Seanergy Maritime Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 6 speakers on the call.

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Synergy Maritime Holdings Corp. Conference Call on the Q3 ended September 30, 2023 Financial Results. We have with us Mr. Samadhi Santanis, Chairman and CEO and Mr. Stavros Gistakis, Chief Financial Officer of Synergy Maritime Holdings Corp.

Operator

At this time, all participants are in a listen only mode. There will be a question and answer session. Please be advised that this conference call is being recorded today, Tuesday, November 14, 2023. The archived webcast of the conference call will soon be made available on the Synergy website, www synergymaritime.com. Many of the remarks today contain forward looking statements based on current expectations.

Operator

Actual results may differ materially from the results projected from those forward looking statements. Additional information concerning factors that can use the actual results to differ materially from those in the forward looking statements is contained in the Q3 ended September 30, 2023 earnings release, which is available on the Synergy website again, www.synergy maritime.com. I would now like to turn the conference over to one of your speakers today, the Chairman and CEO of the company, Mr. Stamatid Santannis. Please go ahead, sir.

Speaker 1

Thank you, operator. Hello. I would like to welcome everyone to our conference call. Today, we're presenting the financial results for the Q3 and 1st 9 months of 2023, while also announcing the distribution of another cash dividend. Starting with our commercial performance, I'm pleased to report that in the 3rd quarter, Synergy achieved a daily timeshare equivalent rate of $15,300 once again over performing the Baltic Ship Size Index by around 14%.

Speaker 1

This is a result of our strategic investment in improving the energy efficiency of our fleet where the majority of our ships is obtaining premiums over the index as well as our effective hedging strategy, where we locked in about 30% of our fleet in fixed rates exceeding $20,000 a day. Concerning the performance of the Capesize market, despite the strong demand for Therefore, vessel utilization improved, expanding the effective fleet supply, which in turn has put severe pressure on the spot market. As congestion found bottom in July August, the increased cargo flows resulted in significant supply tightness, which led to a recovery in day rates to levels exceeding $30,000 per day in October. Having entered the Q4 with 70% of our days taking advantage of the higher market, we're well positioned to benefit from the recent recovery of our sector. Notwithstanding the overall weak Cape market conditions, which impacted our financial results for the quarter, our cash reserves remain at satisfactory levels.

Speaker 1

On that basis, our Board of Directors has approved another consistent quarterly cash dividend of $0.025 per share. Regarding fleet developments, on October 24, we took delivery of our 1st Newcastle Max vessel, which was renamed Titan Ship. The vessel was acquired through a 12 month bareboat structure with a purchase option for Synergy at the end of the charter. The vessel commenced an index linked employment with a 1st class charter for a period of about 1 year at a substantial premium over the Baltic Capesize index. This is actually the highest premium achieved by any vessel of our fleet.

Speaker 1

The addition of the Titan ship will further strengthen our ability to over perform the Capesize Index. Combined with its attractive acquisition price, it would likely produce higher returns on capital. In terms of other commercial developments, we have extended various existing time charters of our vessels, while more and more ships get the increased benefit of the scrubber equipment installed in 2019 without us paying for it. Similarly, within 2024, we expect more vessels to enjoy improvements in the profit sharing terms on their employment, which would provide an additional tailwind to our TCE. In terms of guidance for Q4, about 60% of our total fleet days have now been fixed at the daily TCE rate of $21,600 When applying the recent FFA rate of $15,700 for November December on our open days, the average TCE rate for the period is expected at approximately $19,500 On a more optimistic note, if we apply the average Capesize spot rate since the beginning of Q4 2023, then the resulting TCE for the period is projected to be approximately $22,800 per day.

Speaker 1

Moving on to capital returns, our Board has authorized a distribution of another regular quarterly cash dividend of $0.025 for the 3rd quarter, which brings our total distributions since the commencement of our dividend program to about $1.36 per share, representing approximately 26% of our recent closing price. Returning capital to our shareholders will remain an important priority for us and I'm confident that our healthy balance sheet and lower refinancing needs over the next 2 years will allow us to continue in the same path. That concludes my summary of Q3 developments and I'm now going to pass the floor to Stavros, our CFO, before returning to discuss the current status and outlook of the Capesize market. So, Stavro, please go ahead.

Speaker 2

Thank you, Samadhi, and welcome everyone to

Speaker 1

our 3rd earnings call for

Speaker 2

2023. Let us start by reviewing the main highlights of our financial statements. Our net revenue in the Q3 amounted to $24,500,000 dollars while in the 9 month period it reached $70,800,000 Definitely a drop compared to the expected figures of 2022 as the freight market during the quarter remains subdued. However, we are pleased that we have outperformed the market in terms of time charter equivalent as Amadeus mentioned before, highlighting synergies versatility in all market conditions. Meanwhile, our adjusted EBITDA was $9,500,000 in the quarter $29,100,000 in the 9 month period.

Speaker 2

Finally, we recorded a net loss of $5,000,000 in the 3rd quarter, expanding the net loss for the 9 month period to $8,500,000 dollars It is essential to consider the inflationary conditions under which we currently operate as they have had an impact on our overall costs. At the same time, the advantage we generally gain from vessels equipped with scrubbers was reduced in the Q3 because of the temporarily narrowing gap between high and low sulfur fuel prices. We are optimistic that our freight heating strategy along with the already observed improvement in spot rates in the recent months and the widening fuel spread along with improved profit sharing scheme on some of our vessels should result in improved financial performance in the current quarter. Moving on to our balance sheet, our cash position remained practically unchanged at $22,000,000 This allowed us to continue returning capital to our shareholders by maintaining the regular dividend distributions. Now on the debt front, aggregate balances dropped to $223,000,000 with our market value adjusted loan to value ratio remaining at 52% despite the correction in vessel values.

Speaker 2

We consider such debt levels to be sustainable while after the $54,000,000 refinancings completed during the first half of the year, we have no debt maturities, no balloon payments at least until the Q2 of 2025. This arguably illustrates the financial health of our company and our ability to weather the volatility of the market by managing successfully our short term liquidity needs. As regards to our cash interest expense, these were increased in 2023 so far due to the high interest rate environment. However, our recently financing transactions at improved pricing terms did partly mitigate the steep increase in base rates. With regards to new transactions, as briefly mentioned by Stamatis, we have recently completed the bareboat agreement for our 1st new CastleMax, the Titan Ship.

Speaker 2

Following a down payment of $7,000,000 splitting 2 equal installments paid in the second and the fourth quarter, the agreement provides for a daily rate of $9,000 over the 12 month period of the Berbo Charter, which will not burden our cash breakeven. At the end of the Berbo charter, we have a purchase option of $20,200,000 which we expect to exercise. In aggregate, the acquisition cost for the vessel following exercise of the purchase option will be approximately $30,500,000 which we feel is very competitive. This concludes my review. I would now turn the call back to Samaty, who will discuss the market and industry fundamentals.

Speaker 2

Samaty? Thank you, Saburo.

Speaker 1

Since the beginning of 2023, a significant increase has transpired in Capesize demand as ton miles relating to iron ore, coal and bauxite have increased substantially by up to 8%. In comparison, the size of the Capesize fleet has increased by approximately 2%, which clearly highlights the favorable fundamentals in the drybulk market. Despite the healthy nominal supply and demand balance, the freight market did not respond as positively as initially anticipated, quite the opposite actually. The main reason was the increased efficiency of the Capesize fleet and the significant decrease in congestion, which in turn added considerably to the effective supply of available vessels. Additionally, as highlighted in our previous earnings updates in August, we've also observed an increase in deadweight adjusted vessel speed resulting mainly from the operating vessels of the large ore carriers.

Speaker 1

This we believe is contradicting the emphasis placed on the reduction of the industry's carbon footprint. Going back to the reduced congestion matter, during the 1st 9 months of the year, the levels of port congestion fell to historical lows and reached a multiyear bottom in the summer months. Since the end of August, the reversal of this trend has reduced availability of vessels with congestion starting to return closer to long term averages. As a result, Capesize charter rates staged an impressive recovery since the lows of the 3rd quarter rising to levels exceeding $30,000 a day in October from rates as low as $8,000 a day recorded earlier in the summer. Looking ahead, we remain positive about the prospects of a dry bulk market based on the lowest newbuilding order book of recent decades and limited CPR availability.

Speaker 1

Capesize fleet growth is expected to be lower than 1% in each of the 2 years the next 2 years, suggesting that the expected trade growth will support high fleet utilization and healthy charter rates. Additionally, any curtailment of fleet supply resulting from stricter environmental regulations and temporary disruptions have the potential to improve the market balance significantly. Moving on to Capesize demand, China iron ore imports until the end of September were up by 6.7% year on year, while inventories were down about 20%. Low iron ore inventories are driving increased demand for iron ore as steel production has also been in positive trajectory. Thus, we're seeing strong momentum in export demand in industries outside the local property market in China.

Speaker 1

Long haul iron ore exports from Brazil had a significant 7% growth from last year and we are optimistic about the prospects for future increases based on high profit margins. As regards other Capesize commodities, coal seaborne trade is up about 6.5% year on year according to research, driven by a large increase in China imports. There is a massive order book of coal fired power plants in China as well as the Southeast Asia in general. So increasing coal usage to generate electricity seems to be on a stable path. Lastly, demand of bauxite exports out of Guinea has become another significant driver of Capesize cargo flows with exports rising about 24% year on year in the Q3.

Speaker 1

Going forward, we expect this trend to continue to increase Capesize sized tonnage demand. As a result, I believe that the fundamentals of the iron ore, coal and bauxite markets should support a healthy Cape vessel demand over the next few years. Moving on to vessel supply. The outstanding order book for Capesize and VLOC vessels is at its lowest point in several years, while the availability of shipyards to deliver new orders is extremely limited. The total Capesize and VLOC order book is only about 5% of the existing fleet with growth for 2024 expected to be lower than 1%.

Speaker 1

The decision to invest in newbuilding vessels can be difficult to justify financially due to higher costs and technological uncertainty. Therefore, I believe it is highly unlikely that we'll see any significant increases in the order book over the next 2 years at least. Additionally, we have the acceleration of all existing and new environmental regulations, notably EEXI, CII and EU ETS. As a result, a gradual reduction of vessel speed to comply with regulations will also have to happen, which will further limit effective vessel supply. As highlighted in our last earnings report, it has been observed that many large ore carriers are sailing at very high speeds.

Speaker 1

Since these increased speeds have exponential effect on CO2 emissions, the only logical conclusion in our minds is that we will start to see a slowdown, especially to the extent of the environmental emissions reductions is more important priority over profits. Overall, the limited order book and the difficulties surrounding decisions to build new vessels are both contributing to a limited supply growth for the Capesize fleet. Concluding with such a positive drybulk market outlook, Synergy's high quality fleet and healthy financial standing is positioning our company favorably to achieve high retention investment and deliver attractive capital returns to our shareholders. This concludes our remarks and I would like now to turn the call over to the operator and answer any questions you may have. So operator, please take the call.

Speaker 1

Thank you.

Operator

Thank you. From the line of Tate Sullivan from Maxim Group. Please go ahead.

Speaker 2

Hello. Good day folks.

Speaker 3

Thanks for taking my question. Can you talk, Stacia, are you built related to the fees from related parties and the increase in general and administration expenses? I think you've mentioned before you're building your own ship management business. Is that part of the reason for the higher general and administration expenses? And should that continue going forward too?

Speaker 1

Yes. Hi, Tate. Good morning. I hope all is well. Nice to hear from you.

Speaker 1

Well, we actually have increased G and As, but at the same time, we're compensating about $600 per ship per day from United. So yes, G and As are a little bit up, but we compensate that to a large degree from the fees associated with United Maritime.

Speaker 3

And do you have a ship management business? And could you start to manage ships from other fleets? Or is that am I incorrect?

Speaker 1

Of course, yes. I mean, right now, the vast majority of the fleet under our ownership is under the Synergy Ship Management. So the answer is yes. We consider ourselves a very premium provider of ship technical management and commercial management services. So the answer is yes, we can do other companies, but now we're focusing to Synergy and United.

Speaker 1

We do maintain a few vessels in independent third parties for benchmarking reasons. So we still maintain 1 or 2 companies and we have relationships with most of the independent head parts out there for exchange of information and knowledge and all that. But the vast majority of almost everything is under our roof.

Speaker 3

And then on any scheduled and you have a newer fleet at Capesize, most of the scrubbers, is there any scheduled downtime for 2024 for modeling purposes?

Speaker 1

Well, we have about 3, 4 ships next year that we'll enter the dry docks. We don't consider any important or any particular difficult downtime altogether. I must say around 15 to 20 days each ships. So it's very, very minimal to the total operating days of the company.

Speaker 3

Okay. And then have you seen any in the older fleet of Capesize, any indications recently of scrapping or not at all?

Speaker 1

Well, the oldest fleet vessel on our fleet is 2,009, so it's still considered, let's say, middle aged, it's still considered older, and it still operates very successfully and in very competitive terms with the rest of the fleet. So we don't really feel any pressure whatsoever right now. The market has opened a lot in various commodities that not necessarily require age limits. So we're very much comfortable in the age bracket of our fleet. But most importantly, I must remind everyone that there are no newbuilding order book is very limited.

Speaker 1

It's the lowest order book of the last 20, 25 years. So we're going to have to leave with the ships that the current global fleet has right now. So eventually everything is going to get a bit older in the next few years.

Speaker 3

And outside of your fleet, no recent trend in scrapping? I have not seen any work.

Speaker 1

Correct. Yes, yes. We don't see any material trends in scrapping. However, we believe that from next year onwards, 2024, that the total combination of the environmental regulations is going to be hitting the market, that many ships will not be able to compete with the rest of the fleet. So regardless of age, there are certain yards in the past that have not managed to make ships that will fit the environmental profile of the fleet of tomorrow, let's put it this way, even though it's still the same vessels.

Speaker 1

And those ships will need to be either significantly upgraded or they will have to exit the trade.

Speaker 3

And, Cyrus, one last one for me. You mentioned higher interest cost, interest expense in 2024. Can you give us a rough approximation of where your current floating rates are today?

Speaker 2

Look, in total, the refinancings that we have done have resulted in our margin, while we pay above the base rate to be in the region of 2.5% to 3%. So nowadays, SOFR is around 4.5% to 5%. So the all in cost is around 7% to 7.5%. So in terms of projections going forward, we expect the interest rate quarterly interest rate expense to be the cash expense to be around $5,000,000 And then going into 2024, since the loans are amortizing pretty steeply, So the outstanding balance will be decreasing. We will go down to 4.9%, 4.8% and so on.

Speaker 2

In terms of breakeven, I would say that you should have in mind around $2,800 per vessel per day in our cost breakeven attributed to interest.

Speaker 3

Great. Well, thank you both. Have a great rest of the day.

Speaker 1

You too. Nice to hear from you. Thank you.

Operator

Thank you. We will now take the next question. It's from the line of Christopher Baszkaik from Arctic Securities. Please go ahead.

Speaker 4

Hello, guys. How are you?

Speaker 1

Hey, good morning, good afternoon. Everything is fine. Thank you.

Speaker 4

Good morning. Yes, congrats on the quarter and obviously good guiding. Can you please elaborate a bit on the box of trade and how it will affect the Capesize market and seasonality? There's a lot of talk in the market about this now. And I mean typically, Q1 has been the weakest one.

Speaker 4

But do you see any structural change here over the coming years?

Speaker 1

Well, yes. Most importantly is the fact that from 2024 onwards, we will see the acceleration of all the new environmental regulations that so far they have been in place, some of them, but they have not really been in force. So 2024 is going to be the 1st recording year of all the new environmental regulations. So the Exi will kick in full fledged CII as well. But most importantly, and what will have the first monetary impact for the owners is the EU ETS, and we still have a lot of dischargings in EU.

Speaker 1

So that is going to be the first real pain emissions related. So as I mentioned to Tate before, we strongly believe that many ships will either have to slow down significantly or will have to be upgraded considerably in order to be competitive for the next few years. We have seen a massive increase in demand arising from China and other places year on year, anywhere between 5% 9%. So the volumes are tremendous. If the supply the effective supply of vessels is a little bit more moderate because of speed, congestion and other reasons.

Speaker 1

I believe we can see very big spikes in the market starting in 2024, and that's only going to get better for us going forward, much better.

Speaker 4

Okay. Thanks. So going back to this box, it's trade off of West Africa. Is this something you've seen increase lately? And sort of how much are you involved in this trade?

Speaker 1

Okay. I get it. Yes, Guinea is increasing a lot and we're going to have the Sinmandu, which is iron ore also arising from West Africa. Yes, volumes are picking up a lot. I don't want to focus on the in bauxite because that by itself is a big growing trend by itself.

Speaker 1

But the overall demand tonnage demand for raw materials like iron ore, coal and of course bauxite, it appears to be continuing progressively in the next few years. So yes, bauxite is significantly up, but it doesn't really compare on an absolute basis to iron ore and coal cargoes, the increase we've seen in millions of tons over the last year, year on year.

Speaker 4

Okay. Thank you very much and congrats again.

Speaker 1

Thank you very much. Nice to hear from you.

Operator

Thank you. We will now take the next question from the line of Michael Haim from Noble Capital Markets. Please go ahead.

Speaker 5

Thank you. I do not see any mention of any share buybacks during the quarter and the shares have been a little bit weak since the quarter has ended. You feel that you have the balance sheet and the cash flow to make repurchases if these opportunities arise? And how do you prioritize share repurchase versus paying down debt?

Speaker 1

That's a great question, and thank you for asking this. Good morning. The answer is that we do prioritize on a number of things right now, but most importantly is the cash flow of the company. We still have a dividend in place, which we intend to continue for the foreseeable future. So right now, in respect of giving back money to our investors, I think that's been a priority that we want to continue.

Speaker 1

Year to date, the Capesize market has had the worst period of the last 5, 6 years. So in the beginning of 2023, we're anticipating a much better freight rate environment. Unfortunately, it didn't meet our expectations. It was far below our expectations. So we decided to maintain cash flow as much as we can in order to sustain a good cash and healthy balance.

Speaker 1

The only upcoming buyback that we have until the end of the year is a $3,000,000 small outstanding convertible that we're going to repurchase and that's it. And I think that is a significant repurchase by itself. And so far this year, we've done quite a few repurchases. And I've done purchases from the open market myself. So altogether, it's maintenance of cash.

Speaker 1

We believe 2024 is going to be a better year, but since we were a bit disappointed in 2023, we prefer to have a good cash maintenance. And of course, the principal repayment of our debt, as Tagalos mentioned before, is quite steep. So we want to have the proper cash flow in place to deal with all the cash flows that we need to deal with in the next few months.

Speaker 4

Okay. Thank you.

Speaker 1

You're very welcome. Thank you.

Operator

Thank you. There are no further questions at this time. I would now like to turn the conference back to Mr. Stamatis Santanis for closing remarks.

Speaker 1

Dear all, thank you very much for attending our call today. We look forward to catching up again in the next few weeks months with other corporate developments. In the meantime, once again, thanks for attending our call and thank you. You may disconnect now.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

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