Diana Shipping Inc. (DSX) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to Diana Shipping Third Quarter 2017 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 Mr. Ed Nebb, Investor Relations Advisor for Diana Shipping. Thank you. You may begin.

Thank you, Michelle. And thanks to all of you for joining us today for the Diana Shipping third quarter conference call. The members of the management team who are with us today include 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 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, projections and beliefs as to future events that may not prove to be accurate. And for a description of those risks and uncertainties and other factors that may cause future results to differ from the forward-looking statements, please refer to the Company’s filings with the Securities and Exchange Commission. 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 for Diana Shipping Inc for the third quarter of 2017. The Company's performance during the recent quarter reflected our long-standing strategy of positioning our fleet to take advantage of an eventual rise in charter age. Assuming these conditions have improved, our rates have strengthened, we are starting to show the benefits of these strategies. To review our financial results, Diana Shipping recorded a net loss of $24.5 million and net loss attributed to common shareholders of $25.9 million for the third quarter of 2017. These results included an $8.4 million impairment loss on motor vessel Melite, which was sold for scrap in October 2017 after her grounding in July 2017. And we received from the insurers of the insured value. This compares to a net loss of $78.3 million and net loss attributed to common stockholders of $79.8 million for the third quarter of 2016, of which $50 million related to a loss and impairment from equity method's investments. It is important to note that the Company's loss decreased very significantly from a year ago. If we exclude the impairment loss in the 2017 period and the loss of the equity investments in the 2016 period. Time charter revenues were $43.9 million for the third quarter of 2017. These represent a sharp increase compared to $27.1 million for the same quarter 2016 due to increased average time charter age achieved in the Company's vessels during the quarter and increased revenues resulting from the enlargement of the fleet. For example, during 2017, third quarter, we signed charter contracts for nine vessels, all of which were substantially higher charter rates than the previous contracts. Diana Shipping continues to maintain a strong balance sheet. Cash, cash equivalents and restricted cash were $62.7 million as of September 30, 2017. Long-term debt, net of deferred financing fees, including the current portion was $622.1 million compared to stockholders' equity of nearly $1.1 billion. We continue to manage our fleet of 50 vessels in a responsible manner that promotes a balance of time charter maturities and produces a predictable revenue stream. Currently, our fixed revenue days are 87% for the remainder of 2017 and 29% for 2018. Moving forward we are confident that our strong financial resources and the strategic management of our fleet will enable the Company to continue to benefit from improving conditions in the dry bulk marketplace. With that, I will now turn the call over to our President, Stasios 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 review. Thank you.

Thank you, Simeon, and good morning to all. The bulk carrier market conditions have shown clear signs of improvement this year compared to the historically depressed market environment seen in 2016. The last quarter provided several useful pointers to how the bulk carrier market might develop over the next several quarters. We will provide you with the reasons for that as presented by several analysts, and we'll endeavor to explain why some of the shipping analysts forecast appear to be sensible and likely to materialize. The Baltic industry that we usually refer to during our quarterly presentations seem to indicate that markets without signs of instability or temporary distortions to the supply demand balance. The Baltic Dry Index started the third quarter at 882 and closed yesterday at 1,385. The Baltic Panamax Index followed the similar pattern, and went from 1,068 to 1,280 during the same period. In BCI, the Cape Index, was at 1,052 at the start of the third quarter, and closed yesterday at 3,214. According to Clarksons, bulk carrier earnings in September of this year improved by an average of 17% year-on-year to $12,868 per day. This reflected a more positive demand trend, with growth in the seaborne dry bulk rate projected to accelerate to 4.2% for the total of 2017, up from an average of 0.5% during the 2015 to 2016 years. In early November, the 12-month time charter rates for more than Capesize bulkers was around 15,750 per day. Panamaxs has earned about 12,500 per day for 12-months during the same period. According to Clarksons, at the end of 2016, ship values stood at significantly lower levels at the end of 2015. For example, five year-old Capes were selling at $40 million. In early November though this year, the price was more or less steady at $39 million. As the five year-old Panamax, these were trading at around $28 million at the end of 2016, and the prices slide slightly to $26.5 million in early November of this year. Let's look at microeconomic news. The U.S. Commerce Department announced the growth of 3.1% annually for the second quarter of this year, which was up from an initial 2.6% estimate earlier in the year. The U.S. manufacturing PMI increased to 60.8 in September from 58.8 in August. The positive indicator that the U.S. economy is picking up speed. In China manufacturing PMI climbed from 51.7 to 52.4 from August to September of this year. This is the highest reading since 2012. According to Clarksons, growth in both Chinese retail sales and industrial production accelerated in September 2017. Industrial production grew in September by 6.6% year-on-year, while retail sales expanded by 10.3%. In the Eurozone, the manufacturing PMI came in at 58.1, in September, which represents a 6.5 year high. Recent growth figures show the Eurozone growing at approximately 2.5% on an annual basis. The IMF expect for the global economy to grow 3.6% this year, up from 3.2% in 2016. According to Braemar ACM, the IMF recently announced that the world economy's enjoying its most widespread and fastest growth in temporary and short-lived bounce back from the global recession in 2010. So all in all, as far as the world's growth is concerned, we start to be nearly perfectly aligned to support healthy demand growth for the transportation of bulk cargoes over the next couple of years. On demand now, according to Clarksons, expansion in seaborne dry bulk rates is expected to accelerate to around 4% in 2017, following average growth of just 0.5% in 2015 and 2016 as mentioned earlier. Strong Chinese demand has remained a key driver of volume growth. The Chinese dry bulk import projected to increase by a very strong 7% in 2017. Looking at iron ore now. According to figures by Clarksons, total iron ore import are estimated to reach 1.528 billion tons in 2018, up 3% on estimated 2017 volumes. Chinese demand for higher-quality imported iron ore is expected to increase by 4% next year, but taking the total volume of imported iron ore to 1.114 billion tons. According to shipping analysts, Banchero Costa, downside risks are increasing for iron ore imports, including the potential for lower steel output during winter in China, lower steel demand and high iron ore price. These factors may encourage destocking and further increases in domestic output, as well as competition from scrap speed. In this respect, it is worth noting that after reaching a record high of over 145 million tons in late June, iron ore stockpiles have since then fallen off, hovering at around 120 million tons since August. As mentioned earlier, high iron ore prices may encourage destocking of iron ore stockpiles, even if they are of lower quality that's dampening imports. Coking coal now. Clarksons report that the global seaborne coking coal trading is projected to grow by 3% in 2017, to a total of 268 million metric tons, which would represent the highest annual volume since 2014. Chinese coking coal imports increased by 18% year-on-year to reach 53 million tons during the first nine months of the year. According to Banchero Costa, Chinese demand may taper off this demand from steel mills fall during the upcoming winter output curves. Thermal coal, according to Clarksons’ global seaborne steam coal trade has grown firmly in the year-to-date, the volumes now projected to increase by 6% in full year 2017. For 2018, volumes are projected to grow by a modest 1% to reach 964 million tons. This trend reflects the continued move towards cleaner energy sources in some regions such as Europe. According to Braemar ACM, coal demand from India may very well increased over the next few quarters as the government is seeking to eliminate the use of highly-polluting pet-coke in power generations to 20 million to 25 million tons per year of steam coal coming primarily from South Africa and Indonesia. That will primarily result in increased demand for Panamax and Supermax. Following China's ban on North Korean coal import, overall coal and lignite their shipment to China from Indonesia and Australia, among other nations, have seen a sharp increase. Indonesia has seen the largest volume increase of 11.5 million tons. Meanwhile, Chinese seaborne steam coal imports increased firmly in the first nine months of the year, rising 14% year-on-year to 130 million tons. According to Banchero Costa, coal-fired plant still accounts for the majority of power generation in China and will not disappear anytime soon. The reasons are lower costs and trenched economic interests. Coal-fired generation capacity was still estimated to grow 5.3% year-on-year in 2016, despite lower utilization level. In the first eight months of 2017, thermal electricity output in China was up by 7.6% year-on-year. Grains now, according to Clarksons, total grain export during the 2017 to 2018 growth season are estimated to rise by 2% over the period – over the prior period and reach 358 million tons. Total U.S. wheat and coarse grain exports are projected to contract 19% to around 90 million tons in the 2017 to 2018 crop year. Meanwhile, Brazilian coarse grain exports are projected to more than double during the same period and reach 33 million tons. Argentinian total wheat and coarse grain exports are also projected to grow by 12% to a record 43 million tons in the 2017 to 2018 crop season, reflecting the competitiveness of Argentinian export resulting from the weakness of the Argentinian peso. Let's look at the supply of tonnage. Expansion of the dry – of the bulk carrier fleet capacity is projected by Clarksons to pick up slightly this year to around 3.5%, following growth of only 2.2% in 2016. As regard to deliveries in 2017 after assuming delivery slippages, a total of 41 million deadweight are expected to be delivered. Clarksons predict the good growth of the fleet during 2018 to be only 1%. Deliveries are expected to come in at 23 million deadweight in 2018, wood scrapping to slow down to 30 million deadweight, talking about scrapping. According to Banchero Costa, in 2017 to 2019, the ballast water and fuel suffering relations are expected to provide some support to scrapping levels. However, during the first 10 months of 2017, a total of about 174 bulk carriers totaling 12.3 million deadweight wood scrap compared with 345 units of 27.1 million deadweight scrap capacity during the same period last year. Now, new building orders. According to Banchero Costa, new orders placed from January to September this year, stand at 81 units, totaling 9.3 million tons deadweight of which 30 are Panamaxs, Kamsarmaxs and 21. This compares to 33 units amounting to 8.4 million deadweight ordered during the same period last year. Nation news has been agreement between and several Korean and Chinese owners for the construction of 325,000 deadweight VLOC with employment. These fees which are more financial rather than shipping fee are aimed to provide a predictable transportation cost for Valley over several years and very low return to this is investing owners. This is without taking into account the risks from unforeseen operational problem that these ships may have. Even though most of these vessels will be replacing VLOC's converted tankers about 10 years ago, some will add to capacity, and carry cargoes which will not be available to be transported in traditional gate tons. This is certainly not very encouraging news. The new building order book now. According to Clarksons, at the end of September, the book of bulk order books stood at [Audio Dip] of existing fleet and 67.2 million deadweight. The Panamax order book was 13.1 million deadweight or near 6.5% of the existing fleet. The Capesize order book stood at 38.1 million deadweight, representing 11.8% of the trading fleet. Now what is the outlook for the bulk carrier industry? As mentioned at the early part of this presentation, demand prospect in China and India and various other major economies remain promising. We agree with Clarksons, that we gain the cautious optimism which exists today as regards the future of the bulk carrier market, there remain risks to demand outlook, including some of the potential impact of the environmental inspections of Chinese industrial activity and for further displacement of Indian coal imports from rising domestic coal outsource. The improvement indicates that market conditions is gaining momentum. And while seasonal factors might be their role, there are more positives fundamental driver spreads. Going forward, Brazilian exports are projected to increase further in 2018, while continued consolidation of the Chinese steel industry is expected to benefit demand for imported iron ore at least in the short term. According to Clarksons, limited supply growth in the coming years suggests that the bulk carrier market balance should continue to gradually improve, even if trade growth market moderates slightly going forward. The obvious risk is a sharp pickup in new building ordering, which we all hope will not materialize anytime soon. According to Braemar ACM ship growth, the recovery that we have seen over the last 18 months will continue with slightly remaining positive over the next three to four years. However, Braemar also adds that for some sectors, we pray for this phase of will not be quite as smooth as for orders. The Diana Shipping management team is very pleased that the company's investment and best strategies have materialized exactly as have been predicted. The company has a modern fleet of bulk carriers and reasonable leverage, so as to be able to benefit most from the increase in earnings and ship prices anticipated by most shipping analysts. It should be pointing out, however, that the future movement of time charter rate and ship prices will very much depend on invested psychology and expectations especially for 2019 to 2020. This will play a determining role in the movement of shares in prices and possible future dividend payments. I will now pass the call to our CFO, Andreas Michalopoulos, who will provide you with the company's financial highlights for the third quarter and first nine months of 2017. Thank you.

Thank you, Stasi and good morning. I am pleased to be discussing today with you, Diana's very strong results for the third quarter and nine months ended September 30, 2017. For the third quarter 2017, net loss and net loss attributed to common shareholders of $24.5 million, $25.5 million respectively, including $8.4 million impairment loss on the motor vessel which was sold for strapping in October 2017, after grounding in July 2017, and some insurers’ mutual value. Loss to common shares was $0.25. Time charter revenues increased to $43.9 million in compared to $27.1 million in the third quarter 2016. The increase was due to increased average time charter rates that we achieved during the quarter and revenues derived from the additions to our fleet at the vessel San Francisco and Newport News delivered in January 2017, and a [indiscernible] delivered in May 2017. Ownership days were 4,692 in the third quarter of 2017 compared to 4,232 in the same quarter 2016. Fleet utilization was 97.9% compared to 99.4% for the same quarter 2016 and the daily time charter equivalent rate was $8,147 compared to $5,914 for the same quarter 2016. Mortgage expenses was $2.5 million for the quarter compared to $2.1 million for the same quarter 2016. The increase in mortgage expenses was due to increase in commissions due to increased revenues. Vessel operating expenses amounted to $22.7 million, compared to $21.2 million for the third quarter 2016, an increase by 7% due to 11% increase on the ownership days resulting from the enlargement of the fleet. On average, daily operating expenses increased in all operating expense categories, and daily operating expenses was $4,837 for the third quarter of 2017, compared to $5,014 for the same quarter 2016, representing a decrease of 4%. Depreciation and amortization of deferred charters amounted to $22.4 million, general and administrative expenses were $5.7 million compared to $6 million for the same quarter last year. Management fees related party were $0.5 million in the same month last year. Interest and finance costs amounted to $6.8 million compared to $5.7 million in the same quarter of 2016. This increase was attributable to increased average debt and average interest rates in the quarter compared to the same quarter 2016. The interest and other income amounted to $1.5 million compared to $0.5 million for the same quarter last year. The increase was due to the increase in interest rates and the outstanding balance of the loan due from Diana Containerships following the new loan agreement on June 30, 2017. Loss from equity method investments amounted to $2.8 million compared to $50 million for the same quarter of 2016. The loss was due to the loss on the sale of our investment in [Audio Dip] and a losses on our investment in Diana Real Estate. For the nine months ended September 30, 2017, net loss amounted to $74.8 million and net loss attributed to common stockholders amounted to $79.1 million. Loss per share was $0.85. Time charter revenues increased to $130 million compared to $86.2 million for 2016 and the increase was attributable to increased average time charter rates that we achieved for our vessels during the nine-month period and the increasing ownership days due to the enlargement of our fleet. Ownership days for the nine months ended September 30, 2017 were 30,195 compared to 12,210 for the nine months ended September 30, 2016. Fleet utilization was 98% compared to 99.3% for 2016 and the daily time charter equivalent rate was $8,088 compared to $6,053 for 2016. Voyage expenses were $5.6 million for the nine months ended September 30, 2017. Vessel operating expenses amounted $66.3 million compared to $65.1 million for the nine months ended September 30, 2016. This increase in operating expenses was mainly due to the 10% increase in ownership days resulting from the enlargement of the fleet. On average, operating expenses for crude costs, insurances, stores fare and environmental costs decreased, and there was a small increase in taxes and other operating expenses. Daily operating expenses for the nine months ended September 30, 2017 were $4,916 compared to $5,288 for 2016, representing a 7% decrease. Depreciation and amortization of deferred charges amounted to $65.1 million for 2017. General and administrative expenses decreased to $18.2 million compared to $18.7 million for the same period in 2016, mainly due to decreased payroll costs. Management fees related party were $1.3 million and were the fees paid to Diana Williamson management, our joint venture, for the technical management of our vessels under their management. Interest and finance costs amounted to $19.9 million compared to $16.3 million in 2016. This increase was attributable to increased average debt and average interest rates compared to last year. Interest expense for the nine months ended September 30, 2017 amounted to $18.6 million compared to $14.4 million for the same period last year. Interest and other income amounted to $3 million compared to $1.6 million in the nine months ended September 30, 2016. This increase was mainly due to increased interest income from Diana Containerships, Inc. under our loan agreement with them which amounted to $2.5 million in the nine months ended September 30, 2017 compared to $1.2 million for the same period in 2016. Loss from equity method investments amounted to $5.6 million compared to loss of $54.3 million for the same quarter last year and was mainly due to a loss in our investment in Diana Containerships, Inc. which was sold during the nine months ended September 30, 2017. As previously announced, on July 25, 2017, the motor vessel Melite run aground at Pulau Laut, Indonesia resulting to the vessels’ constructive total loss. The vessels net value which, as of September 30, 2017 amounted to $22.3 million was written down to its scrap value of $2.5 million, resulting to an impairment of $19.8 million. The company recovered an additional amount of $11.4 million from the vessels' machinery insurances, insurers reducing the total impairment loss to $8.4 million. The vessel, which had a loan from Commonwealth Bank of Australia, having outstanding balance of $5.8 million as of September 30, 2017, was sold for scrap to a non-related third-party for $2.5 million in October 2017, and the related loan balance was repaid in full. Thank you for your attention. We would be pleased to respond to your questions and will turn the call to the operator who will instruct you as to the procedure for asking questions.

Thank you. [Operator Instructions] Our first question comes from the line of Gregory Lewis with Credit Suisse. Please proceed with your question.

Yes, thank you, and good afternoon.

Good afternoon.

I'd like to dive in a little bit to the current charter market. Just as we look at your fleet, there's a couple of vessels, there are a couple of Capes, actually that are going to be up for renewal here in the back half of the fourth quarter. I guess, could you tell us a little bit about the depths of the time charter market for the Capesize market and how should we be thinking about these vessels in terms of – could we see them be trading one more short-term spottish-type cargoes, or should we think about you maybe taking the uptick in rates and maybe locking those up for a little bit longer?

We have a strategy in chartering that is very well known to everybody, and that has not changed since 2005 by which we had hedged physically our vessels by having all of these vessels to open throughout the cycle, and in order for us not to take a bet on the chartering, on the chartering market. And we don't intend to change that, Greg. So no, we will not opportunistically try to call the market in terms of chartering.

As you know, Greg, we are taking the agnostic view on the charter market and we are going to remain on this agnostic view for the years ahead. And I think it works very nicely because we can prove that our rates, which we have achieved in the past are more than the marketplace, which is positive.

Okay, yes. I mean, but just as we look at the Cape fleet between the Capes and Newcastles, they're all up for renewal in 2018. So I guess what I was wondering, is there any depth that the time charter market could we actually – is there a potential to fix the Cape or at Newcastlemax for two years or three years? Or is the market still real – there's no real customer demand for multiyear contracts at this point I guess is probably how should I asked the question.

Well, I think that the two-year period is good enough for us, provided the vessels are not opening in the same time and we are spreading the vessels in such a manner that we have different vessels in different periods.

Okay, great. And then just – Stasi, you touched on it about the constructive background for supply over the next call it 12 months to 18 months. And just given that and given the fact that we've seen a little bit of an uptick in rates, how aggressive have shipyards been as of late in terms of whether anything you're hearing, whether it’s Diana maybe getting incremental calls from shipyards or anything you're hearing about the potential for another acceleration in new orders? I'm curious on that. Thanks.

Yes, Greg, the acceleration in the new building orders is probably going to come more due to optimism about future rates and the ship prices and values rather than from the aggression exhibited from shipyards. Shipyards have been up most aggressive, I would say about 12 months to 18 months ago. Now with rates having gone up, we find that most yards are not prepared to build ships at below costs – I would say all of them, and if anything prices might be creeping up slightly on new building contracts. So the determining factor for the number of new buildings that we are going to see over the next few quarters is going to be what ship owners think, is going to be the future earnings pattern of the ships that they're ordering, and some no doubt, will decide to take a view to order more than a couple of ships to give them the opportunity between ordering and taking delivery to possibly locking a profit from any uptick in the price.

Perfect, guys. Thank you for the time.

You’re welcome.

Thank you. [Operator Instructions]. Our next question comes from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good afternoon, guys. Andreas, my questions are for you, mostly. So Mr. Palios mentioned $62.7 million of cash, including restricted cash in his prepared remarks. And if you look at the balance sheet, it was only $37.2 million. Can you just remind us what the remainder is of restricted cash it is obviously $25-point whatever million, but why is it restricted and at what point does it become kind of current cash and cash equivalents?

No, it’s $25.5# million. And in the line – on the balance sheet restricted cash but anyway – this is the cash, the minimum cash that is required in the loan agreements by the banks. So it's $100,000 per vessel.

Got it. And then also debt amortization schedule as we look into 2018, you mentioned you already paid off the $5.8 million for the ship scrap. What's the payback schedule for next year?

You’re talking about – sorry, can you repeat your question because I didn't hear.

Yes, sure. It’s the – your debt amortization schedule for next year, for all of the facilities in total.

Yes. So the debt repayments for the entire 2017 will be $55.5 million and for 2018, it's $62 million.

Okay. Now as the market continues to improve and hopefully, there are some operating cash flow generation, how do you think about the next uses of cash? Is it continue to delever the balance sheet, continue to kind of dip into the market and buy ships and onesies, twosies? How do you think about cash deployment in 2018 in a better market environment?

At the momentum, we have said that we are not going to invest in further ships and that we are staying on the sideline, trying to see this stability in the market, and whether the market turns in a positive way that I think Stasi mentioned in his remarks. Until that is clearly seen one way or another, we are staying on the sidelines using, keeping our cash for our daily operations and focusing on chartering our vessels and daily operations of our fleet. So for the moment, it's nothing that in terms of the strategy has been decided what is for sure that we have stopped our two years of buying mode that we were into, and that already seems --. And the post following the market and the various opportunities that are in front of us in terms of finance, in terms of everything. And certainly we're following the market to see where it evolves going forward.

Okay, that makes sense. And then finally, just for a modeling perspective, there's been a lot of shares issued I think at Diana Containership's. What's the percentage of ownership at Diana Containerships today at Diana Shipping?

Zero.

Zero?

Yes.

Okay. And that's strictly from dilution not -- you didn't sell your stake?

We sold.

So you did. Okay. All right. Perfect. Thank for your help, Andreas.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.