Performance Shipping Inc (PSHG) 2015 Q2 法說會逐字稿

Greetings and welcome to the Diana Containerships Incorporated second quarter 2015 results conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ed Nebb, investor relations advisor. Thank you sir, you may begin.

Thank you very much Donna. Greetings everyone. Thank you for joining us for the Diana Containerships Inc. second quarter conference call. The members of the management team who are with us today are Mr. Symeon Palios, Chairman and Chief Executive Officer; Mr. Anastasios Margaronis, President; Mr. Andreas Michalopoulos, Chief Financial Officer; Mr. Ioannis Zafirakis, Chief Operating Officer; and Ms. Eleni Leontari, Chief Accounting Officer.

Before management begins let me briefly summarize the Safe Harbor notice. Certain statements made during this conference call which are not statements of historical fact or 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 or may not prove to be accurate. 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. And now with that, let me turn the call over to Mr. Symeon Palios, Chairman and Chief Executive Officer of Diana Containerships.

Thank you Ed. Good morning and thank you for joining us to review the performance of Diana Containerships Inc for the second quarter of 2015. During the recent quarter Diana Containerships net income increased and we also continued to invest in the growth of our fleet to position the company for the long terms opportunities we see in the containership market. In terms of our financial results, the company reported net income of $0.9 million for the 2015 second quarter, up from net income of $0.6 million for the same period of 2014.

Time charter revenues, net of prepaid charter revenue amortization, were $17.3 million for the second quarter of 2015, an increase from $12.5 million for the second quarter of 2014, mainly due to a larger fleet, partly offset by reduced time charter rates.

Our balance sheet has remained a source of strength with approximately $58 million of available (inaudible) that costs nearly $257 million (inaudible) . As a result, we continue to be well positioned to take advantage of opportunities to expand our fleet further in the current marketplace. Both the directors today declared a cash dividend on the company's common stock of $0.0025 per share with respect to the second quarter of 2015. The cash dividend will be payable on or around September 9, 2015 to all shareholders of record as of August 18, 2015.

We have continued to make strategic investments in our fleet. Earlier today we announced agreements to purchase two post-Panamax Container vessels, the motor vessel Rotterdam and the motor vessel Hamburg. The Rotterdam is a 2008 built vessel of approximately 6,500 TEU capacity, which is expected to be delivered to the company by mid-September 2015.

The Hamburg is a 2009 built vessel of approximately 6,500 TEU capacity which is expected to be delivered to the company by the end of November 2015. The closing of the Hamburg purchase is subject to the signing of a novation agreement to the time charter contract of the vessel.

In addition we took delivery of two container vessels during the second quarter. The motor vessel YM New Jersey, a 2006 built Panamax container vessel of approximately 5,000 TEU capacity was delivered on April 22. And motor vessel YM Los Angeles, a 2006 built Panamax container vessel of approximately 5,000 TEU capacity was delivered on April 9.

Finally, we have agreed to sell the motor vessel Cap Domingo, a 2001 built Panamax with delivery due to the buyers by mid-March 2016 subject to approval by the buyer's board of directors not later than September 4, 2015.

Once these actions are completed we will have a fleet of 14 container vessels, six post-Panamax and six Panamax. Our fleet is time chartered to some of the industry's leading container lines with coverage for approximately 80% of the days of 2015 providing a stable revenue string. The contracted gross revenue of the fleet including the first six months of 2015 is approximately $82.6 million. In summary, the performance of the Diana Containership thus far in 2015 reflects improved profitability. A solid balance sheet and growing fleet that is well positioned for opportunities in the next phase of the industry cycle.

We remain dedicated to delivering profitable growth and that has shareholder value over the long term. I will now turn the call over to our President, Anastasios Margaronis for a perspective on the industry conditions. He will then be followed by our chief financial officer Andreas Michalopoulos, who will provide more detailed financial overview. Thank you.

I'm sorry but I have mentioned that once these sessions are completed we will have a fleet of 14 container vessels, six post-Panamax and eight Panamax, and not six that I said before. Sorry about that.

Thank you Symeon and good morning to all the participants in the second quarter conference call for Diana Containerships. The containership market has been relatively quite this past quarter compared to developments elsewhere in the shipping industry. Looking at the macroeconomic developments which have been taking place recently, according to the OECC, global growth this year should reach 3.1%, and growth would move to 3.8% in 2016. These figures are downwards revisions from 3.6% and 3.9%, respectively. The Euro area is expected to grow by 0.7% this year and by 2.1% in 2016.

In Europe in May the PMI data outline according to [Maersk Brokers] a Euro area recovery is experiencing some weakness. It fell to 53.6 in May from 53.9 in April, driven by a decline in the service sector. In June, however the index moved back up to 54.1 from 53.6. This was the highest level in 49 months. Also the Euro manufacturing sector seems to be expanding slightly, as it grew from 52 in April to 52.3 in May.

In China according to Maersk Broker the economy grew at an annual rate of 7% in the second quarter. The OECD growth forecast for this year is 6.8% and for next year 6.7%. Both these figures are downward revisions from 7.1% and 6.9% respectively. According to [Braymar ACM], activity in China's factory sector expanded slightly in June while growth in the services sector sped up. The world's second largest economy may be slowly starting to level out after a rash of support measures. The OECD prediction for growth in India is a very respectable 7.3% this year and 7.4% in 2016. In the US growth is forecast according to the IMF to reach 2.5% this year and 3% in 2016. We need to keep in mind that growth in the US and Europe is associated with high multiples of container demand. Hence, 2016 should see drastic increase by more than what most analysts anticipate. If the predicted growth rates of course come to pass.

Let's turn to demand now. According to Clarkson's, global container trade is expected to increase by 6% in 2015 and to reach a 181.5 million TEU. This compares with 4% growth in 2014. Fast growth is expected this year in the fast-growing non-main lane east-west trade, about 7.5%, and the large intra-Asian network, up about 6.9%. Trade growth across the north-south route is expected to improve to 5.4% in 2015 and to 6% in 2016. Trade in the peak leg Far East of Europe trade is expected to grow by 6.2% this year. However, due to the weak euro, Alphaliner reports trade from the Far East to Europe to have shrunk by 3.3% during the first four months of this year compared to last. According to Alphaliner, carriers must reduce by at least 14% the current Far East to north Europe capacity if significant negative repercussions to trade rates are to be averted. This is particularly so in view of the fact that some 25 new ships between 13,800 and 19,000 TEU are scheduled to join this route between now and the end of the year.

On the peak [leg] trans Pacific route volumes are projected to grow by 7% this year. According to Clarkson's trade from Europe from North America expanded by 11% year on year during the first five months of 2015, reaching 1.36 million TEU. Unfortunately though, during the same period, container traffic from the United States to Europe dropped by 9% to 830,000 TEU compared to the same period in 2014. As for 2016, world box trade growth is projected to accelerate to 6.6% in 2016, as I said earlier. That is always according to Clarksons.

It is interesting to note a slowly developing trend of downsizing of some routes. For example Maersk and MSC have announced changes to their AE9 [strobe condor] Asia to Europe service. The average size ship deployed on this route will be reduced from 9,5000 TEU to 6,500 TEU. At the same time, Hamburg Sud and MSC are to launch a joint US Gulf to East Coast South America service in July. The two operators have announced they will merge their service to deploy seven five and a half thousand TEU ships on the new loop.

Let's turn to supply now. According to Clarkson's the fully [cellular] fleet is estimated to grow by 6.8% this year and reach 19.5 million TEU. Both the containership deliveries are expected to reach 1.5 million TEU this year. year to date delivery stands at a 101 ships, or 870,000 TEU with an average size of 8,612 TEU. On the larger size range of 13,800 to 19,000 TEU, Alphaliner estimates that the total of 51 ships are scheduled for delivery this year of which 26 units are already sailing. Next year a further 46 units of this size range are scheduled to join the already over-supplied fleet of very large containerships. This will undoubtedly continue to put pressure on freight rates for at least until the end of 2016 and create over-capacity in the long main lane routes both to Europe and the United States. The ocean three groups of operators which are CMACGM, CSCL and UASC have made the first concession in the ongoing Asia to Europe rate war by taking the decision to withdraw one of their four far east to north Europe strings of 12 consecutive weeks starting from the end of June. This might not be enough to support freight rates, but at least it is a move in the right direction.

More importantly however, it will hopefully make some ambitious operators think again before ordering even more mega container carriers, as they might end up displacing some of their own ships from the main lane trades. Finding alternative employment for displaced damage may be difficult in view of the slowing down of [ESK] process which has been going on for five years now.

Let's turn to the balance between supply and demand. According to Clarkson's in 2015 global container trade is expected to grow at a similar pace to total container capable supply. In 2016 when box trade growth is expected to accelerate as mentioned earlier on, it could very well develop a lead over growth in container capable supply. Such supply in turn is expected to slow significantly as mentioned above. At the same time, charter market sentiment appears to be gradually improving, and the overall supply demand trend looks set to support that with 2016 currently projected to see 7% trade growth against about 4% expansion in total supply. According to [Carl Robinson] the market may be facing a period of short term consolidation, but the long term after 2017 prognosis for the charter market is positive, assuming no economic hiccups. The continued distortion over the order book and the anticipated buyers towards 20,000 TEU ships is likely to shift a negative connotation of the cascade upwards, resulting in a few and new soft spots.

This rate raises questions as to the future of the first generation 10,000 TEU to 14,000 TEU vessels which are currently limited to trading between Asia, the Mediterranean and Europe as well as Asia and the United States. Briefly on slow steaming, just a reminder that in order to manage over supply, running capacity growth continues to be limited by the extensive adoption of containership slow steaming which is estimated to have absorbed about 2.8 million TEU of nominal capacity since 2008.

Let's turn to the freight market and time charter market now. According to Alphaliner, activity in the charter market is exceeding with summer holidays in the northern hemisphere, affecting trade. A less than promising peak season on the cargo side is likely to keep a cap on fresh demand for ships. [Carl Robinson] agrees and reports that at the beginning of this month the summer period brought a significant reduction in inquiry in fixing levels. there are also signs that liner companies are going to take action to address falling trade rates, even though a collapse in the charter market is by no means anticipated, Carl Robinson sees good reasons for further weakening through July and August. In the small over-Panamax wide beam sector, fixing is still taking place at above $20,000 per day, slightly weaker than last time for similar size ships. The Panamax sector remains active, but charter rates seem to be reaching a plateau. A short term supply of tonnage is still tight but a number of ships are appearing in the market with end July dates. For the medium and long term however, we need to keep in mind the very low new building statistics cited elsewhere in this short presentation. According to the Shanghai containerized freight index spot freight rates for containers shipped from Shanghai to Europe fell to a new all time low on June 12 of $243 per TEU. The average rate on this route in the year to date stands $683 per TEU.

On the trans-Pacific trade, spot rate rates from Shanghai to US West Coast routes stood at $1,341 per FEU on June 12. This compares with an average of $1,784 per FEU so far this year. According to Clarkson's search services, the freight market looks likely to remain volatile this year as carriers continue to face challenges in capacity management in the face of continued substantial deliveries. Along with the above, Clarkson's points out that the slowdown in cascading may support non-main lane freight and charter earnings. However, today both parameters remain far below historical averages so there is plenty of upside potential for both freight and time charter earnings.

Turnings in the time charter market improved during the first quarter of this year, notably in the Panamax and large sub-Panamax sizes. Rate increases appeared to reflect improved fundamentals in the market as a result of a number of supply related factors including elevated scrapping, a low idle fleet and a thin [orderable]. Crucially, a slowdown in the cascading of capacity of the charter market sector. According to Clarkson's during May the containership time charter rate index increased by 7% month on month, to reach 63 points. A benchmark 12-month charter rate for a Panamax 4,400 TEU ship rose 4% month on month during May to reach 15,350 per day. For 2016, Maersk Broker foresees an improved supply situation compared to this year. Accordingly, the maintained their expectations of improved charter rates for next year. While cascading in a move towards larger tonnage in general will absorb some demand, they say the fundamentals will improve with additional tonnage providers.

Let's turn to new building investments. According to Braymer ACM, during the first five months of 2015, about 85 containerships were ordered with a combined TEU capacity of approximately 1.1 million TEU. At this time last year, only 79 ships had been ordered with a total capacity of 632,000 TEU. This is an increase of approximately 55% in capacity terms. We hope that the container terminal congestion caused by weekly peaks of container traffic driven by ultra large ships will dissuade operators from ordering the next size of 24,000 TEU container vessels.

Turn to cascading now. As we all know by now, cascading has been transferring surplus capacity down from the main lanes to the non-main lane groups putting supply pressures on the charger market fleet which typically trades on these non-main lane trades. Clarkson's sees indications that some key elements of this cascade trend have began to slow, and as a consequence, the charter market has started to receive a degree of protection from the capacity increases in the main lane. In this respect, Clarkson's also points out that as regards the cascade effect, the proportion of deployed capacity on intraregional trade accounted for by ships of 3,000 TEU plus rose rapidly from 10% in 2011 to 30% at the end of 2014. This share has since flattened out at around 30%. This change in the cascade trend has provided a degree of protection to the charter owned fleet by limiting growth in the supply of capacity available for operators who charter. Additionally, the market environment suggests that further cascading opportunities will remain difficult to find. This suggests that the support charter market talents which have developed could well be on a fairly solid footing.

Let's turn to the order book now. According to Clarkson's the total containership order book as of July 1 this year stood at 414 ships with a total container capacity of 3,508,300 TEU. Deliveries are estimated at around 1,166,000 TEU in 2016 and 1,328,700 from 2017 onwards. In the 3,000 TEU to 7,999 TEU post-Panamax size range orders represent a mere 2.5% of the existing fleet. In the immediately larger size range of 8,000 to 11,999 TEU, the 117 ship order book represents 25.8% of the existing fleet. From 12,000 TEU and up, the 117 ships on order represent 63.2% of the existing fleet. Korean yards currently account for over 40% of the containership order book in TEU terms. And for a little history now, the highest number of ships on order was seen according to Maersk Broker during early 2008 when a staggering 60% of the containership fleet was on order at the time.

Let's turn to demolition. Clarkson's reports that during the first five months of this year 38 ships were sold for scrap, representing 73,710 TEU in capacity. This was 71% below the same period last year. It is currently projected that demolition sales will slow down this year to reach just 240,000 TEU with a further 230,000 expected to be sold for scrap in 2016. It is certainly very early to make assumptions on 2016 scrapping, as much will depend on earnings and anticipation of future trends in the container trade. There are about 370 ships still trading which were built before 1995. Unless the market picks up significantly and sentiment improves markedly from current levels. All these ships are scrap candidates. These have a total capacity of about 550,000 TEU or about 3% of the existing fleet.

Turning to the idle fleet now, according to Maersk Broker in late June, the idle fleet was about 1.6% of the total containership fleet with some 80 vessels between employment, 30 of these being below 1,000 TEU. In late June 2014 the idle fleet was about 2.5% of the total fleet. Thus Maersk predicts that the market will enter the second half with a somewhat better supply scenario specifically for tonnage between 1,000 TEU and 5,000 TEU.

Fleet growth. According to Maersk Broker the 4,000 TEU to 5,399 TEU size range of ships shrunk during 2015 by 0.3%. the order book stood at the end of June at a mere 29 ships. The size sector is expected to be flat in 2016. The 5,400 to 6,999 TEU size range has increased by just 1% thus far in 2015. There are no new building orders in this size range and the fleet should remain flat in 2016 as well. The 7,000 to 9,999 TEU size range is expected to grow 13% this year and about 6% next year. The order book consists of 295 vessels, most of which will have been delivered by the end of 2017.

We have tried, maybe not very successfully, to avoid confusion our audience with numbers, statistics and broker views about the future. Upon reflecting on what has been presented about, each one of us can draw our own conclusions about the future of this very interesting sector of shipping. Regardless of how these statistics are interpreted, it certainly looks as if the container industry has turned a corner. It has been assisted by lack of new building orders in the medium and small size tonnage areas, and now is being helped by the gradual absorption of the cascade effects. All this will helpfully lead all operators to the inescapable conclusion that the ordering of mega carriers will not enhance market share but will only serve to reduce unit costs for each sea passage, assuming all these ships sail in fully laden condition. So we at Diana Containerships continue to have a conservative investment program which we have executed so far and are ready for the real increase in inquiry for ships of this type and tonnage when the market starts to move steeply up again. Now I will pass the call to our CFO Andreas Michalopoulos who will summarize the second quarter earnings and first half 2015 financial results. Thank you.

Thank you Stasi, and good morning. I am pleased to be discussing today with you Diana Containerships Incorporation results for the second quarter of 2015 and the six months ended June 30, 2015. Second quarter of 2015 net income of Diana Containerships Inc amounted to $0.9 million, and earnings per share amounted to $0.01. Time charter revenues net of prepaid charter revenue amortization amounted to $17.3 million compared to $12.5 million in 2014. The increase in net time charter revenues was mainly due to the increase in ownership days in the second quarter of 2015 compared to the same period of 2014. Partly offset by decreased average time charter rates. Ownership days were 1,153 for the quarter compared to 728 in the same period of 2014. [Future utilization] was 98.7% for the quarter compared to 100% for 2014 and the daily time charter equivalent rate was $14,992 compared to $17, 114 in the second quarter of 2014. Voyage expenses were $0.4 million for the quarter. Vessel operating expenses amounted to $9.7 million in the second quarter of 2015 compared to $6.2 million for the same quarter of 2014. This increase was applicable to 58% increase in the ownership days and also due to increased average stores and spare costs and was partly offset by decreased average crew and repairs and maintenance costs. Daily operating expenses were $8,381 for the second quarter of 2015 compared to $8,521 in 2014. Depreciation and amortization of deferred charges amounted to $3.2 million for the quarter. General and administrative expenses were $1.4 million in the second quarter of 2015 compared to $1.5 million in the respective period of 2014. The decrease was mainly attributable to decreased salary and bonuses of the office personnel and was partly offset by increased competition costs on restricted stock awards. Interest and finance costs for the second quarter 2015 amounted to $1.7 million, same with respective quarter of 2014, since there were no changes in our average debt and the average interest rates were substantially at similar levels.

Turning now to the six months ending June 30, 2015. Net income of Diana containerships amounted to $0.4 million and the earnings per share to $0.01. Time charter revenues, net of prepaid charter revenue amortization amounted to $31.2 million compared to $26 million in 2014. The net time charter revenues increased mainly due to the increase in the ownership days in 2015 compared to those of 2014, and the decrease of the prepaid charter revenue amortization partly offset by reduced time travel rates. Ownership days were 2,143 in 2015 compared to 1,499 in 2014. Peak utilization was 99.1% compared to 99.5% in 2014 and the daily time charter equivalent rate was $14,727 for the period compared to $17,229 for the same period of 2014. Voyage expenses were $0.6 million. Vessel operating expenses for the six months ended June 30, 2015 amounted to $18 million compared to $12.8 million for the same period of 2014. The increasing operating expenses was due to increase in ownership days and also due to increased average stores and spares expenses partly offset by decreased average crew costs and repairs and maintenance costs. Daily operating expenses were $8,397 for 2015, compared to $8,561 in the prior period. Depreciation and amortization of deferred charges amounted to $6.1 million. General and administrative expenses amounted to $2.9 million compared to $3.1 million for the same period in 2014. The decrease in general and administrative expenses was mainly attributable to decreased payroll and bonuses and was partly offset by increased competition on restricted stock awards. Interest and finance costs were $3.3 million for 2015 compared to $3.4 million for 2014. In 2015 we had similar average debt outstanding compared to 2014 and slightly lower average interest rates.

Turning to dividend policy for the second quarter of 2015, the board of directors has decided to declare a dividend of $0.25 cents per share. Thank you for your attention. Now we will be pleased to respond to your questions, and now we turn the call to the operator who will instruct you as to the procedure for asking questions. Thanks.

Thank you. The floor is now open for questions. (Operator Instructions). Our first question today is coming from Kevin Sterling of BB&T Capital Markets. Please proceed with your question.

Good morning. It's actually [William Forner] on for Kevin. Congrats on the vessel acquisitions you announced this morning. I was hoping you could touch on how you intend to finance these vessels. I assume it would be similar to previous transactions, maybe 50% cash, 50% debt? Is that the right way to think about it?

That's the idea. We, yes, that's the idea.

Ok and I know you've noted in previous calls your relatively low leverage compared to some of your peers. Just trying to get a handle on how much capacity you think you have on your balance sheet to take on some additional leverage in the near term.

We think we can go up to, at the moment we have $148 million. We can go up to 200 to 230 [as debt].

OK great. Thanks. That's helpful. And then switching gears and maybe I was hoping you could provide some more color on your decision to sell the Cap Domingo. And in particular the price you're able to obtain for this vessel. It seems to me it was at a bit of a premium relative to the current market rates for 15-year-old Panamaxes, and I'm just trying to get a better idea if that vessel was assigned a premium and why that may have been.

As you have noticed, there is a subject to that sale which says that buyers have to get board approval by the beginning of September. This has some subjects and it relates to a possible contract that the buyers may get, and this is why the increased price. And this is something that remains to be seen.

Okay, so I know you may not be able to provide any more color on that, but could it be smoothing where there is a sale lease back type of transaction involved?

This is something for the buyers to worry about. It is not our business. None of our business, but it is obvious to us that those people that are bidding for a contract and in case they get it, they will actually buy the vessel. If they don't they will not.

Okay that's fair. I'll leave it there with that. Staying on topic with some of the older vessels you have coming off charter in the next couple of months, as you noted in your prepared remarks, you know vessels built before 1995 are ideal scrap candidates, so given all else being equal and given today's charter market, you know would you more than likely scrap those vessels, or would you consider re-chartering them if you could get a decent rate?

We are looking at every option at the moment. And we are talking about one vessel basically, which is the one that just finishing the charter employment, the [Garnet].

Right.

It has still a lot of days still remaining in charter.

No, you're right. I wasn't trying to imply in the next couple of months. I meant more in three to six months.

After six months, who knows.

Fair enough. Quick housekeeping item if I can. You're prepaid charter amortization revenue amortization stepped up this quarter. I'm assuming that was related to the integration of the [Yang Ming] vessels? Is that correct?

That's correct. And yes, it was a total of $6 million, $3 million and $3 million.

Okay, and so and thinking about that line item going forward I know you typically provide some details in your annual filings, but can you give us maybe some more color of how we should think about that line item in the back half of the year?

Yes, I think you should model more or less for next quarter. This quarter was $2.7 million as you saw, the quarterly expense, and the next quarter should be around $2.4 million, and the quarter after that will drop to around $1.7 million. And then we can talk again next quarter to have some more detail.

That's great. I really appreciate that color. I will leave it there. Thank you for your time this morning.

(Operator Instructions). Our next question is coming from Mark Suarez of Euro Pacific Capital. Please proceed with your question.

Good morning gentlemen and thanks for taking my questions here. Maybe we can go back to the new acquisitions. I am wondering how you came up with these two new targets and what sort of sources did you get it from? Liners brokers or banks? And also what are your plans for maybe chartering the Rotterdam which I think you're currently in discussions presumably thinking about chartering the vessel once it comes to your fleet.

Certainly. We bought the vessel through the various channels that we have in front of us. Certainly we didn't buy it through a bank. That's all we can say. As regard to chartering employment, when we take delivery closer to that date we will get what the market is giving us at that time [with names].

Got you. So should we assume that you know that once these vessels come into play here into the fleet that you feel confident that you can charter these vessels at a current market rate?

Yes.

Okay and then on the financing, I know you touched on it 50% as your target on debt, and I know the last quarter you talked about assume for now $50 million loan. Would that be a reasonable assumption still as you take over these two vessels?

I think the reasonable assumption is what [Yanni] said before, that as a company, today we are ready to go to the level at the $148 million debt. We are ready with new acquisitions and cash on hand to go to a debt level of $200 million to $230 million total.

Got you. I appreciate your time as always guys.

I will now turn the floor back over to management for any additional or closing comments.

Thank you again for your interest in Diana Containerships. We look forward to speaking with you in the months ahead. Thank you.

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