Performance Shipping Inc (PSHG) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Diana Containerships third-quarter 2013 conference call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Edward Nebb, Investor Relations Advisor for Diana Containerships Inc. Thank you, Mr. Nebb, you may begin.

Thank you, Christine, and welcome, everyone, to the Diana Containerships Inc. 2013 third-quarter conference call.

The members of the management team with us today are 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 Eleni Leontari, Chief Accounting Officer.

Before management begins their remarks, let me briefly summarize the Safe Harbor notice. Certain statements made during this conference call which are not statements of historical fact are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. The forward-looking statements are based on assumptions, expectations, projections, 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.

And now 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. (technical difficulty) report to you on the performance of Diana Containerships Inc. for the third quarter ended September 30, 2013.

During the recent quarter, we continue our [specific] efforts to expand the Company's [containerships], while also maintaining sound financial resources. In this manner, we can ensure that we are positioned for longer-term growth and, at the same time, that we have the fiscal strength to navigate challenging conditions in our marketplace.

With respect to trip expansion, we took delivery during the quarter of the motor vessel Puelo, a 2006 field Post-Panamax vessel of approximately 6,500 TEU capacity, which is chartered to CSAV at a gross charter rate of $27,900 per day. We also took delivery of the motor vessel Pucon, a sister ship of the Puelo, built in 2006. The Puelo is also chartered to CSAV at a gross charter rate of $27,900 per day (sic -- see Press Release -- Pucon).

After completing these transactions, Diana Containerships' fleet currently consists of 10 container vessels, eight Panamax and two Post-Panamax. Our fleet is time chartered to some of the industry's leading container lines for approximately 61% of the days in 2014, providing a stable revenue stream.

The contracted gross revenue of the fleet, including the first nine months of 2013, is approximately $[155.8 million].

Reflecting the Company's credit worthiness, as well as our efforts to provide ample financial flexibility, we have drawn down an additional $6 million under our existing revolving credit facility of up to $100 million with the Royal Bank of Canada. In addition, through a wholly-owned subsidiary, we have drawn down $50 million under the previously announced loan agreement with Diana Shipping Inc.

As announced previously, we have from time to time taken advantage of the opportunity for an at-the-market equity offering pursuant to our effective shelf registration statement. During the third quarter of 2013, the Company issued approximately 5.5 million shares in common stock through the ATM offering, generating gross proceeds of approximately $2.1 million. We have approximately $30.9 million remaining to be sold through this ATM offering.

[Following] now our various financial initiatives, we entered the 2013 third quarter with shareholders' equity of nearly $186 million. We are confident the Company has a solid balance sheet to support vessel acquisitions and for general corporate purposes.

Now let me review Diana Containerships' financial performance during the recent quarter. Time charter revenues, net of prepaid charter revenues amortization for the 2013 third quarter, were $11.1 million. This compared to 14,600 -- $14.6 million for the same period of 2012. The Company recorded a net loss of $718,000 for the 2013 third quarter.

We continue to maintain an attractive and prudent dividend position. Today, we announced that the Board of Directors has declared a dividend of $0.15 per share payable on or around December 18, 2013, to all shareholders of record as of November 29, 2013.

In summary, the performance of Diana Containerships for the third quarter of 2013 reflected our efforts to upgrade the quality and earnings potential of our fleet. We also have continued to manage our business to optimize financial flexibility to employ our resources to build a platform for long-term shareholders value.

Now I will 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 welcome to all the participants in this third-quarter 2013 conference call of Diana Containerships.

Let us start by looking at the most recent macroeconomic developments on a worldwide basis. The IMF expects annual global growth of 2.9% this year and 3.6% in 2014. This represents a downward revision of their last forecast made a few months ago.

In China, gross domestic product growth rose to 7.8% during the third quarter, which is seen largely as a result of government efforts to shore up growth with a looser monetary policy and a small stimulus of investment in infrastructure, such as rail and subway systems. We have to wait and see, however, if this rebound will be sustained.

The manufacturing Purchasers' Managers Index in September rose to a seven-month high of 50.9, which, according to Maersk Broker, indicates that China's growth and recovery is becoming steadier going into the fourth quarter of this year, following the bottoming out in the third quarter.

In Europe, consumer confidence climbed to a 27-month high in October, adding to signs of improvement in the bloc's economy. Also, the composite PMI, combining both the manufacturing and the services sectors, came in at 51.5 as a preliminary reading for October. This follows a 27-month high reading of 52.2 for September.

According to Braemar Seascope, industrial output in the eurozone in August grew at the strongest pace in more than two years, with factory output rising by 1% during that month.

Let's look at container trade growth. According to Clarkson, the global container trade is currently projected to expand by 4.8% during the full-year 2013 and growth is projected to accelerate to 6.1% in 2014. Also, main-lane trade, which contracted last year, is now expected to grow by 2.8% in 2013, while the faster-growing and north/south trades are expected to expand by 5.6%.

Intraregional trade is projected to grow by 6.5% this year, driven by strong intra-Asia volume growth. An encouraging sign is the fact that the container volumes on the all-important Asia to Europe services grew by 3.2% during the first eight months of this year, compared to the same period in 2012. However, European container import volumes are currently projected to expand by only 1% year on year in 2013, and reach 21.9 million TEU.

This, nevertheless, follows a 4.1% year-on-year fall recorded in the full-year 2012.

Clarksons go on to report that North American container import volumes are currently projected to grow by 2.3% in the full year 2013 and reach 20.6 million TEU, having expanded by only 1.4% last year. The improvement in the US housing sector should see through to increase the demand for imports for the construction sector.

Meanwhile, according to Clarksons, container throughput at the top 10 largest Chinese ports increased by 2.2% year on year in September, bringing the total over the first nine months of the year to 109.32 million TEU, which is a 6.7% year-on-year increase.

Let's turn to the market [layer] effect of GDP growth on container demand. According to RS Platou, historically container traffic growth has increased by 2.2 to about 2.7 times the growth over GDP on a worldwide basis.

From 2001 to 2012, container traffic growth increased by 2.1 times the world GDP growth. Based on preliminary data for the first nine months of this year, it seems that this ratio will now be around 2. This is related to lower growth in containerized imports to Europe, where historically growth in imports has been very highly correlated to GDP growth in that area.

Europe accounts for nearly 30% of total containership demand because of its high share of imports from Asia. From 1997 to 2012, the average GDP growth rate in Europe was 1.4% per annum, while container imports increased by a staggering average of 9.6% per annum. When we consider the fact that this period includes the collapse of container traffic in 2009, we realize that we should not underestimate the importance of European demand in the containership industry.

The huge historical multiplier of over 6.5 shows how a modest recovery in GDP growth in the eurozone can create a disproportionately high increase in the demand for imported containerized goods. According to RS Platou, if eurozone GDP grows by 0.9% in 2014, which is indeed the IMF prediction, then containerized imports could grow by 6% to 7%. For comparison purposes, RS Platou calculated that over the same period, that is 1997 to 2012, the multiplier as regards US demand growth was 5.2. This is therefore another important market to watch for signs of increased economic activity going forward.

Let's turn to freight rate developments now. According to Clarksons, freight rates have been coming under increased pressure the last few months. As of September 2013, on a year-on-year basis, the main-lane freight rate indices have dropped by an average of about 23%. The intra-Asian freight rates have fared the best, with a drop of just 7.8%. The north/south composite indices have dropped a surprisingly high 17.1% year on year. The infamous cascade was primarily responsible for this, as we will mention later on.

As with our time charter earnings, according to Braemar Seascope, from July 1 to September 30 this year, earnings have dropped by an average of about 2.2% across all size ranges. The largest part of the easing came in the time charter rates for ships from 4,250 TEU upwards. Admittedly, the time charter rates of the smaller ships have been so low that the scope for further erosion has been pretty minimal.

Let's turn to the newbuilding order book. According to Clarksons, at the beginning of October the full [accelera] containership order book numbered 463 vessels of a combined 3.63 million TEU nominal carrying capacity. This is equivalent to 21.3% of the existing global fleet. The 8,000-plus TEU ships account for 80.7% of the total capacity on order.

Meanwhile, the total order book for Post-Panamax ships is up to 7,999 TEU ships, consists of 97 vessels of 480,000 TEU capacity, equivalent to 13.3% of the existing global fleet.

The Panamax order book from 3,000 TEU upwards is a near 1.2% of existing capacity, and all the smaller vessels together have an order book of less than 5% of the existing fleet.

As regards newbuilding prices, in September the three-month trend, according to Clarksons, showed an upward movement of 4.3% on an overall basis.

In the meantime, demand for containership newbuildings increased in the second quarter of 2013 with 60 vessels of a combined 441,000 TEU ordered. This included, according to Clarksons, as many as 30 orders for 8,000 to 10,000 TEU ships, a factor that has unfortunately grown substantial investment in 2013. This brings ordering in the first half of 2013 to 90 vessels of a combined 700,000 TEU capacity, already more than the 420,000 TEU ordered in the full year 2012.

Continuing with supply, we have data provided by Clarksons. During the [month] of September 2013, the containership fleet numbered 5,125 ships of a combined 16.9 million TEU carrying capacity. On the supply side, Clarksons expects the global container capable fleet to grow nearly 7% in 2013, driven primarily by 8,000-plus TEU newbuilding deliveries.

As for the often referred slippage, RS Platou reports that in 2012, 79% of the 1.58 million TEU order book was indeed delivered, while this year, they anticipate that this trend of the first half of the year continues for the rest of 2013, about 85% of the 1.88 million TEU order book will be delivered. According to Braemar Seascope, in the five years from 2011 through 2015, the 10,000 TEU fleet is estimated to grow based on an annual average of 37%.

Looking at 2013, the sector is expected to grow 25% and the vast majority of these mega-vessels are destined to be deployed on Asia-to-Europe loops. Braemar Seascope continued their analysis by saying that while the industry has been focusing on the growth of the Post-Panamax sector of the fleet, much of that attention has been changed to the sub-Panamax sectors. With new investment concentrated on the large vessels, the smaller sizes, in contrast, are declining. In 2013, this segment is estimated to shrink 0.5%. Looking forward from 2013 to 2015 included, they estimate that this segment will reduce in size by an annual average of 1%.

Slow steaming now. According to Clarksons, by the end of 2012 about 1.6 million TEU of capacity was being absorbed by slow steaming. This year, they calculate that this figure has gone up to 1.9 million TEU. According to shipping analyst Alphaliner, extra and super slow steaming will help absorb 7.4% of the existing fleet. We will refer to the effects of this in the supply/demand balance later on.

Let's turn to idle capacity. According to Alphaliner, on October 7 a total of 181 vessels were laid up, with a capacity of 442,937 TEU, representing 2.6% of the existing fleet. From these ships, 47 were between 3,000 and 5,099 TEU. Most of the rest were smaller vessels, with 52 ships in the 1,000 to 1,999 TEU size range.

We believe that most of these ships will not trade again. Proof of this is the fact that as reported by Clarksons, a large number of the currently scrapped tonnage came from the pool of laid-up ships. The recent increase in demolition numbers has been the key driver behind a substantial fall in the size of the idled fleet in 2013, with reactivation into active trading secondary.

So demolition now. According to Clarksons, about 142 vessels of a combined 322,561 TEU carrying capacity were sold for scrap during the first nine months of this year. Of this capacity, about 57% was accounted for by 3,000-plus TEU Panamax vessels. The latter is particularly encouraging news, and will have the [side effect] to cope with the adverse effects of the famous cascade, which has been affecting the sector for nearly three years now.

According to Braemar Seascope, it is very possible that 2013 will see record levels of TEU capacity scrap. To put things in context, in 2009, 380,000 TEU went for demolition, which is the biggest year for demolition thus far. For 2013, the total is likely to reach between 415,000 and 430,000 TEU, which will be a new record.

Looking at the supply/demand balance, Clarksons currently projects containership demand growth to exceed supply growth from 2014 to 2016, which suggests a gradually improving market.

With idling and slow steaming as mentioned above, Clarksons estimates that the projected surplus of 3 million TEU by the end of 2013 drops to about 700,000 TEU. Naturally, if the services were to speed up again, that would release lots of capacity to the market. However, Clarksons belief that the key determining factor for containership speeds is today's high fuel price environment and recently imposed environmental regulations on emission controls. We assume that will remain true until time charter rates move significantly higher than at present.

Finally, what is the outlook for our industry? Clarksons predicted the supply pressure on individual routes will continue to be determined by the management of capacity down from the main lanes, as operators rapidly receive very large containership deliveries. This redistribution of supply, known by now as the cascade, affects both main lane and non-main lane freight rates.

Rates on a number of north/south routes continues to suffer severely from the influx of new and larger capacity. And we have seen the results of this, as mentioned earlier on.

According to Clarksons, the unprecedented rate of demolition, combined with a thick order book in the small and medium sizes, may eventually alleviate pressures on the charter market earnings of these ships.

Looking ahead, they see box trade in 2014 increasing by 6.2%, with the container capable fleet expanding by about 5.3%. The recent fall in the level of idle capacity, along with the elevated levels of demolition, which continues to reduce the capacity of the sub-4,000 TEU fleet, as mentioned earlier, as well as a gradual slowdown of the cascade, may well bring about a tightening of the charter market supply in the medium term.

On an overall basis, we tend to agree with the forecast made by Braemar Seascope for daily earnings. Their review of the supply/demand trends leads them predict that daily earnings will remain sluggish well into 2014, with a gentle recovery starting in the second half of the year.

If stronger performance figures for world economic growth materialize, there is a real possibility of an orderly recovery in freight rates. As mentioned above, there is a very strong correlation between growth and world GDP, and particularly eurozone and US GDP growth, and the container charter market. This improvement in growth, combined with a return to more balanced supply and demand created by a combination of slow steaming, scrapping, and lay-ups, should turn the market upwards.

When this will happen depends very much on several factors, most important of which we believe is the strength of the cascade. We agree with Braemar that the longer the [pad] market goes on, more ships will be scrapped, and hopefully newbuilding orders will slow in the larger sectors as the saturation point is very fast approaching.

Without any doubt, this is a very challenging environment within which containership owners have to operate. Ownership of containerships is certainly not for the faint hearted. However, the Diana Containerships' management team, led by our experienced Chairman and CEO, have been through difficult and challenging markets in the past. By maintaining a strong balance sheet and pursuing a disciplined business strategy, we're in the process of modernizing the Company's fleet, while at the same time providing more visibility on earnings and a dividend.

It is common in difficult times when pessimism is prevalent among analysts and investors that no business strategy appears sensible or viable. It is our fate to take into account the cyclical nature of the shipping industry. It is not an industry for investors who believe the sectors which go down will take many, many years to recover. This line of thinking shows the lack of understanding of the basic premise on which investments in shipping should be made.

It is more common than most to see huge returns come over only a few quarters, thus making the initial decision to invest very worthwhile and rewarding the patient investor with handsome profits. Short-term gain can only be made in shipping by speculators who are either very lucky or feel that they can see the future clearly through a crystal ball. For the investors with such a unique ability, there are other places indeed to make money than shipping.

As we are here for the medium and long term, we will pursue the policies briefly described above, as well as in prior presentations, confident that the logic of our strategy will be understood and appreciated when the market turns. If we can be sure of one thing, it is that the market will indeed turn, and many will be impressed by the speed and extent of this recovery when it comes.

I will pass the call now to our CFO, Andreas Michalopoulos, who will present you with the financial highlights of the third quarter and the first nine months of 2013. Thanks.

Thank you, Stasi, and good morning. I am pleased to be discussing today with you Diana Containerships Inc. operational results for the third quarter of 2013 and the nine months ended September 30, 2013.

Starting with the third quarter of 2013, net loss of Diana Containerships Inc. amounted to $0.7 million and the loss per share amounted to $0.02.

Time charter revenues, net of prepaid charter revenue amortization, amounted to $11.1 million, compared to $14.6 million in 2012. The decrease in time charter revenues was due to decreased average time charter rates achieved during the quarter, compared with the same period of last year, and the disposal of the vessels Madrid, Malacca, and Merlion in the second quarter of 2013, and was partly offset by the addition to the fleet of APL Garnet in November 2012 and Hanjin Malta, Puelo, and Pucon in March, August, and September 2013, respectively.

Ownership days were 786 for the quarter, compared to 828 in the same period of 2012. Fleet utilization was 99.7% for the quarter, compared to 99.9% for 2012. And the daily time charter equivalent rate was $14,022, compared to $17,198 in 2012.

Voyage expenses were $0.1 million for the quarter. Operating expenses decreased $5.5 million, or 7%, to $6.9 million in 2013, compared to $7.4 million for the same quarter of 2012. Operating expenses in the third quarter of 2013 mainly decreased due to a 5% decrease in ownership days resulting from the disposal of the vessels Madrid, Malacca, and Merlion, partly offset by the addition of the APL Garnet in November 2012 and the Hanjin Malta, the Puelo, and the Pucon in March, August, and September 2013, respectively.

On average, operating expenses decreased due to decreased spares, repairs, and maintenance costs, and this decrease was partly offset by increased crew costs, insurances, and tax expenses.

Daily operating expenses were $8,775 for the third quarter 2013, compared to $8,949 in 2012. Depreciation amounted to $2.4 million for the quarter. General and administrative expenses were $1.2 million, compared to $0.9 million in the third quarter of 2012. The increase was mainly attributable to the establishment of United Ocean Transport Limited, or UOT, our wholly-owned subsidiary to act as the fleet manager effective March 1, 2013, and was partly offset by decreased compensation costs on restricted stock awards.

Interest and finance costs for the third quarter of 2013 amounted to $1.3 million, compared to $0.8 million for the same quarter in 2012. The increase was a result of increased average debt after the drawdown of $50 million from our loan agreement with Diane Shipping Inc. and $6 million from our credit facility with RBS in August and September 2013, respectively, that should [be the most] increased average interest rates.

Turning now to the nine months ended September 30, 2013, net loss of Diana Containerships Inc. amounted to $37.6 million and the loss per share amounted to $1.14. Time charter revenue, net of prepaid charter revenue amortization, amounted to $38.5 million, compared to $42 million in 2012. Time charter revenues decreased due to decreased average time charter rates achieved in 2013, compared to the same period in 2012, and also due to the disposals of the vessels Madrid, Malacca, and Merlion in the second quarter of 2013.

This decrease was partly offset by the addition to our fleet of the Cap Domingo, Cap Doukato, APL Sardonyx, APL Spinel, and APL Garnet in February, March, and November 2012, and the Hanjin Malta, Puelo, and Pucon in March, August, and September 2013, respectively. Ownership days were 2,608 in 2013, compared to 2,285 in 2012.

Fleet utilization was 97.3%, compared to 99.8% in 2012, and the daily time charter equivalent rate was $14,555 for the period, compared to $17,927 for the same period of 2012.

Voyage expenses were $0.5 million. Operating expenses for the period ended September 30, 2013, amounted to $23.6 million, compared to $20.2 million for the same period of 2012. The increase in operating expenses was due to the increase in the ownership days and also due to the increased crew cost, insurances, and tax expenses.

Daily operating expenses were $9,033 for the period ended September 30, 2013, compared to $8,833 in the current period. Depreciation amounted to $8.1 million.

Management fees amounted to $0.3 million and represent the fees paid to Diana Shipping Services S.A., [poc] to February 28, 2013. Effective March 1, 2013, UOT provides us with management services similar to those previously provided by Diana Shipping Services S.A. The fees payable to UOT are a leading [point of] consolidation as these are company transactions.

Selling and administrative expenses amounted to $3.9 million, compared to $2.7 million for the same period in 2012. The increase was mainly attributable to the establishment of UOT [collects as a fee] manager, effective March 1, 2013, and was subject set by decreased company promotion expenses and compensation stock costs on restricted stock awards.

Impairment losses amounted to $32.6 million and represent non-cash impairment charges recorded in the first quarter of 2013 for the vessels Madrid, Malacca, and Merlion. Loss on vessels sailed amounted to $4.3 million and relate to the sale of the vessels Madrid, Malacca, and Merlion in the second quarter of 2013.

Interest and finance costs were $2.8 million for the period ended September 30, 2013, compared to $3.3 million for the same period in 2012. As mentioned earlier, in 2013 we had increased average debt outstanding compared to 2012, as well as increased average interest rates.

Turning to dividend policy now, for the third quarter of 2013 the Board of Directors have decided to declare a dividend of $0.15 per share.

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

(Operator Instructions). Brandon Oglenski, Barclays.

This is Keith Mori on for Brandon. I just had a question. You guys purchased two new -- or two containerships, secondhand, a little bit larger than the average fleet that you guys are running. Are you looking to maybe get a little bit bigger into that class? Is that a class you are interested in, or -- and they are a little bit newer as well, relative to the other ships. Can you maybe speak about that purchase?

This is Ioannis Zafirakis speaking. We like the size, and of the time when we did the purchase, the numbers made real sense, and they still do.

You could have purchased a vessel at a time charter pre-basis around the numbers that we purchased the vessel, and then you are able to charter her back at close to $28,000, which is a very healthy business to do, based on the fact that you have a very nice free cash flow for your investment, and also you are gaining time before the market turns more positively.

And to cut the long story short, again, we like this particular size because of the numbers and also because of the reasons that Mr. Margaronis, our President, explained earlier.

Okay, and I guess, Stasi, you had mentioned that you guys agree more with the Braemar forecast of maybe a more positive outlook in the second half of next year. So you have two vessels coming off charter in the first half. Should we think that maybe you'd look to put them on short-term contracts or are they -- are you looking more for a scrappage opportunity on those vessels?

We are looking at everything which is available. We are looking from scrapping to selling, short-term chartering. What is unlikely to happen is a long-term contract for these vessels when they come up for renewal.

Okay, I will pass it along. Thank you.

(Operator Instructions). Jeff Rudner, UBS.

On the balance sheet, obviously by far and away the largest asset we have is the vessels at net book value. Especially with the acquisitions in the third quarter, are you able to comment as to whether the fair market value of the vessels is roughly the $298 million that we carry them at book value?

The net asset value of the Company is different than the book value that you see, and there are market reports as regards to the current values of the vessels, but anyone can calculate. All the analysts can calculate. You can calculate the actual market value of the Company, something that we have as a policy not to comment at because we strongly feel that the market value of any shipping company is not so important if the company is not liquidating the next day.

The volatility of the market is such that the market value of the assets changes rapidly up and down, and the main key and the most important [part] of the company is how strong the balance sheet is to survive the bad environment.

And Diana Containerships' balance sheet is very strong, and also the ability to pay a very nice dividend and give a nice gift to the shareholders is still there without putting at risk the survival of the Company.

Thank you very much. I appreciate that.

(Operator Instructions). Thank you. We've reached the end of the Q&A session. I would now like to turn the floor back to management for closing comments.

Thank you again for your interest in and support of Diana Containerships. We look forward to speak with you next quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.