Diana Shipping Inc. (DSX) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Diana Shipping First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ed Nebb, Investor Relations Advisor. Thank you Sir. You may begin.

Thanks Christine and thanks to all of you for joining us for the Diana Shipping Inc. 2016 first quarter conference call. The members of the management team who are with us today are Mr. Simeon Palios, Chairman and Chief Executive Officer; Mr. Anastasios Margaronis, President; Mr. Andreas Michalopoulos, Chief Financial Officer; Mr. Ioannis Zafirakis, Chief Operating Officer and Secretary; and Ms. Maria Dede, Chief Accounting Officer. Before management begins their remarks, let me remind you of the Safe Harbor notice. Certain statements made during this conference call, which are not historical facts, are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements are based on assumptions, expectations or beliefs that may or may not prove to be accurate. For a description of the risks, uncertainties and other factors that may cause results to differ from the forward-looking statements, please refer to the Company’s filings with the SEC. And now with that, let me turn the call over to Mr. Simeon Palios, Chairman and CEO of Diana Shipping.

Thank you, Ed. Good morning and thank you for joining us today to discuss the results of Diana Shipping Inc. for the first quarter of 2016. While the dry bulk marketplace continues to be challenging and volatile, we have maintained our gradual and deliberate strategy of expanding our fleet to place the Company in an advantageous position for future industry cycles. At the same time, we maintained a solid balance sheet, and financial resources as a source of strength in a volatile market. To review our financial results, the Company reported a net loss of $31.4 million and a net loss attributed to common stockholders of $32.8 million for the first quarter of 2016. This compares to a net loss of $10.8 million and net loss attributed to common stockholders of $12.2 million reported in the first quarter of 2015. Our time charter revenues were $30.8 million for the first quarter of 2016 compared to $42 million for the same period of 2015. Diana Shipping continues to maintain the fortress balance sheet. Cash and cash equivalents were nearly $171 million at March 31, 2016, including compensating cash balance. Long-term debt, net of deferred financing cost was $616.1 million compared to stockholders’ equity of nearly $1.2 billion. In January 2016, we announced a term loan facility with the Export-Import Bank of China for up to $75.7 million to finance part of the construction cost of the vessels we expect to take delivery in the third and fourth quarter of 2016. We also announced two loan facilities in connection with the recent vessel acquisition. In March, we completed a drawdown of $25.8 million under a term loan facility with ABN AMRO Bank N.V.. The proceeds were used to finance the entire acquisition cost of the motor vessel Infinity 9 and motor vessel Selina. In May, we announced a drawdown of $10.5 million [ph] under a term loan facility with the Export-Import Bank of China having a majority interest and DNB Bank ASA as agent. The proceeds were used finance the entire acquisition cost of the motor vessel Maera. The most recent additions to our fleet supported by the financing discussed above were as follows: We took delivery in March 2016 of the motor vessel Infinity 9 to be named as Ismene, a 2013 built Panamax dry bulk vessel of 77,901 tons deadweight. Also in March, we took delivery of the motor vessel Selina at 2010 built Panamax dry bulk vessel of 75,700 tons deadweight. And last week we took delivery of the motor vessel Maera, a 2013 built Panamax dry bulk vessel of 75,403 tons deadweight. With the delivery of these recent vessel acquisitions, our fleet consists of 46 dry bulk vessels. We also have 2 new-building, new Newcastlemax dry bulk vessels and one new-building Kamsarmax dry bulk vessel expected to be delivered in the third and fourth quarter of 2016. We continue to manage the fleet in a prudent manner that promotes a balance of time charter maturities and produces a predictable revenue stream. Currently, our fix revenue days 80% for 2016. Moving forward, Diana Shipping will continue to pursue shareholders value oriented strategies. Specifically we will maintain a strong balance, we will seek opportunities to expand our fleet to be well-positioned for a more promising phase of the dry bulk side, and we will continue to operate according to high standards of transparency. With that, I will now turn the call over to our President Stacy Margaronis for a perspective on industry conditions. He will then be followed by our Chief Financial Officer, Andreas Michalopoulos, who will provide a more detailed financial overview. Thank you.

Thank you, Simeon and very good morning to all the participants in this latest Diana Shipping Inc. quarterly conference call. The bulk carrier market has been very disappointing so far this year and the levels of the Baltic indices paint a sharp picture of reality and cash burn rates for all bulk carrier owners. The year started with the Baltic Dry Index at 473 and yesterday it closed at 643. The Baltic Panamax Index started the year at 464 and closed yesterday at 604. The Baltic Cape Index stood at 472 on the first trading day of the year and yesterday at a more encouraging 988. According to Clarkson Research, the bulk carrier fleet expanded 2.4% in deadweight terms during 2015, which was historic pace of growth since 1999. Weak market conditions led to a surge in demolitions last year with 30.6 million deadweight reportedly scrap. Bulk carrier ordering was very subdued in 2015 with just 215 units representing a total of 17.7 million deadweight orders compared to an average of 74.2 million deadweight per annum in the previous 10 years. In this respect, there is no doubt that the force which will eventually lead to improve the earnings are at work and the question becomes how long will it take for these forces to work their way through the supply excesses [ph] created through massive ordering over the last few years. Freight rates especially for Capesize vessels have increased over the last few weeks. However, we agree with Commodore Research who claimed that further increases may trigger a temporary feeling sealing on rate as idle capes re-enter the market. One year time charter rate for Modern Cape stood at around $7,500 recently and for Modern Panamax have $5,500 per day, macroeconomic news. According to Howe Robinson, manufacturing production in the United States, Europe and Asia are expected to improve in the second quarter of this year. According to Maersk Broker, predictions are that the U.S. economy should accelerate during the second and third quarters. According to Braemar ACM, the U.S. economy is estimated to have grown by 2.4% in 2015. The composite PMI in the Eurozone rose slightly to 53.1 in March from 53 in February, indicating according to the Maersk Broker, continued growth in the euro area. According to Braemar ACM Shipbroking, The Nikkei India Manufacturing Purchasing Managers’ Index was up from 51.1 in February this year to an 8-month high of 52.4 in March. During the same month, manufacturing activity also improved in China as these concerns over the health of the world’s second largest economy. China’s Purchasing Managers’ Index, PMI, in March came in at 50.2 according to a Reuters post, returning to growth for the first time since July last year that compares with 49 in February, which was the lowest since 2011. The Chinese manufacturing PMI also rose to 49.7 in March from 48 in February this year, making this a first increase on a month-on-month basis in a year. The Chinese government appears confident that the restructured economy will be driven by technology-based sectors as well as high-tech manufacturing. Such restructuring may not prove positive for Chinese seaborne trade if primary and secondary activity weakens. However, the government in China believes that the new economy and the integrated successfully with the more traditional drivers of Chinese economic growth. China is now trying to stimulate growth, protect workers’ earnings and healthcare and improve the environment. These targets are according to Chinese government essential, real long-term stability to be achieved in China. This is particularly important as the new nationwide plan is expected to see 1.8 million coal and steel workers laid off but also assisted in finding new employment in other sectors. Finally, China’s foreign currency reserves rebounded in March to $3.21 trillion. This makes us wonder why it was widely predicted by many analysts earlier this year that the China is only months away from burning through its reserves. Statics so far seem to indicate that China is a long way from reaching this state of reserve depletion. Just look at iron ore now. According to Clarkson’s total seaborne imports of iron ore for 2016 are projected to be 1.358 million tons. This if it materialized, will represent a steady volume of shipment compared to last year. China is expected to import about 945.1 million tons of iron ore, marginally more than the 939.7 million tons imported in 2015. According to Commodore Research, approximately 99.4 million tons of iron ore was stockpiled at Chinese ports at the end of April of this year. Even though this is slightly down compared to last month’s figures, the stockpiles are significant, taking into consideration the current stage of the steel industry in China. However, it appears that miners have succeeded in selling to the Chinese all the iron ore they plan on shipping to that nation regardless at least for the time being of the underlying demand for this commodity. Typically throughout this case, robust iron ore stockpiles haven’t resulted in weak demand for iron ore import. During the first quarter of this year, China imported 7% more iron ore year-on-year. This is the [indiscernible] charter rate for Capesize bulkers during the last few weak as mentioned earlier on. Looking at thermal coal now, global shipments of thermal coal are projected according to Clarkson’s to come in at 866 million tons in 2016. This would represent a drop of 1% compared to last year’s volume. Even though China’s import are projected to drop by 12% compared to last, according to Commodore Research, Chinese coal imports in March increased to 19.7 million tons which was 16% higher on a year-on-year basis. This surge in imports was allegedly caused by power plants seeking to replenish stocks effect of the peak summer season. Indian imports are also projected to drop by 3% this year, compared to 2015 to around 157 million tons. This materializes -- will be primarily due to large stock piles and firm domestic outputs. India’s government remains, according to Commodore Research, very determined to eliminate virtually all coal imports. And domestic coal production is already exceeding actual demand. It is not very good news for the Panamax market, even though it remains to be seen how successful the government will be in achieving its target. Indonesian thermal coal exports are also expected to drop by 4% this year to around 341 million tons. This is not a necessarily bad news in view of the proximity of this country to China and other Far Eastern destinations, provided it is primarily coal by the recently increasing focus on domestic supply. Australia has now become China’s biggest supplier of coal. According to Howe Robinson, Australia and Indonesia now account for 68% of China’s imported thermal coal. Turning to coking coal now, according to Clarkson’s the global coking coal shipments are expected to drop to 244 million tons in 2016, from 251 million tons last year. While challenging Japan as the world’s largest coking coal importer, India is expected to import a record 47 million tons of coking coal in 2016. On the other hand, Chinese seaborne coking coal imports are expected to drop around 12% this year to 31.1 million tons. On grains now, according to Clarkson’s, global grain shipments are expected to remain steady into 2015 to 2016 grain season at 321 million tons. Chinese grain imports are expected to drop 23% to 19.8 million tons, reflecting an increase in domestic production. Imports to Africa are expected to increase by 5% this year and 70.5 million tons. Post grain production in South America dominated by coal is forecast to reach 135.2 million tons in the 2015 to 2016 grain season. Brazil and Argentina are forecast to account for 64% and 26% of production in the region respectively. A record combine corn exports for Brazil and Argentina is forecast due to both high production and currency depreciation which have increased the competitiveness of export. This will no doubt have a beneficial tons mile effects in the Panamax trade during the grain season. Quickly, a look at idle and laid up tonnage. According to Clarkson’s at the end of March this year, around 220 units representing an aggregate of 7.1 million deadweight tons or about 1.5% of the bulk or fleet capacity, were confirmed to have been either laid up or in short term idled. On scraping now, according to Maersk Broker, during the first quarter of this year 173 bulkers of 14.3 million tons deadweight have been scraped, representing a very strong start to the year for bulker demolition. Scraping is currently projected to exceed the 2012 record level of 33.4 million deadweight tons with the above figures providing an estimated 52 million deadweight’s tons for this year. According to Braemar ACM, 62 Panamaxes have been sold for scrap this year with their average age dropping to 21 years. This year, we have witnessed ships as young as 14 years and as old 32 years being sent for demolition. During the first quarter of this year, 40 standard Capes of 6.1 million deadweight tons were sold for scrap. During the same period last year 29 Capes were delivered from the shipyard totaling 5.21 million deadweight. During the first quarter of this year, demolishing was up 85% in deadweight tons compared to the same period last year. As far as supply now [ph] is concerned, according to Clarkson’s total bulk carrier fleet capacity is projected to increase by just 1.5% in 2016 and by less than 1% in 2017. This trend is supported by current scrapping levels and then expected decrease in deliveries in 2017. This though encouraging, will not be sufficient to improve the good health of dry bulk carrier due to the projected weakness in demand. According to Gibson’s the outlook for the Cape market is tied up with the new-building program now in place for 30 Valemax ships. These vessels can now trade directly into China and they are also servicing Japan, Oman, Rotterdam, Subic Bay and Teluk Rubiah in Malaysia. Assuming these ships are all built, they will be delivered between 2018 and 2019 and will absorb pressure from Capesize earnings. Furthermore, according to Clarkson’s, during this year, Capesize deliveries are expected to reach 18.5 million tons deadweight, an increase of 11% compared to the same period last year. New-building tonnage, according to Clarkson’s as of the end of March this year, there were 1,391 vessels on order with a total deadweight capacity of 116.5 million tons. This presented the 15% of the existing global fleet. There are 220 Capes with an aggregate of 49 million tons deadweight, representing 16% of the existing fleet by tonnage and 285 Panamaxes on order with an aggregate of 23.4 million tons deadweight equivalent to 12% of existing fleet by capacity. These would have been considered rather benign numbers, if it were not for the surplus capacity or rating [indiscernible]. On the demand side, Clarkson’s reported growth in global seaborne dry bulk trade might remain subdued in the short-term with an overall expansion of just 0.2% [ph] currently projected for this year. Banchero Costa report that’s on the demand side, there are some positive developments of China, has continued importing larger volumes of iron ore from Brazil and Australia. Additional iron ore capacity is expected to come to market as maybe the iron ore producers are fighting to increase market share and marginalize smaller iron ore producers. On the negative side coal seaborne trade is expected to continue to slow down this year, but at a slower pace than in 2015 as the Chinese government attempts to further reduce the country’s dependency on coal fuel power generation. Turning finally to outlook for our industry, China’s maturing economy and the general easing import demand have the detrimental impacts on seaborne dry bulk trade growth throughout 2015, the situation is expected to influence the market throughout the coming year. The Chinese government recently announced plans to cut around the 100 to 150 million tons of domestic crude steel output in the next three to five years, which is expected to have a significant impact on the country’s future seaborne iron ore import demand. The Capesize fleet capacity is expected to contract marginally next year, which could help to reduce the excess capacity. However, according to Clarkson’s the severity of the current global supply and the weak outlook for iron ore trade growth suggests that the short-term outlook for Capes remains very challenging. Furthermore, despite there is strange increase in capacity over this year and next, expectations for only limited expansion seaborne coal trade suggest a market pressures are unlikely to deviate as quickly. All the above projections are based on the assumptions that the demand growth remains more or less flat. If it drops further, which we consider unlikely or if it rises more than anticipated, then things could change dramatically for the better or for the worst. We agree with the commentaries recently by Clarkson’s, which states that the pace of growth in Chinese seaborne import slows down. Focus on the potential of other countries help provide some growth in global seaborne trade, it has increased. With an economy expanding at the robust stage and the population closed inside China, India has more and more often featured in the sport light. India’s steel production is growing. Gross domestic product growth and population growth looks to outpace China’s in coming years. Even though India’s imports of certain commodities such as coal may not appear impressive as China’s, the shipping industry could possibly benefit for a more impressive import performance of other commodities. Even in the best case scenario, it is very unlikely that the bulk carrier market will reach anywhere near we have the levels of earnings and asset prices seen eight years ago. This environment provides many challenges and rewards for those companies, private or public who will succeed there through good housekeeping and good operating and investment strategies to survive this latest downturn. We at Diana Shipping are cognizant that when the market finally turns, the Company will be there to take advantage of improved earnings with the modern and well maintained fleet and the excellent reputation with all major bulk carrier charters. I will now pass the call to our CFO, Andreas Michalopoulos, who will provide us with the financial highlights of the first quarter of this year. Thank you.

Thank you, Stacy and good morning. I’m pleased to be discussing today with you Diana’s operational results for the three months ended March 31, 2016. Net loss amounted to $31.4 million, net loss attributed to common stockholders amounted to $32.8 million and loss per common share was $0.41. Time charter revenues decreased to $30.8 million compared to $42 million for the first quarter of 2015. The decrease was due to the decreased average time charter rate that we achieved for our vessels during the quarter and was partially offset by revenues derived from the addition to our fleet of the vessels Santa Barbara delivered in January 2015, and Medusa delivered in June 2015 and New Orleans and Seattle delivered in November 2015 and Selina and Infinity 9 delivered in March 2016. Ownership days were 3,931 for the first quarter of 2016 compared to 3,588 for the same quarter of 2015. Fleet utilization was 99.1%, the same as for the first quarter of 2016 and the daily time charter equivalent rate was $6,195 compared to $10,535 for the same quarter of 2015. Voyage expenses were $6.8 million for the quarter compared to $4.9 million for the same quarter of 2015. The increase in voyage expenses was mainly due to a loss from bunkers resulting from the redelivery of vessels during the quarter, amounting to $5.1 million compared to $2.8 million for the same quarter of 2015. This increase partially offset by decreased commissions resulting from the decreasing revenues. Vessel operating expenses amounted to $21.9 million compared to $21.8 million for the first quarter of 2015. The increase was due to the 10% increase in ownership days, resulting from the enlargement of the fleet and was partly offset mainly by decreased insurance, stores and spares, repairs and environmental costs. Daily operating expenses were $5,582 for the first quarter of 2016 compared to $6,073 for the same quarter of 2015, representing a decrease of 8%. Depreciation and amortization of deferred charges amounted to $20 million. General and administrative expenses were $6.3 million compared to $5.7 million for the first quarter of 2015. The increase was mainly due to increased payroll cost and legal fees. Management fees related to parties were $0.4 million for the quarter and were the fees paid to Diana Wilhelmsen Management Limited for the management of six of our vessels. Interest and finance costs amounted to $5 million compared to $2.5 million in 2015. This increase was attributable to increased average debt and average interest rates during the quarter compared to the same quarter of 2015. Interest and other income amounted to $0.6 million compared to $0.9 million and was decreased due to the decrease in the income earned from Diana Containerships as a result of the amended loan agreement. Loss from equity method investments amounted to $2.2 million compared to $0.8 million for the same quarter of 2015. That’s it for the time of presentation. Thank you for your attention and we would like -- we would be pleased to respond to your questions. So, I will turn the call to the operator who will instruct you as to the procedure for asking questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.

Andreas, can you just remind us of what the Company’s debt amortization payments are? If I remember correctly, it’s like $45 million this year and then $50 million next year; can you just update us on those numbers?

Yes, it’s 42,000,150, the short-term portion, and then for next year it’s 50 million. [Ph]

So it’s 42 million prospectively from the end of the first quarter?

Prospectively, yes.

And then, also what’s the minimum liquidity covenant, I think it’s like what something like low to mid $20 million level?

For the moment, we are in discussions to put it a bit more broadly. And I think to answer your question, where you’re getting at, we do as we think the dry bulk shipping companies today have mutual covenants. And we are in discussions with our banks in order to be able to deal with those mutual covenants and to also look at what we can do with the cash we have on hand and how we can best be prepared for the future.

Okay, that’s great. Can you just give us any color on timing? I know it’s hard to -- I mean would this be something that you’d expect to be wrapped up before the end of the second quarter?

We cannot give any color at the moment on timing on that. But you will be the first to know, rest assured about that.

Okay, thanks Andreas. Maybe a couple more with respect to the cash costs, just any cash costs associated with lower asset values, just wanted to know if there are any cash payments in the quarter or expected for sort of LTV test after the first quarter?

LTV test happens, often cash cost -- we don’t expect any.

One more question on -- sorry, these are sort of obviously in the weeds question, so I apologize for that. But, I was just having a nice breeze to your annual report and noticed that you had some updated disclosures there on asset impairments in your impairment test. And what I did notice was when you guys do your long-term asset impairment tests, you’re using rates that are basically on average whether they are 5% or 10% below what you did in the 2014 annual report and just given sort of the weakness in rates over the last 12 months to 18 months, just trying to assume that the asset impairment test essentially assumes basically a hockey stick type of improvement rates, I’m just trying to put that with your general overall outlook for the market.

Amit, this is Ioannis speaking. The impairment test has to be seen in a broader view and you either accept that there is a way to calculate it and you have another period where you always take, whether it is in your benefit or not. And you should be amending it based on what has happened in short term, two years before you or two years after you, otherwise it doesn’t make any sense. Being consistent with the impairment test, it is the most important because otherwise you are putting in the calculation a feeling, a forecast, a perspective about what is going to happen in the market, which you shouldn’t have.

Right, okay.

So for us, being consistent in the way we calculate the impairment, we do the impairment; this is very important. There will be a period where it may not be in our benefit. But being consistent is what we care about.

Sure no, I agree…

You cannot start amending the impairment test take out a year, putting in another year, take out the extreme, put it out the other extreme with a low budget. So, it doesn’t work like this, shouldn’t work like this.

Okay, that’s fair. Maybe, I mean, but what you do provide in the report though, sensitivities around what the impairment would be under different asset value or rate assumptions, which is really helpful. But, given sort of a lot of your LTV tests are on market value of the asset basis and not necessarily the book value, Andreas, could you help us in terms of trying to understand, if there was an impairment potentially, not saying there is, but if there was, what would be the impact on any of the covenants or if there are any covenants that are tied to the book value of the assets?

No, there would be an impact on the P&L, but no impact on the covenant. The impairment has -- is more or less in accounting tiding up than anything else. There wouldn’t be any impact. The covenants are based on market values.

One last question for me and then I’ll turn it over. It’s a little bit of a positive question which is great, but one of the things that’s been pretty amazing is if I look at all the other dry bulk companies over the last two to three years, their share counts have basically increased two to three x. And when I look at Diana Shipping, the diluted share count actually is down a little bit from several years ago, which is obviously a pretty amazing accomplishment in this type of market. But, I just wanted to know Ioannis and everybody else, what your confidence level is? This can essentially stay the same, given that you guys are also enjoying a little bit more pressure than you are used to and what would be your willingness to maybe go down this road to may be -- in terms of equity financing to release some of the pressure?

We have stated many times that our model works together with our shareholders at good part of the market raising equities. Our model works if we treat our shareholders with the utmost respect. And therefore diluting them in this part of the cycle as a choice is something that we do not consider. Only out of necessity, we may consider something like this in the future, something that we haven’t -- is not a level that we have reached to-date. It’s going to be our last resort. We will eliminate all the other possibilities before we do an equity offering. We know that if let’s say two years past from now and we’re still in the same bad market position et cetera is going to be probably more diluted, if we do an offering. But nevertheless, we have to do our best to avoid and offering period.

And Ioannis, have you gotten a little bit more positive, given there is a re-rating that we’ve seen in the market, albeit so slight, but is this sort of a somewhat of a light at the end of the tunnel for you or is it still just a little bit of a head fake?

If let’s say the rates were at the levels that we are today and we were able to see light of the tunnel out of the tunnel, then that would not be a very good thing because we still have a way to go as regards to scraping and laying up. We need more cleansing. One thing is for certain that we have reached the level where everyone and by everyone I mean every shipping company feels like is not very well prepared for what is coming. And this is for me the absolute bottom of the market. It’s a good thing that almost everyone is pessimistic about the market because the cleansing is going to happen.

Our next question comes from the line of Gregory Lewis with Credit Suisse. Please proceed with your question.

Ioannis, it sounded like you feel like the market is bottoming. And I guess so my question my first question would be around the asset prices. It looks like actually we’ve seen at least from the smaller asset sizes, the Panamaxes and the Handys, it looks like we’ve seen asset prices sort of stabilize here. And it also looks like we’ve actually seen some cash buyers come into the market. Could you sort of provide a little bit of color about what’s going on in the sale and purchase market; are owners, are traditional ship owners actually stepping in and buying assets or how are they funding these assets, given what we’re hearing about the banks being less than willing to lend for new ships?

Great, I’m going to say something and of course our CEO, our boss, Mr. Palios is going to add something. But, the only thing I want to say is that when I talk about the market bottoming, we are referring to the charter rate environment. You have to understand that in a prolonged period that we see maybe happening, the values of the vessels may go further down because we are talking about and increasing the scrapping rate and increasing the non-ability of the companies to maintain these budget environment et cetera. So, the asset value still may have some way down to go. What we show recently about customer value and interest in buying something is going to stop in case we keep having these lower rates. And eventually the bad [ph] rate environment let’s say for another year will leave, it has to because that has been the case in the past, to lead to lower asset values. You cannot have the one without the other.

Greg, I think that here we have two graphs, we have the graph of the same vessels and we have the graph of chartering. Usually there is a lag between the one and the other and that lag is directly proportional to the cost of money to the interest rate. In 1986, when the interest rate was 23% for dollar then the lagging was very, very limited. Today the lag effect is huge because the cost of money is not the same, it is very little. And that is very important because it will take little bit more time for the prices to bottom out the same way as the freight market has bottomed out.

And then, just one more question, it looks like we’ve seen a little bit of congestion at some Chinese port uptick. Is there anything that’s driving that? I mean, it’s difficult to argue that there is a lack of infrastructure just given where the market is today versus where it was a couple years ago. Any sense for why we’re seeing an uptick in port congestion around some Chinese ports?

No. Really there isn’t any particular reason. We believe it’s a temporary phenomenon that will quickly go away. It hasn’t affected any rate at all in any way, shape or form. And we don’t expect it to increase. And still you get serious congestion in places like Australia or Brazil. I don’t think you should be looking any effect on the overall supply demand balance.

Our next question comes from the line of Noah Parquette with J.P. Morgan. Please proceed with your question.

I wanted to follow up on your cleansing comment. In the first three months, we saw a great level of scrapping but since then we’ve seen like Greg was saying, asset values have stabilized, a lot more buyers, rates are up; scraping came down a little bit in April. I mean what is your read on sentiment and what is your view on the risk that the cleansing kind of stops before it really should?

This is something that we were very careful mentioning at the previous conference call that the first quarter has been very good as regards scrapping and there is always a danger when there is a blip in the market and it’s more blip that this starts and I think it really went down, the scrapping went down in April, admittedly not fantastically down; it was much lower than March, February and January. But, I think that as long as we keep seeing similar charter rates and as long as the sentiment is negative, if we see very similar levels on a quarterly basis to the first quarter of 2016 at the scrapping level for an entire year that would be a very good sign. But it has to be an entire year. I have to remind you that May 2015 was a fantastic scrapping month but nothing else in that year, nothing else, very low level. So, we need a full year of very good scraping to start thinking about the recovery.

And is there any update on delivery schedule of your three new-builds still later half of the year?

No, update yet, no news, good news but no news.

And then, it’s maybe early but what’s your charter strategy just kind of the same thing portfolio for one year charter coming?

Certainly this is what we will keep doing. The portfolio approach not too many vessels opening at the same time.

Our next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Please proceed with your question.

I would like to ask you about how the shipyards -- they’re behaving and what is the relationship right now with ship owners? And to ask openly, if you’re in any discussion with the shipyards delaying your new-building program and if you see this order book that is reported as something like 15% of the fleet being delivered then how much you expect that it fund on order book?

Our shipbuilding program, Fotis, is not enormous, there are merely three ships, two Newcastlemax, one Kamsarmax and we have loan on them secured from China Export-Import Bank. So that’s for us because you asked for us. So, we don’t have much to discuss. Of course we’re always discussion; 8f we have a news on some possible small delays, we will come back to everybody as we always if that happens and it might happen. And it is in our and -- we always discuss with Chinese shipyards and we have very good relationships with the two shipyards with which we -- where we build ships, namely Jiangnan and China Pacific. So, we will come back to you if anything evolves on that end. Now, regards to the general question, the only thing we can say that we’ve seen at least in China something that you have for sure noticed as well that most of the private shipyards do not get much funding anymore from the state government on banks and therefore are silently closing one by one. And you have already seen quite a few shipyards closing which can only be a positive for the overall but this has already happened. There is still a few more to go but not much more.

The only reason that I asked about your intention was try to understand how the ship-owners are thinking right now because we see still in the order book, something like 1,300 ships reported by Clarkson’s. It’s quite confusing to try to identify, how many of these vessels are real in the order book and how many are not. Can you give us your estimate of this about 117 million deadweight that they reported on order, how much do you think that is real and how long will it take to be delivered? Is it a two-year delivery or it’s something that is going to take much longer?

We have to look at past recessions and take a clue from there. First of all, we have to discount one-by-one the ships that are being included in these figures, which are in the list of shipyards that Andreas has referred to. So, those we can forget about. And there are some, not many but there are some in those figures, if you look at detailed breakdown of the ships on order by yard. Then, we have to look at delays which for sure are going to exceed 10% to 15% of the total order book and then cancellation. There have been cancellations; we know that. There have been also some, not many for the time being cancellations which were down based -- or on the back of orders now for tankers, this is a new thing that is beginning to come up, which is bad news for tankers down the road. And at the end of the day, it’s going to be all the matter of finance available, not only for the original person who ordered to company that ordered the ships but also for the people who will want to finance the acquisition of the retail, let’s call it. So, all in all if I were to hazard a guess, I would say that 30% of those ships will be -- today will be affected either through the cancellation or long delay. So, the ships will not be delivered in two years that’s the only thing we can say to certainty. But it’s going to be over the next three years or four years, will depend on the availability of finance and the state of the market between now and then.

But the uncertainty that we have about demand is much bigger that can lead to any meaningful projection or result in assumptions or result in the way someone who want to see the market moving. Taking about 30% [ph] or 25% or 35% slippage or decrease in the deliveries, I don’t think that leads anyone to a meaningful answer to the big question.

Fotis, one thing, which has happened is that most of these contracts have been placed at a price, which is at least 50% in excess of what is a going rate today. So everybody is trying to see whether things can happen for him and not take delivery of the vessels. So, if the shipyard misses one ship, it will have a snowballing effect because if you miss one ship, then you will miss other ships also. So, today you have two kinds of shipyards, first of all you have the shipyards which is state owned and the shipyards which are privately owned. Now going to the privately owned yards, you have shipyards which are bust already and you have shipyards which are facing cash flow problems. The one which are facing cash flow problems, if they miss one ship, then they will miss a lot of ships and it goes on like that. And then at the end they will close down. So from this point, we have a positive sign but as we said before, it’s not all that important.

One last question, and I think I know the answer, but I wanted to confirm, since you talked about the consistency and in the past you have talked your chartering strategy that is to have a staggered chartering strategy and constantly to have some ships open. I wonder, if given the current rate environment, the fact that rates are struggling to cover operating expenses and in some cases this is not possible, whether you consider of not fixing vessels at levels that they are below operating expenses? And also if you any thoughts of scrapping the three, four vessels that you have that they are above 15 years old?

First of all, the rates are not in the level where -- what you should be considering, as we have said in the past is the different between OpEx and scraping, and laying up expense. So from the moment you make more than this or you have still the ability to operate the vessel at this level, you do that, regardless of the period. Everything starts from the point where we’re strongly seeing that it is better to start your chartering rather than trying to beat the market. Now, as regard to scrapping, we have said in the past that scrapping is only done out of necessity. The age of the vessels that you referred to is such but they still have life in front of them that they can easily gain the cost burn [ph] that they have today from an uptick in the market, a 15-year old, when there is 18-year old and the market is at the upper part of this cycle, they easily make few million dollars more then what the value of the vessel is today.

And furthermore Fotis, a reminder that it depends where the vessels has been built and what is the percentage of mine steel as compared to high tensile steel. So everything can trade provided the steel, it has all the papers properly issued. So, we keep the vessels, we maintain the vessels in a nick in such a manner that is not the 15-year -governing process to take care for scrape. You can trade here more provided that you don’t have to spend a lot of money to put here in a ship-worthy [ph] position and if the vessel is built properly initially, and bear in mind that those vessels you are referring, we have built ourselves in the best yard in the world. So, we are far from thinking of scrapping the ships.

Our next question comes from the line of Jon Chappell with Evercore. Please proceed with your question.

I’ll try to keep it pretty brief. Andreas, you guys have been very consistent with your strategy of buying on the way down, buying at the bottom and I assume you’ll be buying on the way up as well. As we try to figure out the total availability that you have to purchase the cash balances, obviously come down a little bit over the last several quarters, so call it around 150 million right now. How much of that 150 do you feel you need to have on the balance sheet for operations to deal with the doldrums in the market and how much of that would you say is accessible? And then when you think about the total firepower, what would be your comfort on leveraging whatever cash you use from your balance sheet to get to a total spend?

Jon, this is Ioannis speaking again. As we said that here because we knew that question was going to come, today we are at this level in the market where nobody really thinks that he is well prepared for what is coming. So radically speaking, we need all the money that we have aside, in order to gain some more breathing space. We know very well but the name of the games, who have been today offense but nevertheless this is shipping and this is the absolute bottom and this is where nobody wants to be to play smart because seeing ahead you need all the dry powder in order to gain sometime. We are very, very fortunate that we manage to buy a lot of vessels at the lower part of the cycle. It has been always a case that not a lot of people buy out the absolute bottom. But nevertheless, if you have purchased vessels at the lower part, it’s enough to produce money for your shareholder. What I’m saying is that we see shipped vessels and we made buy very few, but we have not these between ourselves that we define -- we try to find ways to avoid doing that both that’s the sentiment and that’s how it usually works.

Got it, so shipping decent little bit, understood. Stacy, you had mentioned VLOC order and the potential detrimental impact on the Capesize market longer term there. You guys obviously have handful of Capesizes in your diversified fleet, but does that change your kind of strategy on that segment in particular relative to maybe the more nimble midsize or smaller classes?

Not particularly, Jonathan, because the following has happened. There is a time between now and the delivery of these ships, which is going to work we believe in favor of the Capesize sector for obvious reasons. And those are the fear of the over tonnaging coming as a result of the joining this fleet of these 30 Valemaxes. So, over the two years that we will start working, people would want watch what the effect will be on the Capesize market. So, we can be fairly certain or comfortable but you can never be comfortable in shipping that order in a Cape or a Newcastlemax, it will not be as a top priority in the lifts of choices that dry bulk carrier owners or respective owners we have. So from that point of view, it’s going to be good. Because if demand keeps creeping up and supply is shrinking, what we could see by 2018 or 2019 is a fairly balanced market, which could take this tonnage onboard without having any major refreshment demand. So, the fear of these ships coming, we feel might work the favor of the Capesize market. So, at the end of course we have to keep in mind that the positive and the negative is the tonnage which will come in which has not been significant. So, we’re not changing, in another words, our outlook for Capes. We still believe that they’re going to be attractive ships to trade.

One last one, Ioannis, you’ve mentioned earlier the cleansing, hopeful an upcoming cleansing, but then you are quite strict about your 15-year old ships hanging in there and making money in three years’ time. How do you kind of rectify those two things? Because if everyone thinks the same way, and no one is willing to scrap a ship in its upper teens and you are only reliant on 20-year-old or older ships to be removed from the market, is that a deep enough cleansing to really remove that capacity?

The question is who can afford to do that; who has the ability to do that. We have said that there will be maybe 5, 7 years old vessel being scraped. It doesn’t mean that every 15-year vessel is going to be scrapped. The ones that are going to afford to keep them, they will keep them; it doesn’t go like this. If you have the ability to not to scrap, as I said scraping is done out of necessity and that means that there will be a lot of people that will scrape because they will not have the ability to keep the vessels for two years.

I know that this is also dependent a lot, Jonathan, on the condition. That’s what will make them affordable, as Ioannis said now, or not. If they are very well-maintained, they’re going to be affordable as regard to the surveys and people might consider keeping them, other things being equal.

If they have cash.

If they have cash. It is not going to be too much but they’ll have to burn it.

Our next question comes from the line of Kevin Sterling with BB&T. Please proceed with your question.

Andreas, I look at your daily vessel operating expenses of 5,582, they are down about $500 a day from Q4 a year ago. Is that the right run rate we should be thinking about going forward for your daily vessel operating expenses?

Yes, 5,600 be the run rate that you should be looking at with small fluctuations but yes that’s we’re making a lot of efforts on our operating expenses, as you just noticed from what you’re saying and we intend to continue as much possible because this is also part of us adapting without of course as everybody said before, changing the quality of our vessels and our preventing maintenance et cetera, but we still have come down from last quarter and we intend to try to keep it that way.

And you guys had mentioned in your prepared remarks about the reactivation of idle tonnage which could put a cap on rates. In your estimation, how much idle vessel tonnage do you think is out there right now?

As we said earlier, they are about 1.7% of the fleet, and there are a number of Capes, which are either idled somewhere or laid up properly. Now, if they are properly laid up and they are old, the chances of them being reactivated are slim, unless rates really shoot up. The ships that might join the trading markets are the ships which are idling; they are not an enormous number. From the numbers that I have read that would get not more than 30 in that condition, as regards large bulkers, but remains to be seen. And then it’s a view, which we have to respect because we’ve seen that’s happened in the past. But if the demand picks up, we don’t go through all these, let’s say, lifts or potential lifts on the turnings of the ships. The ships will be absorbed fairly easily and the market will keep moving on. We don’t think that’s going to happen, but if there is strong enough demand, it could happen. But it’s wise for analysts to bring it to our attention and everybody else’s attention that hey, there are those ships there, those ship they are reactivated. We needed more increases in demand in order to keep earnings rising.

A very important factor to that Kevin also is that usually what happens in our industry is that there is a peak in demand, there is a peak in the rate, but nobody things that this is sustainable. And reaction of the idle and laid up vessels is not immediate, they have to -- people have to be certain that this is something sustainable but it is worth spending money to do something on the idle or the laid up vessel and this is how it usually works; the reflex are not there.

And as we look kind of out there in the industry, are you guys seeing larger fleets being marketed or your strategy is still to target one-off sister ships that meet your technical standards and chartering strategy?

Yes. certainly, we are in the wavelength as regards to the vessels that they are of interest to us. We have not changed that.

Our next question comes from the line of Spiro Dounis with UBS. Please proceed with your question.

Just a quick one from me, so just wanted to get around to scrapping and maybe why it’s not been sustainable lately; and why maybe it’s not going to be more? And one other thing that concerns me I guess is -- and you tell me where I’m going wrong here, but it seems like your most competitive vessel might actually be your older one, just because maybe it doesn’t have a bunch of debt strapped to it that makes the cash breakeven really high. And if you look at a brand new Cape fully loaded cash breakeven around $14,000 a day versus maybe an older one that doesn’t have any [indiscernible] anymore, can operate at call it $5,000, $6,000 a day. It seems like that older Cape can undercut the new one all day long. And I guess I’m just wondering is why would the older vessels scrap, if it’s most competitive right now?

It’s not a matter of how all the vessel is going to be scrapped. We should not get confused as if the vessel has to be scrapped or not there; they don’t. It’s a matter of the owner being able to keep the vessel or to find a buyer to do that. And if the market sentiment is really bad, there are not buyers and the values of the vessels they go down to the scrap value. And therefore, the only solution for him is to scrap. And it’s very simple. It is not as if when the market is terrible, that suddenly we go out of the 15-year-old vessels and we cannot find any around. At the time in ‘80s when you have new buildings being scrapped, we still had vessels that were older vessels in the water waiting for the market to recover.

So, do you think these owners -- I guess it sounds like we could see, to your point, maybe vessels, as announced early, the age -- I mean we could see something younger than 15 scrapped, it sounds like -- and I guess...

Certainly, if the markets stay at the levels that we are today for another -- till the end of the year, you will see something.

All right, I think that will defiantly help recovery. Great, that’s it from me guys, appreciated, look forward to catching up in a few weeks.

Welcome, thank you.

Our next question comes from the line of Mike Weber with Wells Fargo. Please proceed with your question.

Hey, this is Donald stepping in for Mike. My questions have been answered. But, I thank you for your time gentlemen.

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing or additional comments.