Seanergy Maritime Holdings Corp. (SHIP) Q3 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Seanergy Maritime Holdings Corporation Third Quarter and Nine Months 2022 Financial Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be the question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. Many of the remarks today contain forward-looking statements based on the current expectations. Actual results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that can cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2022 earnings release, which is available on the Seanergy website, www.seanergymaritime.com. I would now like to turn the conference over to one of your speakers today, Stamatis Tsantanis. Please go ahead, sir.

Hello. I would like to welcome everyone to our conference call. Today, we are presenting the financial figures for the third quarter and the first nine months of 2022. We're also pleased to announce the distribution of another cash dividend this quarter, our fourth consecutive cash dividend. The second half of 2022 has not leaped up to our initial expectations and the challenging market conditions affected negatively the freight rates of the Capesize sector. We attribute the slowdown to the following factors: China's zero-COVID policy and continued lockdowns, which have resulted in a self-imposed slowdown of industrial production; the conflict in Ukraine that created various trading disruptions, as well as global inflation and a slow economic growth worldwide. Lastly, the unwinding of vessel congestion, improved fleet efficiency and thereby increased effective vessel supply. Notwithstanding these conditions, the third quarter was yet another profitable quarter for Seanergy, thanks to the flexibility of our fleet and our smart commercial strategy. We continue to believe that the market weakness will be short-lived and we expect within the first half of 2023, a sustainable recovery of the Capesize sector with a long-term duration. Regarding our financial performance during the third quarter, we recorded net revenues of $34 million and adjusted EBITDA of $19 million, while net income was equal to $7.1 million. For the first nine months of 2022, net revenues reached $96.5 million, almost equal to the previous year respective period. Adjusted EBITDA was $53.1 million, while net income amounted to $16.7 million. Our daily time charter equivalent for the third quarter was about $2,600, representing a premium of over 50% compared to the average Baltic Capsize Index for the period attributed mainly to our freight hedging activities and some profit selling from our scrubbers. In the nine-month period, we achieved a daily time charter equivalent of $21,000, representing a 25% premium over the BCI. Compared to the corresponding nine-month period of 2021, our time charter equivalent has declined by a mere 10%, which compares very favorably with a 44% drop in the Baltic Capesize Index. Looking ahead to the fourth quarter of 2022, we have fixed approximately 70% of our open spot days at a daily rate of $18,500, which again converts very favorably to the Baltic Index average of $14,700. As regard to TCE guidance for the fourth quarter, at the current FFA rate for December, our full quarter time charter equivalent would be equal to about $16,600. On a more positive note, more and more of our long-term charter contracts move in to their optional periods, so our fleet will be earning a larger share of the profit arising from the use of the scrubbers. This is expected to have an additional positive impact on TCE in the future quarters. In terms of commercial updates, four of our vessels secured new time charter employment or extended their existing agreements since our last call. All these time charters are linked to the BCI and were concluded at equal or increased premiums over the index compared to the expired agreements. In addition, we managed to improve the scrubber profit sharing scheme for scrubber-fitted vessels that were due for renewal. Moving on to corporate and financial developments, we continued our reward commitment to our shareholders with the declaration of another regular cash dividend of $0.025 per share for the third quarter with a total cash dividend payout reaching $22.5 million or $0.125 per share over the last four quarters. This represents a dividend yield of approximately 25% based on the closing price of our shares as of yesterday. This excludes the distribution of United Maritime shares in the summer, which has had a very successful course over the last months. In addition, we repurchased convertible loans, warrants, and shares during the same period, resulting in the total rewards initiatives of $49.2 million, illustrating in fact, our objective to create and distribute value to our shareholders. In addition, we have recently launched a tender offer to purchase our Class E warrants, aiming to reduce the risk of potential dilution from legacy share linked instruments [ph]. I've also personally continued my open market stock purchases, which reflects my strong confidence in the company and its prospects. Concerning our $5 million buyback program authorized at the end of the second quarter, we have not conducted any buybacks to-date as we have prioritized consistency on the dividend distribution front. Our intention is to utilize the whole available amount for the repurchase of our outstanding convertible notes and the Class E warrants through the tender offer in the coming months. On the financing front, as Stavros will continue in a minute to discuss, we refinanced the only remaining 2022 loan maturity that was due in December with a new facility at a considerably lower margin. As a result, there are currently no other maturities until November 2023. We remain committed to continuously improving the capital structure of our company, while ensuring sufficient financial flexibility to deal with the Capesize market volatility and our ability to take advantage of potential opportunities if vessel values correct further. I will now pass the call to our CFO, Stavros Gyftakis, who is going to discuss more thoroughly our financial results. I will come back to the call at the end for the market update. So, Stavros, please go ahead.

Thank you, Stamatis and welcome, everyone, to our earnings call. Let us start by reviewing the main highlights of our financial statements for the third quarter and nine-month period that ended on September 30, 2022. During the quarter, we recorded net revenue of $34 million, decreased from $48.2 million in the same quarter of 2021. This reduction reflects the slower Capesize market conditions that prevailed in the third quarter of 2022 as elaborated previously by Stamatis which caused our daily time charter equivalent to decline similarly percentage-wise to $20,614 from $30,764. Adjusted EBITDA and net income for the third quarter were equal to $19 and $7.1 million, respectively. The adjusted quarterly figures exclude the $2.8 million non-cash gain related to the spin-off of the Gloriuship to United Maritime in July. For the nine-month period, net revenues was $96.5 million compared to $96.4 million in 2021 with increased fleet size compensating for the decline in the time charter equivalent on a year-over-year basis. More specifically, our daily time charter equivalent for the nine-month period was $21,000 compared to $23,400 in the corresponding period of 2021. Adjusted EBITDA in the nine-month period of 2022 increased to $53.1 million from $51.4 million in the same period last year. Net earnings were equal to $16.7 million versus $20.7 million last year. On a US GAAP basis, earnings per share for the quarter and nine-month period were $0.04 and $0.10, respectively, highlighting our profitable performance under Capesize day rates that we consider to be below historical average or mid-cycle levels. Operating expenses, excluding pre-delivery expenses incurred in connection with vessels that entered the fleet in the subset period, were $6,875 per day per vessel in the first nine months of 2022. Continued COVID-related expenses, especially on the crew and forwarding fronts and inflationary pressures on cost of materials and services globally have a direct impact on OpEx. In addition, included in this figure are also the costs related to the transfer of certain vessels in our in-house management platform, which we expect to benefit the OpEx side in the long run. Lastly, the increase is partly driven by increased repair and maintenance costs incurred on the bulk of our maintenance program, which ensures that we retain satisfactory rights operating across our fleet. The priority placed on environmental efficiency requires proactive actions on our part to ensure our ability to provide quality service to our customers with minimal expiry days and over time, such expenses are rewarded with premium charter rates and higher asset values overall. In general, we expect our operating expenses to plateau, if not improve from this point onwards. In terms of CapEx going forward, we are pleased to have already completed our ballast water installation program with 100% of our fleet complying in that zone. We have one vessel dry docking in 2023 with an estimated CapEx of about $800,000 to 1 million. With regards to our balance sheet, we ended the third quarter of 2022 with $25 million of cash and $233 million of senior debt outstanding. The latter translates to approximately $30 million of debt outstanding per vessel secured against an average market value of about $28 million, meaning that the average loan-to-value across our fleet is below 50%. It is important to note that our net debt is covered by the scrap value of our fleet, which amounts approximately $209 million at current scrap prices. Further to this, in the fourth quarter, United Maritime redeemed the Series C preferred shares held by Seanergy, which increased our cash position by $10.6 million in addition to the preferred dividends of about $170,000 received earlier in the same quarter. Turning to our financing activity, since our last update in October, we entered into $28 million loan facility with [Indiscernible] for the refinancing of the indebtedness outstanding other credit facility, which matured in December 2022. The new facility has a term of five years and an interest rate margin of 2.5%, a significant improvement compared to the 3.5% margin of the previous facility. Taking into account the repayment of the old facility, the refinancing resulted in a net cash inflow of approximately $4.4 million. Following this transaction, our next loan maturity is $4 million scheduled for November 2023, secured by one 2011 built scrubber-fitted vessel. We have successfully addressed all remaining loan maturities for the current year, while strengthening further our cash position, which will allow us to navigate through a seemingly softer market environment, which we nevertheless expect to be temporary, while at the same time, we'll continue to evaluate opportunities to expand and renew our fleet. This concludes my review. I would now turn the call back to Stamatis, who will discuss the market and industry fundamentals. Stamatis?

Thank you, Stavros. Let's now elaborate on the Capesize demand and supply fundamentals. As I mentioned in my introductory comments earlier in this call, the Capesize freight market in 2022 proved quite disappointing. The average level of the Baltic Capesize Index for the first nine months of the year was approximately $16,600 with a low of $2,500 per day in late August and a high of $38,200 in May. With the third quarter being the weakest in the year so far, which is unusual, and the weakest third quarter over the last six years. The main reasons were the following: the continued lockdowns in China resulted in a self-imposed slowdown of industrial production. In addition, the conflict in Ukraine that created various trading disruptions as well as the global inflationary pressure and slow world economic growth. Lastly, the unwinding of vessel congestion, improve fleet efficiency and thereby increased effective vessel supply. However, the historically robust vessel supply fundamentals as well as the gradual improvement in Chinese infrastructure -- industry allow us to be confident that the steady market recovery will occur in the coming quarters. From a vessel demand viewpoint, third quarter was a rather old period for the Capesize sector. While trade volumes rose overall, the freight rates of Capesize has declined. As mentioned, a major reason for the lower freight rates was the reduced port congestion globally. Specifically, in China, port congestion declined by an estimated 13% during the third quarter, adding more vessels in the open market, which intend applied pressure on freight rates. However, recent data from China is showing a slow but steady improvement in industrial production, as illustrated by key indicators such as investment in infrastructure and excavator and heavy machinery sales. Coupled with recent news about additional economic support measures and the ongoing easing of the COVID restrictions, makes us feel quite optimistic. Furthermore, coal is expected to continue supporting the Capsize sector with trade flows likely remaining healthy amid Europe's energy supply crisis caused by the Russia-Ukraine conflict. Meanwhile, we expect that the ban of Russian imports during the third quarter will further boost [Indiscernible] demand as Europe has started to increase imports from longer coal suppliers. Moving on to vessel supply, figures are extremely encouraging for the Capesize sector. First, the new vessel order book currently stands at the lowest point of the last 20 years. New vessel deliveries are at a meager 1.72% [ph] per annum, which is lower than the expected scrubbing rate. The spread of a new building contract compared to a 10-year-old ship, the price of a 10-year-old is at a multiyear multiple. So, new orders do not make any financial sense as this huge premium cannot be amortized. Moreover, the uncertainty of the environmental regulations adds an additional reason to the reluctance of new orders. We also see a rising trend in vessel demolition volumes as we have seen 17 units being sent for scrapping this year so far compared to 14 in 2021 full year. One of the most important issues that will affect the vessel supply in the coming years is the introduction of the EEXI and CII regulations in January 2023, which is effectively next month. While the EEXI has a one-off effect, the CII will have a progressive impact of the global fleet. The combination of these regulations will be a continuous speed reduction that will affect one way or another the majority of the Capesize vessels. Hence, the effective vessel supply will start to contract in the following periods. We believe that the effect will be more severe in the next few years and this has been grossly underplayed by a number of market participants. The healthy vessel supply fundamentals combined with the gradual improvement of demand in 2023 will lead to a positive Capesize market in the near future. Seanergy is in a solid position to endure any low points of the economic cycle and very well-placed to benefit from the upside in the market. As a closing remark, I firmly believe that the worst part of a Capesize downward trend will soon come to an end and we should expect much brighter days ahead. On that note, I would like to turn the call over to the operator and answer any questions you may have. Operator, please take the call. Thank you.

Thank you. [Operator Instructions] And the question comes from the line of Tate Sullivan from Maxim. Your line is open, please ask your question.

Hello. Thank you. Good day. How are you? You provided some detail on the scrubber profit sharing schemes in the contracts that you announced so far in 4Q 2022. Can you give more detail to how those work? Are those managed by the contract -- the customer on those contracts, such as Glencore or what are the specific cash schemes within those profit sharing schemes, please?

Hi. Good morning. How are you?

Good. Thank you.

Very well. Thank you. So, first of all, the agreement -- the initial agreement was signed back in 2019 and we had an initial period that is now coming to an end and we're getting into the optional period that the charters have the option to extend the contract. Now, in the optional period, the Seanergy has profit participation of about 50% on all the scrubber installations that the charters paid for back in the day, 2019 and 2020. So, now we're going to start to see the benefit -- the real benefit without having invested for those scrubbers and the equity ourselves. So, we estimate at a spread of about $250, the profit to be in the region of $2 million to $2.5 million per quarter arising from the use of the scrubbers. So, it's quite substantial for the company, especially for something that we didn't allocate in initial capital for.

Thank you. And then on the warrant tender offer, you announced earlier this week, should we look at that as a form of repurchases? Or what made you decide to go forward on that tender offer?

Well, it's part of our overall repurchase and buyback program. So, we're using some capital to repurchase back some remaining legacy warrants that are outstanding and may have some dilutionary effect in the future. We don't really expect them to have. So, it's a good opportunity to clean up the capital structure without allocating any significant capital of that. So, it's basically among the buyback initiatives of the company to clean up the capital structure as much as we can.

Okay. And then did I hear you mentioned that have you tracked heavier excavator and heavy machinery sales in China? Can you give more -- where are those data points from? Is that what you're referring to?

Yes, we do. I mean we have local intelligence in China from various sources and we see that the sales of excavators and heavy machinery has been on the rise, which means that the government is funding infrastructure projects more and more. And we believe that this effect combined with the -- hopefully, soon reopening of the economy is going to drive up infrastructure and new construction investments over. So, we're very optimistic about that. We see all the signs in place. All the listed companies selling heavy machinery apparently, they're rebounding significantly. As you can see, all the construction companies listed on the Asian markets have been rising anywhere between 50% to 100% the last month or so. So, the signs are there. We just need to see that's happening in action before any real increase happens on the rates.

And last for me, I mean, with the outlook for the rates to start to recover and those data points from China in 2023, can you talk about your opportunity to fix more rates for the first half of 2023. I mean can you fix rates today above cash breakeven levels? Or can you provide more detail on your strategy for fixing rates going into 2023?

Yes. We are -- we strongly believe that the first half of 2023 futures are very, very low. So, they're gross lever. So, in our opinion, it doesn't make any sense to fix at this very low rates, which we believe will -- the actual market will be much higher than those presented on the forward rate. So, we believe that now there has been a big over-sell in the market for various reasons that I don't want to comment on and I strongly believe that we will see much stronger rates, much higher rates than those denominated by the future contracts in the first half. So, to answer your question, is we will try and place [Indiscernible]. We have the premium on the BCI on the majority of our ships. We have the scrubber premium as well and we are all very reluctant here as management and BOD the company to commit at these very low levels.

Okay. Thank you, Stamatis.

You're very welcome Tate. Thank you.

Thank you. Dear speakers there are no further questions. I would now like to hand the conference over to our speaker Stamatis Tsantanis for closing remarks.

Well, once again, I would -- is there another question operator?

Yes. Yes. Excuse me. So, we have another question come from Tate Sullivan. Just give us a moment.

Of course, no problem.

Tate Sullivan, your line is open, please ask your question.

Thank you. Thank you for letting me ask a follow-up. I think Rio Tinto yesterday guided to unchanged iron ore production for 2023. I'm not sure on the timeline for Vale to get 2023 guidance. But I mean, if Vale comes out and also keeps production guidance -- production guidance unchanged at 2022 levels, would you view this as positive for the market or probably to -- how do you look at those data points before?

Well, yes. I mean, first of all, 2022 iron ore production was below the initial estimates and I'm talking about the overall production globally. For various reasons, Vale underperformed once again, but if they manage to produce and export the same quantities in 2023, the key in the game will not be whether demand is going to be stable or it's going to be a bit higher or a bit lower. The key in 2023 will be the fact that the supplier vessels, the effective supply is going to start to gradually reduce. Let me remind you right now that there is basically no congestion globally. So, the vessel turnover in all the major ports is very fast and very efficient. And right now, the rates -- one of the main reasons why the rates are so low is because there's no congestion and everything is operating with high efficiency. So, the key for 2023, assuming the demand is going to remain the same, will be the beginning of the reduction of the effective supply of vessels. This is going to start to create a long-term effect on the rate -- positive effect on the rates, which is going to last for years because that is going to have a progressive result. It's not a one-off thing. So, very confident that once the new regulations start to kick-in in the beginning of 2023, we will start to see rates start picking up because the effective supply of the vessels will start to reduce gradually over the next quarters.

Great. All right. Well, have a great rest of the day. Thank you.

Thank you, Tate. Thank you.

Thank you. Dear speakers, there are no further questions. Please continue.

Okay. So, I would like to thank once again everyone for joining our call today. Like I said before, Q3 has not lived up to our initial expectations. But nevertheless, Seanergy manage to perform much better than the Baltic average and we expect that the same is going to happen in Q4. So, thanks, everyone, for participating in our call and looking forward to catching up with various good news in the future. Thank you.

This concludes today's conference call. Thank you for participating. You may now all disconnect.

Maria, thank you very much.