Diana Shipping Inc. (DSX) Q3 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to Diana Shipping's 2020 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I will turn the conference over to Ed Nebb, Investor Relations for Diana Shipping. Ed, you may begin.

Well, thank you, Rob, and thanks to all of you for joining us for the Diana Shipping Inc. 2020 third quarter conference call. The members of the company management team who are with us today include Mr. Simeon Palios, Chairman and Chief Executive Officer; Ms. Semiramis Paliou, Deputy Chief Executive Officer and Chief Operating Officer; Mr. Anastasios Margaronis, President; Mr. Ioannis Zafirakis, Interim Chief Financial Officer, Chief Strategy Officer, Treasurer and Secretary; and Ms. Maria Dede, Chief Accounting Officer. Before management's remarks, let me just briefly summarize the Safe Harbor notice. Certain statements made during this call, which are not historical fact, are forward-looking statements as defined by the Safe Harbor provisions of the Private Securities Litigation Reform Act and such forward-looking statements are based on assumptions, expectations, projections and beliefs as to future events that may or may not prove to be accurate. A description of the risks, uncertainties and other factors that may cause future results to differ materially from the forward-looking statements are contained in the company's filings with the SEC. And with that, it is my pleasure to 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 third quarter of 2020. As a challenging year winds towards a close, the world is still feeling the effect of the COVID-19 pandemic and its impact on people's lives and global economic activity. While recent developments in terms of potential vaccines are promising, in the near-term, we are facing renewed lockdowns due to a resurge of the coronavirus. Such measures will continue to negatively affect the global economy and the market demand for worldwide shipping. In response to these uncertainties, the company has continued to pursue strategies to prudently manage our financial resources, our fleet and our overall operations. To summarize the 2020 third quarter, Diana Shipping reported a net loss of US$13.2 million and a net loss attributed to common shareholders of US$14.6 million for the third quarter of 2020, including a US$6.8 million impairment loss, which resulted from the agreement to sell the vessels Sideris GS and Coronis. This compares to net income of US$1.8 million and net income attributed to common stockholders of US$0.3 million reported in the third quarter of 2019. Time charter revenues were US$42.3 million for the third quarter of 2020, compared with US$53.5 million for the same period of 2019. This decrease was mainly due to the sale of vessels in 2019 and 2020 and decreased average time charter rates. The balance sheet remains challenged with total cash, including restricted totaling US$90.4 million at September 30, 2020. We have taken several steps to strengthen our financial position in recent periods. In July, we repurchased an aggregate amount equal to US$8 million of the outstanding senior unsecured bonds. You may recall that we also extended to refinance several loan facilities during the second quarter to extend their maturities. With respect to fleet management, in September, we agreed to sell the 2006 built vessel, Coronis, for a sale price of US$7.1 million before commissions. Later that month, we agreed to sell the 2006 built vessel, Sideris GS, for a sale price of US$11.5 million before commissions. Both vessels will be delivered to the buyers later by January 20, 2021. In conclusion, we are confident that Diana Shipping Inc. can continue to navigate the prevailing challenging conditions, while remaining sharply focused on preserving and building shareholder value. With that, I will now turn the call over to our President, Stasi Margaronis, for a perspective in industry conditions. He will then be followed by our Interim Chief Financial Offer and Treasurer, Ioannis Zafirakis, who will provide a more detailed financial overview. Thank you.

Thank you, Simeon, and thanks to all who have taken the time and trouble to participate in this quarterly conference call of Diana Shipping Inc. The dry bulk market has responded better than feared to the disruption and upheaval caused by the COVID-19 pandemic. This will be discussed further later on in the short presentation. For now, we can look at the bulk carrier indices and compare where these stood at the beginning of the year and at what levels they closed last Friday, November 20. On January 2 this year, the BDI stood at 976. By last Friday, it closed at 1,148. The Baltic Panamax Index started the year at 1,003 and closed at the end of last week at 1,353. The Baltic Cape Index was at 1,646 on January 2 and ended last week at 1,435. Let us not look at the effects of the pandemic, and then we pardon, on the major economies of the world and its effects on world trade and world growth. According to Howe Robinson, the current recession caused by the COVID-19 pandemic is unique in the economic sectors it has hit hardest. Usually, these are the heavy and capital goods industries, or in the case of financial crisis, the banking sector. However, this time, what were normally relatively immune sectors such as retail, entertainment arts, hotels, restaurants have contracted by between 15% and 25% in the OECD during the first-half of 2020 and more since then, while manufacturing, mining, construction and power utilities have been less hard hit. Agriculture and the financial and insurance industries have remained more or less unchanged, while seaborne grain movements, as we will see later, are expected to rise significantly. According to the IMF and OECD, world GDP will shrink by 4.4% this year, mainly due to the COVID-19 pandemic. In 2021, there are hopes that growth will return and GDP growth for the world as a whole will be about 5.2%. No doubt these numbers will be revised several times over the next few months, depending on developments with the pandemic and the vaccination process that is when vaccines will become available to the world population as a whole. In the U.S., GDP is projected to drop by 4.3% this year and increase by 3.1% in 2021. In the euro area, GDP is expected to drop by 8.3% in 2020 and increase by 5.2% in 2021. China's economy is now expected to grow by about 1.9% in 2020, according to the IMF. This, if it materializes, will make China the only G20 economy expected to record growth this year. In 2021, Chinese GDP is expected to increase by 8.2%. Let's look at seaborne trade now and the COVID-19. According to Clarksons, the COVID-19 pandemic is projected to drive a 2.3% decline in bulker ton-mile demand over the whole year. On the other hand, the bulk carrier fleet is expected to grow by 3.4% in deadweight tons. This has already brought weighted average bulk carrier earnings down by about 22% year-on-year so far. However, the trends that have not been uniform across commodities. The iron ore trade continues to be supported by strong Chinese demand, while grain trade is also set to record firm growth this year. At the other end of the commodity spectrum, coal has already seen shipments drop by 10% this year, and the minor bulk trade is expected to show significant declines in the full year. Overall, a fairly firm rebound in the dry bulk trade is projected for 2021. Demand is expected to grow by 4% next year, and supply is expected to increase by only 1.5%. Even though the lingering effects of any oversupply from this year could present downside risks, Clarksons believe that the supply demand forecasts for next year will allow a fundamental rebalancing to take place in the sector, which should eventually bring firmer earnings. Let's take a look at iron ore now. Clarksons predict that world iron ore seaborne imports will increase by 2% this year and by a further 2% in 2021. Chinese seaborne imports have gone up by 11% during the first 3 quarters of this year, mainly due to the following factors. First subdued iron ore demand elsewhere, which has seen cargoes diverted, so to speak, to China. Secondly, firm steel production growth in China; and third, the decrease of availability of scrap steel in China, which has boosted iron ore demand from steel mills. According to Banchero Costa, total steel output in China from January to September 2020 came to 783.3 million tonnes, up by 4.9% compared to the same period in 2019. According to Commodore Research, valid iron ore exports remain likely to surge during the final few weeks of this year and first couple of months in 2021. Howe Robinson concurred with this view based on guidance provided by Vale according to which the company will try its utmost to meet its target of 310 million tonnes for this year. Howe Robinson continued by stating that future production by Vale will be sold rather than stored, meaning that inventory stocks will be replenished at a considerably lower pace between 2021 and 2022 than seen in the past. Coking coal now. According to Clarksons, global seaborne coking coal demand is currently projected to decline 10% this year due to major impacts to steel industries globally as a result of the COVID-19 pandemic. For next year, Clarksons projects an increase of shipments by about 7%, which will bring volumes shipped about 259 million tonnes worldwide. This will be lower than what was imported worldwide in 2018 and only 3 million tonnes higher than shipments seen in 2017. Steam coal now. According to Clarksons, global seaborne steam coal trade remains under significant pressure due to the impacts from the COVID-19 pandemic. Volumes traded this year are expected to drop by 8% and come to 937 million tonnes compared to last year's 1.021 billion tonnes. For 2021, Clarksons projects an increase of 4% compared to this year. In China, it is widely reported that to meet winter demands of steam coal, the government is keen to boost domestic production rather than import coal for that purpose. According to Clarksons, Chinese demand for imported coal is projected to decline by 4% this year and by a further 3% in 2021. Turning to grain now. Clarksons predict that world seaborne grain demand is expected to reach a record 506 million tonnes this year, which is about 6% higher than last year. In 2021, a further 3% increase is projected, taking the total to 521 million tonnes. China is projected to increase its imports of wheat and coarse grains by 80% and 45%, respectively this year, as Chinese state buyers have sought to bolster strategic reserves and stockpiles. Clarksons believe that Chinese seaborne grain imports are likely to continue to expand into 2021 based on demand from sectors such as animal feed, which are set to continue growing strongly. The USDA reported sharply higher soybean shipments to China in September and October, reaching about 2 million tonnes per week. This is a number not seen since 2017 before the trade war between the U.S and China began. Let's turn to some environmental issues and alternative fuels. According to Gibson, the European Parliament has adopted the recommendations of its environmental committee made in July this year and voted to include greenhouse gas emissions from shipping in the emissions trading systems from January 2022. This means that 2030 owners must reduce emission levels by 43% from 2005 levels. According to Gibson, turning to fuels now, ammonia is attracting interest as an alternative carbon free fuel. They claim it is easier to store than hydrogen, though it does present plenty of challenges in that respect. And there is some industry expertise when it comes to handling it on board. However, the main barrier to it being used as a fuel for shipping is that it is acutely toxic. We believe that ammonia can be used in the fuel cells in a conventional engine. Plenty of significant technological advances, though, are still needed for ammonia fuel cells to become a viable alternative technology for shipping. Maritime transport currently contributes about [indiscernible] million tonnes of CO2 annually, which is 2.5% of global greenhouse gas emissions. A rather small percentage, one would say, considering shipping's contribution to world trade. Turning to crew changes and the effects of COVID-19 in that sector. According to the IMO, there are about 300,000 seafarers on board vessels unable to be relieved, despite in some cases having served considerably beyond the 11-month limit stipulated by the Maritime Labor Convention. The numerous restrictions and obstacles that prevent crew changes have created the humanitarian crisis at sea according to the IMO Secretary-General, Kitack Lim. Unfortunately, the rate of progress is not keeping pace with the backlog of ships requiring crew changes. Let's look at the new building order book now. According to Clarksons, as of the end of September, there were 633 bulkers on order globally with carrying capacity of 59 million gross tonnes. In deadweight terms, the dry bulk order book has shrunk by 35% so far this year. About 126 states on order representing 7.8% of the world fleet by deadweight. About 165 Panamaxes and post Panamaxes up to a 1,000 tonnes deadweight were in the order book, amounting to 6% of the fleet by deadweight. Total bulk carrier order book came to 57 million deadweight, equivalent to only 6.3% of the trading fleet. A quick look at the price spread in very low sulfur fuel and high sulfur fuel prices and scrubber fitted bulkers. Clarksons report as of the beginning of October, there were 1,257 bulkers of 187.1 million deadweight or 20.7% of total capacity fitted with a scrubber. As much as 40.9% of cape size capacity is now scrubber fitted. However, the share of the bulker fleet under retrofit have fallen to 0.2% by October, down from 2.2% in January this year. By the end of October this year, bulker prices at the world's four largest bunkering ports, Singapore, Rotterdam, Houston and Fujairah showed the average spread at approximately $54 per tonne, which was up from $49 per tonne earlier in the month. Commodore Research reminds us that at the start of the year, the spread took at approximately $358 per tonne. Australia and China relation. According to Braemar, it has been widely reported that in July this year, the Australian government backed the call for an independent investigation into the origins of the coronavirus and China's initial handling of the outbreak. The first reaction by the Chinese government was the imposition of an 80% tariff on barley purchases from Australia. Since that time, Chinese power stations and steel mills have been told to immediately stop using Australian coal. Apparently, a deadline was set November 6, after which date all coal from Australia reaching Chinese ports will not be eligible for customs clearance. Australian coal shipments to China are likely to remain depressed for the foreseeable future and Australian coal is being resold into different markets. Chinese buyers are looking to other suppliers with high quality coal. Russia has been one of the suppliers, but has been unable to increase production fast enough to satisfy Chinese demand. This could translate to more long haul trades from Canada and the United States, but will also increase the flow of overland coal volumes into China from Mongolia, something we have seen already take place from September onwards. According to the Commodore Research, up to the end of August this year, China had imported 46% of its coal imports from Indonesia, 32% from Australia, 10% from Russia, 7% from Mongolia and 5% from a variety of other exporters. September marked a dramatic change with 50% sourced from Russia and 28% sourced from Mongolia. Australian imports have been reduced dramatically. Question now remains, if iron ore and natural gas will also be affected by the deteriorating trade relations between the two countries. A quick look at the age profile of the fleet. According to Banchero Costa, about 10% of the trading fleet of Panamaxes is over 20 years old and 14% is between 15 and 19 years old. The age profile of capes is better. Only 2% are over 20 years old and 10% are between 15 and 19 years old. We need to keep in mind that due to their trades, capes have a life expectancy that is between 3 and 5 years shorter than Panamaxes and Kamsarmaxes. Let's look at demolition now. According to Banchero Costa, at least 85 units of a combined 11.26 million deadweight have been sold for scrap up to the end of October this year. This is 98% more tonnage compared to the same period last year. Apart from the capes mentioned below, this number included 7 Panamaxes as well as one Post-Panamax vessel. The rest were smaller ships. According to Braemar, the cape sector has seen the highest level of scrapping so far this year. About 45 vessels have already left the trading fleet with a total carrying capacity of 10.6 million deadweight. This represents in deadweight terms about 78% of all dry bulk removals so far this year. On the fleet numbers now, according to Banchero Costa, the net fleet growth this year is expected to come in at around 4%, while for 2021 it is expected to drop to 2%. Numbers slightly higher than what we mentioned earlier. The cape sized fleet is expected to increase by 5% this year and by 2% in 2021. Similar numbers are projected for the growth of the Panamax fleet, which are defined as ships up to 85,000 deadweight. New building contracting in the first 10 months of this year, at least 86 units of 7.34 million deadweight were reported contracted. This includes 15 capes, 8 Post-Panamaxes and 19 Panamaxes. The rest were smaller ships and there were no VLOCs ordered. Let's finally turn to the outlook for our industry. We agree with Gibson Shipbrokers that freight rates should move higher this coming quarter based on the industrial emphasis in China, leading to increased seaborne volume and demand. According to Commodore Research, the cape size market needs plenty of extra iron ore volume to import from its present levels. Fortunately, Chinese iron ore demand prospects remain very encouraging and Vale recently has been indicating, as mentioned above, that not only its production but also sales volume will fare well in the near-term. Grain shipments. During the new grain shipment season should also help underpin Panamax and Post-Panamax earnings over the next few quarters. The statistics and forecasts mentioned above make us reasonably optimistic with regards to the prospects of the bulk carrier industry for next year. As has been consistently the case thus far, we at Diana Shipping will protect the solidity of the company's balance sheet and make the best use possible of funds received from the recent sales of tonnage as has been the case over the last year or so. We anticipate that unless heavy new building contracting resumes next year, the market will finally get the much needed boost in earnings. On this note, I will turn the call to our interim CFO, Ioannis Zafirakis, who will provide us with the highlights of the third quarter and 9 months 2020 financial highlights. Thank you.

Thank you, Stasi. Good morning to everyone. I'm pleased to be discussing today with you the Diana's operational results for the third quarter and 9 months ended September 30, 2020. During the third quarter, we recorded a net loss attributed to common stockholders of $14.6 million or $0.17 per share, and that included an impairment loss of $6.80 million. As you are probably aware, in 2019, we sold six of our vessels and in the third quarter of 2020 another two, which are about to be delivered to the new owners. And that decrease the ownership base this quarter to 3.719 -- 3,719 compared to 4,027 for the same quarter in 2019. The fact that we had less ownership days together with deteriorated market conditions led to lower revenues of $42.3 million compared to $53.5 million for the same quarter in 2019. Voyage expenses were $2.9 million compared to $3.3 million for the same quarter in 2019, and the decrease in revenues resulted to decreased daily time charter equivalent rate, which was at $10,735 compared to $12,682 for the same quarter of 2019. The fleet utilization was at 97.3% compared to 99.4% the same quarter last year. During the quarter in discussion, our vessels operating expenses decreased to $21.3 million compared to $22 million of last year. Of course, the total number of operating expenses was lower than the previous year, and this is why the daily operating expenses were increased to $5,732 compared to $5,458 for the same quarter of 2019. Everybody has to understand that this increase is mainly due to increased crew expenses and other COVID-19 related issues. General and administrative expenses increased to $9.5 million compared to $7.1 million for the same quarter last year, and this was mainly due to one-off accelerated vesting of restricted share, which resulted to increase compensation costs on restricted cost -- on restricted stock of [indiscernible]. On the other hand, we are very satisfied that interest in finance continued to decrease in this quarter due to the decreased interest rates and decreased average debt, and that was strengthened by the repurchase of the 8 million of our bonds. Now for the month -- the 9 months ended September 30, 2020, net loss attributed to common stockholders amounted to $131 million, or $1.53 per share. But again, this included the $102.5 million impairment loss and $1.1 million loss from the sale of vessels. The time charter revenues decreased to $127.1 million compared to $169.2 million for the same period last year, and that was due to the same reasons that we mentioned earlier. Similarly, the daily time charter equivalent rate decreased to $10,900 per day, compared to $12,961 of last year. Again, fleet utilization was at 97.3% compared to 99.2% in 2019, and that was due to extended delays faced at ports due to COVID-19 issues and the increased number of dry docks -- scheduled dry docks that we had for that period. The vessel operating expenses amounted to $63.4 million compared to $67.2 million for 2019. The decrease in operating expenses was due to the decrease in ownership days and was offset by increased operating expenses in insurance expense, repairs and taxes. Daily operating expenses in 2020 were $5,639 compared to $5,367 for 2019. The general and administrative expenses, again as we said earlier, regarding the third quarter for the 9 months increased to $25.7 million compared to $20.8 million in 2019. And as I said earlier, that was because of the accelerated vesting of restricted shares of Board members, which was due to the company's restructuring in 2020 and its complete separation from performance shipping inc. Interests and finance costs amounted to $16.9 million, significantly lower compared to $22.7 million of last year. And again, we are very satisfied with that. Thank you for your attention. And I would like now to turn the call to the operator, who will instruct you as to the procedure for asking questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Randy Giveans with Jefferies. Please proceed with your questions.

How are you team, Diana? How's it going?

Hi, Randy.

Hey, and then great to hear you again, Simeon. Hope you're feeling well.

Thank you very much. I’m doing very well, indeed.

Sounds like a good deal. Well, looking at your fleet, you recently sold the Sideris GS, the Coronis, what will you do with the proceeds? And maybe any plans for additional vessel sales here in the next few months?

Yes, it is our intention to sell some of our old tonnage. We have not decided yet which vessels we are going to be selling in the next quarter or so. Definitely, we are talking about one or two vessels to be sold in the next quarter. The good thing is that selling our vessels is a conscious decision that we do not because we have a plan for the money that we are going to get. I mean, we are not pressed by anything to do so. So, we think that taking it slowly, we're going to have a good average as regards the sale of our vessels that they are of the vessels that they have been built many years ago. And, of course, they are -- the first candidates, they are the vessels that they are on mortgage as we speak. We have not, as I said at the beginning, made up our minds yet which vessels we're going to be selling during the next quarter, but we will know soon.

Okay. And then I know in July you repurchased 8 million of those unsecured notes, but none in maybe the recent months. So is that a target here for use of cash going forward? Is it the unsecured notes? Is it common shares? Is it just kind of keeping it on the balance sheet in a more defensive posture?

Yes, we're going to take, again, a defensive position. So the first option of ours that we are considering is to keep the money aside. Then I'm taking them again on order. Then the second option is to buy back our bonds, part of our bond. The third option is to buy back our shares, and the fourth option is to buy more vessels. Again, I want to stress to have your attention in what I was saying earlier, that we are the rulers of our destiny and we are in a very strong position to have the option to decide what we want to do with the cash, with the vessels that we have for sale, et cetera. And this is the best position that a company would be as we speak today.

Okay. That makes sense. And I guess one quick modeling question. G&A fell pretty materially from the first quarter to the second quarter, but then increased again in the third quarter. So just trying to get a modeling guidance, I guess, for the fourth quarter and in 2021 for G&A.

Okay. As we said in the -- in my speech earlier, the third quarter numbers that we show, they were highly increased because of accelerated vesting -- of an accelerated vesting of shares of two Board members that they have left our company and also accelerated shares of a company owned by Mr. Palios because of the restructuring that we said that we have to do and the fact that we have nothing to do now with Performance Shipping. We are completely separated. So you should not expect to have this type of G&A. So I will suggest that they're going to be -- they're going to look like the first quarter of 2019 rather than anything else.

Got it. All right. Well, that's it for me. Thanks, again, and happy Thanksgiving from here in the U.S.

Same to you.

[Operator Instructions] The next question is from the line of Omar Nokta with Clarksons Platou. Please proceed with your questions.

Thank you. Hey, guys. I just wanted to maybe follow-up on Randy's questions about the debt and whatnot. It was helpful. And I think it's fairly consistent with what you said earlier in the year about the options. You've got the cash. You leaving the balance sheet, option one, then buy back the bonds, then stocks and then ships. I know that you mentioned the 8 million buyback of the Norwegian bonds in July. And I remember from the last call you had outlined your adjusted debt repayment schedule, which would be $10 million a quarter for each of the third and fourth quarters, and then a total of $40 million in 2021. Is that still relatively the same amount for as we look here for the fourth quarter and for next year?

That is correct. The maturities today, as we speak, we are talking about in 2021, we have zero maturities and the only thing you have is amortization of debt. And in 2022, if we do not exercise the option that we have in Nordea is going to be around $100 million. Of course, you have to understand that most probably the Nordea option is going to be exercised and our main target now and we have to see what we're going to do and we will start from the beginning of next year is to try and bring forward everything we have for 2023, that we have the maturity of the bonds as well. So we will be very active to that respect. And this is one of our targets. I know that someone may consider 2023 being far away, but as you know how we operate and we will try to make it better and we will start from the beginning of next year.

Okay. Thanks, Ioannis, for that. And maybe just for clarity, you mentioned I know the Nordea loan or the bank facility due in 2022, there is an option feature and you mentioned it's $100 million that’s due if you do not exercise the option?

Yes. The maturities for 2021 -- sorry, 2022, it's $108 million. We are talking about Nordea having $42 million in March, if we do not exercise the option in March 2022. But we have no reason to believe that this is not going to be exercised and accepted by Nordea.

Okay. So that would -- if everything is exercised and approved and that would imply something closer to maybe $65 million, $70 million?

Yes.

Okay. And then just one other question just on the -- Randy mentioned the Coronis and the Sideris vessels that were sold. Are those still on track to close in the first quarter with roughly maybe $17 million, $18 million of cash coming?

We are trying for the one vessel to finalize and complete the sale during the fourth quarter of 2020. We think that we have a good probability of achieving that, and the next one looks like being in the first quarter of 2021.

Okay. Thank you. Got it. All right. That's it for me. Thanks, guys.

Thank you. At this time, I will turn the floor back to management for closing remarks.

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

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.