
Hey, Doug.
Doug Mavrinac
Hey, John, just a handful of follow-up questions for you. The first one being on the point that you just touched on that has to do with the fleet of being rationalized and the way that you do that is through scrapping.
So when you look at kind of what’s being scrapped and the average age of what’s being scrapped, and how that compares to secondhand values? At what age ship do you see that there are being a point of indifference of saying, all right, well, 17-year old ship or 19-year old ship, this is worth scrap now.
So where is that point of indifference of operating versus scrapping? And then secondly, as that continues to get younger and younger, how does that affect the proportion of ships that are now in the scrapping zone?
John Wobensmith
Well, okay, let me take the second part of the question.
Doug Mavrinac
Okay.
John Wobensmith
Obviously the younger we get, the greater percentage of ships that can go to scrap.
Doug Mavrinac
Right.
John Wobensmith
I mean, we have actually seen 15-year-old Capesize ships scrapped over the last couple of months….
Doug Mavrinac
Right.
John Wobensmith
We even saw that starts to happen in third and fourth quarter of or really fourth quarter of last year. What is encouraging is scrap prices have been increasing.
I think that when you get to a ship that’s 15-years old, you then have to do special surveys every 2.5 years instead of every five years. So your CapEx expense numbers can go up dramatically, particularly with steel renewal.
So I think these decisions particularly on the larger Capes and the Panamaxes from a financial standpoint are pretty easy to make right now, Cape rates running at $500, $600 a day on the spot market. I think you’re – we’ve seen some layups, but not a lot of them expanding on your question a little bit.
But you really need a 12-month earnings number in Capes, for example, of somewhere around $3,000 a day to say, we want to continue to operate the ship and not layup or scrap and clearly we’re not near that right now.
Doug Mavrinac
Right, right. So kind of taken that and kind of seeing right, well, [ph], we’re starting to see some 15-year old ships being scraped, and it’s not really worth operating at these levels.
Does that mean that like if you look at the proportion of ships that are over 15 years of age, are we talking like, 15% of the fleet, 20% of the fleet, such that, that’s starting to get to be a pretty big number that you can start to say all right, well, we can start to see a pretty – and even more meaningful reduction of the existing fleet that can go towards the rebalancing?
John Wobensmith
Yes, I mean, look, I think we mentioned before we’re at really 10% for 20 plus, but you could – you’re adding another call it…
Doug Mavrinac
A pretty decent number.
John Wobensmith
…probably another 10%, Doug.
Doug Mavrinac
Right, quite right, yes. And that’s kind of what’s interesting about seeing that average A, it’s kind of creeping up either, because scrap values are increasing, or because secondhand values are decreasing.
It seems like you’re kind of getting closer to that inflection point of or that, at least, that point of indifference?
John Wobensmith
I think it’s a combination of both, I think you’re correct.
Doug Mavrinac
Yes, gotcha. Okay, great.
Thank you. And then as a follow-up, when you guys are doing internal projections, and you mentioned how we’re still seeing a lot of growth delivery is expected for 2016, that’s not necessarily the case, if you look at the order book for 2017 and 2018 or whatnot.
So at what point do you or if you guys look at this from this perspective, do you start to see the potential that you could actually see the fleet starting to shrink, i.e., more demolitions than deliveries. Is it at some point later this year, or is it at some point in 2017, or do you even look at it from that perspective?
John Wobensmith
No, we look at it from that perspective. And in fact, if you take the month of February, there was actually a very small shrinkage if you compare demolitions to what was delivered.
January was a high delivery month that’s – and that’s normal. I mean, you only said people pushing December deliveries in the January to get the newer date.
But we did see February show negative fleet growth. I’d certainly think as you get into 2017, you could see negative fleet growth.
And I also – we’re talking about 15% of the order book and a lot of that being delivered in 2016, we still are very skeptical about what the actual order book is in terms of what will be delivered. We still think there are lot of cancellations that haven’t been reported and that that are probably to come down the line.
Doug Mavrinac
Gotcha, very helpful. Thank you.
And then just final question, as it pertains to the reclassification of your debt as current. Whenever you look at your balance sheet, I see a $140 million in cash, I see significant equity value.
So, kind of given those two dynamics and also kind of seeing over the last couple of weeks a lot of the U.S. listed peers getting amend and extend agreements, kind of done.
How would you describe your current positioning within that current environment? I mean, are those the types of conversations that you guys are having as far as saying, okay, well, debt prepayment is a potential option given our cash on hand.
I mean, how is – how would you describe the tenor of your conversations on that topic of amendment extend?
John Wobensmith
Well, look, let’s talk in general. Having a over $100 million of cash on the balance sheet, I think is helpful.
I don’t think there are many peers that that actually have that kind of cash position. So that that make things a little more helpful and constructive.
We said in our press release, I said on the call that we are in conversations with our banks.
Doug Mavrinac
Right.
John Wobensmith
Of course, everybody wants details. But at this point, we can’t provide any…
Doug Mavrinac
All right.
John Wobensmith
We can’t predict the actual outcome of what things will look like. But I think as everyone knows, we’ve always had a good and a productive relationship with our commercial banks.
I would say we’re having constructive conversations. But look, the industry is challenging, nothing is easy.
And but like I said, you fall back on your relationships and clearly we’re – as I said, we’re having constructive conversations there. I can’t really comment beyond that.
Doug Mavrinac
Those are very helpful. And actually everything was very helpful.
So thank you for the time, John.
John Wobensmith
Thanks, Dough.
Operator
[Operator Instructions] And we’ll go next to Sherif Elmaghrabi with Morgan Stanley. Please check your mute function.
Your line is open.
Sherif Elmaghrabi
Well, can you hear me now?
John Wobensmith
Yes. Hi, how are you?
Sherif Elmaghrabi
Hey, good morning. Sorry about that.
Just a quick modeling question for me. I realize that you guys said that you need to see a one-year rate around $3,000 maybe justify the layup.
But I’ve heard from some other owners that they’ve seen vessels in layup. So should I take that to mean that do you guys don’t have any ships in layup just for modeling purposes and especially aroundsome of the older vessels, what considerations would you need to take to look at selling the vessels, or putting them away for certain amount of time?
John Wobensmith
So, look, first of all, we don’t have any ships on layup. The $3,000 number is particular to Capes, as you get into the smaller ships that number comes down.
I think what you’ve seen is that, if you look at our employment details, we have been doing some transactions on the charter side and the Capesize sector, where we’ve been setting a floor of $3,250 with a 50-50 profit share above that.
.
Sherif Elmaghrabi
Got it. That’s very helpful.
Thank you, gentlemen.
John Wobensmith
You’re welcome.
Operator
At this time there are no more questions. This concludes the Genco Shipping conference call.
Thank you, and have a nice day.