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Edited Transcript of DSSI.N earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 Diamond S Shipping Inc Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Diamond S Shipping Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig H. Stevenson

Diamond S Shipping Inc. - CEO, President & Director

* Kevin M. Kilcullen

Diamond S Shipping Inc. - CFO

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Conference Call Participants

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* Erik Hovi

Clarksons Platou Securities AS, Research Division - Research Analyst

* Liam Dalton Burke

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Susanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond S Shipping Q2 2019 Earnings Conference Call. (Operator Instructions) Thank you.

Mr. Craig Stevenson, CEO, you may begin your conference.

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

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Good morning, and welcome to the Diamond S Second Quarter 2019 Earnings Call. I want to thank you for dialing in this morning. As you know, the shipping industry is a seasonal business and summers are quite slow and this is a typical summer.

I'd like to start off on Slide 4 to begin our comments on the second quarter and beyond. In the second quarter, the first full quarter of all 68 ships, we earned $15,500 a day on our Crude Fleet in the spot market and about $12,800 a day in the products spot market. All-in TCE was $16,200 a day on the Suezmaxes and $13,120 a day in the Product Fleet.

We also look at TCE less OpEx and G&A. And as you know, in our industry, some people classify expenses differently.

The Crude Fleet generated $8,000 a day in the operating earnings. While in the Product Fleet, they generated $5,400 per day. Our liquidity for the quarter is $80 million and our overall net loss is $0.21 a share.

We turn to Slide 5. We've updated some basic oil market factors. Oil demand is going to be in excess of 100 million barrels a day this year and both sources are pointing to a stronger growth in the second half of this year. OPEC has reaffirmed their current throughput down from peak levels back in 2015.

On the bottom left-hand of the page, inventories play a major role in the industry. Geographical lower inventories create shipping arbitrages, where the industry can capitalize on available tonnage and higher margins. The best way to measure inventories is days forward of current demand.

On the bottom right-side of the page, refinery maintenance has been skewed more towards the first half of the year and we expect the second half of the year to be unusually lower. This also explains somewhat of a weakness in rates today as well as represents some positive signal for the future tanker earnings.

You can turn to Slide 6. Here we have fleet statistics in the top part of this slide. Time charter spot differential is growing this summer as we've seen certain customers trying to fix into next year. Asset values are holding. We wanted to highlight the difference between older vessel values as we expect older vessel values to close the new-building parity gap.

The order book is the lowest we've seen in years, though Suezmax's end product tankers are about 9%. The Suezmax number actually includes shuttle ships. And so if you actually take out shuttle ships out of that number, it actually is below 6% order book, incredibly bullish for the industry in the long-term.

You turn to Slide 7. Here, we have a picture of one of the scrubbers we're installing. We're installing 5 scrubbers on our Suezmax fleet. Overall, the industry is just beginning to retrofit scrubbers on the world fleet, and we're seeing installation delays. Instead of being 25 to 30 days, it's an additional 15 days longer than anticipated. This is actually causing a backlog and will create further insufficiencies than we originally anticipated. According to Clarksons, about 16% of the world's fleet will be installing scrubbers, most of which is coming in the second half of '19 into 2020.

And lastly, the world prepares to comply with IMO 2020. We expect uncertainty of pricing, quality of fuel. Retrofitting scrubbers will create significant inefficiencies in the marketplace and therefore, create higher demand for tankers.

And now at this time, I'd like to turn it over to our CFO, Kevin Kilcullen, and he'll go through the financials. Kevin?

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

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Thank you, Craig. Starting on Slide 9. As Craig mentioned, the second quarter of each year is generally the beginning of the seasonally weak market for tankers. The company delivered a net loss for the quarter. Rates began to slide in April and have bounced around annual lows for much of the summer. For Diamond, our spot crude fleet achieved TCE of $15,500 in the second quarter and the product fleet $12,800. Time charters brought the overall achieved TCE up on both fleets.

Encouraging aspect is that year-over-year the overall market is improved, especially on the product side. We believe this is an encouraging sign for future improvements throughout the second half of 2019.

Our coverage of the third quarter is reflective of the weak spot environment and is as of now, substantially similar to the second quarter. We currently have approximately 50% of the Crude Fleet days booked at $17,300 a day and 60% of the Product Fleet booked at $13,000. This coverage number includes our time-chartered ships. And in today's environment, those time charter rates are generally higher than what our spot ships are achieving.

EBITDA for the quarter is up sharply due to the full earnings contribution of all 68 vessels for the first time as a public reporting company.

Of note on the cash flows, we have had an uptick in working capital as much of the Crude Fleet has rolled off of short period time charters, and bunker inventories and accounts receivable have moved upward.

Moving to the balance sheet on Slide 10. Diamond S maintains a generally healthy cyclically reasonable level of leverage. Our debt is approximately 50% loan-to-value on our vessel assets. We have a low overall cost of debt. And today, we are currently only financed with senior secured shipping loans. We continue to evaluate the optimal capital structure for Diamond S. We believe the company has access to numerous sources of capital in the marketplace.

Cash breakevens are very close to current TCEs, even in this depressed freight rate environment. Maintaining vessel breakevens designed to survive throughout the volatile shipping cycle is a focus at Diamond S.

Continuing on to Slide 11 with our CapEx. The downside of a heavy dry-dock year like 2019 is the increased capital demand and loss of current revenue days. The upside is that we will be maximizing available revenue days in what is anticipated to be a stronger market in 2020. Of note, our first 2 Suezmaxes to be retrofitted with scrubbers, as in the pictures that Craig pointed out earlier, are in the shipyard now and expected to exit in late August.

CapEx numbers have shifted a bit in timing since our last update. However, we are still expecting 2019 CapEx spend to be in the mid-30s.

Finishing up on Slide 12 with the forward CapEx outlook. Substantially similar numbers to what the company has shown in the past. The one thing to note here is 3 scrubbers that we had originally anticipated to begin install in the fourth quarter of 2019 have now been officially moved to the first quarter of 2020 and the resulting shift in CapEx expenditures.

With that, I will turn it back over to Craig for a summary.

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

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Thanks, Kevin. Before we open it up to Q&A, I mean I would just like to say that generally, we're excited about the opportunity of IMO 2020, and we're also -- on a long-term basis, we're excited where the order book is today. 9% for both classes of ships is an incredibly long-term bullish stat to support the industry.

So at this point, operator, we'd like to turn it back to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Liam Burke of B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [2]

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Craig, as you look at the cash flows, your operating cash flows are growing. How are you looking at capital allocation in the light of your scrubber investments? And could you give us a sense of if there's any adjustments you'd like to make to the fleet?

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

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Yes. I think one of the things that -- I think we said on the last call is that we do look at the age profile and that some point in time, we have to start addressing the age profile on the product side of the business. And so that's something that we actively have talked about and anticipate that taking place some time this year, at least starting that. It's a long process, but it's a process that we need to start though.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. And you mentioned in the press release about your net asset value to debt levels. Are you comfortable there? Would you like to improve them? Or how are you looking at your current leverage?

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

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I think the current language is actually quite good. it's not to say -- the industry I think typically has -- doesn't have a problem with borrowing money and so it typically has a lot of leverage. And so we are toward the lower end of that range. But if it went a little lower, it wouldn't be a problem to us. And so I think when you start to talk about leverage, you also need to talk about contract cover. We've got 20% contract cover right now in the sort of the bottom of the market. And to the extent that we would have more spot activity, we would probably like some lower leverage.

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Operator [6]

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And our next question comes from the line of Erik Hovi of Clarksons.

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Erik Hovi, Clarksons Platou Securities AS, Research Division - Research Analyst [7]

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So going back to you talked about the MRs going back to the newbuild parity. So since all the class here with MR resale value has increased 8% to $39 million and the 10-year-old has moved 27% to $90 million or 49% now of the retail value versus 42% in August last year. So in theory, the 10-year olds should be roughly 60% of the resale, but it also peaked at almost 80% in the heights of the market. So my question is what relative value do you find is attractive to modernize your fleet?

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Craig H. Stevenson, Diamond S Shipping Inc. - CEO, President & Director [8]

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Yes. I think that we're all doing what everyone is doing. We're waiting for the IMO 2020 and the low order book to work its way into spot rates and long-term rates. Long-term rates have certainly gone up. I think you're also seeing values trickle up as well as a result of those time charter rates. The spot rates have been the lagered here and that's what quite frankly everyone wants to know when 2020 start to kicks in. And so we've seen a few nuggets in the marketplace. We've seen inventories starting to drawdown. We've seen discussions about cleaning of tanks. But activity levels certainly on the MR side and quite frankly on -- somewhat on the Suezmax side, it's still been very lackluster. Now when you start to drawdown tanks, you don't need as much transportation as you used to. And so that's one of the explanations why the work rates are sort of weak today.

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Erik Hovi, Clarksons Platou Securities AS, Research Division - Research Analyst [9]

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That is interesting. So how do you see the value proposition for a resale versus a 10-year-old vessel?

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Craig H. Stevenson, Diamond S Shipping Inc. - CEO, President & Director [10]

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Yes. I mean, I think when we look at our fleet, the MR fleet is the fleet that we're probably more concerned with on an age profile basis. And we need to start to turn that. We've had many, many discussions on that, but I do need to -- there is a relative number that sort of starts with the newbuilding cost, all-in cost for a newbuilding.

But practically speaking, I think we first look at existing ships on the water that are high-quality ships and that's where we would start to turn first, and it is only once that we can get into either a long-term contract that someone wants a brand-new ship that we would be aggressively pursuing newbuildings. But I would tell you that something else that makes a lot of sense today is to look at someone else's order that's already been placed and is in line. And so that's another attractive way to rebuild your fleet, but you should see this narrowing of the values between the 10-year-old ships and a recent newbuilding or resale, if you will.

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Operator [11]

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(Operator Instructions) I have no further questions in the queue. I turn the call back to the presenters for closing remarks.

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Craig H. Stevenson, Diamond S Shipping Inc. - CEO, President & Director [12]

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Thanks very much. Appreciate your time. It's a slow time of the year, but I think the opportunities look quite great. I -- one of the things that -- I think if you were just to look at the order book and you didn't even have IMO 2020, it would be a very bullish signal for the industry. You add 2020 on top of it and it gets super attractive. And so continue to follow this space. We're optimistic about what the later half of this year represents. Thanks very much for your time.

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Operator [13]

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And this concludes today's conference call. You may now disconnect.