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Edited Transcript of DSG earnings conference call or presentation 14-May-19 3:00pm GMT

Q1 2019 Diamond S Shipping Group Inc Earnings Call

Greenwich May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Diamond S Shipping Group Inc earnings conference call or presentation Tuesday, May 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Stevenson

Diamond S Shipping Inc. - CEO, President & Director

* Kevin Kilcullen

Diamond S Shipping Inc. - CFO

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Conference Call Participants

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* Randy Giveans

Jefferies LLC - Analyst

* Liam Burke

B. Riley FBR - Analyst

* Eric Colee

Locksmith - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Diamond S Shipping Inc. first-quarter 2019 earnings conference call. With me on the line today is Chief Executive Officer, Craig H. Stevenson, Jr., and Chief Financial Officer, Kevin Kilcullen. Before I turn the call over I would like to draw your attention to the forward-looking statement disclosures on page 2 of the presentation. Mr. Stevenson, I would like to hand the call over to you now. Thank you.

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [2]

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Thanks very much. If you can turn to slide 4, of the presentation, the highlights, and we will talk a little bit about the first quarter. Obviously the highlight of the quarter was the conclusion of our merger with CPLP and, as a result of that, which occurred on March 27, we have a company with 68 ships, 75% of which are in the product side of the business and 25% are in the crude side of the business. Estimated gross value of $1.6 billion.

It's a very attractive fleet. We have a strong balance sheet that enables us to navigate through the cycles in the business. Our asset value to net debt is 51% basis broker valuations. And we have a balanced fleet with 20% time charter cover.

When we look at the actual results, we only had four days of results for the new company. The vast majority of the quarter was reflected of the private company, Diamond S Shipping LLP.

Just a few points we want to get out of the way about the quarter. We had a number of charters, short-term time charters last year that actually bridged the gap into the first quarter, some of which actually went into the second quarter as well. And so, there were some repositioning costs as it relates to those.

In addition, we'd also like to point out our point of view, how we look at time charter equivalencies. The three biggest metrics in the business are time charter or revenue-generating side of the business, OpEx per day and SG&A cost per day. What we tend to do, because some people use different ways of expensing that, we tend to take RTC and then we strip out our OpEx and we strip out our G&A out of those numbers.

And as you can see, on the crude side of the business for the quarter we did $12,600 a day and on the product side of the business we did about $6,900 a day on that basis. We have $81 million in cash today and we had a net loss of $1 million or $0.04 per share.

If you can turn to the next slide please, slide 5. The combination of the business resulted in 68 ships. We have an average age of 8.8 years. It is actually one of the larger shipping companies in the tanker space today. But the more important aspect is it's at the right time. And that is from an asset value standpoint we are at the bottom of the cycle. It is very attractive from the investing side of the business.

We have an experienced management team and Board with deep roots in the business and know what to do throughout the cycle. We expect to grow the Company in a disciplined manner to ensure that we return shareholder value to our shareholders. And currently we have 80% of the fleet today on the spot market.

If you can turn to slide 6 please, this is more or less the slide on the macro trends in the industry. Oil demand is expected to be 100 million barrels a day this year. OPEC continues to be a very significant factor in the oil business. We expect that later on this year, after the meeting in June, that they will add additional supply to the marketplace creating additional ton miles.

On the bottom left, it's actually an interesting slide for the industry. And there is a growing disconnect between the location of the supply growth in the oil industry from areas that are consuming that oil. And so, we see markets moving from one to the other and so it's quite significant.

In the bottom right-hand corner, inventories do play an interesting role in the business creating arbitrages. You can see from 2016 until now there's been a steady decline in days forward of demand. And so, we think that will continue to drive the rates as well.

Please turn to slide 7. This is an interesting slide because this has certainly changed over the years. But there's a dramatic -- this is all about US exports of crude oil. And so, right now it's between 3 million and 3.5 million barrels a day. It basically goes to long-haul movements, a significant driver of crude oil ton mile demand.

When we look at the capacity going forward there's an additional 2 million to 3 million barrels that are under construction and anticipated to come online early in 2020. All very supportive to ton mile demand.

In the bottom left, if we look at the Suezmax H profile, and 21% of the fleet today is 15 years or older, quite significant. But what's really unusual is the next slide (sic - chart) just next to it, and that is we have under 6% of the Suezmax fleet on order today. Those two slides produce a compelling story for the Suezmax side of the business.

When we look at the far right bottom right slide we have the blue line that represents the decline -- the 4% decline curve on new buildings. And the line under that represents the vessels existing on the water. So there's a material difference between those two and we expect those two lines to get much closer. And that is the value of secondhand ships will go up in value.

If we turn to slide 8 now, on the product side of the business there are significant new refineries in the East for export to the West. And so grassroot refineries are building in the East and will absorb tonnage to the West.

At the bottom side of this we look at the profile of MRs today. And roughly 17% of the MRs or 15 years or older and you have 9% of those vessels on order today. And so, both of those numbers still are bullish as well, not quite as bullish as the Suez Max side, but still bullish nonetheless.

When we look at the new building decline curve and we look at the existing ships, here again we find the cheapest vessels out there are the existing ships on the water. And we expect that to narrow into the future.

If you can turn to the next slide, I guess the most talked about issue in the industry over the last two years has been IMO 2020 and going from 3.5% sulfur fuel to 0.5%. It's a very significant event for the industry and it's super positive for our business. Demand for medium and heavy crudes -- crude oil is stronger because it will yield more distillate products. That is what's needed to produce the compliant fuel.

This will continue to drive ton miles given the disconnect between these oils and the location of complex refineries. About 3 million to 4 million barrels a day of high sulfur fuels will be displaced by this light oil or even gas oil blends. Refineries are expected to change their feedstock slates in order to supply this compliant fuel.

The industry is also investing in scrubbers to try to get a cost advantage over the ships that will just buy compliant fuel. Today about 16% of the tanker fleet is investing in scrubbers. Diamond S is a participant in this. We have five scrubber contracts and we are going to evaluate two others. And we expect in the second half of 2019 we will see scrubber tonnage going off-line to install these systems, creating the opportunity for the shipping market to capture stronger returns.

At this time I'd like to turn the presentation over to Kevin Kilcullen, our CFO, for the financial presentation.

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Kevin Kilcullen, Diamond S Shipping Inc. - CFO [3]

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Thanks, Craig. Continuing on slide 11, as was mentioned upfront, it's important to remember as we look at the first quarter there are only four days of combined 68 vessel activity in the financial statement. The comparative period from 2018 includes only the historical 43 vessel DSS fleet.

With a small net loss for the quarter the Company was close to breakeven on a P&L basis. Moving into the TCE results, as Craig has already discussed, Q1 TCE on the crude fleet was impacted by the unfavorable positioning of ships redelivering from short-term time charters signed in 2018. The earnings hit from repositioning voyages carried over into the second quarter on a number of the vessels as well.

With respect to the Q2 booked to date numbers, these include the full quarter impact of time charter covered days, TC rates on the time charter vessels are generally higher than those achieved in the spot market to date in the second quarter.

Turning to the product side, it's important to note that Q2 and onwards includes 45 MR2s and 6 MR1 or handy size vessels, while the comparative historical periods contain MR2s, the larger vessels only.

EBITDA generation for the quarter evidences the much stronger tanker market, especially on the crude side. And for cash movement in the quarter, the transaction net of borrowings was roughly cash neutral. The Company did experience an increase in working capital due to the pre-funding of our commercial manager and an increase in bumper inventories as vessels get off time charter.

Moving on to slide 12, accounting for the merger that Craig mentioned earlier was the single largest event in the quarter. The Company accounted for it as an asset acquisition resulting in a very streamlined pro forma balance sheet with no goodwill. The cash consideration and transaction costs were funded by $345 million of borrowings on a $360 million senior backed facility secured by 28 vessels.

Focusing in on the balance sheet on page 13, coming out of the transaction, Diamond S has a very healthy balance sheet. With net loan-to-value of 51% there is substantial equity value in our fleet. Our debt capital structure is entirely financed by senior secured ship loans leading to a very attractive cost of debt.

With a weighted average margin of 270 basis points over LIBOR, at current LIBOR rates we pay approximately 5.5% on our entire $940 million of debt. This leads to a reasonably healthy liquidity situation. At the close of the first quarter we maintained a $42 million cushion above bank required minimum cash. And that is inclusive of $15 million of availability on our $60 million revolver.

We maintain extremely competitive cash breakevens with $18,000 a day on the crude fleet and $13,000 on products. Even factoring in estimated CapEx for 2019 that only adds about $2,000 a day on the crude fleet and $1,500 on the products, all-in breakeven below $20,000 and $15,000 a day respectively are extremely healthy and competitive daily cash breakevens.

Moving on to 14 and the CapEx program, there's a significant amount of CapEx in 2019, roughly 27.5 is yet to be incurred. We are installing 15 ballast water treatment systems and five scrubbers this year. The scrubbers are all going on vessels in the crude fleet and, as Craig mentioned before, two additional scrubber installations are under evaluation.

15 gives the future outlook for CapEx from where we are sitting today. I think two of the big takeaways from this slide are the future CapEx is a very light dry docking year in 2020. This enables the Company to maximize revenue days in what we believe will be a strong tanker market. The other important takeaway here is that approximately $60 million or half of the estimated CapEx in this four-year period relates to ballast water and scrubber installations and these are one-time regulatory driven expenditures.

Finally, on page 16 we attempt to address a question that we are often asked by investors which is when will more shares be available in the market. We filed an S-1 registration statement and that was declared effective last Friday, increasing the amount of freely tradable shares to 55% of the total and leading to a very healthy float. As disclosed in our transaction documents, the remaining lockups expire in September 2019 and March 2020. With that I will turn it back over to Craig for a summary.

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [4]

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Thanks, Kevin. Before we go to the Q&A, I just want to remind everyone that we have a significant fleet in two classes of ships and they are 100% owned. So, we didn't do any leverage lease transactions. We had two bets. We have a crude oil bet and we have a product bet.

Importantly we are well capitalized with low operating leverage, as Kevin has pointed out. And we're excited about where we are in the industry today and how we can grow the business. Operator I would like to turn it back to you to go through questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions).

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Randy Giveans, Jefferies LLC - Analyst [2]

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Howdy, gentlemen. This is Randy Giveans from Jefferies. How are you? So a few quick questions from me. The presentation was pretty robust, so that answered a lot of them. But you mentioned in your prepared remarks you are looking to, quote/unquote, grow the Company in a disciplined manner. So would that be through new buildings, I guess more likely secondhand ships or possibly even chartering in ships? And also would it be within Suezmaxes and MRs or you are open to looking at VOCCs and other asset classes?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [3]

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I don't think we are too limited in that sense. We want to do accretive transactions that make sense for all the shareholders. I think the most obvious places to look first would be the two existing classes you have today. But for instance I don't think I would look at it in a limiting way. And that is I think other types of tankers we would certainly look at it and, to the extent that it's an accretive transaction for us, I think we would absolutely evaluate that.

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Randy Giveans, Jefferies LLC - Analyst [4]

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But with a preference for secondhands or new buildings?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [5]

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New buildings -- I always sort of thought that that was sort of the last thing that you thought about and that is you first look for high-quality younger ships on the water. You're constantly looking to bring down your average age. And so it's only once you exhaust that do you look at new buildings.

Now obviously if someone comes to you -- a major customer comes to you and he wants you to build a new ship and he offers you a long-term transaction, that's something different. But barring that I think you would first look for high-quality secondhand ships.

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Randy Giveans, Jefferies LLC - Analyst [6]

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Okay. And then looking at your chartering strategy, you have some vessels on charter expiring soon. Do you plan on keeping most of your vessels in the spot market or looking to kind of lock-in new time charters on those ships in the back half of this year, 2020?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [7]

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Yes, we have 20% today. I think when we look out over the next couple of years it looks like a super attractive market. The charter rate would have to be quite significant to convince us to time charter out ships today.

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Randy Giveans, Jefferies LLC - Analyst [8]

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Excellent. And I guess just touching on that attractive market coming here later this year, 2020, as an owner/operator of both crude and refined product tankers, which kind of sector do you see benefiting the most with IMO 2020 kind of on the demand side?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [9]

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We get the question all the time and typically markets lead with the crude side of the business and then the product side of the business follows afterwards. I think both classes of ships are poised to -- I mean, I think it's a tough call. I mean normally you would say the crude side of the business probably has more upside. But today the math sort of says the product side of the business looks fantastic.

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Randy Giveans, Jefferies LLC - Analyst [10]

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Congrats again and thanks for the time.

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [11]

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Appreciate the questions. Thank you.

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Operator [12]

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We'll now take our next question. Please go ahead; your line is now open.

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Liam Burke, B. Riley FBR - Analyst [13]

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Liam Burke, B. Riley FBR. Craig, you spoke earlier about the disciplined growth strategy. How do you balance that with the rest of your capital allocation? It looks like your cash flows stepped up pretty well this quarter even though you had some significant working capital needs. Do you expect as we go through the year, as Kevin talked about, capital requirements are more -- are limited this year? How are you looking at capital allocation over and above discipline growth?

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Kevin Kilcullen, Diamond S Shipping Inc. - CFO [14]

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In terms of how we're looking to grow the Company and how we're going to transform the existing asset base, as I think I touched on one of my slides, there's tremendous equity value in our ships today. So particularly as a source of capital to fund attractive opportunities, it's not unheard of -- it wouldn't be unheard of to see us take capital out of certain vessels and redeploy it into other ones that we think drive higher returns in our system.

I think we are also looking at the smaller universe of larger opportunities that entail a combination on a NAV/NAV basis with other owners and operators of similar tonnage. I think that could be a big growth driver for the Diamond S platform using into next year.

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Liam Burke, B. Riley FBR - Analyst [15]

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And you touched on scrubbers. You've got a schedule. Is there any change to your view on installation or are you pretty much set on which vessels -- or which class of vessels you are going to maintain the installation program?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [16]

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It is basically the Suezmaxes, and so it makes more sense on vessels that have more sea time quite frankly.

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Liam Burke, B. Riley FBR - Analyst [17]

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And you don't see any need to go down to the product side?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [18]

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It's just a difficult argument. Those ships have so much port time it just -- it takes the payback period and it can push in up to 4, 4.5 years. And so, depending on what you think the delta is going to be.

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Operator [19]

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And our next question -- we'll now take our next question.

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Eric Colee, Locksmith - Analyst [20]

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[Eric Colee], [Locksmith]. So you mentioned the rate, so adjusting for your repositioning are you guys seeing rates in line with the market and are you expecting to close the gap in the second half?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [21]

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Yes, I think we are seeing rates in line with market. I mean, what we had is, as we said earlier, we had a number of ships on short-term time charters that bled over into this year. And as a result of those fixtures, it puts pressure on those rates.

And so, obviously we are keenly focused on having the fleet in such a way that it sort of maximizes the near-term earnings outlook. And so, we are trying to campaign our ships in such a way to not take long voyages but anticipate markets that are going to rise and be on shorter-term voyages so as we can capture that when markets do pick up.

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Eric Colee, Locksmith - Analyst [22]

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And on the asset side, so our S&P guys tell us about the MR segment market being fairly tight now for [modern] tonnage with (inaudible) values and the lack of [sellers]. So you being in the market are you experiencing the same? And what considerations do you have regarding the S&P market at the moment?

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [23]

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Yes, I think that we are always active -- one of the things that you always have to do is you have to look at your fleet and continue to turn your fleet. And so, we are always an active participant looking forward to basically reduce the age of your fleet.

And so, we have some ships, some 2006s that we are certainly looking at and we will compare that against what the marketplace gives. But it looks like the marketplace is moving up and we're not surprised that asset values are starting to firm. So, I'm not sure that you aggressively do anything at this point. More or less in a watch and wait mode.

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Eric Colee, Locksmith - Analyst [24]

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Again, congrats on the listing and first official quarter (inaudible).

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Operator [25]

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Thank you very much indeed. And as there are no further questions we are now passed back for closing remarks.

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Craig Stevenson, Diamond S Shipping Inc. - CEO, President & Director [26]

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Okay, well, it's fantastic to be public again. And so, you've got a new excited team trying to grow the business and we think we are in a fantastic place in recycle. So we are optimistic about what -- the future for Diamond S. So thanks very much for your time today. Thank you.

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Operator [27]

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Thank you very much indeed. And with many thanks to both our speakers today, that does conclude our conference. Thank you all for participating. You may now disconnect. Thank you, gentlemen.