Earnings Call: Q1 2021

May 25, 2021

Earnings release

Thank you for standing by, ladies and gentlemen, and welcome to the Cinergy Maritime Conference Call on the Q3 2021 Financial Results. We have with us Mr. Stamatas Fontanas, Chairman and Chief Executive, ESSDA and Mr. Sverdas Giftakis, Chief Financial Officer of the company. Apologies. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. Forward looking statements. Please be reminded that the company publicly releases its financial results, which are available to download on the Synagio website at synagio maritime.com. If you do not have a copy of the press release, you may contact Capital Link at 212-661-7566, and we will be happy to send it to you. Before turning the call over to Mr. Santano, 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 21A of the Securities Exchange Act F1934 as amended, confirming future events and the company's growth strategy and measures to implement such strategy. Words such as expect, intend, 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 the operations outside the United States, challenging rules and regulations applicable to the shipping industry and other risk factors included some 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 expects to disclaim any obligation or undertaking to release publicly any updates or revisions to any forward looking statements and concern 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. Santenas. Please go ahead, sir. Thank you, Alberto. Hello, everyone, and thank you for joining our call. Today, we will discuss our results for the Q1 of 20 21, and we will provide you with a general update of the major corporate events that have taken place. After going through a transformational year in 2020, where synergy laid a solid foundation for the future through several important transactions. From the beginning of 2021, we are focused mainly on positioning the company optimally to take advantage of the strong drybulk market. I will now highlight the following important milestones for the company. Kinetics fleet will reach 16 Capesize vessels after agreeing to acquire 1 more Capesize ship since our last update. This represents a 50% fleet increase compared to the end of Q3 2020. All vessels acquired are built at the highest quality CPIs in Japan, and 2 of them come with exhaust trash scrubbers installed. On a fully delivered basis, the market value of our fleet should be approximately $412,000,000 against debt outstanding at about $207,000,000 A total investment of 100 and 4,300,000 has been made in 2021 for these purchases and total new debt of approximately 42 point €1,000,000 will be added to our balance sheet at the end of Q2 2021. This represents a loan to value of approximately 33% on this new 5 pesos. The weighted average interest rate of the new debt is about 3.1%. As we discussed at the national developments, we have entered 4 new period employment agreements. 3 of these time charters are index linked benefiting directly from the strengthening of the market. 1 is at a fixed rate of 31,000 barrels per day for 12 to 18 months. We are currently on course to see the best year for Cape Sasmakkirk in many years. Our fleet achieved a Q1 20.21 daily 10 setter equivalent of $16,219 per day increased by 9.2% from the Q1 2020. Adjusted EBITDA was equal to CHF 7,900,000, slightly up from CHF 1,000,000 in the same quarter last year. At the Nenemt, more than 95% of our fleet base for the 2nd quarter are fixed at the level of approximately $22,400 per day, and we consequently expect further sequential improvement in our financial performance. Cash and cash equivalents as of March 31, 2021, stood at $54,400,000 compared to 23,700,000 as of December 31, 2020. Debt outstanding at the end of the quarter was approximately 131,500,000. Sehall's equity at the end of the Q1 of 2021 was 138,100,000 compared to 95,900,000 dollars at the end of the Q4 of 2020. Let's move on to discuss the most important developments since our last earnings call. On May 10, 2021, we took delivery of our Cape vessel, Hellaship. The ship was built in 2012 in Japan. And this was the very first delivery of the 5 Cape sizes agreed to be acquired within 2021. The ship was fixed with a major setter and a 11 to 15 month index linked tent setter. During the same week, the company also took delivery of the flagship, which was built in 2015, also in Japan. The vessel has commenced a time center agreement with Calvio. The vessel will earn an index linked rate for a period of 5 years. And as mentioned before, cargo will fund the installation of energy saving devices on the ship in order to improve its environmental performance. In June 2021, we also expect delivery of a trailer ship and the pattern ship, which were acquired in February March 2021. These are our 3rd and 4th new acquisitions for the year. As a reminder, the vessels were built in 2006 2010, respectively, at reputable Japanese yards. Our 5th and final acquisition for the year so far is a top quality 2012 built Japanese Cape vessel. This also is fitted with an exhaust gas scrubber system. We expect the delivery of our 16th vessel in August. As a reminder, especially surveillance balanced water treatment system installation for all vessels was completed by the previous and current owners and also we do not anticipate incurring significant capital expenditure for at least the next 2 years. Moreover, 2 vessels come fitted with an Adjust Test Scrubber system. Vessel values have been on a clear upward trajectory the past months. And given the spot and tense aftermarket conditions, I strongly believe that further improvements are well within reach. Moving on to a summary of our loan facilities. We have reached definitive agreements on 3 new financing transactions. Our CFO, Stavros, will go into more detail on this shortly. But the total amount permitted is approximately 73,500,000 and the average interest rates will be approximately 3.1% margin over level. This represents a much lower cost of capital than the existing loan facilities that were prepared in the past few months. Synergy is today in an optimal financial position to capitalize on improving market conditions. I'll now turn the highlights from our financial statements before discussing some of the important financing transactions that have taken place. During the Q1 of the year, we experienced significant counter seasonal market strength. Even as the Q1 is traditionally the weakest year, the Baltic Capesize Index averaged approximately 17,000 per day compared to only 4,500 in the Q1 of last year. Against this positive backdrop, Synergies daily time charter equivalent improved from approximately 8,500 to approximately 16,200 during the quarter, which led to a 99% increase in net operating revenues from $7,500,000 to approximately $16,300,000 Daily vessel operating expenses were stable compared to last year at approximately $5,500 On a sequential basis, it is worth noting that daily OpEx improved from $6,100 in the Q4 of 2020 and we are optimistic about achieving further improvement as the adverse effects of the COVID crisis have started dissipating. EBITDA for the quarter was equal to 6,700,000 dollars as opposed to approximately $1,000,000 in the Q1 of 2020. Adjusted EBITDA, which excludes non recurring, non cash charges was $7,900,000 The Kipsis market has already registered a notable consecutive improvement from the already strong levels of the Q1, and our daily TCE for the Q2 is expected to be approximately 23,000 as seen from the forward guidance in our press release. Our fleet's daily cash breakeven rate per operating day for the rest of 2021 is expected to be equal to approximately 12,500,000 dollars 13,000 per day, excluding CapEx, and we therefore expect our significant operating leverage to result in continued profitability improvements for the rest of the year. Moving on, I'm pleased to note the large decrease in interest and finance costs during the quarter. Total interest and finance expense was equal to $4,400,000 compared to $5,700,000 in the same period of 2020. The figure includes large non cash expenses related to the accelerated amortization of deferred finance charges resulting from the early repayment of some of our loans in February 2021, as well as amortization expenses related to our convertible notes. Cash interest expenses were approximately 2,700,000 dollars down 38% from 4,200,000 in the Q1 of 2020. Daily cash interest expenses amounted to approximately $2,700 in the 1st quarter compared to $4,600 in the same quarter of 2020. Daily cash interest costs to continue during 2021. For 2022, we expect that cash interest expense should be at or below $2,000 per day per vessel on the back of the increase in our fleet size. I'm particularly happy to report that the financial restructuring, the early retirement of expensive debt and its replacement with low leverage, competitively priced loans is having an immediate and visible positive effect on our financials. Moving on to discuss our balance sheet highlights. Synergy ended the Q1 with a cash balance of 58,000,000 dollars up from $28,600,000 at the end of 2020. Total debt outstanding was approximately $131,500,000 dollars of which $127,500,000 represents senior secured liabilities. The book value of our equity was equal to $188,000,000 almost doubling from $95,000,000 as of December 31, 2020. The significant improvement in the company's financial health during the Q1 came as a result of firstly, the accretive equity offering that was completed in February secondly, the early retirement of expansion and high leverage loan facilities as they address the significantly improved market condition. While the first two are self evident, I wanted to note that the rapid increase in vessel values over the Q1 has led to a sharp disconnection between our vessels market value and book value. As a result, our self orders equity on a market value adjusted basis is even higher than the figure on the balance sheet. After considering the recent vessel acquisition and the amortization schedule of our existing and prospective loan facilities, we expect that the pro form a debt position of the company at the end of the second quarter should be about 207,000,000. The fleet market value on a fully delivered basis should be approximately 412,000,000. Dollars Regarding the important financing transactions concluded in our last update, the company has accrued approximately 73,500,000 in vessel financings and is currently in advanced discussions for an additional 31,000,000 facility that we expect to be able to announce in more details very soon. More specifically, on April 22, we entered into a 15,500,000 credit facility with a GN Baltic Bank secured by the tradership and the goodship. The tail of the facility is 4.5 years and the interest rate margin will be 4%. On May 11, we entered into a sale and lease per transaction with Hagil to partially fund the acquisition cost of the flagship. The financing amount is $20,500,000 at an implied interest rate of approximately 2%, only fit for 5 years. On May 20, we entered into a $37,500,000 facility with AlcoBanc for the financing of the leadership, the squireship and the lordship. The purpose of the facility is to refinance the $25,500,000 leadership and squireship The earliest maturity of the facility will be in December 2024 and the interest rate will be equal to LIBOR plus 3.5%. I'm very pleased to note that through this transaction, the maturity of the Leadership and Squareship facilities was extended by 2 years from 2022 originally to 2024 now. Being able to address debt maturities proactively is an important indicator of the improved financial health of our company. The terms that Cinex is able to obtain on financing transactions are quite competitive at the moment, and we expect this to be an important factor facilitating our success as a company in the following years. As an indication of this competitive terms, the all mean class breakeven rate of our fleet excluding CapEx is now expected to be close to $13,000 per day in 2022 and onwards. This is a significant improvement on what the company was experiencing in previous years and put synergy on a more sustainable track. Lastly, concerning the debt levels that have been added through the Q2 in our balance sheet, pursuant to the update discussed previously, I wanted to note that we have taken a very conservative approach on leverage and therefore we are confident that the sustainable leverage levels seen in this report will not be distorted. To provide some more color, after concluding all the financings currently contemplated, the net debt that will be added and the post COVID recovery that is driven by fiscal spending and infrastructure construction in many parts of the world. As regards to the Q1 of 2021, the Baltic Capesize Index averaged about $17,000 per day and saw a significant improvement in sentiment after a relatively weaker Q4 2020 when the market was negatively affected by operational in Brazil. Capesize rates during the first half of sorry, the Q1 of 2021 ranged from a low of about $10,000 a day to a high of $26,500 a day. This performance was truly exceptional considering the weak seasonality. Global demand for steel and iron ore remains very strong as China continues record volumes of steelmaking. In addition, Brazil iron ore exports are clearly recovering from the low levels of 2019 2020, and Vale recently stated its target of achieving $400,000,000 of iron ore production by the end of 2022. This compares very favorably with the 320,000,000 tonnes in 2021. And given the long distance voyages out of Brazil, we generate substantial incremental Capesize demand. In addition, coal shipborne volumes are staging a very strong recovery from the extreme COVID induced weakness of 2020, and the tensions between China and Australia have helped coal ton miles rise even more. Having in mind that Q1 is traditionally the weakest quarter for Cape vessels, we expect to see an even stronger market for the rest of the year. We're particularly happy to see this optimistic sentiment reflected in 1 year terms at the rates as opposed to being limited to spot earnings. Indicative 1 year time charter levels for a standard Capesize are currently around $28,000 per day, which is a big increase from $22,500 a day, which we reported in our last earnings call in March. Capesize asset values have risen by more than 45% since the end of 2020. Looking at vessel supply over the next 2 years, we're very optimistic as the upcoming environmental regulations will have a positive effect in the market. The immediate reduction of emissions that will be enforced in 2023 will lead to the speed reduction of 10% to 15% of the global fleet. This will result in an obvious supply squeeze that could lead to an impressive further rise of the market. The effect will be even greater when adjusted for the larger ships. In addition, the uncertainty surrounding the future prevailing market marine technologies in order to comply with the 2,030 global shipping emissions has led to the lowest newbuilding order book in decades. Going back to my initial point, we have entered into a super cycle that is expected to be sustainable for years to come. Concluding, over the last years, we have carefully positioned Synergy to take advantage of this super cycle. Our high quality fleet with full market exposure is expected to greatly benefit from this market. We're fully committed to creating strong shareholder value. With that note, I would now like to turn the call over to the operator and answer any questions you may have. Thank you very much. Operator, please take the call. Thank Your first question comes from the line of Tate Sullivan from Maxim Group. Please go ahead. Your line is open. Yes. Thank you. Good day. Doug, thank you for all the details on 2Q 'twenty one guidance with the debt at the end of the quarter. But can you talk a little about 3Q, 2Q May 24th? I mean, so just to recap, it's $207,000,000 of debt by the end of the quarter with $412,000,000 market value to acquired vessels. Is that what you said earlier, please? Hi, Tate. This is Fabio. Thanks for your question. Yes, actually, this is the figures, the figures that you mentioned. I mean, we have one facility, one financing that is currently being negotiated, and we're close to completing that. Assuming that this proceeds, our pro form a debt will stand at €207,000,000 And following the delivery of all the vessels that we have recently announced, the market value of the fleet will be at around €412,000,000 €417,000,000 So yes, that's the picture. No, thank you. That helps for forecasting on pro form a for the ships. And then just can you give an update? And it was great you included the detail on the shares outstanding after the to the December SPA, please? Hi, Tate. This is Thomas. The answer is no. There are no additional warrants outstanding at this kind of levels with Zalco. So we've done well. Great. And it sounds like and I can do the calculations after it, maybe follow-up too. But with 3 about a 3% spread on your new debt, can you just give a and you commented on the cash interest costs. I think it was about $3,000 $2,000 a little less than $2,000 per day per ship. I mean so all in, what do you expect your interest expense to decrease to pro form a for all the acquisition of the ships? Or better to is that better to follow-up later? Everything all in, including LIBOR, we expect to be around 5%, including LIBOR. Okay, great. Okay. Thank you for those follow-up details. You're very welcome, David. Thank you. Your next question comes from the line of Pafat, Noble Capital Markets. Please go ahead. Your line is open. Good morning, Johannes. Good morning, Sabers. I was hoping if you could just clarify how you're going to handle the FF pace that you've locked in from the Q2 and whether you're going to report the CCE average of $22,400,000 Or is it going to be higher and then you're going to back out below the line the FFAs? Well, it's actually it's been reported on a blended average. So that's why we just provided guidance that at the end of Q2, having known what we knew at the time, we decided to hedge very few of our ships at this kind of levels, which might seem very low today. However, as compared to the information we had on the FX at the time, especially the way that the Q2 always works, I mean, it was a multiple of what the FX for Q2 always works. So we thought at the time it was a good hedge. Of course, we've proven not to be so correct about that. Still, the majority of the fleet operated at very, very decent levels at around 28,000. So the blended overall average is about 22,000, 23,000. This is where we expect it to be for Q2, maybe a bit more. Okay. Yes, I was asking more about how you're going to report it. So, Stamatis, do you have any FFAs locked in for the Q3 at this point in time? And We do, yes. We expect the Q3 to be substantially higher than that. First of all, we're going to have 1 ship fixed for 12 to 18 months running at $31,000 So the one fixed ship will run at substantially higher levels. And then we have an average of about $25,000 on 4 other ships locked in for Q3. So we expect the Q3 figures to be, more than what we know right now, we expect it to be substantially higher than Q2. Okay. That's helpful. So you have, I think, a total of 6 tapes that are subject to where you can use FFAs to lock in. So you've locked in on 4 of the 6 for the 3rd quarter? For the Q3, we're going to have 1 fixed 12 to 18 months and 5 more converted, 4 at an average of 25 and 1 converted at 33. So like I said before, it's going to be substantially higher than that. Okay. And then is anything fixed into the Q4 beyond that 1 year time charter at 31,000? No, no. We have not fixed anything for Q4. Okay. So you're completely open. Great. And then can you just, maybe walk through how we should be And then could you highlight how much you're going to spend on acquisitions, whether it's advances or actually closing the acquisitions in the Q2? So in the second quarter, we're going to pay around $90,000,000 And we have drawn debt of $100,000,000 less €25,000,000 which were used for the acquisition. So we have added debt of around €75,000,000 We have paid €90,000,000 for new vessel acquisitions. Okay. And then just Finally, what is more important for you all to know, I mean, is that currently we have around as we speak now, we have around €52,000,000 53,000,000 in cash. We have loan commitments of around €38,000,000 And we have around €50,000,000,000 50 €2,000,000 of outstanding commitments for our vessel acquisitions. So pro form a, after all the new debt arrangements have been concluded and after we are taking delivery of all the ships, including the 16 ships that is Tomat will discuss about it previously, we're going to end up with a cash position of around €35,000,000 to €40,000,000 So basically, the acquisitions are well funded, and there is significant cash buffer in the balance for the company. So, Stavros, just to be clear that you expect pro form a cash at the end of the Q3 to be 35,000,000 dollars It's going to be around $35,000,000 to $40,000,000 end of Q3, so much again, plus one unlevered ship. So the final ship will not have leverage for now. So if we decide to have another 30% to 40% leverage on that ship, then the cash balance is going to be around $15,000,000 $20,000,000 more. Okay. And then the $207,000,000 that you referenced for the pro form a debt, does that include the convertible? Or is the convertible over and above that? It does not include the convertible. We are in the process of hopefully towards the end of the year with the strong cash flows of the company to aggressively reduce that as well. Okay. And then just to clarify to the comments on the number of shares outstanding, what the $8,000,000 warrants that were exercised by Gelco, those brought in $5,600,000 was that in the first quarter or the second quarter? That was in the second quarter. Okay. And then they did convert sorry. Yes. Paul, that was basically a legacy thing that was negotiated back in December, and it was signed in the beginning of January of this year without having no knowing what kind of performance. I mean, at the time, when the stock was, what, dollars 0.50 obviously, providing convertibility at $0.70 or $1.20 appeared to be significantly higher. So that's kind of a legacy situation that we're done with that now and there's no more dilution to Genco expected to happen. Yes. No, I just wanted to make sure that I was accounting for that and try to figure out the first quarter. In April, they converted JELCO converted $3,000,000 of debt into essentially shares that $4,300,000 My understanding there was also warrants issued of a like amount at Yes, yes, of course. There are full units, of course, yes. Yes. So there's, Gelco still has $4,300,000 roughly in warrants that they can exercise at $0.70 Yes. But these are all unregistered and they cannot be registered prior to Q4. So these are not covered by any registration statement nor did we expect to file any registration statement whatsoever to register those shares. So if they become available for sale, it's going to be not before another 5, 6 months. Yes. I just wanted to make sure that I was again, I had full clarity on what still potentially could be issued looking at the rest of the year. And I thought you said that there weren't any warrants