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Edited Transcript of DSX earnings conference call or presentation 10-May-18 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Diana Shipping Inc Earnings Call

Athens May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Diana Shipping Inc earnings conference call or presentation Thursday, May 10, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anastasios C. Margaronis

Diana Shipping Inc. - President and Director

* Andreas Nikolaos Michalopoulos

Diana Shipping Inc. - CFO and Treasurer

* Edward Nebb

Kwittken & Company LLC - MD of IR

* Symeon P. Palios

Diana Shipping Inc. - Chairman of the Board and CEO

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Conference Call Participants

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* Christopher Warren Robertson

Jefferies LLC, Research Division - Equity Associate

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Presentation

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Operator [1]

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Greetings, and welcome to the Diana Shipping first quarter 2018 conference call. (Operator Instruction] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Edward Nebb, Investor Relations Advisor. Please proceed.

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Edward Nebb, Kwittken & Company LLC - MD of IR [2]

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Thank you, Kelly, and thanks, to all of us for joining us for the Diana Shipping Inc. First Quarter 2018 Conference Call. The members of the management team who are with us today include: Mr. Symeon Palios, Chairman and CEO; Mr. Anastasios Margaronis, President; Mr. Andreas Michalopoulos; Chief Financial Officer; Mr. Ioannis Zafirakis, Chief Operating Officer and Secretary; and Miss Maria Dede, Chief Accounting Officer.

Before management begins their remarks, let me remind you of the safe harbor notice. Certain statements made during the conference call, which are not statements of historical fact are forward-looking statement under the safe harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements are based on assumptions, expectations, projections and beliefs as to future events that may not prove to be accurate and for description of the risks, uncertainties and other factors that may cause future results to differ from forward-looking statements, please refer to the company's filings with the SEC.

And now without further delay, let me turn the call over to Mr. Symeon Palios, Chairman and Chief Executive Officer.

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Symeon P. Palios, Diana Shipping Inc. - Chairman of the Board and CEO [3]

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Thank you, Ed. Good morning, and thank you for joining us today to discuss the results of Diana Shipping Inc. for the first quarter of 2018. Our performance for the recent quarter reflected a sharp reduction in net loss, as we experienced a rising trend in time charter rates. As the dry bulk industry recovery has continued to gain in strength, all of the vessels we were chartered in recent months, were fixed at significantly higher rate than their previous charter. In short, the company has benefited from its established strategy of positioning the fleet to take advantage of the improving industry cycle.

To highlight our financial results, the company reported a net loss of USD 3.1 million and net loss attributed to common stockholders of USD 4.5 million for the first quarter of 2018. This was a strong improvement from the net loss of USD 26.5 million and a net loss attributed to common stockholders of USD 27.9 million reported in the first quarter of 2017. Time charter revenues rose to $48.4 million in the first quarter of 2018 compared to USD 31.3 million for the same period of 2017. The increase in time charter revenues was due to increased average time charter rates that we achieved for our vessels during the quarter and increased ownership days, resulting from the enlargement of our fleet.

Turning to the balance sheet. Cash, cash equivalents and restricted cash were USD 89.9 million at March 31, 2018, up from USD 65.8 million at the end of 2017. Long-term debt, net of deferred financing fees, including the current portion, was USD 587.2 million compared to stockholder' equity of USD 622.1 million. We continued to manage our fleet of 50 vessels in a responsible manner that promotes a balance of time charter maturities and produces a predictable revenue strength.

Currently, our fixed revenue days are 71% for 2018. Looking ahead to the balance of 2018, we are confident that we continue strategic management of our fleet and solid financial resources will enable the company to continue to benefit from improving positions in the dry bulk marketplace.

With that, I will now turn the call over to our President, Stasi Margaronis, for a perspective on industry conditions. He will then be followed by our Chief Financial Officer and President, Andreas Michalopoulos, who will provide a more detailed financial overview. Thank you.

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Anastasios C. Margaronis, Diana Shipping Inc. - President and Director [4]

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Thank you, Symeon, and welcome to all of the participants of this quarterly conference call of Diana Shipping Inc. We had another interesting quarter in dry bulk freight market. And we can look at the most recent developments and try to get the pragmatic sense of the markets and where it is heading, at least, over the short and medium term. The bulk carrier market registered clear gains in 2017 from the depressed earnings environment of 2016. According to Clarksons, bulk earnings average is just under $11,000 per day in 2017, up 77% year-on-year, but still down by 38% from the 2000 to 2016 average. Seaborne dry bulk rate grew by an estimated 3.9% in 2017, which turns into 5% in terms of ton mile to total 5.1 billion tons. This compares with average growth of 0.5% per annum during 2015, '16 period and reflected a bounce back in coal trade and growth in Chinese iron ore import amongst other factors.

The Baltic Dry Index started the year at 1,230 and closed yesterday at 1,465. The Baltic Panamax Index stood at 1,340 on January 2, and closed yesterday at 1,253. The Baltic Cape Index started 2018 at 2,281 and closed yesterday at 2,616. The fluctuations of spot rate during this quarter was significant and are an indication of how finely balanced the market happens to be at this point in time. This is what makes us reasonably optimistic that if the supply demand assumptions we will menton below come to pass the market should see a steady improvement in earnings for all large bulk carriers.

Let's start with macroeconomic development. World GDP growth, according to the IMF, is predicted to be 3.9% this year and about the same in 2019. For United States, GDP growth is predicted to reach 2.7% this year and about 2.9% in 2019. Industrial production in the Eurozone, grew 2.9% year-on-year in February, a slower rate of growth in January and below expectation. There was an uptick in the energy sector though, probably driven by the cold winter weather. GDP growth in the Eurozone is predicted by the IMF to reach 2.2% this year and about 2% in 2019. In China, the government has set a 6.6% target for growth this year, which is the same target it had set for 2017. As we know, by now, the Chinese economy grew at 6.9% during last year, outperforming most forecasts. According to Clarksons, Chinese seaborne imports are currently projected to grow by 5% to reach 2.6 billion tons in 2018. Iron ore imports are expected to grow by 4% and reach 1.1 billion tons this year, supported mainly by high demand for imported high-quality ore.

China will probably continue to implement the supply-side reforms in the domestic coal industry this year with a total of a 150 million tons per annum of additional coal production capacity has to be put into operation by the end of this year. More about coal later on though.

Overall demand according to Clarksons, the global seaborne dry bulk trade is currently projected to expand by around 2.7% to 5.2 billion tons in full year 2018 and by 4% in terms of ton mile. Expansion is expected to be driven by continued firm growth in China's iron ore imports as well as expectations of 3% growth in global seaborne minor bulk rate in 2018, which is projected to be the fastest growth since 2013.

Starting with steel demand, at the Global Iron Ore and Steel Forecast Conference, which took place at the end of March this year in Perth, Western Australia. BHP Billiton made an interesting presentation. It focused on the demand that will be created via China's One Belt, One Road initiative and the growth in steel demand blast furnace capacity throughout emerging Asia with 20 million tons per year of additional capacity expected. Even though BHP admitted it is still too early to make accurate prediction, the forecast is that in 30 of the key companies impacted by the OBOR initiative, steel demand will reach 455 million tons by 2020, up 13% compared to 2016 levels. In the same conference, the presentation by the China Metallurgical Industry Planning and Research Institute, in short, MPI, made another less-optimistic point on iron ore demand in relation to sea. The policy implemented at the beginning of this year in China to gradually replace iron ore consuming blast furnaces with scrap consuming electric arc furnaces, in short, EAF drew plenty of attention. As Braemar points out, the move towards EAF and scrap steel is a natural progression as the economy matures. In 2017, China's EAF ratio was just 10% compared to the world average of around 25% and more than 60% in the U.S. and 40% in Europe. The NPI's view was that China will be hitting 20% to 30% EAF production by 2030. Though, this is contingent on the increased supply of cheap electricity. So, according to China's NPI, with a possible weakness in the rate of steel production and the quarter of steel production moving to scrap steel rather than iron ore feedstock, the long-term outlook for Chinese seaborne iron ore imports is a troubling one. However, this will be a slow enough changeover process that there will probably be enough time for the capesize fleet to adjust to the changing demand environment.

Iron ore now. Clarksons predicts that the China seaborne iron ore imports will grow by 4% to around 1.1 billion tons during 2018. Overall, global seaborne iron ore trade is expected to continue to grow at a fairly healthy pace in 2018, with current projections indicating a growth of 3% to around 1.5 billion tons during this year. In line with stricter environmental policies, Chinese authorities revoked about third of domestic iron ore mining licenses in 2017, further capping domestic iron ore outputs. Such factors are expected to help provide some support for Chinese iron ore import volumes, at least, for this year and next. As for stockpiles, according to Braemar ACM in mid-April of this year, major Chinese ports have about 161.7 million tons of iron ore in stockpile.

Coking coal. According to Clarksons, global seaborne coking coal trade is currently projected to grow 3% to 264 million tons during 2018, reflecting expected increases in imports into all major steelmaking regions.

Asian imports are expected to grow firmly, driven by a projected 7% increase in India's seaborne imports. According to Clarksons and Braemar, India's increasing steel production has had a positive impact on coking coal trade over the last decade. Looking ahead, while iron ore trade might not see a significant benefit, India's coking coal imports are expected to grow firmly, as India remain the bright spot of growth in the global steel industry.

Thermal coal now. This year, according to banchero costa, Chinese coal imports could be threatened by government policies to support domestic coal prices and increase local production this year. According to China's National Energy Administration, China aims to increase domestic coal production by 7.3% to 3.7 billion tons in 2018. Clarkson's predict that global seaborne thermal coal trade will expand by 1% to around 953 million tons this year, as limited growth in Chinese imports and projected year-on-year declines in European and Indian imports, are expected to be outweighed by firm growth in imports into a number of emerging Asian economy.

Indian seaborne thermal coal imports are currently projected to decline marginally to around 140 million tons. Although, there could be some upside to the current outlook if domestic production growth remains weak and thermal coal demand continues to grow as healthily as it has in recent years.

In support of this view, banchero costa claimed that India appears to be a bright spot for thermal coal trade this year as strong coal demand from household electrification continues to exceed domestic coal production feasibility, in spite of attempts by the Indian government to reduce reliance on coal imports. India's strong coal demand (inaudible) in increased shipments from key suppliers such as Australia and Indonesia.

Turning to the grains rate now. According to Clarksons, global seaborne wheat and coarse grains trade is currently projected to increase by 2% in the 2017 to 2018 crop year to a record of 361 million tons. China's seaborne soybean imports grew 11% year-on-year to 8.5 million tons in January alone. And they are currently expected to grow by around 6% to exceed 100 million tons for the first time in the full year 2018. This will have followed extremely robust growth of 15% in 2017. This trend vindicates our conviction expressed several years ago that the soybean trade will rapidly grow in importance and absorb an ever-increasing amount of tonnage, primarily Panamax and Handymax bulkers.

On the supply side now. According to banchero costa, deliveries of Capes and VLOC bulkers in 2018 are expected to be around 11 million tons deliveries in total, after accounting for slippage. In dead weight terms, 49% of scheduled deliveries in 2018 are expected to be unit larger than 380,000 tons [shipment]. A fleet in this size range is expected to grow by 2% in 2018 and 3% in 2019. These figures assume some delivery slippage and lower demolition activity compared to the 2015 to '16 period. According to Clarksons, on the supply side, the limited contracting activity in recent years is expected to see the pace of deliveries and with that overall fleet growth fees in 2018.

Projections suggest that the bulk carrier fleet growth will remain low for 2018 and 2019 at around 2% per annum with scope for further improvement and the bulk carrier market to materialize. The Panamax fleet grew by 2% year-on-year in February 2018 and so did the Capesize fleet.

Turning to demolition now. Fewer bulk carriers have been sold to demolition during the first quarter this year compared to the same period in 2017. More specifically, during the first quarter of 2017, about 5,229,000 deadweight worth of ships were demolished. While in the first quarter of this year, the number dropped to 2,432,000 deadweight. The average age of ship sold for demolition went up to 28.5 years, so far in 2018, up from 26 years in 2017. In the first 3 months of 2018, demolition of dead vessels of over 120,000 deadweight were recorded by banchero costa, for a total of 1.6 million deadweight, which was 44% down year-on-year in deadweight terms.

Looking at the age profile of potential scrapping candidates, it's interesting to note that according to Clarksons, while there are only 78 capes in larger vessels trading to date that were based from 1998 and earlier, there are still 163 Panamax trading, which fall into this age bracket.

According to Braemar, the latter number is as many as 215 and the difference probably due to Braemar are counting ships built in 1999 as well.

New building orders now. According to banchero costa, ordering activity for units over 120,000 deadweight slowed dramatically during 2015 and 2016, but improved especially over the last few months of 2017. In the first 3 months of 2018, 21 vessels of this size category were ordered. Over the same period, about 45 new orders were placed for bulk carriers, totaling 6.7 million deadweight. This compares with only 21 units ordered during the same period in 2017.

Turning now to order book. According to Clarksons, as of 1st April 2017, about 721 bulk carriers were on order with capacity of 81.2 million deadweight. This represents about 9.9% of the existing fleet. There were 186 over 100,000 deadweight on order as of April 1, totaling 47.9 million deadweight, representing 14.7% of the world fleet. On the Panamax side, there were 214 ships on order, 16.9 million deadweight, representing 8.3% of the trading fleet.

Finally, let's look at the outlook. We agree with the view expressed by Clarksons that the capesize market will be supported going forward by projected focus and increase in iron ore imports worldwide in 2018.

As mentioned above, this will be the result of the preference of Chinese steel mill to consume high-quality imported iron ore against the backdrop of a wider environmental focus in the country. In the long-term though growth will start to slow if steel production eases. However, we reiterate what we presented during our last quarterly conference call as our most favorite forecast for overall growth in demand over the short and medium-term. Assuming, there are no unpredicted development that we have a negative effect on world growth and no sudden surge in new building orders, the balance state of bulk carrier market that we seem to be in today, should allow rates to steadily improve going forward.

On this note, I will pass the call to our CFO, Andreas Michalopoulos, to present the financial highlights of the first quarter of 2018. Thank you.

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Andreas Nikolaos Michalopoulos, Diana Shipping Inc. - CFO and Treasurer [5]

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Thank you, Stasi, and good morning. I'm pleased to be discussing today with you Diana's operational results for the 3-months ended March 31, 2018. Net loss and net loss attributed to common stockholders amounted to $3.1 million and $4.5 million, respectively. Loss per common share was $0.04. Time charter revenues increased to $48.4 million compared to $31.3 million in the first quarter of 2017. The increase was due to the increased average time charter rate that we achieved through our vessels during the quarter, and revenues derived from the addition to our fleet of the vessels Astarte, Electra and Phaidra delivered in May, 2017. This increase was partly offset mainly by a decrease in revenues due to the grounding of the Melite and her sail in October 2017. Ownership days were 4,500 in the first quarter of 2018 compared to 4,313 in the same quarter 2017. Fleet utilization was 99.8% compared to 98.2% for the same quarter of 2017. And the daily time charter equivalent rate was $10,416 compared to $7,069 for the same quarter of 2017. Voyage expenses were $2.1 million for the quarter compared to $1.1 million for the same quarter of 2017. The increase in voyage expenses was due to an increase in commissions due to increased revenues. Vessel operating expenses amounted to $22.9 million compared to $21.3 million for the first quarter of 2017, an increase by 8%. The increase was mainly due to the 4% increase in ownership days, resulting from the enlargement of the fleet and increased crew and environmental costs. Daily operating expenses were $5,096 for the first quarter of 2018 compared to $4,942 for the same quarter 2017, representing an increase of 3%. Depreciation and amortization of deferred charges amounted to $13 million. General and administrative expenses were $7 million compared to $5.8 million for the same quarter last year. The increase was mainly due to increased payroll cost, mainly due to the increase in euro-dollar exchange rate.

Management fees to related party were $0.6 million compared to $0.4 million for the same quarter last year. The increase was due to the transfer of 3 additional vessels to Diana Wilhelmsen Management Limited during 2017. Interest and finance costs amounted to $6.9 million compared to $6.4 million in the same quarter of 2017. This increase was mainly attributable to increased interest due to increased interest rates, partly offset by decreased average debt compared to the same quarter 2017. Interest and other income amounted to $1.4 million compared to $0.6 million for the same quarter last year. The increase (inaudible) increase in the interest rate and the outstanding balance of the loan due from Diana Containerships Inc. following the new loan agreement on June 30, 2017.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mr. Christopher Robertson with Jefferies.

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [2]

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Looks like the vessel utilization was pretty high for the quarter. Do you expect a similar level in Q2? And can you walk us through the planned dry docking for the rest of the year?

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Andreas Nikolaos Michalopoulos, Diana Shipping Inc. - CFO and Treasurer [3]

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Yes, we expect the same type of utilization for Q2. This is normal utilization for shipping usually unless unexpected things are happening. For the second quarter, the dry dock that we're foreseeing is 3 vessels, multivessel Phaidra and multivessel Nirefs and multivessel Alcyon

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [4]

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And you had $30 million in cash from investing this quarter, can you go into the sources of that cash?

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Andreas Nikolaos Michalopoulos, Diana Shipping Inc. - CFO and Treasurer [5]

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What did you say? Can you repeat the question?

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [6]

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On the cash flow, the $30 million in cash from Investing, can you go into the source of that cash?

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Andreas Nikolaos Michalopoulos, Diana Shipping Inc. - CFO and Treasurer [7]

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This is the money that was received from Diana Containership Inc. Loan and repayment of loan proceeds.

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Christopher Warren Robertson, Jefferies LLC, Research Division - Equity Associate [8]

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Okay. And one last question, what's the market appetite for some of the older Panamax vessels and could we see some vessel sales during 2018 as the market improves?

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Anastasios C. Margaronis, Diana Shipping Inc. - President and Director [9]

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As the market improves, we have said that, for us, every vessel that we buy is an option to be sold in a good market again in the future. And therefore, in a better market, certainly, we may -- you may see us selling some of our vessels.

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Operator [10]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

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Symeon P. Palios, Diana Shipping Inc. - Chairman of the Board and CEO [11]

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