Good morning, ladies and gentlemen, and welcome to the Genco Shipping & Trading Limited Third Quarter 2022 Earnings Conference Call and Presentation. Before we begin, please note that there will be a slide presentation accompanying today's conference call. That presentation can be obtained from Genco's website at www.gencoshipping.com. To inform everyone, today's conference is being recorded and is now being webcast at the company's website at www.gencoshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference will be accessible at any time during the next two weeks by dialing 8885831035. I repeat, 8885831035, and entering the passcode 8740274. I repeat, 8740274.
At this time, I will turn the conference over to the company. Please go ahead.
Good morning. Before we begin our presentation, I note that in this conference call we will be making certain forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as anticipate, budget, estimate, expect, project, intend, plan, believe, and other words and terms of similar meaning in connection with the discussion of potential future events, circumstances or future operating or financial performance. These forward-looking statements are based on management's current expectations and observations.
For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday, the materials relating to this call posted on the company's website and the company's filings with the Securities and Exchange Commission, including, without limitation, the company's annual report on Form 10-K for the year ended December 31st, 2021, and the company's reports on Form 10-Q and Form 8-K subsequently filed with the SEC. At this time, I would like to introduce John Wobensmith, Chief Executive Officer of Genco Shipping & Trading Limited.
Good morning, everyone. Welcome to Genco's Third Quarter 2022 conference call. I will begin today's call by reviewing our Q3 2022 and year-to-date highlights, providing an update on our comprehensive value strategy, financial results for the quarter and the industry's current fundamentals before opening the call up for questions. For additional information, please also refer to our earnings presentation posted on our website. During the third quarter of 2022, Genco continued to achieve strong financial results. Our earnings were supported by our sixth consecutive quarter of fleet TCE greater than $20,000 per day, combined with a sequential decline in operating costs. Notably, we declared a dividend of $0.78 per share for the third quarter of 2022, representing an increase of 56% compared to Q2 and an annualized yield of 22% based on our current share price.
We have now paid 13 consecutive quarterly dividends totaling $3.795 per share. Since implementing our value strategy, which is focused on paying meaningful and sustainable dividends throughout the cycles, de-leveraging and positioning Genco to capitalize on compelling growth opportunities, we have declared four quarterly dividends totaling $2.74 per share for a yield of 22%. During the quarter, we continued to successfully execute core pillars of our value strategy as we proactively paid down debt and further reduced our cash flow breakeven levels for the benefit of shareholders. Continuing to pay down debt during a time that we do not have any mandatory debt repayments is consistent with our medium-term goal to reduce our net debt position to zero and has enabled us to achieve significant balance sheet strength and industry-low cash flow breakeven levels.
We believe we have the most compelling risk-reward model in the dry bulk public markets. Irrespective of the broader macro environment, we remain in a strong position to pay sizable dividends to shareholders while seeking opportunities to take advantage of attractive growth opportunities as markets develop. For the third quarter, we drew on our significant operating leverage, generating a solid time charter equivalent rate of $23,624 per day as we capitalized on the cargo and time charter coverage we put in place during a strong Q2 market. The prudent approach of taking forward cargo coverage during a period of market strength and in significant benchmark freight outperformance during Q3 2022, particularly on our minor bulk fleet.
Specifically, our Ultramax and Supramax TCE during Q3 2022 was approximately $7,000 per day higher than the Baltic Supramax Index average for the quarter. Looking ahead, our estimated TCE for the fourth quarter based on fixtures to date represents coverage of over 75% of available days at approximately $20,500 per day, well above current spot rates of $12,000 and $14,000 a day for Capesize and Supramax vessels respectively. It is also significantly higher than our breakeven rate of approximately $9,000 per day. In terms of 2023 market trends, we expect continued low net fleet growth given the historically low order book, which together with IMO 2023 environmental regulations are expected to be supportive for freight rates.
As a direct result of the low order book, demand growth has a low threshold to exceed in order to outpace supply growth to further tighten market fundamentals. At this point, I will now turn the call over to Apostolos Zafolias, our Chief Financial Officer.
Thank you, John. During the third quarter, we continued to record strong earnings and voluntarily pay down debt as we maintain a commitment to reducing financial leverage and our cash flow breakeven rates. On a cumulative basis since the start of 2021, we paid down $270 million of debt or 60% of our debt levels, enabling Genco to achieve a low net loan to value of 11%. Notably, the current scrap value of our fleet is over 2 x our debt outstanding. For the third quarter of 2022, we declared a $0.78 per share dividend, representing an annualized yield of 22%. While revenues remained firm, the 56% increase in the quarterly dividend from Q2 to Q3 reflected lower operating expenses in the latter period.
Specifically, drydock and CapEx declined to $7.8 million from $22.6 million in the second quarter. Furthermore, our vessel operating expenses decreased by 25% to $22.1 million in Q3. Despite the large quarter-over-quarter decline, we continued to invest in upgrading select vessels within our fleet. While the overall operating environment related to cost remains challenging and difficult to predict given various macroeconomic factors, our success in completing the transition of our fleet out of Chinese crews and the progress in upgrading select vessels following our technical manager transition will help in maintaining comparatively lower crew change expenses, including COVID-19 costs, as well as spare and store expenses for the balance of the year. For Q3 2022, the company recorded net income of $40.8 million or $0.96 basic and $0.95 diluted earnings per share.
Adjusted net income for the quarter was $1 per share when excluding unrealized losses on fuel hedges of $1.9 million. Our third quarter EBITDA adjusted was $60.3 million, bringing our nine-month 2022 adjusted EBITDA to $181 million. As of September 30, 2022, our cash position was $71.5 million, which when combined with our revolver availability provides total liquidity of approximately $290 million. This substantial liquidity position, combined with the fact that five of the Ultramax vessels that we acquired through 2021 remain unencumbered, provide significant flexibility for us to continue delivering under the three pillars of our comprehensive value strategy. In Q3 2022, we paid down debt totaling $8.75 million, representing the quarterly run rate of voluntary debt repayment.
Although we have no mandatory debt amortization payments until 2026, we plan to continue to voluntarily delever, as John mentioned, given our medium-term objective of reducing our net debt to zero. Following our substantial deleveraging since the beginning of 2021, our debt outstanding was $180 million as of the end of the third quarter, which resulted in a net debt of $180 million. We note that we also have interest rate caps in place with varying durations through March 2024, which limit our exposure to rising interest rates. As I mentioned, our Board of Directors declared a dividend of $0.78 per share for the third quarter, in line with our value strategy calculation.
Walking down the dividend formula, this resulted from operating cash flow of $60.4 million, less debt repayments of $8.75 million, drydock and ballast water treatment system and energy saving device costs of $7.8 million, and the previously announced reserve of $10.75 million. We expect our expense levels in the fourth quarter to continue to remain lower than the first half of the year as we have completed the transition of our fleet to our new technical management joint venture and completed the heaviest dry docking period of our vessels during the second quarter. We continue to focus on cost optimization while seeking to continue to meet stringent safety and vessel maintenance standards.
In total, the expense and reserve side of the equation are estimated to be approximately $56 million for Q4, and included in that figure is the expected reserve at $10.75 million, which is based on the run rate voluntary debt repayments expected to be made in the fourth quarter, as well as the estimated cash interest expense. I will now turn the call over to Peter Allen, our SVP of Strategy, to discuss the industry fundamentals.
Thank you, Apostolos. During the third quarter of 2022, Capesize and Supramax freight rates counterseasonally declined from Q2 levels, a development that hasn't materialized since 2012. Despite the decline, freight rates remained at firm levels overall, with non-scrubber-fitted Capesize and Supramax indices averaging nearly $14,000 and $20,000 per day, respectively, during Q3. We believe the primary drivers behind this freight rate development were restrictive COVID-related policies imposed in China, the lack of the usual Ukrainian grain export season, an unwinding of congestion in certain ports, and underperforming Brazilian iron ore shipments. At the start of Q4, we saw Capesize rates strengthen to over $20,000 per day for the first time since July as inclement weather in China delayed vessel schedules, resulting in a shortage of tonnage availability.
We believe this type of market reaction to seemingly minor weather-related events highlights the overall tightness in the supply and demand balance prevalent in the dry bulk freight market. We expect this dynamic to persist in the years to come given the low level of capacity additions expected over the next two years. Regarding energy markets, we continue to see tightness globally as more regions turn towards coal imports. We have seen a rerouting of cargo flows as Russia exports more coal to China and India while Europe has sourced more coal from the U.S., Colombia, and Australia. Furthermore, after an expected contraction of steel demand in 2022, the World Steel Association forecasts a return to growth next year, which we believe will support demand for key commodities such as iron ore and coal.
On the grain side, the third quarter typically represents a period in between the South and North American export seasons in which the Black Sea regions augment its shipments.
In July, a UN-brokered deal saw the establishment of a grain corridor to allow for grain shipments from the region, which has resulted in shipments of approximately 10 million tons to date. However, at the end of October, Russia temporarily ceased their participation in the agreement only to rejoin days later. With the initial 120-day agreement set to expire on November 19th, negotiations for an extension continuing, there remains uncertainty around exports from the Black Sea going forward. Regarding the supply side, net fleet growth in the year to date is approximately 2.4%. The historically low order book as a percentage of the fleet of just 7% as well as near-term and longer-term environmental regulations are expected to keep net fleet growth low in the coming years.
Additionally, high scrap prices continue to be attractive to owners of older tonnage, considering the increased level of investment these ships require in light of these upcoming regulations. Overall, we believe these positive supply and demand dynamics provide a solid foundation for the dry bulk market and lead to a low threshold for demand growth to have to exceed in order to improve fleet-wide utilization and freight rates. This concludes our presentation. We would now be happy to take your questions.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one. If you wish to cancel your request, please press star two. Our first question comes from Omar Nokta from Jefferies. Please go ahead.
Hi. Thank you. Hey, guys. Good morning. Just a couple of questions. Maybe just first off, I did want to ask about the Ultra/Supra performance during the quarter. I would say it's pretty strong and comes with the benefit of having scrubbers. At first I thought it was maybe related to the time charters you guys had put in place, but it does feel like maybe you had a pretty solid spot performance. Can you maybe just kind of go over that and how you drove, you know, such upside in the quarter?
Yeah. Thanks, Omar. Good morning. You're correct, our Ultra/Supra sector did very well by about $7,000 a day over and above the industry rate for the BSI for the quarter. If you actually look at the numbers, I think our spot rates on our Ultras were $26,668, and the benchmark was somewhere around $19,000 a day. We did have some period coverage on the Ultra/Supras , but that was actually at a lower rate of $23,878. What actually drove that particular spot rate outperformance was. I believe we talked about this a little bit on the last call.
When we saw obviously the unfortunate situation happening in Ukraine, we were very skeptical as to what grain movements would be happening in the third quarter, which is typically a high season for the Black Sea. We purposely began taking forward coverage for the third and fourth quarter because we, you know, we didn't really believe that there was going to be a lot of grain coming out. Unfortunately, for the grain side, that has occurred. Fortunately for us, we saw it ahead of time and we took action on it. That's really what led to that outperformance. As you know, we have a very active commercial platform.
We had the ability to take those forward cargo liftings, which, you know, we obviously did this quarter, and we've done in the past, and we'll continue to do when the opportunities arise.
Thanks, John. Okay. Yeah, I recall that makes sense. Then maybe just more broadly, wanted to ask about capital allocation as we go into next year. You know, the past couple of years, you've been pretty diligent about paying down debt, reserving cash, and also paying out a healthy dividend. But in 2023, the dry dockings are supposed to come down. I think you have in the release $5.7 million, which compares to, I think, $40 million for this year. You know, given that decline, do you see yourselves adjusting the reserve for 2023 in terms of how much you hold back from the payout?
Yeah. You know, a couple things. You know, maybe I'll go into a little detail and let you know how the sausage is made, so to speak. You know, we look at projections going into 2023, which is always a little bit of a dangerous thing to do to try to actually project freight rates. I think we have a pretty good sense directionally where things will go. You know, trying to predict day-to-day rates can be difficult. You know, we look at a variety of things as we look forward. We look at the FFA curve. We have a series of third-party data providers that we use.
Right now there is a big discrepancy between where the FFA curve is versus the data providers, meaning the data providers are significantly higher. We tend to well, we feel that FFA curve is too low at this point. What we're doing is, you know, towards the end of the year as we get into December, and we will have another board meeting to assess our views on 2023, and at that point, you know, we'll take a look at that reserve as well as what debt, you know, prepayments we want to do. Because keep in mind, we don't have any mandatory debt repayments right now. We will, you know, we'll assess at the end of the year.
My goal is to let the market know where we come out really at the very beginning of next year. We're not going to wait, you know, until we announce earnings sometime in late February. We'll do it beforehand and let the market know both on what we plan on prepaying in 2023 as well as the reserve.
Okay, great. I will look forward to that.
Hopefully that answers your question. You know, look, I agree with you on the CapEx. It's a very light year for us. You know, interestingly enough, 2023, 2024, and 2025 for the overall Capesize fleet are actually very high dry docking years for the fleet overall, but not for us. That's, you know, an industry stat. That could actually be interesting in helping push rates up by having large percentages of the fleet in dry dock for those years.
That's interesting. Yeah. Okay, great. Well, thanks, John. I'll look forward to early next year, and then I'll turn it back into the queue.
Great. Thanks, Omar.
Greg Lewis, BTIG. Please go ahead.
Hi. Thank you, and good morning, everybody, and thanks for taking my question. You know, John, I guess I'll follow up a little bit on Omar's question around capital allocation in a little different way. You know, I think you guys have been pretty upfront about, you know, managing, you know, returning cash to shareholders, but also managing the fleet. I guess what I'm wondering is we've seen a little bit of a step-down in asset prices here, and clearly, you know, at least the sentiment around vessels in Q1 looks pretty challenging. We know FFAs are wrong just as much as they're right. I guess what I'm wondering is, as we kind of manage m-m.
Good balance sheet, still generating good cash flows based on, you know, as we look, you know, ahead and low break-even, could we see opportunities to kind of, you know, whether we call it renewal or expanding the fleet here now that maybe some of the big strength in asset prices have pulled back a little bit?
The short answer is yes, Greg. We, you know, we set this company up from a balance sheet standpoint to always play offense, which I think we have now put ourselves in that position pretty solidly. We definitely have an overall goal of expanding the fleet, even beyond just normal fleet renewal. I think it's a matter of finding the right transaction and it's a matter of the timing. You're correct, asset prices have come down a little bit. I still don't think they actually match where freight rates are today. I also believe that we're probably in a little different situation than maybe what we've seen in years past in that high new building prices still exist, and then I don't think that's going away.
I think asset prices could be a little more sticky, and less correlated to direct freight rates, for the next few years, easily. We think there are gonna be opportunities most likely in the first part of next year. You know, my personal view is that, you know, one of the things that's holding freight rates back is the zero COVID policy in China. I do believe that is going to soften as we get into, you know, probably second quarter or so of next year. By the way, I don't have any more information than anyone else, but that's my personal view. I do think there could be some opportunities as we get into the early part of next year. We'll just have to wait and see.
I mean, we're very focused on buying at the right time. We're very focused on not buying in the very upper historical quartiles in terms of values. You're correct, we've started to come off a little bit, which for us, I think is healthy. I think it will give us some things to look at as we get into early next year.
Okay, great. Thank you for that. Now, I mean, it is interesting as you think about China potentially reopening at some point next year, it would seem like it's a pretty opportunistic time. I did want to follow up because one of the things that we're wondering is, you know, on the asset prices, realizing, hey, the spot market is down. I was hoping you could maybe share a little bit of color and realizing you guys don't have a lot of debt and don't plan to have a lot of debt. Clearly, you know, borrowing rates do impact asset prices as well.
Any kind of sense for where modern tonnage lending rates are now and maybe where they are today versus maybe where they were, you know, maybe six, nine, 12 months ago before, you know, we started to see, you know, interest rates heading higher?
Yeah. Apostolos, do you wanna take that?
Yeah. I think, first of all, just to address our situation, as I mentioned on the call, we do have interest rate caps in place, for various durations through 2024 at a weighted average rate of 94 basis points. In terms of the existing debt, we're pretty well hedged and covered. As far as the overall market is concerned, look, I think that LIBOR and SOFR rates have moved up, quite significantly in terms of the margins that the banks are charging. You know, I mean, I think that margins could range anywhere from 2%-4%, and add another 4% for LIBOR or SOFR, and you're getting a financing cost in the high single digits.
There is obviously the alternative financing providers space, which has higher financing costs as well. You know, for us, it's also the ability to take advantage of the existing balance sheet in terms of
How we can raise that, we have a revolver in place, and when combined with our cash position, that is close to $290 million. We do have five unencumbered vessels that we can utilize going forward opportunistically as well.
Okay. Super helpful, guys. Thank you very much. Have a great day.
Thank you, Greg.
Thanks, Greg.
Thank you. I'd like to remind if you wish to ask a question at this time, please signal by pressing star one. Now next question comes from Liam Burke from B. Riley. Please go ahead.
Yes. Thank you. Good morning, John. Good morning, Apostolos.
Good morning, Liam.
John, a large percent of the fleet for the fourth quarter was fixed, vis-à-vis the spot market, and you fixed it in a declining spot market environment. It was a good call. How do you look at the fleet management going forward as you balance between time charters and spot?
Yeah, no, look, I think, let's take the two segments. Let's take the minor bulk segment and then talk about the Capesize segment. On the minor bulks, you know, we obviously have a very robust commercial operating platform where we're doing, you know, 90% plus of our business direct with cargo owners. We're able to book those cargoes and trade around those cargoes, meaning using, you know, either our ship to lift that cargo, or if it makes sense and we can make more money, we'll use somebody else's ship and charter it in short term. I don't think anything is going to change much there.
It doesn't mean from time to time that we won't do some time charter coverage, whether it's three to five months or four to six months, if it makes sense, for where that vessel is positioned. I would look at the minor bulks as more of a shorter duration. Now, the Capes on the other hand, that's a different animal. What I mean by that is because of the volatility in the Capesize sector, we do from time to time take time charter coverage on a longer term basis, anywhere from one to three years. Right now, we don't think that's the right thing to be doing. We think these rates are too low.
We think, again, there is going to be a recovery that is going to come sometime next year on the Capesize front because of the low, you know, very low supply situation, as well as the demand picking up once, you know, China reopens. When we do see the opportunity to take exposure off the table at certain rates for Capes, we do it. We've demonstrated that in the past with the longer-term charters we've done. We've also done, which have been interesting, some index-related charters on the Capes, where we, you know, we collect a spot rate on a daily basis, but we also have the ability to fix longer term within that, you know, within that index charter.
That has been very successful as well and very helpful, particularly with all the volatility that has existed this year, in particular, you know, in the Capesize sector. It's. I think we've seen more volatility in the Capes this year than we've seen, you know, in the last five, six years. I think we were looking at numbers the other day, and I think, you know, 54%-55% of the days so far this year for Capesize, you know, have moved ±5% on a daily basis. A lot of volatility this year, and some of those spot index deals have been, you know, have worked well and been able to play that.
Super. On the DVOE, you had a lot of one-time expenses in the second quarter. We saw it down sequentially. Is there more to go there, or is it pretty much leveling off at where we are in the third quarter?
Yeah. Look, we're getting to more normalized. We guided for fourth quarter, a little bit lower at $5,150 per day. We feel good about that number. I would say that's getting into a more normalized trend on OpEx. The reality is, you know, inflation has certainly affected us just like you know, just like everyone else. Our spare parts cost more. Our air freight to get those parts around the world has cost more. There has been some inflation there. We've also seen some inflation on the crew side, because we do want to make sure that we're maintaining the best crew that we can get. You know, that means paying a little more than what we did last year.
I would say when we start to get into that fourth quarter number of $5,150 a day, you're starting to get into a more normalized level, and our COVID-related expenses have come way down. That's been a positive thing as well.
Great. Thank you, John.
Thanks, Liam.
Thank you. Ladies and gentlemen, is there any other questions in the queue? I'd like to hand the call back over to our speakers for any additional or closing remarks.
No, thank you very much. We appreciate everyone joining and look forward to speaking to you soon. Thank you.
Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.