Diana Shipping Inc (DSX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Diana Shipping Incorporated Third Quarter 2008 Earnings Conference Call on the 12th of November, 2008. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

I will now hand the conference over to Mr. Edward Nebb. Please go ahead, sir.

Thank you very much, Anna, and good morning, everyone. This is Ed Nebb, Investor Relations Adviser to Diana Shipping. I want to welcome you to the Company's 2008 Third Quarter Conference Call. The members of the Diana Shipping management team who are with us today include Mr. Simeon Palios, Chairman and Chief Executive Officer, Mr. Anastassis Margaronis, President, Mr. Andreas Michalopoulos, Chief Financial Officer, Mr. Ioannis Zafirakis, Executive Vice President and Secretary, and also in the room is Ms. Maria Dede, Chief Accounting Officer.

Before management begins, let me briefly summarize the Safe Harbor notice, which you can see in its entirety in the news release we issued earlier today. Certain statements made during this conference call which are not statements of historical fact are forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements are based on assumptions, expectations, projections, intentions and 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 SEC. With that, let me turn the call over to Mr. Simeon Palios, Chairman and Chief Executive Officer of Diana Shipping. Go ahead.

Thank you. Good morning, and thank you for joining us today. Since the time of Diana's IPO in March 2005, we have managed the Company for the benefit of our shareholders. We have built an outstanding fleet of young ships, established relationships with leading charters and maintained a healthy balance sheet.

Our strengths today under more challenging market conditions than our industry has seen in some time is due to these actions, as well as the other prudent shareholder-oriented decisions we have made over the years.

It is because we are in a position of strength that our Board has made a decision to suspend payment of the Company's dividend, beginning with the fourth quarter of 2008. We believe it is our responsibility to act in the best interest of shareholders at all times. The market in which we operate is not static, and we must respond to its challenges and opportunities.

After much careful consideration, we have come to the conclusion that the best course for enhancing long-term shareholder value is to reemploy our cash flow towards the attractive opportunities we believe exist in the current marketplace, rather than to pay out that cash flow in dividends.

We have done this as a strategic initiative, not a financial necessity. At the same time, we are sensitive to the expectation of our shareholders and did not want to make the change without notice. That is why we have chosen to declare a dividend of $0.95 per share, for a total payout to shareholders of $71.3 million, before embarking on the new policy, effective with the dividend for the fourth quarter.

As for the opportunities we see in the marketplace, they are significant and compelling. The current period of low charter rates has reduced the prices of vessels to levels that we have not seen since early 2000. We believe that even more attractive valuations may ultimately be available to those with the liquidity, management expertise and vision to seize upon them.

We believe that these and other opportunities should offer substantial rates of return in the long term that will justify the decision to reemploy our cash in this manner. As you know, Diana has one of the lowest debt levels in the dry bulk shipping industry. By enhancing our liquidity and financial flexibly through the change in our dividend policy, we have placed the Company in an even stronger position to take advantage of such opportunities.

We are significant shareholders, as well as managers, and we believe this action is in the interest of all shareholders. Our confidence in the future and in the long-term value of our company is indicated by the Board's decision to authorize a share repurchase program of up to $100 million. The buyback authority will be used from time to time as market conditions and further opportunities warrant. Now I would like to briefly point out some of the financial highlights of the 2008 third quarter, which clearly reflect the ability of the Company to deliver a strong performance.

Net income was a record of $57.6 for the third quarter of 2008, compared to $50.4 million in the comparable period last year. For the nine months ended September 30, 2008, net income was $167.5 million, up from $97.8 million for the same period of 2007.

Voyage and time charter revenues were $87.4 million for the 2008 third quarter and $253.1 million for nine months, increasing sharply from the respective period of 2007. Looking ahead, I want to emphasize that the charters we have fixed should generate gross revenue next year of approximately $197 million and that represents only the 60% of the total days.

Our contracts are with major charters and we have seen no chance in our relations -- we have seen no change in our relationships with any of these key customers. The revenues to be generated under these contracts in 2009 are substantially in excess of our fixed costs. Therefore, whatever the direction of the market, we believe we have a large cash flow cushion.

Let me conclude by saying that the Board of Directors and the management team have great confidence in the future of Diana Shipping and our ability to take advantage of the opportunities that will arise in our market. We firmly believe that our strong balance sheet and liquidity, our reputation of trust among leading charterers and our ability to manage across a variety of industry conditions will serve Diana well in the months and years ahead. With that, I will now turn the call over to our President, [Stacy] Margaronis. Thank you.

Thank you, Simeon, and a warm welcome to all who have joined us in this conference call. Freight market developments during the third quarter of this year have been overshadowed by what has been happening at freight rates from the end of September to date.

We need not remind our listeners about the precipitous fall in the Baltic Dry Index, the Panamax and the Cape-size Baltic Indices from their respective high points during the end of May, early June this year. What is much more important is to look at what is happening now in the world economy and what is likely to happen during the next few quarters.

However, before we do that, we would like to quote a small section from our fourth quarter 2006 conference call of February 22nd, 2007. This will remind our listeners that our Company has for nearly 20 months now been preparing for the events which have been affecting the equity and credit markets worldwide for the last year or so, with extremely negative consequences.

We start our quote by saying in the book, global governance of financial systems, the offers (inaudible) will analyze international systemic risk in great detail. They point out that financial transactions, which initially appear as efforts to hedge against risks and promote financial stability utilize formulas and methodologies to price such risks when are inexact, extremely complex and very often result in the underpricing of risk. This may very well create more risk than is optimal for financial markets.

Unfortunately, the present international legal framework of financial regulation does not cover most of the relevant activities involving the regulation of systemic risk. We did not comment further on the potentially grave consequences of this lack of regulation and mispricing of risk.

We then went on to say, quote, "It is obvious that even a short-lived interruption of international capital flows, not to mention a breakdown of the world financial system, will seriously interrupt international trade with devastating effects for the shipping markets, which carry over 80% of world merchandise traded by volume," unquote. Unfortunately, what we described above as one of the major risk factors to what then appeared to be a rosy scenario for dry bulk shipping, destined to last eternally, is what has transpired some 20 months later due to the mispricing of credit risks.

As far as our Company is concerned, preparing to confront such a serious downturn in the shipping markets has resulted firstly in the maintenance of a strong balance sheet. Second, the acquisition of very modern and efficient tonnage, which will still operate in a full-freight market environment and, thirdly, the securing of long-term contract cover with top-class charters, which will ensure a healthy cash flow going through the downturn.

Turning to macroeconomic considerations, all world growth forecasts have been adjusted downwards over the past two quarters. The consensus is that in the USA gross domestic product is expected to contract over the first half of 2009 by about 0.7%, and in Japan by about 0.3%. The Eurozone is also expected to contract by 1% during the first half of 2009.

In China, gross domestic product growth slows to 9% in the third quarter of 2008 and is expected to grow at 9.6% for the entire year. For 2009, GDP is expected to grow by about 8.8%. More importantly, however, industrial production growth declined to 11.4% in September '08, from 12.8% in August. This may put downward pressure on global commodity markets at a time when the industrial economies are already slowing rapidly.

As has been recently announced, to counterbalance this slowdown, the Chinese government is planning to increase spending, especially in areas of education, health care, low-rental housing and social security. It will also boost investment in accordance wit the rural revitalization policy, regional development strategy and industrial policy.

On the demand side, on iron ore, it is worth noting that [most brokers] estimate that total stocks at major Chinese seaports were about 68 million tons in mid-September. Chinese steelmakers are asking Vale to reduce iron ore prices instead of raising them for a second time this year. The only encouraging sign there is that a week or so ago Vale withdrew their unreasonable demands for iron ore price increases to Chinese steelmakers.

In the meantime, cash prices of iron ore imported by China declined 20% in early October, the most since at least 2006, as steelmakers reduced production. The Secretary General of the China Iron and Steel Association said he expected China to produce about 500 million tons of steel in 2008, up only 10 million tons through last year and short of earlier forecasts of between 520 and 550 million tons.

[Gartson's] latest forecast of worldwide iron ore exports for 2009 stand at 921 million tons, or 8% higher than in 2008. Domestic iron ore prices have now dropped sufficiently to discourage Chinese miners from expanding production of high-quality iron ore. As such, in 2009, a large proportion of the growth in Chinese ore consumption should still have to be provided by imports.

Steam coal. According to Fearnleys, by the end of September, stockpiles at China's 355 major power stations rose significantly, to 34.5 million tons, from 27.5 million tons a month earlier. Coal ports are operating on large inventories as domestic consumption continues to slide. It leads to the 19.66 million tons at the end of September, up 13.6% from a month earlier. However, according to Clarkson Research, total exports of steam coal are still expected to increase worldwide, to 616 million tons in 2009, up 4% from 2008.

Australia is expected to increase its exports to 114.4 million tons in 2009, a 3.1% increase year on year. This relatively low and slow growth will be caused by damage caused by floods earlier this year and infrastructure capacity constraints. On coking coal, according to Clarkson Research, South Korea is becoming a significant coking coal importer, a trend which looks set to continue in the future, with a forecast for imports in 2009 at 23.9 million tons.

Total coking coal exports for 2009 are estimated to reach 235 million tons, up 5% from the year before. On the grain trade, again according to Clarkson's, in spite of the predictions for a bumper wheat crop for 2008, 2009 crop year, with European and CIS harvests at record levels, overall grain exports are expected to drop in 2009 by 3% compared to last year, bringing them down to 230 million tons.

The Ukraine is fast becoming one of the world's biggest grain exporters, with exports anticipated to reach 60 million tons in the 2008, 2009 crop year, and this should provide a long-term seasonable impetus for the Panamax bulk trades from 2010 onwards.

Turning to the supply side, again according to Clarkson's, the Panamax trading fleet grew by 6% in 2008, with the order book standing at 53% of the existing fleet. The Cape-size fleet grew by 10% during 2008 and the order book stands at a staggering 110% of the existing fee. We should keep in mind that the latter category includes all bulkers over 100,000 tons dead weight. Using Clarkson's and Fearnleys' figures, which are quite similar, we have the following statistics.

Excluding demolition, the Panamax fleet is expected to grow by 20% in 2009, about 15% in 2010 and 9.1% in 2011. The equivalent fleet growth for Capes is 20.8% in 2009, 31.4% in 2010 and 12.8% in 2011. All these figures also assume that there will be no further ordering and that all vessels on order will be delivered and delivered on time.

These are rather important assumptions, as we will explain later. Let us start with scrapping. The weak dry bulk freight market has finally brought some old tonnage to the scrap yards. The first numbers out are not that impressive, because the tight rate markets have created problems for scrap yards in obtaining bank financing to purchase vessels for scrap.

The good news is that local banks in the Indian subcontinent are now opening again letters of credit and all the main markets, China, India, Bangladesh and Pakistan, are offering broadly the same levels per light ton displacement, around $200 per lightweight ton.

According to Clarkson's, more than 50 vessels, predominantly bulkers and some container ships, are potential candidates for prompt demolition. However, there is no doubt that hundreds of scrapping candidates are lining up to be sold at the best price their owners can obtain in order to preserve the significant trading profits made over the last three years or so. Fearnleys expects about 3 million tons dead weight per annum of bulkers to be scrapped in 2009 and 2010, respectively.

This would represent about 4% of gross scheduled deliveries. We feel that these numbers could prove to be on the low side if the present freight market levels prevail for 2009 and 2010, and more ships should head then for the scrap yards.

Looking at the age profile now. As scrapping is highly influenced by the age of the fleet, we should mention that the world dry bulk fleet is pretty young. The only component of the fleet that looks really old is the handysize segment, where about 61% of the existing fleet is over 20 years old. The equivalent number for Capes in this age bracket is just over 20%, and to get to this number we have to include all ships over 100,000 tons dead weight. For Panamaxes, the number is around 26%.

Even taking into account the shorter lifespan of large bulk carriers compared to the smaller bulkers, the age profile of the large ships is not likely to provide much support, in the form of high rates of scrapping over the next few quarters to rebalance supply and demand.

Order cancellations. [The bulkers] have very often spoke about rebuilding order cancellations. According to Arrow Shipbrokers, by the middle of October, cancellations of the following new building orders have been confirmed. For Cape-size bulkers, 58 ships, for post-Panamax bulkers, four orders. For Panamax and [camshore maxes], 52, and in bulk, 50 orders have been canceled for smaller bulkers.

Numbers compiled by Arrow indicate that in China alone, only 24% of new building orders are with greenfield and non-state-owned shipyards and about 40% for Panamax orders. However, over 50% of new building contracts for smaller bulkers have indeed been placed in China with such shipyards.

The credit crunch. The financing of new building deliveries beyond 2009 looks problematic. The value of total dry bulk carrier deliveries in 2010 is about 6% higher than for 2009. However, a very large chunk of this tonnage has no secure finance. According to DVB, debt of $415 billion will be required over the next three years to partly finance all new building orders. On top of that, equity of about $150 billion will be required for the same purpose.

By far, the largest proportion of these numbers would be required during 2009 and 2010, i.e., about $270 billion in debt and about $133 billion in equity, a rather tall order given today's credit market and freight market pessimism. It is estimated by [Laurenson and Samoku] that the [bulk] cost, the current new building order book is not yet fully financed and cancellations have already been made, as mentioned above, and will continue, due to the credit crunch.

It is interesting to note an official estimate of a bulk 750 main engine cancellations on a worldwide basis. Most of these are from Chinese shipyards, with Turkish and Korean shipyards following closely.

Lay-ups now. According to Fearnley Marine, the weak dry freight market has led to the temporary anchoring of about 40 Cape-size bulkers in the Pacific basin, and a further 30 units might be anchored or laid up by their owners if trading prospects for Capes do not improve soon. 20 of these belong to one owner, Zodiac Marine.

Congestion. This again is not providing any help in balancing demand and supply for dry bulk tonnage. According to [Hal Robinson], loading port congestion at the iron ore and coal ports in Australia is at its lowest point for nearly two years, with only 93 ships waiting outside ports.

Brazilian iron ore port congestion is also at its lowest level for the year, with only 26 vessels waiting in queues, including 20 Capes. At the end of March 2007, total vessel queues in Australia and Brazil reached a record 260 ships.

Let's turn to the demand-supply balance. Where will all these forces take the dry bulk shipping freight market over the next couple of years? One thing is certain, that nobody can predict accurately the future course of freight rates, except by pure coincidence. This we witnessed very recently, when even the most pessimistic forecasters had failed to foresee the severity and speed of the freight market collapse.

One set of data which could be used in trying to predict the future are the dry bulk fleet growth estimates, prepared by Credit Suisse, using data from Clarkson's. Their calculations show that if only 5% of orders for 2009 deliveries are canceled and only 10% of new building orders for 2010 similarly disappear, the net average supply growth would stand at 6.9% in 2009 and an unprecedented 10.6% for 2010.

With the same assumptions for 2009 delivery cancellations and half of the 2010 new building orders canceled, the net increase in bulk tonnage during 2010 would reach a manageable 7%. These numbers make certain assumptions on scrapping, which are quite conservative. However, it should be kept in mind that within certain size categories, such as Capes and ultra-large bulk carriers, the numbers vary significantly, as we have mentioned earlier on.

Even if this method provides us with some guidance on fleet growth, we are still left with a huge unknown factor, and that is the growth or contraction in demand. It is quite obvious that any attempt to make accurate freight market predictions are, as usual, futile exercises of pure academic interest.

In view of the above, the management team at Diana Shipping, under the leadership of our CEO, have plotted a corporate strategy which will ensure that we will not only survive the current downturn, but also take advantage of it. This we intend to do by expanding the fleet more aggressively than during the earlier period of booming freight markets, without relying on the precise timing of any freight market turnaround which will eventually come.

To succeed and maximize future profitability through a conservative expansion policy, we need to finance future acquisitions with a reasonable amount of debt and make up for the balance with equity. The former we are confident to secure from our long-established banking relationships, while the latter will have to come from our healthy future cash flow, at least until the equity markets open up again and become a realistically priced source of capital.

I will now pass you to our CFO, Andreas Michalopoulos, who will provide you with our Company's financial highlights for the third quarter of 2008 and first nine months of the same year. Thank you.

Thank you, Stacy, and good morning. I am pleased to be discussing today with you Diana's operational results for the third quarter and nine months ended September 30th, 2008.

Third quarter of 2008, net income for the third quarter of 2008 amounted to $57.6 million and increased by $7.2 million, or 14%, compared to $50.4 million for the same period in 2007. This increase is attributable to the increase in average time charter rates during the period and the enlargement of the Company's fleet that went from 16 vessels at the end of the third quarter of 2007 to 19 at the end of the third quarter of 2008.

The EPS of Diana Shipping amounted to $0.77 for the third quarter of 2008. Voyage and time charter revenues increased by $38.3 million, or 78% to $87.4 million in the third quarter of 2008, compared to $49.1 million in 2007.

The increase is attributable to increased average hire rates and the increase in the number of vessels in the fleet after the acquisition of the Boston in November, the Salt Lake City in December 2007 and the Norfolk in February 2008. This increase was partly offset by the decrease in revenues due to the delivery of the Pantelis SP to its new owners in July of last year.

Ownership days were 1,748 for the third quarter of 2008, compared to 1,477 in the same period of 2007, due to the enlargement of the fleet mentioned earlier. Fleet utilization was 99.9% in the third quarter of 2008 and 2007.

The daytime charter equivalent rate for the third quarter of 2008 was $48,207, compared to $31,644 for 2007. Voyage expenses increased by $1.2 million, or 52%, to $3.5 million in 2008, compared to $2.3 million in 2007. The increase in voyage expenses is attributable to the increase in revenues, which created higher condition payments.

Operating expenses increased by $3.5 million, or 47%, to $10.9 million in 2008, compared to $7.4 million in 2007. The increase in operating expenses is attributable to the 18% increase in ownership days resulting from the delivery of the new Cape-size vessels to our fleet, a 29% increase in crew costs, a 15% increase in the exchange rate of the euro to US dollars and other increases in all categories of operating expenses.

Daily operating expenses were $6,240 for the third quarter of 2008, compared to $5,008 in 2007, representing an increase of 25%. Depreciation and amortization of deferred charges increased by $4.4 million, or 67%, to $11 million for the third quarter of 2008.

General and administrative expenses increased by $1.1 million, or 50%, for the third quarter of 2008, to $3.3 million, compared to $2.2 million in 2007. The increase is mainly attributable to accrued employees' cash bonus and compensation on restricted stock, which did not exist in 2007, to increase dealer fees and traveling expenses and to the exchange rate of US dollars to Europe.

Interest and finance costs decreased by $0.5 million to $1.4 million for the third quarter of 2008, compared to $1.9 million for the same period in 2007. The decrease is attributable to the decrease in interest rates, partly offset by the increased weighted average debt outstanding during 2008, compared to 2007.

For the nine months ended September 30th, 2008, compared to the nine months ended September 30th, 2007, now. Net income for the nine months ended September 30th, 2008, amounted to $167.5 million, an increase by $69.7 million, or 71%, compared to $97.8 million for the same period in 2007.

The increase is attributable to improved trading conditions and the increase in the size and number of vessels in our fleet. Voyage and time charter revenues increased by $121.5 million, or 92%, to $253.1 million in the nine months ended September 30th, 2008, compared to $131.6 million in 2007.

The increase is attributable to increased average hire rates in 2008 compared to the same period of 2007 and the enlargement of the Company's fleet. This increase was partly offset by the decreasing revenues due to the sale of the Pantelis SP and its delivery to its new owners in July 2007, which derived revenues during the first nine months of 2007 that did not exist in the same period of 2008.

Ownership days were 5,165 for the nine months ended September 30th, 2008, compared to 4,271 in the same period of 2007. The increase in ownership days resulted from the enlargement of the fleet.

Fleet utilization was 99.9% for the nine months ended September 30th, 2008, and 99.3% for the same period of 2007. The daily down charter equivalent rate for the nine months ended September 30th, 2008, was $47,098, compared to $29,399 for 2007. Voyage expenses increased by $4.2 million, or 70%, to $10.2 million in 2008, compared to $6 million in 2007.

Voyage expenses mainly consist of commissions and income, or loss from bulkers during the delivery and redelivery of vessels. The increase in voyage expenses is attributable to the increase in commissions, which are a percentage of revenues and was partly offset by income resulting from the same purchase of bulkers and the delivery and redelivery of vessels, amounting to$1.6 million for the nine months of 2008, compared to $0.1 million in the same period of 2007.

Operating expenses increased by $9.2 million, or 44%, to $30 million in 2008, compared to $20.8 million in 2007. The increase in operating expenses is attributable to the 21% increase in ownership days, resulting from the increase in the number and size of the vessels to our fleet, the 15% increase in the exchange rate of euro to US dollar and increases in all categories of operating expenses. Daily operating expenses were $5,804 in 2008, compared to $4,876 in 2007, representing an increase of 19%.

Depreciation and amortization of deferred charges increased by $15.4 million, or 92%, to $32.2 million for the nine months ended September 30th, 2008, compared to $16.8 million for the same period in 2007. This increase is the result of the increase in the number and size of vessels to our fleet.

General and administrative expenses during the nine months ended September 30th, 2008, increased by $4.1 million, or 62%, to $10.7 million, compared to $6.6 million in 2007. The increase is attributable to $2.6 million of accrued cash bonuses and compensation costs on restricted stock during the nine months ended September 30th, 2008, that did not exist in the same period of 2007 and also to increase salaries, legal fees and annual meeting expenses.

Interest and finance costs during the nine months ended September 30th, 2008, decreased by $1.4 million, or 24%, to $4.4 million, compared to $5.8 million in 2007. The increase is attributable to reduced interest as a result of a significant decrease in LIBOR rates for the period, partly offset by the increased weighted average debt outstanding during the first nine months of 2008, compared to the same period in 2007.

Insurance settlement for vessel unrepaired damages amounted to $0.9 million and related to cash received in the first quarter of 2008 for unrepaired damages claimed for the Coronis during the previous year.

Turning to dividend policy for the third quarter of 2008, the Board of Directors has decided to declare a dividend of $0.95 per share. Diana declares and pays quarterly dividends that are substantially equal to available cash from operations during the prior quarter.

In calculating the cash dividend, we have taken into account expenses, dry dock reserves, contingent liabilities and capital needed to support the Company's operations. Pursuant to our amended dividend policy in 2006, the third quarter dividend has not been increased with interest expense and is not calculated that if we were financed with equity for the outstanding debt and the qualifying debt on our balance sheet was on or about $150 million.

Thank you for your attention. We would be pleased to respond now to your questions, and I will turn the call to the operator, who will instruct you as to the procedure for asking questions. Thank you.

Thank you, sir. (Operator Instructions) Thank you. The first question comes from Doug Mavrinac of Jefferies & Company. Please go ahead with your question.

Great, thank you. Good afternoon, guys.

Hi, Doug.

Hello. I just had a handful of questions for you all, and before asking about the suspension of the dividend, I just wanted to ask a couple of specific questions that have to do with some of the concerns or topics that investors are interested in these days, and one of those is counterparties and the ability or the preference for counterparties to potentially back out of contracts.

So, i.e., maybe the contracted revenues of a particular company might not be as contracted as it appears. Has Diana seen any of their counterparties come to them and ask to have a contract renegotiated, or have you guys seen any cancellations of contracts?

Thank you, Doug. I think it's a very and a very up-to-the-point question. Our charterers are brand-name industry leaders with very strong financial position and excellent credit. As you know, they include Cargill, [Kohler's], BHP Billiton, the Costco Group, [Adjin] Shipping, NYK and Constellation Energy. Our strategy in chartering with these guys, based off today, we do not foresee any of our charter as renegotiating or defaulting on our contracts.

Okay, great, thank you. And, Simeon, would you say, based on your extensive experience in the industry, is that is the key in identifying who your counterparties are, looking at their financial strength, looking at whether they're an industrial end user or not? I mean, how would you rank that in importance in selecting counterparties, and then also could you share with us maybe a profile of the type of counterparty that Diana would not put one of their vessels on contract to?

Well, I think that Cargill, Kohler's, BHP Billiton, Constellation, are people who are end users, so it's important to charter ships to the end users because they have the urgency to move their own cargoes. So we believe that by sticking with them you have a better chartering policy than doing anything else.

Okay, great. Thank you. And then, finally, getting to the topic of the decision to suspend Diana's dividend, just kind of adding -- or seeking a little bit more color on it. Obviously, or maybe not obviously, but obvious to us and it sounds like you guys as well, there are going to be a significant number of opportunities that come out of this turmoil, as there always is whenever there is turmoil in the market.

Do you foresee opportunities arising in the near term, i.e., maybe distressed sellers having to sell assets for really low prices and there being opportunities there? Or is your vision more towards the order book may not be as big as it is today and that there may be longer-term opportunities as a result of that?

Well, we have decided to suspend the dividend, because we believe that, due to the depressed markets, the Company needs to have spectacular investment opportunities in the near term. By suspending the dividend, we free up cash to make investments, investments such as acquisitions that will deliver significant returns for our shareholders over the next several years.

We intend to buy ships, possibly not this quarter, but we have already seen a 2004 Panamax sold for $30 million, or a little bit less than that. We believe that within the foreseeable future we may see opportunities that are even better than this. We do not anticipate having any difficulties in finding enough ships to purchase. We intend to use very little, if any, leverage initially, but maybe at leverage to our balance sheet to increase assets as we see the market coming out of this downturn.

Okay, perfect. Thank you very much.

Thank you. The next question comes from Jonathan Chappell from JPMorgan. Please go ahead with your question.

Thank you, good afternoon. Just two questions for you. The first is regards to the buyback. If you can just help us out with the decision, if you're going to save as much cash and liquidity as possible to take advantage of opportunities by cutting the dividend, why the decision to potentially spend money in another way, buying back the stock?

Thank you, Jonathan. Our Board has authorized the purchase up to $100 million worth of shares. We have no present plans to repurchase shares under this authorization, but if the shares present a more attractive investment than the ships we see in the market, we may repurchase shares instead of using our cash to buy ships. If the two alternatives show similar returns, we most likely -- we will probably marginally favor ship purchases in order to further consolidate the market.

Okay, so no plans right away on the share buyback.

No, no.

Okay. The second question has to do with your rechartering. By what we've read in the press release, up to seven ships will be redelivered from current charters within the first quarter of '09. Do you plan on employing those on short-term employment or locking them up in your prior strategy of one to three years? Basically, what I'm getting at, is there a change to your chartering strategy, given the depressed markets right now.

I think this is a very good question, Jonathan. On the assumption that all the ships that come free in 2009 are idle and earn no revenues, we cover all our fixed costs by many times and generate $196 million gross revenue. We do not know whether we will charter these ships for long or medium-term [fixes] or we will operate them in the spot market. But I would like you to understand that any revenue they produce will represent a premium to the cash flow we have locked in.

Okay, even at spot. Thank you, Mr. Palios.

Thank you. The next question comes from Justin Yagerman of Wachovia. Please go ahead with your question.

Hi, good morning, guys. This is Mike Webber filling in for Justin. How are you?

Very well, thanks, Mike.

Just a handful of questions. First, when you look at the cash you guys will probably be building over the next 12 months, how do you prioritize that between paying down debt, which you don't have very much of, buying back shares and making acquisitions?

I realize that's going to be dependent on the opportunities that present themselves in the near term, but maybe you can give a little bit of color I guess over the next two or three quarters of how we should expect your debt level to fluctuate, given -- assuming asset prices stay where they are right now?

Well, the reason that we have suspended the dividend is purely, and I mean that, purely because we want to increase our tonnage under present conditions. You see, the prices of the ships are going to come even lower, I believe, because the freight market is low and asymptotically will come closer to the value of the freight market. At the moment, there is a lag. But this lag will very soon evaporate, and, obviously, the cash which we will be generating is going to go for further acquisition of tonnage.

But always having in mind that we have to be very selective in what we buy. It has to be a Panamax, it has to be a Cape, and a very, very new ship. We have in mind that our average age is four years, so we have to go and make a better age profile of our fleet. So they must be very, very young.

Okay, when you're looking out at, I guess, the distressed opportunities that may be arising over the next three to six months, what signs are you looking for? I guess you have confidence that vessel valuations have bottomed. I mean, what signals to you that this is the best opportunity you can get right now?

Well, being in this tough market, we have a lot of people who are watching us very carefully, and they know us well, they know that we have a strong balance sheet, they know what we are looking -- so instead of us going to them -- if the need comes, we do go to them. But, most likely, they come to us.

I mean as far as looking at distressed opportunities, I'm sure you guys are getting inundated with deals right now. What do you look for as a sign that vessel values have bottomed and that you really start getting constructive on some of these opportunities?

What is going to bottom first is the freight market, and then asymptotically, the [sail] and [passenger] market will follow suit. And, of course, we are in touch with the shipyards. We are in touch with the shipbrokers. We are in touch with banks and the time will very soon come that we will have enough potential purchases and at values which are going to give value to our and benefit our shareholders.

Mike, if I may add, this is where the very experienced management team plays a very big role. Don't forget that our Chairman and CEO has more than 40 years experience in the industry, our President more than 25 years experience and Head of Chartering, around 50 years experience. So the same way we assess the chartering market every day, it is the same way we assess internally the sale and purchase market and try to find the best opportunities for the Company as and when they arise, and that's what we will do in this new era for our Company.

And it also has to be made clear, Mike, if I could add, that we are not going to wait for a certain moment in time to make all our acquisitions, because that pre-assumes that we have the ability to call the absolute bottom in the market, and we never profess to have such abilities, either on the upside or on the downside.

So we're going to gradually schedule all the acquisitions, possibly before the bottoming of the market, at the bottom and beyond that. But, at the end of the day, all these acquisitions will prove to be tremendously profitable for our shareholders.

Okay, that makes sense. I mean, right now are you guys seeing more opportunities for new builds or in the [S&P] market.

Both.

Both? All right, you noted earlier on the call that any acquisition would probably be made with I guess a reasonable amount of debt. I mean, what sort of splits would you be looking at, assuming the equity markets stay closed? How do you guys think about that going forward?

In the beginning, we will have not very much debt, but as the time goes by and we watch the market, maybe we will increase it. But rest assured that we have no problem in raising debt from our banking friends.

All right, that makes sense. With regards to the repurchase program, you said you don't have any inclinations to do anything in the near term. Maybe if you could give a little color on how you think about that, obviously purchasing a vessel right now, even at distressed levels, you're going to be buying at an NAV, whereas your stock, you're probably going to be able to purchase it below NAV right now, how you think about that I guess over the near-intermediate term?

I think that the buyback program is another tool that is offered to us and, as we have always used different tools that were offered to us, dividend to investment plan, where we were distributing dividends, et cetera, et cetera, we have put that in place in order to have it in place and to see whether it makes sense for us to use it at one point in time or not.

At the moment, as you might have understood, the focus is not so much on buying back shares but mainly on assessing the shipping opportunities that become available and trying to find the best one to increase shareholder value.

Okay, all right, well, that makes sense, and thanks a lot for your time, guys.

Thanks.

You're welcome.

Thank you. The next question comes from Urs Dur of Lazard. Please go ahead with your questions. I do apologize. One moment, please, ladies and gentlemen.

Hello?

I do apologize. Mr. Dur, your line is open. Please go ahead.

Yes, I don't know what happened. Anyway, hello, good afternoon, guys.

Hi, Urs.

Good afternoon.

You mentioned, Stacy, that you don't want to predict the bottom of a market. I understand that. I was wondering maybe -- expanding a little bit on what [Jon] asked, because there are a number of ships coming off next year, how do you view the current spot market environment?

Do you have any comments on all of the discussions out there in regards to a lack of letters of credit and a lack of the actual trade credit availability to make the short-term trades move? And do you have any view as to when and if that could ever change? Hello?

Actually there -- hello. There is no doubt that a large part of the speed with which the freight market dropped from September to date was due to the lack of availability of letters of credit. Now, this would not anticipate staying in its present state for too long, because there is no way that trade can stop for too long worldwide.

So already we see signs of letters of credit being open, albeit with slightly different terms than they were, and letters of credit are accepted now from banks when they were not only a few weeks ago.

So that should kick start movement of cargoes and generally commodities worldwide, and, as you know, worldwide shipping is responsible for most of these movements of cargo, and then we're going to be left with the real problem, if you will, that is affecting and will affect over the next two quarters the freight markets for dry shipping, which is the supply-demand, the old issue of balance between supply and demand. And, as we I think made clear, within the next few quarters we anticipate more supply than demand, and we gave some numbers, as indicated, of this prediction.

Sure, sure, no, I saw your -- or listened to your order book outlook. Thank you. Everything else has been asked for me. Thank you.

You're welcome.

Thanks.

Thank you. The next question comes from Scott Burk of Oppenheimer. Please go ahead with your question.

Good morning, guys.

Good morning.

Listen, I just had -- I wanted to ask about the two new buildings that you have on order right now. We've seen some other companies walk away from their new building commitments. What is your view to your new buildings? Do you remain committed to that even though new building values have come in so much?

Well, the two new buildings which we have are for delivery in 2010, under construction in [Waigauchau], it [appears] in Shanghai, in China. We have no problem whatsoever with this state yard.

SWS is not a [gainful] yard and has a proven track record of delivering Cape-size vessels. Now, as regards to how we are going to finance, at present we tend to finance between the two new buildings with money borrowed on our lines of credit. At some future time, we may decide to pay a portion with cash from the Company's balance sheet, depending on what we deem to be in the best interest of our shareholders at the time.

Scott, don't forget that one of these two buildings, the New York, is chartered to a major Japanese charter, NYK, at a very good rate, and that our new building program consists of only two new buildings.

So, quite frankly, with the cash that we have, the revolving credit facility available, the new cash that we will have by suspending the dividend and the purchase price of $60.2 million each for those new buildings, we basically -- and from a very good yard, as Mr. Palios just mentioned, Waigauchau, we basically do not intend to do a walk-away like others might have, because we have no necessity to do that. On the contrary we are in a position of strength here and we are getting ready for new opportunities to grow even further.

Scott, what is also customary, when credit markets operate normally, is that banks that offer the construction for pre-delivery finance are interested invariably in doing the post-delivery finance, as well. Even though we know that Fortis has gone through various problems recently, by the time the deliveries of these ships arrive we have no doubt in our minds that they will be very interested in looking at the long-term post-delivery finance of these two units. This is in reply to what you asked about our thoughts on financing.

Okay, and what percentage of those, how much have you paid in terms of construction payments to date?

At the moment, we have paid $24.084 million for the two vessels, and that is 20% of the purchase price. We have paid that with a pre-delivery finance facility that we have with Fortis Bank and we have paid that already a long time ago when we signed the contract.

Okay, and Andreas, in terms of your total liquidity right now, what's your total liquidity?

Well, at the moment we basically have -- we will have around $150 million from our revolving credit facility drawn down with RBS, plus $24 million of -- once we pay the dividend, plus $24 million with this pre-delivery facility from Fortis Bank, so that's as of 11 of December, I would say, when we would pay the dividend.

And just to remind me, what's the total size of your total facility then? What do you have left, remaining?

At the moment, the total size of our revolving credit facility, and that's just indicative, obviously, because this could be increased, it's $300 million.

So you have about $125 million of liquidity plus whatever cash flows you get.

I would say even a little bit more, plus the cash flows that you can calculate and it will be substantial, obviously, as well on the fourth quarter, where all of our vessels are chartered

And also kind of talking about the banks, do you have any pressure at all from the banks to cut the dividend or suspend the dividend?

No, we have no pressure whatsoever. We have -- as we said before, we have almost no debt. The banks absolutely have not made any requests to us to cut the dividend, nor are we in any kind of weak position. To the contrary, we made this decision from a position of strength.

By suspending the dividend, we are proactively setting ourselves up to make maximum advantage of the investment opportunities presented by the market conditions.

Okay, thanks, guys.

Thank you. The next question comes from Gregory Lewis of Credit Suisse. Please go ahead with your question.

Yes, thank you and good afternoon. I guess my first question is regarding the potential for you to add debt to your balance sheet. I mean, clearly, you mentioned that you're going to initially acquire vessels with cash on hand and then potentially lever up your balance sheet at a later point in time. At that later point in time, what sort of debt level would you be comfortable with?

Well, it will depend. It will depend how much we have bought the vessels. For example, if we go back to 1999 times, when we purchased ships at $20 million apiece, Panamax, it means that you can easily have a debt on that ship of 70%, 75%. Now, if you go and buy a vessel at -- Panamax at $30 million, then I think it will be prudent not to exceed the 50% finance. So it depends what sort of ships you are going to find in the open market and at what level.

Okay, so it sounds like if it's a really distressed market, you'd be willing to lever up your balance sheet north of, say, 60%, and then sort of if we just see asset prices sort of hang in where current estimates sort of have them for, you'd probably be around, say, a 50% debt to cap. Is that sort of what you're thinking?

Yes. It's going to take some time before we fully expand our fleet, of course. It's not going to be done in one quarter. It may take several quarters before we buy all the ships we need.

Okay, and that sort of brings me to my next question. You mentioned that you're sort of talking about 2000-type levels. Well, in like 2000, 2001, up to about 2003, Panamaxes for -- a five-year-old Panamax was worth around $20 million. I mean, it sort of sounds like you're sort of expecting those levels sort of to reappear in this market over, say, the next six to 12 months.

Well, I think, Gregory, we have to make clear that when there is no use for a vessel, the vessel stops to be an asset. It becomes a liability. So the price of that particular ship can go down a lot and we may see the $20 million again for a new building or a two or three-year-old ship. We may see it again.

Okay, and I actually wanted to touch on -- you were talking about the financing for the order book in 2010. It looks like 2009, probably -- it looks like the majority of the financing has already been done. Given the fact that, for instance, if you owned a Cape-sized vessel four years ago, that ship probably generated revenues north of $90 million if it was operating in the spot market for those three years.

So that leads me to believe that a lot of owners are probably pretty cash rich. Given the cash richness of a lot of these owners, are we really expecting a lot of financing issues in the 2010 order book?

Yes. Actually the answer is clearly yes and we have seen that in the cost, because we should keep in mind that the liquidity which exists now in the accounts of ship-owners is not cash which necessarily has to go to financing new buildings. If those investments are deemed to be less profitable than others, or the timing of those investments are deemed to be rather premature, the money will not be put up in order to purchase those ships and partly finance their acquisitions. And we have seen that in all recessions in the past, going back to prewar years.

There was never a time -- or very rarely was there a time that ship-owners had no money at all, generally. There were always some owners that had a lot of cash, yet they chose not to invest, for various reasons. Some of them I have touched upon earlier.

So, yes, logically there should be a caution created in the drop of asset values because of the illiquidity, but in actual fact and for physiological and other reasons of opportunity cost, et cetera, this does not happen and we see values dropping and orders being canceled by people who could quite easily afford to go ahead with these acquisitions.

Okay, great. And then just a couple of really quick follow-up questions. It looked like your vessel operating expenses were up around 10% quarter over quarter. Is that attributed to a combination of, I guess, like the euro and, given the more recent weakness in the euro, should we expect that vessel OpEx number to start drifting the other way?

Yes, that's point number one, and the main reason, though, for this quarter for OpEx were the crew costs, Greg, because don't fret that crew costs from the second to the third quarter are typically increased because the renegotiations happen in the third quarter and when you increase the crew cost of the crews, you have to do it retroactively for the entire year. So you get a hit on your operating expenses due to that.

Linked to that, which was a major part of the increase, there was also an increase in spares and stores due to the dry dock of motor vessel Danae, and dry docking today you can't capitalize anymore all the costs and amortize them thereafter. Most of the costs are considered by US GAAP standards as expenses and need to be put directly -- expensed in the P&L. An that's why both of those factors are the main part of the increase that we have.

Okay, and just what was the average crew cost increase year over year, for your contracts?

Well, I mean, if you take quarter over quarter, strictly speaking, you had a 53% increase, but of course you have to take into account there that you had an increase in the number of vessels. So, basically, if you take it on a daily rate assumption, you have an increase of around 18%, 18% to 20%.

Thank you. The next question comes from Noah Parquette of Cantor Fitzgerald. Please go ahead with your question.

Hi. Just as a follow-up to the vessel operating expense question, given kind of the reduced supply outlook and generally lower demand forecast, do you think there'll be less pressure on wage increases in the next year or two?

We do hope so, yes. We do hope so, that there's going to be less pressure on the crew side, because, well, we do hope so, yes. And we think so.

Yes, there's no doubt with which the world fleet have decreased and demand for crews during the last three years has gone up has far outstripped the ability of the recruiting agents to get competent crews. And now, of course, the pressure will be off to a certain degree and with that should come less pressure on wage increases.

Okay, thank you. And most of my questions have been answered. I just wanted to know what your thoughts were on the Chinese stimulus package announced over the weekend, what effect you think that will have on the dry bulk market over the next year or so, given the infrastructure focus of that?

Yes, but logically it all depends, of course, on the speed of implementation. It's I think a three or four-year plan, but knowing the Chinese government's method of implementing their measures, it more will happen in the front end of this period than in the latter part. Logically, it should keep GDP, and this is obviously a guess, at well above 8% growth for 2009 and possibly for 2010, as well.

And it should make up for the boosting in demand for the transportation of certain commodities, including the ones that we carry in our ships during those years, a demand factor that we have not included in our forecasts up to now, and I think most analysts have not. It all depends, of course, how much demand will drop from other sources, which are going to give us a balance at the end of the day, and we don't know that yet.

Okay, all right, thank you. That's all I had.

Thank you. The next question comes from Justin Yagerman of Wachovia. Please go ahead with your question.

Hey, gentlemen, I jumped on the call late, so I apologize for not asking the questions initially, but wanted to get a sense of -- it sounded like you've at least checked out the possibility of expanding your credit facility of raising some debt here. Do you have any sense of what cost of debt would be if you were to enlarge your credit facility if you saw an opportunity in this environment?

Well, I think the cost are obviously not going to be the ones that we got when a million banks were at our door trying to compete and give us a credit facility. But still, I think that, considering that many banks do not give loans to any operator today and they come to our office to still discuss opportunities is a very good sign, because don't forget that banks are still working and still need to lend some money to some people.

And, obviously, when they look at their portfolio of owners, to whom are they going to lend? To the people that are highly -- with a high debt already on their back? No. To the people that are not experienced operators? No. To the people that have all the vessels that might be problematic? No. So to whom do they come? To a public company that has been transparent from the beginning, that has a young average age of fleet, a low debt and a very good experience.

And we are in this lucky situation, so we have explored the possibilities of expanding our debt and banks are there to do that at still-attractive conditions, considering the overall market situation.

Sorry, this is Ioannis. Bear in mind that we have plenty of cash to utilize before needing debt, and we have plenty of also time to wait for debt to become more available and more attractive.

Yes, no, that's a very fair point, and I guess piggybacking on that and in reference to some of the questions that were asked earlier in the call, I just wanted to get a sense, as you're assessing these opportunities in the market and you're thinking about vessel valuations and what rates look like, when you think about -- and this ties in with the financing question, what are you looking for from a project standpoint in terms of cash-on-cash returns in this market and what begins to get attractive to you? Do you have a hurdle rate that internally you guys discuss as a minimal return that you need to see on a project to get excited about it?

Well, Justin, don't forget that in 1999 we had ordered six Panamaxes from [Halla]. We then become [Samco, Udai Samco], and at that time the price was around $20 million, and the range we could see were about $9,000 for a year. Now, at those numbers, today, for example, you may be able to charter a ship similar to that at around $14,000, $15,000 daily for a year. So it makes sense to do that, if you can find the vessel at these prices, even at $2 million or $3 million more than $20 million, and then you have the upside potential. So here now we are talking about ship owning.

So you're not as focused, necessarily, on the very near-term returns, knowing that if you buy young ships, further down the line in the cycle you'll be able to make large returns off of those vessels.

Indeed. That's ship owning.

Okay, all right. No, that makes a lot of sense and it's obviously worked for you in the past, so appreciate the color, guys, and thanks a lot for your time.

Thank you, Justin.

Thank you. The next question comes from Gregory Lewis of Credit Suisse. Please go ahead with your question.

Hi. I guess one last follow-up question. Regarding the delivery of one of the two Capes that's going to come in 2010 that goes on contract, in looking at the footnote, what happens in the event that the ship is not delivered on time and it's delivered after April 30th, 2010?

No, the ship will be delivered on time, because don't forget that Waigauchau belongs to a governmental shipyard. It's a yard that we have bought a number of ships from them and they have been always ahead of schedule. The vessel will be delivered to us, I suppose three months ahead of schedule. So we have our eyes and we know what progress they are making. We know the people and they have been always performing, no problem there whatsoever. It's a very substantial --

But in the worst-case scenario event that there's like a shipbuilding strike, what happens to the contract?

Don't forget that we have a specific contract that has penalties for late deliveries of the vessels and so on and so forth. We have a contract with the yard, but we do not anticipate, as our CEO said, any kind of problem.

Okay, thank you.

Thank you, sir. There are no further questions. Please continue with any other points you wish to raise.

Well, thank you again for your interest in and support of Diana Shipping. We believe the actions we have taken in response to the market's challenges and opportunities are in the best interest of shareholders' value and we look forward to the future with confidence. Thank you.

Ladies and gentlemen, this concludes the Diana Shipping Incorporated third quarter 2008 earnings conference call. Thank you for participating. You may now disconnect.