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Genco Shipping & Trading Limited Announces Second Quarter Financial Results: Comprehensive IMO 2020 Strategy Underway, Fleet Modernization Efforts Continue

Genco Shipping & Trading Limited, the largest U.S. headquartered drybulk shipowner focused on the transportation of major and minor bulk commodities globally, reported its financial results for the three months and six months ended June 30, 2019.

The following financial review discusses the results for the three and six months ended June 30, 2019 and June 30, 2018.

Second Quarter 2019 and Year-to-Date Highlights

Commenced the installation of exhaust gas cleaning systems (“scrubbers”) as part of our comprehensive IMO 2020 strategy
– Four of our Capesize vessels have had scrubbers successfully installed to date, and we anticipate our remaining Capesize vessels to be scrubber-equipped by the end of 2019
In August 2019, we agreed to sell the Genco Challenger, a 2003-built Handysize vessel for a gross price of $5.3 million
Recorded a net loss of $34.5 million for the second quarter of 2019
– Basic and diluted loss per share of $0.83
– Adjusted net loss of $20.4 million or basic and diluted loss per share of $0.49, excluding $13.9 million in non-cash vessel impairment charges, as well as a $0.2 million non-cash impairment of the operating lease right-of-use asset
Net revenue (voyage revenues minus voyage expenses and charter hire expenses) totaled $36.9 million and $84.9 million during the second quarter of 2019 and the first six months of 2019, respectively
Our average daily fleet-wide time charter equivalent, or TCE, for Q2 2019 was $7,412
Through the first six months of 2019, our fleet-wide TCE was $8,341, which outperformed the relevant Baltic Exchange benchmark sub-indices as adjusted for our owned fleet profile by approximately $700 per vessel per day1
– Run rate of over 400 fixtures annualized on a fleet-wide basis
Third quarter 2019 TCE to date is $11,640 for 64% of our fleet-wide available days
Recorded adjusted EBITDA of $5.0 million during Q2 20192
John C. Wobensmith, Chief Executive Officer, commented, “During the first half of 2019, we continued to outperform our benchmarks, advance our comprehensive IMO 2020 strategy, and further strengthen our fleet profile and earnings power. With our sizeable and modern fleet of major and minor drybulk vessels, we remain well positioned to capitalize on the overall marked improvement in freight rates that began at the end of the second quarter and which has been largely driven by increased demand for Capesize vessels and low net fleet growth. Highlighting our strong upside to the Capesize sector, strategic positioning on select minor bulk vessels and our fleet’s significant operating leverage, we have booked a TCE of $11,640 thus far for the third quarter, over 55% higher than in the second quarter.”

Mr. Wobensmith continued, “As we approach the implementation of IMO 2020 in the months ahead, we continue to execute our comprehensive portfolio approach to compliance aimed at improving our environmental footprint, maximizing shareholder returns and reducing fuel costs in an evolving marine fuel environment. As 2019 represents our heaviest operational year to date with the installation of scrubbers in addition to ballast water treatment systems, we remain on target towards accomplishing our goal of full regulatory compliance. We are advocating for the full and effective enforcement of these upcoming environmental regulations as the global maritime industry takes an important step towards significantly reducing sulfur emissions.”

Overall, our fleet deployment strategy remains weighted towards short-term fixtures, which provides optionality for the Company. We believe that our active commercial strategy, together with our efficient cost structure, provides ongoing potential for increased margins. Furthermore, our approach to fleet composition in which we own both major bulk and minor bulk vessels provides us with direct exposure to global drybulk commodity trade flows. Moreover, our ownership of Capesize vessels provides us with upside potential associated with the iron ore trade, while our minor bulk vessels provide a relatively steady earnings potential.

The drybulk freight rate environment during most of the second quarter remained under pressure despite improving relative to the first quarter of the year. On our Capesize vessels, we maintained a short-term charter strategy in anticipation of a recovery in freight rates without locking in longer term coverage at softer levels. As contracts expire, vessels can then be fixed in what has been a strong third quarter drybulk market to date. On our minor bulk fleet, we strategically positioned select vessels to key regions in anticipation of a stronger third quarter market while rebalancing our positional exposure given our upcoming drydockings. On a fleet-wide basis, we utilized the second quarter to drydock several of our vessels while also commencing our scrubber installation program, the latter of which has led us to primarily trade our Capesize vessels in the Pacific instead of our usual approach of maintaining exposure to both the Atlantic and Pacific basins.

Our opportunistic charter strategy has enabled us to directly benefit from the substantial improvement in the drybulk market that commenced towards the end of June. With still a significant portion of our Q3 available days still uncovered, particularly on our Capesize fleet as previous fixtures conclude, we anticipate upcoming fixtures to be done at levels reflective of current stronger market conditions. Genco’s approach to fleet composition has proved beneficial, as spot earnings on the Capesize vessels have exhibited substantial upside in Q3 to date. The rally in this larger vessel class has filtered down to the smaller sectors as well, leading to an overall uplift in the earnings environment. We currently have the following TCE fixed for the third quarter of 2019:

Capesize: $17,152 for 65% of the available Q3 2019 days
Panamax: $13,408 for 40% of the available Q3 2019 days
Ultramax and Supramax: $10,694 for 65% of the available Q3 2019 days
Handysize: $7,768 for 65% of the available Q3 2019 days
Fleet average: $11,640 for 64% of the available Q3 2019 days
1 TCE relative performance is benchmarked against the weighted average of the relevant sub-indices of the Baltic Dry Index as published by the Baltic Exchange (BCI 5TC, BPI, BSI 58 and BHSI) net of 5% for commissions, adjusted for our owned fleet composition as well as the characteristics of our vessels.
2 We believe the non-GAAP measure presented provides investors with a means of better evaluating and understanding the Company’s operating performance. Please see Summary Consolidated Financial and Other Data below for a further reconciliation.

Financial Review: 2019 Second Quarter

The Company recorded a net loss for the second quarter of 2019 of $34.5 million, or $0.83 basic and diluted net loss per share. Comparatively, for the three months ended June 30, 2018, the Company recorded a net loss of $1.1 million, or $0.03 basic and diluted net loss per share.

The Company’s revenues decreased to $83.6 million for the three months ended June 30, 2019, as compared to the $86.2 million recorded for the three months ended June 30, 2018. The decrease in revenues was primarily due to lower rates achieved by the majority of the vessels in our fleet as compared to the second quarter of 2018 partially offset by the increased employment of vessels on spot market voyage charters.

The average daily time charter equivalent, or TCE, rates obtained by the Company’s fleet was $7,412 per day for the three months ended June 30, 2019 as compared to $10,964 per day for the three months ended June 30, 2018. In the second quarter of 2019, the drybulk market remained under pressure as iron ore volumes in both Brazil and Australia were limited due to the Vale dam breach and effects of Tropical Cyclone Veronica, respectively. Subsequently, during the third quarter, the freight rate environment has improved significantly as iron ore volumes have started to recover at a time of easing net fleet growth and lower fleet-wide productivity due to the global drybulk fleet’s preparation ahead of IMO 2020.

Image: Genco Shipping & Trading Limited

Total operating expenses were $110.9 million for the three months ended June 30, 2019 compared to $75.3 million for the three months ended June 30, 2018. During the second quarter of this year, $13.9 million in non-cash impairment charges were recorded in relation to the anticipated sale of the Genco Challenger and the revaluation of two other Handysize vessels to their respective fair values. During the three months ended June 30, 2018, a $0.2 million non-cash impairment charge was recorded in relation to the anticipated sale of the Genco Surprise. Voyage expenses rose to $41.8 million for the three months ended June 30, 2019 versus $26.0 million during the prior year period primarily due to the increased employment of vessels on spot market voyage charters as part of our commercial strategy, in which we incur significantly higher voyage expenses as compared to time charters, spot market-related time charters and pool arrangements. Vessel operating expenses increased to $24.4 million for the three months ended June 30, 2019, from $23.7 million for the three months ended June 30, 2018 primarily due to higher drydocking related expenses, partially offset by a decrease due to fewer owned vessels. General and administrative expenses decreased to $5.8 million for the second quarter of 2019 compared to $6.5 million for the second quarter of 2018, due to lower legal and professional fees, partially offset by an increase in compensation related expenses. Depreciation and amortization expenses increased to $18.3 million for the three months ended June 30, 2019 from $16.5 million for the three months ended June 30, 2018, primarily due to depreciation expense for the six vessels delivered during the third quarter of 2018, partially offset by a decrease in depreciation expense for the eight vessels that were sold during the second half of 2018 and the first quarter of 2019.

Daily vessel operating expenses, or DVOE, amounted to $4,615 per vessel per day for the second quarter of 2019 compared to $4,344 per vessel per day for the second quarter of 2018. The increase in DVOE was predominantly due to higher drydocking related expenses. We believe daily vessel operating expenses are best measured for comparative purposes over a 12 month period in order to take into account all of the expenses that each vessel in our fleet will incur over a full year of operation. Based on estimates provided by our technical managers and management’s views, our DVOE budget for 2019 is $4,525 per vessel per day on a weighted average basis for the entire year for our fleet.

Apostolos Zafolias, Chief Financial Officer, commented, “Year-to-date, we have continued to actively manage our fleet, decreasing its average age and augmenting fleet-wide fuel efficiency, all top priorities for Genco and key components of our fleet modernization efforts. Specifically, after completing the sale of our last 1990s built vessel in the first quarter, we agreed to sell a 2003-built Handysize vessel at an attractive price. We have also funded scrubber related expenses to date from cash on hand, maintaining full flexibility under our credit facility for the remainder of our scrubber program.”

Financial Review: Six Months 2019

The Company recorded a net loss of $42.3 million or $1.01 basic and diluted net loss per share for the six months ended June 30, 2019. This compares to a net loss of $56.9 million or $1.62 basic and diluted net loss per share for the six months ended June 30, 2018. Net loss for the six months ended June 30, 2019 includes $13.9 million non-cash vessel in impairment charges, a $0.2 million non-cash impairment of the operating lease right-of-use asset, as well as a gain on sale of vessels totaling $0.6 million. Net loss for the six months ended June 30, 2018, includes non-cash vessel impairment charges of $56.6 million, as well as a loss on debt extinguishment in the amount of $4.5 million. Revenues increased to $177.0 million for the six months ended June 30, 2019 compared to $163.1 million for the six months ended June 30, 2018. Voyage expenses increased to $84.8 million for the six months ended June 30, 2019 from $47.1 million for the same period in 2018. This was primarily due to the increase of employment of vessels on spot market voyage charters during 2019 as part of our commercial strategy, in which we incur significantly higher voyage expenses as compared to time charters, spot market-related time charters and pool arrangements. TCE rates obtained by the Company decreased to $8,341 per day for the six months ended June 30, 2019 from $10,716 per day for the six months ended June 30, 2018, due to lower rates achieved by the majority of the vessels in our fleet. Total operating expenses for the six months ended June 30, 2019 and 2018 were $205.2 million and $200.6 million, respectively. Total operating expenses include $13.9 million in non-cash vessel impairment charges, as well as a gain on sale of vessels of $0.6 million for the six months ending June 30, 2019. For the six months ended June 30, 2018, total operating expenses include non-cash vessel impairment charges of $56.6 million relating to the revaluation of certain vessels that comprise our fleet renewal plan to their respective fair values. General and administrative expenses for the six months ended June 30, 2019 increased to $12.1 million as compared to the $11.7 million in the same period of 2018. DVOE was $4,518 versus $4,373 in the comparative periods. The increase in DVOE was predominantly due to higher drydocking related expenses, as well as crew related expenses. EBITDA for the six months ended June 30, 2019 amounted to $8.4 million compared to a $8.7 million loss during the prior period. During the six months of 2019 and 2018, EBITDA included non-cash impairment charges, an operating lease right-of-use asset non-cash impairment, gains on sale of vessels, and loss on debt extinguishment as mentioned above. Excluding these items, our adjusted EBITDA would have amounted to $21.9 million and $52.4 million, for the respective periods.

Liquidity and Capital Resources

Cash Flow

Net cash provided by operating activities for the six months ended June 30, 2019 was $14.8 million as compared to $25.0 million for the six months ended June 30, 2018. Included in the net loss during the six months ended June 30, 2019 were $13.9 million of non-cash impairment charges, a gain of $0.6 million arising from the sale of the Genco Vigour, $0.6 million of non-cash lease expense and a loss of $0.2 million related to the non-cash impairment of our right-of-use operating lease asset. Included in the net loss during the six months ended June 30, 2018 were $56.6 million of non-cash impairment charges, as well as a $4.5 million loss on the extinguishment of debt and a $5.3 million payment on the $400 Million Credit Facility. Depreciation and amortization expense for the six months ended June 30, 2019 increased by $3.0 million primarily due to depreciation expense for the six vessels delivered during the third quarter of 2018, partially offset by a decrease in depreciation expense for the eight vessels that were sold during the second half of 2018 and the first quarter of 2019. Additionally, there was an $8.8 million increase in the fluctuation in due from charterers due to the timing of payments received from charterers and a $3.1 million increase in the fluctuation in prepaid expenses and other current assets due to the timing of payments. Lastly, there was an $8.0 million increase in the fluctuation in inventories associated with vessels on spot market voyage charters. These increases were partially offset by a $4.0 million increase in deferred drydocking costs as there were more vessels that completed drydocking during the first half of 2019 as compared to the first half of 2018. There was also a $1.5 million decrease in the fluctuation accounts payable and accrued expenses due to the timing of payments made.

Net cash used in investing activities was $13.7 million during the six months ended June 30, 2019 as compared to net cash provided by investing activities of $1.9 million during the six months ended June 30, 2018. Net cash used in investing activities during the six months ended June 30, 2019 consisted primarily of $10.4 million purchase of scrubbers for our vessels, $7.8 million purchase of vessels related primarily to ballast water treatment systems and $2.5 million for the purchase of other fixed assets due to the purchase of vessel equipment. These cash outflows during the six months ended June 30, 2019 were partially offset by $6.3 million of proceeds from the sale of one vessel during the first half of 2019. Net cash provided by investing activities during the six months ended June 30, 2018 consisted primarily of the proceeds received for hull and machinery claims related primarily to the receipt of the remaining insurance settlement for the main engine repair claim for the Genco Tiger.

Net cash used in financing activities during the six months ended June 30, 2019 was $38.5 million as compared to net cash provided by financing activities of $38.5 million during the six months ended June 30, 2018. Net cash used in financing activities of $38.5 million for the six months ended June 30, 2019 consisted primarily of the following: $34.6 million repayment of debt under the $495 Million Credit Facility; $3.2 million repayment of debt under the $108 Million Credit Facility; $0.6 million payment of deferred financing costs; and $0.1 million payment of common stock issuance costs. Net cash provided by financing activities of $38.5 million for the six months ended June 30, 2018 consisted primarily of the $460.0 million drawdown on the $460 Million Credit Facility and the net proceeds from the issuance of common stock on June 19, 2018 of $110.2 million partially offset by the following: $399.6 million repayment of debt under the $400 Million Credit Facility; $93.9 million repayment of debt under the $98 Million Credit Facility; $25.5 million repayment of debt under the 2014 Term Loan Facilities; $9.7 million payment of deferred financing costs; and $3.0 million payment of debt extinguishment costs. On August 14, 2018, we entered into the $108 Million Credit Facility to finance a portion of the purchase price for the six vessels acquired during the third quarter of 2018. On June 5, 2018, the $495 Million Credit Facility refinanced the following three existing credit facilities with its original $460 million tranche: the $400 Million Credit Facility, the $98 Million Credit Facility and the 2014 Term Loan Facilities. Additionally, on February 28, 2019, the $495 Million Credit Facility was amended to add a tranche of $35 million for the purchase of scrubbers in addition to the original $460 million tranche used for the refinancing on June 5, 2018.

Capital Expenditures

We make capital expenditures from time to time in connection with vessel acquisitions. As of August 7, 2019, our fleet consists of 17 Capesize, two Panamax, six Ultramax, 20 Supramax, and 13 Handysize vessels with an aggregate capacity of approximately 5,075,000 dwt and an average age of 9.5 years.

In addition to acquisitions that we may undertake in future periods, we will incur additional capital expenditures due to special surveys and drydockings for our fleet as well as capital expenditures for the installation of scrubbers on our 17 Capesize vessels. We expect the cost of the scrubbers for our Capesize vessels, including installation, to be approximately $2.25 million per vessel, which may vary according to the specifications of our vessels and technical aspects of the installation, among other variables. We anticipate funding the acquisition and installation of scrubbers on our 17 Capesize vessels through a combination of commercial bank debt and cash on hand. We also anticipate incurring capital expenditures with respect to the installation of ballast water treatment systems, which we intend to fund with cash on hand.

During the second quarter of 2019, we had five vessels complete their drydockings. We had an additional five vessels begin their drydockings during the second quarter and complete in the third quarter of which four completed the installation of scrubbers. We currently expect 15 more vessels to enter the shipyard during the third quarter of 2019, of which nine are to have scrubbers installed. Furthermore, we anticipate 10 vessels to enter the shipyard during the fourth quarter of 2019, four of which are to have scrubbers installed.

IMO 2020 Update

We continue to progress on the execution of our comprehensive plan of compliance with the upcoming IMO 2020 emissions standards that targets a significant reduction of emissions from vessels globally. Our portfolio approach entails the installation of scrubbers on our 17 Capesize vessels and the consumption of ultra-low sulfur fuel for the balance of our fleet. We have established this strategy to ensure 100% compliance with the upcoming environmental regulations. During the second quarter we began the scrubber installation process on four of our Capesize vessels, which was subsequently completed in the third quarter. We target a completion of our scrubber installation initiative by the end of the year, ahead of the January 1, 2020 sulfur cap enforcement date.

Full Report

Source: Genco Shipping & Trading

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