Seanergy Maritime Holdings Corp. (NASDAQ:SHIP) Q2 2020 Earnings Conference Call August 5, 2020 10:30 AM ET
Stamatis Tsantanis – Chairman & Chief Executive Officer
Stavros Gyftakis – Chief Financial Officer
Conference Call Participants
Poe Fratt – Noble Capital Markets
Thank you for standing by ladies and gentlemen and welcome to the Seanergy Maritime Conference Call on the Second Quarter 2020 Financial Results. We have with us Mr. Stamatis Tsantanis, Chairman and Chief Executive Officer; and Mr. Stavros Gyftakis Chief Financial Officer of the company.
At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today.
Please be advised that the company publicly released financial results which are available to download on the Seanergy website at seanergymaritime.com. If you do not have a copy of the press release, you may contact Capital Link at (212) 661-7566 and they will be happy to send it to you.
Before turning the call over to Mr. Tsantanis, we would like to remind you that this conference call contains forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended concerning future events and the company’s growth strategy and measures to implement such strategy.
Words such as expects, intends, plans, believes, anticipates, hopes, estimates, and variations of such words, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks and are based upon a number of assumptions and estimates, which are inherently subject to significant uncertainties and contingencies many of which are beyond the control of the company.
Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, competitive factors in the market in which the company operates, risks associated with operations outside the United States, change in rules and regulations applicable to the shipping industry, and other risk factors included from time-to-time in the company’s Annual Report on Form 20-F and other filings with the Securities and Exchange Commission the SEC.
The company’s filings can be obtained free of charge on the SEC’s website at www.sec.gov. The company expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company’s expectations with respect thereto or any change in events, conditions, or circumstances on which any statement is based.
Now, I will pass the floor to Mr. Tsantanis. Please go ahead sir.
[Technical Difficulty] our call is in good health in these difficult circumstances. As explained extensively in our previous communications, the first half of 2020 was one of the most challenging periods in the history of the dry bulk market. A series of negative factors including the continuous spread of COVID-19 caused severe difficulties for societies and businesses across the globe including, of course, the Capesize market.
During these times, our top priority continues to be the health and safety of all our people on border ships, out of staff, as well as to maintain the high-quality of service we always provide to our clients.
On that note, I would like to thank all of our crew members for their strong commitment in our company. We’re very successful in doing so both in — as our business continue to run efficiently without disruptions. In addition, we have worked tirelessly on many fronts to strategically position Seanergy as best as possible for the future.
I will start today’s call with a brief recap of our financial performance and the current Capesize market. After that I will provide an update on the very important events that have taken place since our last earnings call in June.
The time charter equivalent of our fleet for the first six months of 2020 was approximately $7,000 per ship per day compared to approximately $8,400 per day in the first six months of 2019. This is fully in line with the average daily earnings of the Bodegas index in the six-month period of 2020.
Our balance sheet has improved significantly with cash reserves in excess of $30.4 million compared to $14.6 million as of December 31st, 2019. Our stockholders’ equity of $58 million is the highest level recorded since the company’s added launch in 2015.
Since the middle of June, the charter range of Cape vessels has staged a very fast recovery and the market has now stabilized at very healthy levels. After reaching historical lows of $2,000 to $3,000 per day in May, the average daily earnings of the BCI peaked to more than $53,000 per day in nearly $33,000 per day in early July before stabilizing at levels of around $20,000 per day.
The Capesize market has a tremendous ability to recover quickly during the period of high uncertainty and this makes us very confident in the strong fundamentals of our business. We expect to see this recovery extend through the second half of the year, since the demand for our core commodities remains very robust and all major iron ore miners have reiterated per confidence in their export levels.
As a tangible demonstration of this positive outlook, I’m pleased to see that our shipments of iron ore from all major export ports have already recovered to normalized levels. All of our vessels are employed in spot or index-linked charters that allow us to take full advantage of the positive market conditions.
Having seven out of soon to be 11 ships of our fleet employed on index-lined charters has allowed synergy to enjoy full utilization, while closely tracking the Capesize market. Our daily time charter equivalent for the third quarter of 2020 based on approximately 88% of our available days stands now at approximately $22,400 per day, which is almost 200 — more than 200% higher than first half time charter equivalent rate.
I would like now to discuss the most important developments that took place since our last earnings call. In the second quarter of 2020, Seanergy was very successful in a series of highly accretive transactions. Regarding fleet expansion, during the second quarter we agreed to purchase a 2005 Japanese build Capesize vessel for $11.4 million. The price of this vessel is one of the lowest ever recorded in a similar transaction.
Acquisition is fully in cash and by investing some of the proceeds of our capital rating transactions in a highly accretive manner. Based on the current level of the Capesize futures and on the fact that the vessel will not have any debt service applications, we expect to generate very strong cash flows immediately upon delivery.
In addition in late May 2020, we further expanded our business relationship with Glencore through the addition of a third vessel under the commercial arrangement that Seanergy has piled in the sector. The night ship was delivered to Glencore for a period of up to five years following her scrubber installation, which was fully paid for by the client.
Most importantly, 70% of our fleet now employed under index-linked time charters taking advantage of the steep improvement in Capesize rates. Another highly accretive transaction was a gain we managed to achieve with one of our legacy lenders. After months of negotiations with one of our previous banks, we accomplished a $5.6 million gain from refinancing a $29.1 million loan facility by paying $23.5 million that was sourced by a new loan from one of our current lenders, as well as corporate cash reserves.
Through this transaction not only we extended an imminent maturity to 2025, but we also reduced our corporate leverage by $6.6 million. The gain of this deal will be reflected in our third quarter financial statements.
Regarding other facilities that mature in 2020, we are making good progress in our discussions with our lenders with the objective of extending the maturities and further improving the financing terms. We expect to be able to provide further updates in the coming months and we are very optimistic about the outcome.
In total, over the first six months of 2020, Seanergy has refinanced approximately $60 million of loan facilities. Our CFO will offer more detail shortly, but we have proven once again our strong ability to source ample liquidity during a difficult time for the dry bulk market and the global economy. When combined with the capital raising activities concluded so far within 2020, these transactions ensure Seanergy’s well funded and in a great position to take advantage of rising trends in the Capesize market.
Before handing the call over to our CFO, Stavros Gyftakis, who will review our financial performance for the reporting period, I would like to reiterate that the improved market conditions seen currently will lead to a much stronger second half of the year. This is in line with what we saw both in 2019 and 2018 when the improvement in the second part of the year was not only enough to offset the weaker performance during the first six months but also led to the strongest annual rates over the last five years. Seanergy is in a strong position to capitalize on a very robust market environment.
On that note I’m handing the call now to Mr. Stavros Gyftakis.
Thank you, Stamatis. Good morning everyone. I hope that you and your families are staying safe and healthy. In terms of our financial performance, I specifically refer you to the earnings press release which details our second quarter and first half financial results and vessel performance.
As a general comment our numbers were adversely impacted by the usual negative seasonality of the Capesize market, coupled with uncertainty caused by the recession triggered by the outbreak of the COVID-19 pandemic. The global GTV recorded one of the steepest clients ever as the second quarter of the year marked the peak of the quarantine measures and force globally to address the health crisis.
As discussed previously Stamatis since mid-June conditions in the Capesize market have normalized resulting in our vessels achieving better rates. It is indeed encouraging to see that the market was able to recover strongly and stabilize at sustainable levels through a very challenging and a certain period like the past six months.
Summarizes the key figures for the period, net operating revenues in the second quarter of 2020 defined as revenues after deducting all mortgage expense and commissions were $4.7 million on the back of an average time charter equivalent of $5424 per day for the period.
The time charter equivalent performance was mainly impacted by the unfavorable timing of features of spot voyages for our three vessels that are not employed on index-linked time charters. Those were fixed and voyages before June and as such were not able to benefit from the subsequent market improvement. This was the reality of the market in April and May.
Freight and resulting time charter equivalent rates were deeply below operating breakevens and usually Capesize voyages have long durations. Once you commit at a certain rate your time charter equivalent is given for the next two to three months. This is why the index-linked strategy provides for a natural way to better track the market.
On a positive note currently all three spot vessels are in position to fix the next project inventory which should reverse the negative impact of the previous features and improve considerably our operating profitability. Regarding our financial results for the 6-month period that ended on June 30, 2020 net operating revenues decreased $12.3 million from $14.8 million in the first half of last year with the decline being attributed to the deteriorating market conditions.
Similarly the time charter equivalent of our fleet for the first half of 2020 stood at approximately $7000 per day. I would like to point out that over the 6-month period which reduces the timing impact of any particular voyage fixtures our fleet performance was in line with that of the Baltic Capesize index which averages at approximately $7200 in the same period.
Operating expenses, managing fees and general and administrative expenses marked only a margin increase in the first half of 2020 versus the first half of 2019. In the end the falling revenue proved to be the main factor behind the decline in EBITDA which reached negative $1.1 million for the first half of this year versus EBITDA of $2.1 million for the same period of last year.
Net loss for the 6-month period was approximately $19.6 million with the bottom line being negatively affected by the previously discussed decrease in operating revenues. I would like to stress that the bottom line result does not include a large refinancing gain of $5.6 million that we expect to record in the third quarter of 2020 following settlement of one of the legacy facilities at a discount in July.
Turning to our balance sheet as of June 30, 2020 we ended the quarter with $50.4 million in cash and cash equivalents and shareholder equity possible to $58 million. Apologies. Both being the price levels recorded since 2015 and that is having fully absorbed the impact of the low market and associated customer of the first half of the year. Equally importantly, we have marked considerable improvement in a trade working capital position, which has reduced by approximately $7 million compared to the 2019 year-end position.
Total debt net of deferred finance charges as reflected on our balance sheet amounted to $199 million it has also been noted that the refinancing of the loan facility secured by the vessels continue, will have the effect of reducing our debt outstanding by $6.6 million from the quarter end figure.
By comparison the cash position of the company at the end of the year was $14.5 million and debt outstanding was equal to $207 million. I’m optimistic that the year under the significant improvement in the position achieved under a difficult market environment will provide an important foundation for the company’s future.
As discussed previously by Tsantanis, the time charter equivalent of our fleet for the third quarter stands in excess of $20,000 per day and we expect to generate cash while reducing debt over the next two quarters. Furthermore, I would like to add that our latest vessel acquisition is going to be financed entirely with cash on hand and this consequently expected to contribute to the company’s free cash flow under any future market environment.
At this point, I’d like to focus on the measures that were taken during the first six months of the year to preserve and generate liquidity as we were faced with some of the weakest Capesize markets in the last 50 years. Through a series of capital market transactions, including an underwritten public offering for the direct offerings and exercises of associated warrants we is a total of $47 million net proceeds. Through these proceeds, we were able to achieve multiple objectives.
Firstly, we successfully addressed the cash burn of the first half caused by the higher market conditions. Secondly, we considerably improved our trade working capital position. Thirdly, we supported our refinancing efforts. And finally, we were able to also finance the acquisition of a good quality vessel with prompt delivery adding this way to the company’s growth prospects and operating scale.
As stated in a previous update, we expect that we will continue to emphasize maintaining our liquidity and flexibility to respond to the rapidly changing and highly uncertain market conditions next to deleveraging our balance sheet and improving the fleet cash flow generating capacity.
Lastly, I would like to provide some updates on the refinancing activities. Firstly, during March 2020 we refinanced two loan facilities secured by the leadership and the scholarship having a total amount of funding of $31.1 million. The initial maturities of the two loans were in March 2020 and November 2021 respectively and both were extended to December 2022. The main terms of the facilities remained unchanged, while most corporate level covenant were cancel, as well as certain dividend distractions.
Secondly as discussed previously by our CEO, in June, we achieved a positive outcome on the facility secured by the Geniuship and Gloriuship that was originally scheduled to mature on June 30, 2020. The $29.1 million outstanding under the loan was settled for $23.5 million. The closing of the transaction was completed in July and the resulting accounting gain will be reflected in our third quarter results.
In order to refinance the facility on July 15, 2020 we entered into a new five-year loan facility with an existing third-party lender of the company. The new facility had significant benefits for the company since, a it amortizes through much lower quarterly installments resulting in lower breakeven rates and thus improved free cash flow; and b, is light on covenants and overall restrictions are locked for increased financial flexibility.
As regards to $38 million maturity scheduled for December 2020, we are at this point under advanced discussions with underlying lender to achieve a mutually advantageous solution, which we expect will see the maturity of facility being extended under improved terms.
Also further details — at this point. We have to note that we were able to refinance more than $60 million of maturing the debt during the past six months, delivering always in a timely manner and consistent user guidance.
Following that there will be no other significant senior debt maturities in 2021 and the next scheduled maturity will be November 2022. Given that the positive and improving trend has developed the Capesize market over the past three years, it’s likely to endure over the next two years as well. We expect our cash generating capacity to improve on a full year basis even as quarter-to-quarter performance is likely to be volatile.
This completes my views on financials. I will now turn the call back to Tsantanis who will discuss the market and industry fundamentals.
Thanks Stavros. Moving to the industry outlook. As we mentioned in the beginning of our call, the Capesize sector was severely affected in the first six months of 2020 by various negative factors such as weather disruptions and the outsized impact of the COVID-19 pandemic worldwide. Brazilian iron ore exports, which are very fundamental for our business. In the first half of 2020 were about 13% lower than the already lowest volumes seen in 2019 when there was also the major accident at one of Vale’s key producing areas.
Lower cash flows, however, were not a result of a weakened demand, to the contrary there’s a continued strong demand for core commodities especially iron ore driven mostly by the trillions in infrastructure investments globally and government stimulus packages in China and other countries.
As mentioned earlier from June onwards, trade volumes have recovered to pre-cash levels and the Capesize market has performed exceptionally well. The current spot rate of about $20,000 per day and the FFA level for the rest of 2020 is approximately $21,000 a day.
Looking towards the next year in more detail in 2021, the volume of trade is expected to return to growth of 6.2%. The latest guidance from Brazil’s major iron ore minor, Vale, indicates a gradual recovery in production to almost 400 million tons per annum by 2022 from 310 million tons guidance for 2020. And that implies more than 25% increase in output. At the same time Australian miners continue to expand capacity steadily. We view these developments as major factors for the future growth in demand for Capesize vessels.
As regards to fleet growth, the Capesize order book is at historical low levels. As mentioned in more details in our previous two earnings calls, the International Maritime Organization regulations regarding CO2 emissions are bound to become very restrictive from 2030 onwards and the uncertainty around new vessels and engine designs makes it very hard for ship owners to commit new investments. This is also clearly reflected in the lack of availability of financing for new products.
The positive supply outlook in the face of steady iron ore demand has been the main factor supporting the strong Capesize market performance since 2019. And this is evidenced by the resilience of the Capesize’s rates even during the highly uncertain macroeconomic [ph] environment over the past years. We are confident that it’s going to continue.
Seanergy emphasis on the improvement of the fleet’s environmental efficiency and the establishment of long-term relationships with prominent charters ensure our fleet’s continued commercial success. Seanergy is the only pure-play Capesize listed company with all of our ships taking advantage of the positive market conditions.
Moreover, our strong balance sheet will allow us to capitalize on attractive opportunities at historically low asset values and deliver as always highly accretive transactions to our shareholders.
On that note, I would like to turn the call over to the operator and answer any questions you may have. So Jody please take over.
Thank you very much, sir. [Operator Instructions] Our first question is from the line Poe Fratt from Noble Capital Markets. Please go ahead.
I have several questions. The first one is on the good ship delivery, it sounds like it hasn’t been delivered yet. And then can you highlight when you expect it to be delivered? And then what the actual payment would be ex any deposits that you’ve put down?
Yes. So as you know, the current COVID-19 situation globally has made vessel deliveries very, very challenging. However, as always we have managed to secure right now a certain safe area for the change of cruise and delivery of the ship. And this is expected to happen any day to be honest.
So obviously, the ports that have been closing down automatically but all the ships border portion are still open and that creates cues. And that’s pretty much evident in all Southeast Asia and other parts of the world.
So if I can answer the question Poe, it’s basically any day. I mean it may happen tomorrow or by the end of this week, it may happen early next week. So it’s a matter of a couple of days for the vessel to take delivery. In certain payment we have already submitted the 10% installment deposit, when we accrete the transaction. So the remaining 90% will be paid upon the actual delivery visit. So that’s also going to be in it.
Okay. Great. And then is it – because of the uncertainty, did you include it in your forward cover of 88% of the remaining days covered, or was it excluded from that calculation?
No this is actually excluded for the calculations, excluded.
Okay. And then when you look at the forward cover is there a material change or a difference between the – you said the $21,000 for FFA rates for the rest of the year. Is there a major difference between the third quarter – rest of the third quarter and the fourth quarter average, or is it pretty close?
Well, the fourth quarter is actually a little bit lower than the third quarter. So right now the fleet which is 88% of our vessel base for available days for 2000 and – sorry for the third quarter, fixed at $22,400 a day. Q4 is a little bit lower but that’s how the curve works. So we expect the forward tariff to start rising together with the actual physical market.
Okay. Have you done the same calculation for the fourth quarter you have to manage as far as just because you’re – the way you’re looking at it is based on index-linked time charters too. Have you calculated the fourth quarter coverage at all at an average rate?
Not so much. I mean we have not done so because most – a lot of the spot values and within September, end of September or beginning of October. So I don’t want to be misguiding giving guidance about let’s say 5% or 10% or 15% of days for Q4. So I don’t want to give some sort of guidance for Q4.
Okay. Great. Okay. Sounds good. And when you look at industry supply sort of you outlined it why you thought that industry supply might be muted, whether it’s the 2030 potentially tighter emissions and financing challenges that the industry faces as for as hopefully new capacity coming on to the market. What – do you think there’s a scrapping wave coming once the yards open up? They’ve been it seems like close for the most part over the first half of the year whether it’s Bangladesh, India or Pakistan, do you think there potentially is a pickup in scrapping coming?
There is a material number of ships that are pre 2000 built and these are converted or carriers that in our opinion need to be scrapped ASAP because they have proven to be extremely volatile in various ways. So that needs to be prioritized and exit the market as quickly as possible.
There is of course, certain tonnage that is getting into the market right now. But Poe come to think about it with Brazilian volumes this year, altogether at around 350 million tons including the third-party miners, the market has pretty much stabilized. And given the fact that we expect 50 million or even 100 million tons more trade out of Brazil in the next couple of years and that’s as per the official guidance of this miners. Any new tonnage is very, very well going to be absorbed. And in our opinion there’s going to be a gap in vessel supply. So this is what we see so far.
We don’t want to be optimistic because in this world nobody can give any accurate projections of course. But I wouldn’t focus so much on the supply the supply ships. I would focus mostly on the supply of cargoes. And given a very low year this year, I would expect that to recover significantly in 2021 and 2022.
Great. Thanks. And then Stavros on the new loan facility I haven’t seen the amortization schedule or information of the amortization schedule. Do you have that available, or maybe another way to look at it. Can you look at — can you give us a number or the loan amortization that you’re looking at over the second half of the year by quarter? What loan amortization, do you — will you see in the third quarter and then the fourth quarter?
Hi. Hello, Poe. How are you?
Very well. How are you?
I am good. I am good. So I mean, the amortization of the new interest facility is around $0.5 million per quarter for both vessels, which is basically 50% of the amortization that we had in the previous facility. And now concerning our quarterly principal repayments, these are in line with what you have seen in the previous year. So it’s between $5.5 million. Now there have been some deferrals over the first two quarters on some of our facilities in which we are in discussions with the underlying lenders and we expect to catch up on the deferral, once we finalize the discussions as part of the solutions that we are currently working on. So basically, I mean assuming that we are able to finalize within the third quarter you will see a significant improvement on our total debt figure versus the one of the 30th of June.
Okay. And just a couple more detailed questions. Just it looked like SG&A expenses were up in the second quarter. Is there a reason for that? And then also what’s the outlook for the second half as far as s G&A expenses?
There was a marginal increase in SG&A expenses and that had to do with timing of set and payments to the Greek Tax authorities and stuff that are regular for the staff of the company. That’s about it. It’s a matter of time.
Okay. And then do you think that over the second half of the year, they’ll decline a little bit, or should we just be as flat as far as quarterly SG&A for the rest of the year?
It’s pretty much the same. I mean, we try to spread it over as much as we can throughout the year. But I would generally use the same — pretty much the same rate.
Okay. And then Stavros, would you be able to give us your operating cash flow for the quarter? And then also the working capital changes that you saw during the quarter?
The working capital change the trading capital changes are the ones mentioned on the call it’s around $7 million compared to the year-end figure and it’s around $8.3 million when compared to the end of the previous quarter.
Okay. And then you have a…
[Indiscernible] considerable improvement compared to what we have seen I mean the previous year now whatever — we are standing currently let’s say the working capital position of around 800,000 per se which given I mean the size of the company vessels it’s pretty normal.
Okay. Thanks a lot for your time.
Thank you, Poe.
Thank you, Poe.
[Operator Instructions] There are no further questions coming through. So I’ll hand the call back to yourselves.
Okay. Jodi, once again I would like to thank everyone for participating to our call today and I wish everyone to be safe and good health. And thank you everyone. Thank you.
Thank you very much, sir. Ladies and gentlemen, that does conclude the call for today. Thank you all for joining. You may now disconnect your lines.