Diana Shipping Inc. (DSX) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Diana Shipping 2016 Second Quarter Conference Call. [Operator Instructions] As a reminder, this conference is recorded. I would now like to turn the conference over to Ed Nebb, IR Advisor. Thank you, Mr. Nebb, you may begin.

Thanks, Brenda, and thanks to all of you for joining us today for the Diana Shipping Inc. second-quarter conference call. The members of the management team who are with us today are Mr. Simeon Palios, Chairman and CEO; 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 briefly summarize the Safe Harbor notice. Certain statements made during this conference call which are not historical facts are for looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements are based on assumptions, expectations, intentions or beliefs as to future events that may not prove to be accurate. For a description of the risks, uncertainties and other factors that may cause future results to differ materially from the forward-looking statements, please refer to the Company's filings with the Securities and Exchange Commission. Now, with that, let me turn the call over to Mr. Simeon Palios, Chairman and Chief Executive Officer.

Thank you, Ed. Good morning and thank you for joining us today to discuss the results of Diana Shipping Inc. for the second quarter of 2016. The dry bulk trade continues to face extremely challenging market conditions, as you are well aware. We continue to believe that an increase in demand, driven by global economic activity as well as greater discipline over supply, are necessary if we are to see any meaningful improvement in industry conditions. In this environment, we remain sharply focused on maintaining the financial resources to ride out the current conditions and position the Company for the long term. To review our financial results, the Company posted net loss of $31.3 million and a net loss attributed to common stockholders of $32.7 million for the second quarter of 2016. This compares to a net loss of $14.1 million and a net loss attributed to common stockholders of $15.5 million for the second-quarter 2015. Our time charter revenues were $28.3 million for the second quarter of 2016 compared to $38.6 million for the same period of 2015. Currently, our fixed revenue days are 87 for 2016. Diana Shipping continued to maintain a solid balance sheet. Cash and cash equivalents including cash balance were near the $149 million at June 13, 2016. Long-term debt, net of deferred financing costs, was $618.7 million compared to stockholders equity of nearly $1.2 billion. We have continued to maintain our capacity to support the Company's strategy with appropriate financing arrangements. In May 2016, we announced a drawdown of $13.5 million under a term loan facility with The Export-Import Bank of China having a majority interest and D&B Bank ASA. The proceeds were used to finance the entire acquisition costs of the m/v Maera. As we reported to you last quarter, we took delivery in May of 2016 of the m/v Maera, formerly Manzoni, and 2013 built Panamax dry bulk vessel of 75,403 tons deadweight. With delivery of Maera our fleet consists of 46 dry bulk vessels. We also have two building Newcastlemax dry bulk vessels now expected to be delivered in the first quarter of 2017 and the new building Castlemax dry bulk vessel expected to be delivered in the fourth quarter of 2016. As we navigate the difficulty of [indiscernible] Diana Shipping will strive to maintain a strong balance sheet and financial resources. Furthermore, we will continue to monitor our business in a prudent manner and be well-positioned for a more promising phase of the dry bulk site. With that I will now change the call over to our President, Stacey Margaronis, for a perspective on the industry position. 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 welcome to all the participants of the second-quarter Diana Shipping Inc. conference call. The second quarter has seen a slight improvement in the earnings of bulk carriers across the board. The Baltic exchange industries reflect quite accurately this development. At the beginning of the second quarter the Baltic Dry Index stood at 450, and on 30 June it was at 660. The Baltic Cape Index started at 345 and closed at 996, while the Baltic Panamax Index similarly recovered from 535 to 662. According to Clarksons the Capesize Baltic five time charter rate on 27 July was $5,723, up from $3,013 on 31 March. The Panamax Baltic four time charter rate was $6,020 on 20 July, up from $4,275 on 31 March this year. According to Clarksons the improved earnings have led to a sustained amount of activity in the sale and purchase market with signs of ongoing negotiations and an increasing number of vessel inspections. Clarksons continues with recently achieved secondhand state practice represent approximately 10% increase over levels seen earlier this year for quality secondhand tonnage. We will outline analysts' reasoning for this positive development and examine arguments for and against the prospects of this being the beginning of a lasting and significant improvement in bulk carrier earning. Starting with the usual [indiscernible] macroeconomic news, according to Clarksons' research, profits of China's industrial firms have improved so far this year, with total profits up by 6.5% year on year in the first four months of 2016, compared to a decline of 2.3% in 2015. This total reflected greater levels of demand and the easing pace of declines in raw material prices. Commodore Research are troubled, though, by the fact that in the United States, in spite of their positive economic parameters, industrial reduction has fallen on a year-on-year basis during each of the last nine months. According to [indiscernible] Shipbroking recently released Asian manufacturing PMIs are a source of hope, showing a fairly wrought improvement across the region. But it is uncertain if its higher manufacturing activity is sustainable. Let's now look at supply and demand: according to Clarksons global seaborne dry bulk rate is expected to grow at 0.7% in 2016. However, the dry bulk carrier fleet is expected to increase by 1.1% this year, which indicates that pressure on the dry bulk markets is, unfortunately, likely to continue. According to Bonterra Foster the Panamax stroke Kamsarmax fleet is not expected to grow this year. It should grow by 3% in 2017 and by 1% in 2018. We said the Kamsarmax/Panamax fleet is projected to shrink 2% in 2017 and a further 3% in 2018. As to the Cape fleet, we are forecasting negative growth of 1% this year and in 2017 and a further 2% decline in 2018. According to Clarksons, during the first five months of 2016 51 Capes were delivered, 62 scrapped and, unfortunately, 30 ordered. These orders are more or less accounted for in their entirety by the Valamax order placed in China. During the same period 61 Panamaxes were delivered, 72 were scrapped and only two were ordered. According to Bonterra Foster, India could become an important importer of dry bulk commodities to fuel its growth, despite the government's intention to post domestic iron ore and coal production. Although India has domestic reserves of both iron ore and coal, thus far it has only succeeded in overcoming significant hurdles to domestic mining of coal but not of iron ore, which has led some analysts to project sharp increases of iron ore imports going forward. Let's look at the Panama Canal now. According to Harold Robinson Partners, the effective reopening of the new Panama Canal on dry bulk shipping may depend on what total charges actually apply and on the draft actually increasing to close to 15.2 meters maximum. Nevertheless, we expect some movement of Colombian coal in larger size ships and grain in increased stem sizes on Panamax or Kamsarmax and post-Panamax bulkers. This will develop due to the opening of the new Panama Canal. The opening of the Canal may improve the portions of the badly hit post-Panamax vessels shift in excess of 92,000 tons deadweight, which have been suffering from the size of grain stem shipments and their inability to transit the old Panama Canal. Turning to the order book now. The good news here is that the order book has been shrinking for several quarters across nearly all size ranges. As of the beginning of July of this year, the total order book according to Clarksons stood at 119.4 million deadweight, which represents 15.3% of the world bulk carrier fleet. There are 51.5 million deadweight of Capes on order, equivalent to 16.7% of the global fleet and 24 million worth of Panamaxes, representing 12.3% of the existing global fleet. The majority of this balance is scheduled for delivery this year with much less scheduled for delivery in 2017, but with 17.6 million deadweight worth of Capes scheduled for delivery in 2018. Demolition now -- the first half of this year saw record numbers of ships heading for the scrapyard. According to Clarksons, 36 ships of 11.1 million deadweight of Capes were scrapped during this period, also 88 Panamaxes or 6.3 million deadweight headed for the scrapyard during the same period. A total of 22.2 million deadweight of bulk carriers were sold for scrap during the first six months of this year, which was 35% more than the first six months of 2015. The average age of ships scrapped during the first half of this year was 23.2 years, down from 25.2 years during 2015. According to Clarksons, demolition activity seems to be on track to decisively exceed a 33 million deadweight seen back in 2012. Now iron ore. According to Clarksons seaborne iron ore trade is expected to increase to 1.391 million tons, which would be 2% higher than in 2015. An increase in construction activity in China has supported a firm recovery in the country's steel production in recent months. According to Clarksons it has helped support higher iron ore imports by China. This increase is expected to outweigh declines of imports into other countries. For example, in the European Union 27, seaborne iron ore imports combined are expected to drop by 3% this year. What is encouraging, according to Commodore Research, is Chinese steel output, which has been increasing steadily as of late, mainly due to the low supply of steel mines and ports. Chinese growth could, according to Commodore Research, exceed most expectations during the second half of this year. As for coking coal, according to Clarksons world seaborne coking coal trade is expected to drop to 239 million tons, which would be 3% lower than 2015. Nevertheless, Clarksons predicts that Chinese coking coal imports will increase by 2% this year and reach 36 million tons. The trend is predicted to be quite the opposite, though, for India, where imports are expected to drop by $0.05 in 2016 and reach only 45 million tons. On thermal coal now, according to Clarksons total [indiscernible] thermal coal seaborne trade is expected to drop by 2% this year to 862 million tons, down from 881 million tons in 2015. Clarksons cites three main reasons for this drop. First, China's imports are expected to drop by 6%, mainly due to the country's season pace of economic growth. Second, environmental regulations are estimated to reduce imports of coal into the European Union from the 7 by another 8% this year. Finally, since mid-2016 Indian thermal coal imports have come under pressure from firm domestic supply growth, as mentioned earlier on. As we reported from January to May of this year, Indian coal imports fell 10% from last year's levels to 89.3 million tons. In the short term, Clarksons predicts that demand for thermal coal imports will remain firm as port and power supply stockpiles remain low. Commodore Research claims that at the end of June this year, coal supplies at Qinhuangdao, China's largest coal port, stood at approximately 3.4 million tons, which was about 3.1 million tons or 48% less than at the same time in 2015. The above has led Commodore Research to forecast strong coal imports by China through the end of August this year. However, from then onward they continue to believe that there is a solid chance of coal imports coming under renewed pressure. Overall, Chinese thermal coal imports are projected by Clarksons to drop 7% this year to around 119 million tons. Indian coal-derived electricity production is staying under pressure, which is a negative development for coal import prospects and the dry bulk carrier market, particularly Panamaxes. Indian thermal coal imports are expected to drop by 7% this year to approximately 157 million tons. Turning to grain now, following a near doubling of Argentinian exports of wheat last year, Clarksons predicts that the 2016-2017 season will see a further 10% increase this year compared to last year. Even though volumes of this trait are less than 10 million tons per season, the timeline effect could be quite beneficial, especially for Panamax. According to Commodore Research, what has been recently helping the Panamax market has been firm amounts of South American grain cargoes, which have been shipped during this grain season. Finally, estimates of Panamaxes have benefited from a 23.5% growth in deadweight miles generated by the seasonal grain trade. Let's turn to the outlook now for our industry. [indiscernible] predictions that overcapacity in Capes will keep rates down for a while. However, limited contracting and stable seaborne iron ore trade going forward could shed some light at the end of this long tunnel. Commodore Research states in their recent report on bulkers that Panamax rates have been finding significant support recently on the strength of healthy grain and coal volume, as mentioned earlier. However, [indiscernible] varies for Panamax earnings from late August onwards, once South America's peak grain export season comes to an end. Ongoing new buildings deliveries for the rest of the year and the anticipated strength in Chinese hydropower production are cited as additional negative factors for Panamaxes in the short and medium term. According to [indiscernible] RACM the bulk carrier charter market has bottomed during the first half of this year. Unfortunately, however, they see the supply of vessels matching the few bright spots in trade which exist for the remainder of the year. They expect average rates in the second half of 2016 to be higher compared to the first half but not by very much. Therefore, on balance, analysts predict an improvement in bulk carrier earnings during the rest of this year but do not foresee a sustainable recovery until the circle of tonnage created by the uncontrolled speculative ordering of bulkers during the last three years or so are absorbed through scrapping and higher demand. The Diana Shipping investment policy is to diligently analyze possible purchases of effectively priced low bulk carriers and prepare the Company for the better days that are going to come. Our strong balance sheet will enable the management team, led by our CEO, Simeon Palios, to take advantage of opportunities which are representing themselves in the dry bulk shipping market. I will now pass the call to our CFO, Andreas Michalopoulos, who will provide you with the financial highlights of Diana's financial results in the second quarter and first half of 2016.

Thank you, Stacy, and good morning. I am pleased to be discussing with you Diane's operational results for the second quarter and six months ended June 30, 2016. For the second-quarter 2016 net loss amounted to $31.3 million. Net loss attributed to common stockholders amounted to $32.7 million. Net loss per common share was $0.41. Time charter revenues decreased to $28.3 million compared to $38.6 million for the second 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 partly offset by revenue derived from the addition to our fleet of the vessels [indiscernible] delivered in June 2016, New Orleans and Seattle delivered in November 2015, Serena and Ismene delivered in March 2016 and Maia delivered in May 2016. Ownership days were 4,147 for the second quarter of 2016 compared to 3,670 for the same quarter of 2015. Fleet utilization was 99.4% compared to 90.2% for the second quarter of 2015 and the daily time charter equivalents rate was $6,003 compared to $9,613 for the same quarter of 2015. Voyage expenses were $3.6 million for the quarter compared to $4.1 million for the same quarter of 2015. The decrease in voyage expenses was mainly due to a decrease in revenues, which decreased commissions. Loss from bunkers in the quarter amounted to $2 million compared to $2.2 million in the same quarter last year. Vessel operating expenses amounted to $21.9 million compared to $21.3 million for the second quarter 2015 and increased by 3%. The increase was due to the 13% increase in ownership days resulting from the enlargement of the fleet and was partially offset by decreased expenses insurances, stores and spares and repairs. Daily operating expenses were $5,289 for the second quarter of 2016 compared to $5,813 for the same quarter of 2015, representing a decrease of 9%. Depreciation and amortization of deferred charges amounted to $20.3 million. Expenses were $6.5 million compared to $6.2 million in the second quarter of 2015. Management [indiscernible] deposits were $0.4 million for the quarter and were the fees paid to Diana Williamson Management Limited for the management of six of our vessels. Interest consignments costs amounted to $5.6 million compared to $3.4 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 $0.5 million compared to $0.9 million and was decreased due to the decrease in the income earned from Diana container ships as a result of the amended loan agreement. Loss from equity method investments amounted to $2 million compared to income of $0.3 million for the same quarter of 2015. For the six months ended June 30, 2016, net loss amounted to $62.7 million. Net loss attributed to common stockholders amounted to $65.6 million and loss per share was $0.82. Time charter revenue decreased to $59.1 million compared to $80.6 million for 2015. The decrease was attributable to decreased average planned charter rates that we achieved for our vessels during the period. Ownership days for the six months ended June 30, 2015 were 8,078 compared to 7,268 for the same period of 2015. Fleet utilization was 99.2% compared to 98.6% for 2015, and the daily time charter equivalents rate was $6,096 compared to $10,069 for 2015. Voyage expenses were $10.3 million for 2016 and includes $7.1 million of loss from bunkers from the redelivery of our vessels during the six-month period. The vessel operating expenses amounted to $43.9 million compared to $43.1 million for 2015. The increase in operating expenses was mainly due to the 11% increase in ownership days resulting from the involvement of the fleet and was partially offset by decreased insurances both in spares and repairs. Daily operating expenses for the six months ended June 30, 2016 were $5,431 compared to $5,941 for the same period of 2015, representing a 9% decrease. Depreciation and amortization of deferred charges amounted to $40.3 million for 2016. General and administrative expenses amounted to $12.7 million compared to $11.9 million in 2015. The increase was mainly attributable to increased travel costs and increased Board of Directors fees and legal fees. Management fees to related parties were $0.7 million and were the fees paid to the technical management of the six vessels transfer to DWN to aggressively in 2015 from August to December. Interest in finance costs amounted to $10.6 million compared to $5.9 million in the first half of 2015. This increase was attributable to increased average debt and average interest rates compared to last year. Interest expenses in the first half of 2016 amounted to $9.4 million compared to $5.2 million for the same period last year. Interest and other income amounted to $1.1 million compared to $1.8 million for 2015. This decrease was due to the decrease in interest income received from Diana containerships during the period, amounted to $0.8 million compared to $1.6 million for the same period in 2015. Loss from equity method investments amounted to $4.2 million compared to loss of $0.4 million for the six-month period of 2015 and was due to a loss from our investments in Diana Container Ships, Inc., which was partially offset by gain from investments in Diana Williamson Management Limited. Thank you for your attention. We will be pleased to respond to your questions and I will return the call to the operator, who will instruct you as to the procedure for asking questions. Thank you very much.

[Operator Instructions] Amit Mehrotra, Deutsche Bank.

First, first question is obviously about the reports that you are contemplating asset purchases, specifically a Capesize resale. Just wanted to simply ask if you can confirm or deny this and, if it is indeed true, what the rationale is for this kind of investment, given the uncertainty around the ability to meet the near- and midterm cash calls.

We will try to explain the situation as simply as possible. We are currently proactively and we are active before a problem arise, if it does, to come with an agreement with the banks as regards possible using on the repayment schedule. If we do not manage to come to an agreement, we have to continue business as usual. And at this stage of the cycle we are considering cheap assets, cheaply purchased vessels at the bottom of the cycle, as good as cash or even better. We will consider unencumbered vessels at this stage in the cycle, where they have been purchased at this stage in the cycle. They don't have a lot of way downwards. And also they are very, very liquid, if necessary, after a year or two years from now. At the same time, we strongly feel that being as good as cash, at this stage later on, can be proven to be a nice asset to have in your negotiations with the banks, if you want after a while to come into an agreement with the banks as regards, again, and easing on amortization schedules. It's very simple. So there is some truth in what you have said because we are ready to buy vessels, certainly not spend the entire cash position that you see, which is substantial, but an investment within the next four months, equal to $40 million-$80 million is certainly something that we are considering seriously.

Okay, thank you for that, the details. If I could ask a follow-up on that, you guys have been in discussions with your lender group for a while. I think it's maybe 10 or 13 banks, large, if I'm correct. And clearly you are closer to pulling the trigger, so to speak, than you have in the past in terms of the assets that you have identified. So maybe can we read between the lines and say the negotiations are harder than maybe you would have expected and the banks are essentially being a little bit more difficult in terms of requiring you to raise liquidity, and so this is why you are maybe contemplating this step? What can we glean from the status of the negotiations?

You cannot read between the lines. Having said that, time is of the essence for everybody. And we need to be always ready to do what is best for the Company and our shareholders.

The tricky part of the whole question of yours is the proactive part of the deal. If you consider the fact that we are acting proactively, then you can understand our ability to have two plans.

Right, okay.

Either/or.

Maybe I can just follow up one more time. In this environment it just seems like the banks are being tougher. And so I know you've talked last quarter about an equity raise being the last resort. Do you see that as being part of any negotiation, or is that still off the table and you want to explore?

Certainly raising equity is out of the question, especially proactively. That's why I keep talking about the proactive part of the story. We still have plenty of cash aside and we still, by adding our models and you are adding yours, you can see that we have a nice time ahead of us before we have a real problem, where we can discuss with the banks again.

Okay. Well, that's --

And this is something that we feel that the banks -- at the end of the day some of them, they have understood already. In others may understand. But for us raising equity proactively and diluting our shareholders -- we will not do it. We will do it if absolutely necessary.

Right. And I guess the proactive purchase of assets could accelerate the point in time where you would need to do that defensively. Right?

No. No. Because, before the raising of equity you can sell the unencumbered assets.

Okay, got you.

Even at a higher price than what you have paid today.

Okay. Okay, good. Let me just ask Andreas a couple quick ones, housekeeping items, if you will. The new building payments -- is that still $83 million or is that less?

The new building payment is $78.6 million.

$78.6 million? So if I am correct, Andreas, does that take your LTV currently to like 80%-85%? Is that in the ballpark of where you guys see it?

Yes, more or less, more or less.

Or that may be too optimistic? It may be higher than that?

No, no, no. It's more or less around there. But, you know --

Okay. Last question from me -- the remaining debt repayments this year, I think you had $45 million this year and $50 million next year.

The remaining this year is $31.3 million for the remaining of the year, and for 2017 is $46.7 million.

46.7? Okay. Great, guys. That's all I have. Thank you so much.

It seems that we have no further questions at this time. I'd like to turn the floor back over to management.

Thank you again for your interest in and support of Diana Shipping. We look forward to speaking with you in the months ahead. Thank you.