Diana Shipping Inc (DSX) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Diana Shipping Third Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ed Nebb, Investor Relations Adviser 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. Symeon 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 the conference call which are not historical fact are forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act. 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 the risks, 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. Symeon 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 is reflected in our long-standing strategy of positioning our fleet to take advantage of an eventual rise in charter rates. As shipping conditions have improved and rates have strengthened, we are starting to show the benefits of this strategy.

To review our financial results, Diana Shipping recorded a net loss of USD 24.5 million, a net loss attributed to common stockholders of USD 25.9 million for the third quarter of 2017. These results included an USD 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 all the insured value. This compares to a net loss of USD 78.3 million and net loss attributed to common stockholders of USD 79.8 million for the third quarter of 2016, of which USD 50 million related to a loss and impairment from equity method investments.

It is important to note that the company's loss decreased very significantly from a year ago due to extraordinary impairment loss in the 2017 period and the loss of the equity investments in the 2016 period. Time charter revenues were USD 43.9 million for the third quarter of 2017. These represent a sharp increase compared to USD 27.1 million for the same quarter of 2016 due to increased average time charter rates 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 9 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 USD 62.7 million at September 30, 2017.

Long-term debt, net of deferred financing fees, including the current portion, was USD 622.1 million compared to stockholders' equity of USD 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 with our strong financial resources and with 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, Stasi Margaronis, for a perspective on industry conditions. He will then be followed by our Chief Financial Officer, Andreas Michalopoulos, who will provide a more detailed financial overview. Thank you.

Thank you, Symeon, 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' forecasts appear to be sensible and likely to materialize.

The Baltic industry that we usually referred to during our quarterly presentations seem to indicate that steadily improving 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 a similar pattern, and went from 1,068 to 1,280 during the same period.

In BCI, the Cape Index, was at 1,032 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 whole of 2017, up from an average of 0.5% during the 2015 to 2016 year.

In early November, the 12-month time charter rates for modern Capesize bulkers was around $15,750 per day. Panamaxes 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 than at the end of 2015. For example, 5 year-old capes were selling at [$4 million]. In early November, though, this year, the price was more or less steady at $39 million. As for 5 year-old Panamaxes, these were trading at around $28 million at the end of 2016, and the prices decreased slightly to $26.5 million in early November of this year.

Let's look at macroeconomic 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, a positive indicator that the U.S. economy is picking up speed.

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 [present 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 spurt since the 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're starting to be nearly perfectly aligned to support healthy demand growth for the transportation of bulk cargoes at least over the next couple of years.

On demand now, according to Clarksons, expansion in seaborne dry bulk rate is projected to accelerate to around 4% in 2017, following average growth of just 0.5% in 2015 and '16 as mentioned earlier. Strong Chinese demand has remained a key driver of volume growth, the Chinese dry bulk imports projected to increase by a very strong 7% in 2017.

Looking at iron ore now. According to figures by Clarksons, total iron ore imports are estimated to reach 1.528 billion tons in 2018, up 3% on estimated 2017 volume. Chinese demand for higher-quality imported iron ore is expected to increase by 4% next year, thus 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 output curbs in China, lower steel demand and high iron ore prices. These factors may encourage destocking and further increases in domestic output, as well as competition from scrap fees. 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 33 million tons during the first 9 months of the year. According to banchero costa, Chinese demand may taper off as demand from steel mills falls during the upcoming winter output curbs.

Thermal coal. According to Clarksons, global seaborne steam coal trade has grown firmly in the year-to-date with volumes now projected to increase by 6% in full year 2017. For 2018, volumes are projected to grow by a modest 1% to reach 954 million tons. This trend reflects a continued move towards cleaner energy sources in some regions such as Europe.

According to Braemar ACM, coal demands from India may very well increase over the next few quarters as the government is seeking to eliminate the use of highly-polluting petcoke in power generation with 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 Panamaxes and Supramaxes.

Following China's ban on North Korea coal imports, overall coal and lignite shipments 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 9 months of the year, rising 14% year-on-year to 130 million tons. According to banchero costa, coal-fired plants still account for the majority of power generation in China and will not disappear anytime soon. The reasons are lower costs and French economic interests. Coal-fired generation capacity was still estimated to grow 5.3% year-on-year in 2016, despite low utilization levels. In the first 8 months of 2017, thermal electricity output in China was up by 7.6% year-on-year.

Grains now. According to Clarksons, total grain exports 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 grain exports are projected to contract 19% to around 19 million tons in the 2017 to '18 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 '18 crop season, reflecting the competitiveness of Argentinian export resulting from the weakness of the Argentinian peso.

Let's look at 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 deliveries in 2017 after assuming delivery slippages, a total of 41 million deadweight are expected to be delivered. Clarksons predicts growth of the fleet during 2018 to be only 1%. Deliveries are expected to come in at 23 million deadweight in 2018, with scrapping to slow down to 13 million deadweight.

Talking about scrapping. According to banchero costa, in 2017 to 2019, the ballast water and fuel sulfur regulations 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 was scrapped compared with 345 units of 27.1 million deadweight capacity scrapped 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 13 are Panamaxes, Kamsarmaxes and 21 are capes. This compares to 33 units amounting to 8.4 million deadweight ordered during the same period last year.

Major news has been the agreement between Vale and several Korean and Chinese owners for the construction of 20 325,000 deadweight VLOCs with long-term employment. These deals, which are more financial rather than shipping deals are aimed to provide a predictable transportation cost for Vale over several years and very low return to the investing owners. This is without taking into account the risks from unforeseen operational problems that these ships may have. Even though most of these vessels will be replacing VLOC's converted from tankers about 10 years ago, some will add to capacity, and carry cargoes which will not be available to be transported in traditional cape tonnage. 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 (inaudible) existing fleet and 67.2 million deadweight. The Panamax order book was 13.1 million deadweight, or a mere 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 prospects in China and India and various other major economies remain promising. We agree with Clarksons, that against the cautious optimism which exists today as regards to future of the bulk carrier market, there remain risks to the demand outlook, including some potential impact of environmental inspections of Chinese industrial activity and from 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 playing their role, there are more positives and fundamental drivers present.

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 side growth in the coming years suggests that the bulk carrier market balance should continue to gradually improve, even if trade growth 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 Shipbroking, the recovery that we have seen over the last 18 months will continue, with it [slightly] remaining positive over the next 3 years to 4 years. However, Braemar also adds that for some sectors, the pass-through of this phase of the cycle will not be quite as smooth as for others.

The Diana Shipping management team is very pleased that the company's investment and debt 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 pointed out, however, that the future movement of time charter rate and ship prices will very much depend on investor psychology and expectations, especially for 2019 to 2020. This will play a determining role in the movement of shares and 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 9 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 9 months ended September 30, 2017.

For the third quarter 2017, net loss and net loss attributed to common stockholders amounted to $24.5 million to $25.9 million, respectively, including an $8.4 million impairment loss on the motor vessel Melite which was sold for scrap in October 2017, after her grounding in July 2017, and the receipt from insurers of the insured value.

Loss to common share was $0.25. Time charter revenues increased to $43.9 million, compared to $27.1 million in the third quarter 2016. The increase was due to the increased average time charter rates that we achieved on our vessels during the quarter and revenues derived from the additions to our fleet of the vessel San Francisco and Newport News delivered in January 2017, and [Phaidra Soya May] delivered in May 2017.

Ownership days were 4,692 in the third quarter of 2017, compared to 4,232 in the same quarter 2016. The utilization was 97.9%, compared to 99.4% for the same quarter 2016, and the daily time charter equivalent rate was $8,947, compared to $5,914 for the same quarter 2016.

Voyage expenses were $2.5 million for the quarter compared to $2.1 million for the same quarter 2016. The increase in voyage expenses was due to an 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 in ownership days resulting from the enlargement of the fleet. On average, daily operating expenses decreased in all operating expense categories, and daily operating expenses were $4,857 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, [chartering and state] expenses were $5.7 million compared to $6 million for the same quarter last year. Management fees to related party were $0.5 million, the same as 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 $0.8 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 Diana Containerships Inc. and a loss on our investment in Diana Wilhelmsen.

For the 9 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 $113 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 9-month period and the increase in ownership days due to the enlargement of our fleet. Ownership days for the 9 months ended September 30, 2017, were 13,495, compared to 12,210 for the 9 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 $6,033 for 2016.

Voyage expenses were $5.6 million for the 9 months ended September 30, 2017. Vessel operating expenses amounted to $66.3 million, compared to $65.1 million for the 9 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 crew costs, insurances, stores, spares and environmental costs decreased, and there was a small increase in taxes and other operating expenses.

Daily operating expenses for the 9 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 the [decreased sales].

Management fees to related party were $1.3 million and were the fees paid to Diana Wilhelmsen 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 rate compared to last year. Interest expense for the 9 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 9 months ended September 30, 2016. This increase was mainly due to increase in interest income from Diana Containerships Inc. under our normal agreement [treatment], which amounted to $2.5 million in the 9 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 period last year and was mainly due to the loss in our investment in Diana Containership, Inc, which was sold during the 9 months ended September 30, 2017.

As previously announced, on July 25 -- 26, 2017, the motor vessel Melite ran aground in Palau Laut, Indonesia resulting to the vessel's constructive total loss. The vessel's value which, as of September 30, 2017 amounted to $22.3 million, was written down to 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 vessel's other 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 will be pleased to respond to your questions and turn the call to the operator who will instruct you as to the procedure for asking questions.

(Operator Instructions) Our first question comes from the line of a Gregory Lewis with Credit Suisse.

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 depth 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 on more short-term spottish-type cargoes, or should we think about you may be taking an 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 hedge [through VCR] vessels by having always a vessel to open throughout the cycle. And in order for us not to take it back under chartering -- on the chartering market. And we don't intend to change that, Greg. So no, we would 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, but just as we look at the cape fleet, I mean between the capes and the Newcastles, they're all up for renewal in '18. So I guess what I was wondering, is there any depth to the time charter market? Could we actually -- is there the potential to fix a cape or a Newcastlemax for 2 years or 3 years? Or is the market still real -- there's not real customer demand for multiyear contracts at this point -- I guess is probably how I should have asked the question.

I think that the 2-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. Just given that and given the fact that we've seen a little bit of an uptick in rate, 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.

Yes, Greg. The acceleration in new building orders is probably going to come more due to optimism about future rates and ship prices and values rather than from the aggression exhibited from shipyards. Shipyards have been at their 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 cost -- 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 we begin to see over the next few quarters is going to be what shipowners think is going to be the future earnings pattern of the ships 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.

(Operator Instructions) Our next question comes from the line of Jon Chappell with Evercore ISI.

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 we look at the balance sheet, there is only $37.2 million. Can you just remind us what the remainder is of restricted cash. It's obviously $25-point-whatever million, but why is it restricted and at what point does it become kind of current cash and cash equivalent?

Well, it's $25.5 million. And in the line -- on the balance sheet restricted cash but anyway, and this is the cash -- the minimum cash that is required in the loan agreements by the banks. So it's at $100,000 per vessel.

Got it. And then also, debt amortization schedule as we looked at 2018. You mentioned, you already paid off the $5.8 million for the ship that was scrapped. What's the payback schedule for next year?

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

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 deliver the balance sheet, continue to kind of dip into the market and buy ships in onesies, twosies? How do you think about cash deployment in 2018 in a better market environment?

At the moment, 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 the other, we are staying on the sidelines using, keeping our cash for our daily operations and focusing on chartering our vessels and the big operations of our fleet. So for the moment, it's nothing that in terms of strategy decided. What is for sure is that we have stopped our 2 years of buying mode that we were into, and that already seems [lost]. And of course 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.

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

0.

0?

Yes.

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

We sold.

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

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.