Diana Shipping (DSX) Q1 2019 Earnings Call Transcript

Diana Shipping (DSX 0.35%)
Q1 2019 Earnings Call
May. 09, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Diana Shipping Inc. 2019 first-quarter earnings conference call and webcast. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Edward Nebb.

Thank you, Mr. Nebb. You may now begin.

Edward Nebb -- Investor Relations

Thank you, Konstantinos, and thanks all of you for joining us for the first-quarter 2019 conference call of Diana Shipping Inc. The members of the management team who are with us today include Mr. Simeon Palios, chairman and CEO; Mr. Anastasios Margaronis, president; Mr.

Andreas Michalopoulos, chief financial officer; Mr. Ioannis Zafirakis, chief strategy officer and secretary; Ms. Semiramis Paliou, chief operating officer; and Ms. Maria Dede, chief accounting officer.

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

With that, let me turn the call over to Mr. Simeon Palios, chairman and CEO.

Simeon Palios -- Chairman and Chief Executive Officer

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 2019. The recent quarter was highlighted by continued strength in our financial performance as we achieved higher time charter revenues and improved profitability.

We also continue to actively manage our fleet profile, announcing and so completing the sale of three vessels. Finally, we have returned a significant amount of capital to our shareholders in the form of self-tender offers. To summarize our financial results, Diana Shipping Inc. reported net income of USD 3 million and net income attributed to common stockholders of USD 1.5 million for the first quarter of 2019, including a USD 4.8 million in per ton loss.

This represents a significant improvement from the net loss of USD 3.1 million and the net loss attributed to common stockholders of USD 4.5 million for the first quarter of 2018. These strong results were largely due to higher time charter revenues, which rose to USD 60.3 million for the first quarter of 2019 versus USD 48.4 million for the same quarter of 2018 mainly due to the increased average time charter rates that we achieved for our vessels. Turning to the balance sheet, cash and cash equivalents, including restricted cash totaled USD 136.5 million at March 31, 2019. Long-term debt, including the current portion, net of deferred financing fees was USD 506.2 million compared to stockholders' equity of approximately USD 621 million.

Reflecting our commitment to return value to shareholders, the company completed a self-tender offer in March 2019, purchasing approximately 3,889,386 shares of our outstanding common stock at a price of $2.8 per share. This followed an earlier self tender in December 2018 when we purchased 4,166,666 shares of our outstanding common stock at a price of $3.6 per share. Most recently, in mid-April 2019, the company announced a self-tender offer for up to 3,125,000 shares at a price of $3.2 per share, which will expire later this month. In total, the completed self-tender offers have returned nearly USD 25.9 million in capital to Diana Shipping shareholders.

In connection with our active management of the company's fleet, in 2019 first quarter, we agreed to sell three vessels: the Danae for a net sale price of USD 7.2 million, the Dione for a net sale price of USD 7.2 million and the Erato for sale price of USD 7 million before commissioned. These vessels were bid between 2001 and 2004 and were among the oldest vessels in the fleet. We will continue to monitor our fleet of 45 vessels in a responsible manner that promotes a balance of time charter maturities and produces a predictable revenue stream. We are pleased that the company demonstrated its financial strength capacity to return capital to shareholders and continue prudent fleet management strategy during the past quarter, and we will strive to sustain our progress throughout the year.

With that, 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 a more detailed financial overview. Thank you.

Anastasios Margaronis -- President

Thank you, Simeon, and welcome to the participants of this springtime conference call with Diana Shipping Inc. on the first quarter of this year. The market has certainly disappointed owners and charters alike thus far this year. At the beginning of 2019, the BDI, the Baltic Dry Index, stood at 1,282 and yesterday closed at 940.

The Baltic Cape Index started the year at 1,987 and closed yesterday at 1,159, while the Baltic Panamax Index started the year at 1,391 and closed yesterday at 1,188. These are certain not very encouraging numbers, but there is a bright side to this clean occurrence. The low earnings so far this year have helped increase scrapping and reduce newbuilding ordering. Both of these developments, coupled with the negative sentiments, especially about near-term earnings, will work in the market's favor over at least the medium term and maybe long term.

A brief look at macroeconomic developments, according to the IMF, advanced economies should grow by 1.8% on average this year and by 1.7% in 2020. As we got developing economies, growth this year should stand at 4.4% and 4.8% in 2020. World GDP growth should average 3.3% this year and 3.6% in 2020. The reason cited for the weakness in world GDP growth are the U.S.-China trade tension, disruption to the German automotive sector and tighter credit policies in China.

According to the recent IMF report, 70% of the global economies projected to experience reduced growth in 2019 compared to 2018, although expansion is expected to be firmer in the latter half of 2019. According to Commodore Research, European Union industrial production has now contracted on a year-on-year basis for three straight months, which has not been the case since 2013. As for Indian economic activity, it remains robust and Moody's recently forecast Indian GDP growth to rise from 7% in 2018 to 7.3% in 2019 and sustain similar levels in 2020. Turning to earnings now, when looking at the recent drop in bulk carrier earnings, it is interesting to note that according to Clarksons, China's imports of iron ore, coal and grain have now all declined in sync in four of the last seven months through April of this year and occurrence seen only five times previously since return of the millennium.

Not surprising, therefore, average Capesize quarter earnings fell earlier this year to a three-year low of $1,926 a day. Capesize vessel earnings have been affected by the suspended Vale iron ore production, about 6% of seaborne iron ore supply and cyclone disruption to West Australian iron ore ports. According to the same source, average earnings of Panamaxes built around 2010 fell 37% over the last six months compared to a year ago. As for Cape, the drop was rather scary 86% over the same period.

One-year time charter rates fell on average by 40% over the last six months. For Panamaxes, the 12-month time charter has fell by 20% over the same period. A quick look at demand, following adjustments due to the Vale iron ore shipment disruption, global seaborne dry bulk trade is now projected to expand by subdued 1.7% this year to reach 5.3 billion tons with a similar pace of expansion projected in ton mines. On the supply side, Clarksons project bulk carrier fleet capacity to grow by 2.9% in deadweight terms this year, although active supply growth would be limited by the impact of the forthcoming IMO 2020 Global Sulphur Cap with bulk carrier's time out of service for scrubber retrofits currently estimated to absorb 0.5% of the bulk carrier fleet capacity during 2019.

As we got scraping according to Braemar, four VLOC were sold for scrap so far this year. Three of these were converted to VLCCs. Their average age was 25.4 years since they were launched as newbuilding tankers. Braemar anticipates the scrapping of these vessels to continue and abated going forward.

Demolition of ships over 100,000 deadweight has reached 19 vessels thus far this year. This accounts for about 3.5 million deadweight in terms of capacity. With scrapping outpacing delivery, the combined Cape and Newcastlemax fleet have been reduced by a net of 11 ships or 1.7 million deadweight so far this year. According to Clarksons, the volume of bulk carrier tonnage demolished in the first quarter of 2019 rose 45% year on year.

On the other side of the Cape, bulk carrier and newbuilding orders totaled 40 vessels with an aggregate of 3.9 million deadweight during the first quarter of this year, down 60% year on year in deadweight terms. As regard to the age profile, which is only one, but not necessarily the most important factor determining scrapping of tonnage, 14% of ships over 10,000 deadweight are 16 years or older. From the Panamax fleet, this figure is 18% and of the Cape is only 10%, including the rather ancient VLCC conversions are 16 years old or older. Turning to the order book, according to Clarksons, as of the beginning of April, the bulk carrier order book consisted of 93.6 million deadweight, which represented 11.1% of the global fleet.

From this tonnage, 23.7 million deadweight for Panamaxes representing 11.3% of the global fleet and 49.7 million deadweight Capes, the equivalent of 14.8% of the fleet. Iron ore in our production, according to Clarksons, the iron ore trade continues to be dominated by developments in Brazil and Vale. Australian iron ore exports are expected to increase by about 2% to 866 million tons during 2019. According to Howe Robinson, Brazilian miner Vale recently estimated filling up to 75 million tons left iron ore this year compared to 2018 after several mines were halted following the recent Danvers.

If this materializes, the reduction would still leave 2019 Brazilian iron ore sale at around 307 million tons, compared to 309 million in 2018. Overall, iron ore imports are expected to drop in 2019 by 1% to 1,468 million tons compared to 2018. In 2020, this figure is expected to go to 1,484 million tons, a 1% increase compared to this year's imports. According to Commodore Research, approximately 146.7 million tons of iron ore were stockpiled at the beginning of April at Chinese ports.

Turning to coking coal, according to Clarksons, China's coking coal imports are now expected to decline for a second consecutive year in 2019. Australian coking coal exports are projected to grow by 4% to 165 million tons this year. On a worldwide basis, coking coal imports are expected to reach 274 million tons this year. This will represent a 3% increase compared to 2018.

Next year, Clarksons expect a further 3% increase compared to this year. On thermal coal, according to Clarksons, the pace of Indian steam coal imports is expected to slow slightly as power plants have increased their inventory levels in recent months and domestic production continues to expand. In the meantime, the European Unions of seaborne thermal coal imports are projected to decline by around 9% to 88 million tons this year. Maersk Broker reports that the China plans to cap coal imports and raise production in 2019.

This capping will keep imports to around level seen in 2018. So overall, world exports are expected to grow to 1.023 billion deadweight or about 1% with a further 1% increase forecasted in 2020. As we've got Green Cargos now, according to Clarksons' Global seaborne coarse grain trade volumes are initially projected to be capped by around 2% this year, mainly expecting higher exports from the Ukraine and Argentina. Overall, global seaborne grain trade is projected to grow by 2% to reach around 481 million tons in 2019.

Now what would the outlook be for our industry. According to Commodore Research, much more scrapping is needed this year for the overall dry bulk market to be able to maintain a sustained support. It is Clarksons' view that even though Capesize vessel earnings are expected to improve in their current flows, 2019 looks likely to be a much less positive year for the market than 2018. The reason they cite is the potential for seaborne iron ore trade to contract this year and the Capesize fleet to expand by around 3.6% in deadweight terms.

As regard to Panamax vessels, Clarksons' forecast earnings to improve since the seasonal lows seen in February. As mentioned earlier, for the market as a whole, here again the fundamental balance appears to be moving away from the market at least for the rest of this year. It may be that the sector witnesses further rebalancing supported by slower fleet growth of around 1% next year and the number of positive factors relating to the introduction of the IMO 2020 Sulphur Cap mentioned below. According to Clarksons, looking ahead to 2020, initial projections suggest that seaborne dry bulk trade could grow by 2.2% and by around 3.2% in terms of per miles.

Bulk of fleet growth is expected to slow to around 2% potentially allowing for some rebalancing, while some wildcards relating to the IMO 2020 Sulphur Cap, such as scrubber retrofits, slower operating speeds and increased recycling should have a positive effect. Braemar reports that an optimistic estimate of Vale's province is a reduction of between 50 million and 65 million tons of iron ore this year compared to expectations. As a very crude calculation, this estimate has been the equivalent in terms of impact of having an extra 75 standard size Capesize ships into the market. This might appear to be rather ominous for at least this year.

However, they point out the factors, which make people more optimistic for this year, still remain valid. For example, while the VLOC order book may be long, that's what the standard Capesize vessel is very short indeed. Also scrapping has reappeared in larger and larger numbers, particularly scrapping of older tanker conversion. In this environment, we wish to point out that for almost, if not all, the low tanker conversions will be heading for the scrapyards fairly soon.

Finally, owners are resisting accepting poor daily rates for their vessels and they're holding out for higher rates. It, therefore, appears that factors are present that would help the bulk carrier market in 2020 and hopefully beyond that. We, at Diana Shipping, plan to take advantage of this environment by strengthening even further the company's balance sheet through the sale of the older tonnage and the possible reinvestment of the proceeds to continue to repurchase our common shares for so long as the shares are trading at an attractive discount to NAV. At this point, I will pass the call to our CFO, Andreas Michalopoulos, who will provide us with the first-quarter financial highlights.

Thank you.

Andreas Michalopoulos -- Chief Financial Officer

Thank you, Anastasios, and good morning. I'm pleased to be discussing today with you Diana's operational results for the three months ended March 31, 2019. Net income and net income attributed to common stockholders amounted to USD 3 million and USD 1.5 million, respectively, and USD 24.8 million of impairments. Earnings per common share was $0.02.

Time charter revenues increased to USD 60.3 million, compared to USD 48.4 million in the first-quarter 2018. The increase was due to the increased average time charter rates that we achieved for our vessels during the quarter. This increase was partly offset mainly by a decrease in revenues due to the sale of two vessels in December 2018. Ownership days were 4,320 in the first quarter of 2019, compared to 4,500 in the same quarter of 2018.

Fleet utilization was 99.7%, compared to 99.8% for the same quarter of 2018 and the daily time charter equivalent rate was $13,453, compared to $10,416 for the same quarter of 2018. Voyage expenses were $2.8 million for the quarter, compared to $2.1 million for the same quarter of 2018. The increase in voyage expenses were due to an increase in commissions due to increased revenues. Vessel operating expenses amounted to $22.4 million, compared to $22.9 million for the first quarter of 2018 and decreased by 2%.

The decrease was due to the minus 4% decrease in ownership days resulting from the sale of two vessels and was partly offset by increases in supplies, repairs and maintenance and environmental costs. Daily operating expenses were $5,175 for the first quarter of 2019, compared to $5,096 for the same quarter of 2018, representing an increase of 2%. Depreciation and amortization of deferred charges amounted to $12.4 million. General and administrative expenses were $7.5 million, compared to $7 million for the same quarter last year.

The increase was mainly due to increased payroll, cost of increase in board of directors fees and insurances. Management fees to related party were $0.5 million, compared to $0.6 million for the same quarter last year. The decrease was due to the sale of two vessels in December 2018. Increased interest and finance costs amounted to $7.7 million, compared to $6.9 million in the same quarter 2018.

The increase was attributable to increased interest -- due to increased interest rates partly offset by decreased average debt compared to the same quarter of 2018. Interest and other income amounted to $0.7 million, compared to $1.4 million for the same quarter last year. The decrease was due to the repayment of the loan to Performance Shipping Inc. Thank you for your attention.

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

Questions & Answers:

Operator

[Operator instructions] The first question comes from the line of Randall Giveans with Jefferies.

Chris Robertson -- Jefferies -- Analyst

This is Chris Robertson on for Randy. Congratulations on the successful tender. So kind of following the share repurchases, what's the current share count and how are you going to think about putting excess cash to work going forward? Are you considering additional tender offers, dividend or perhaps fleet renewal?

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

First of all, this is Ioannis Zafirakis speaking. We still have pending the last one, the last tender offer and it's going to be closing probably on the 13th of May, but if you are asking about the number of shares today, we are talking about the 101.8-approximately million shares. And as we have said in the past, the intention is from the moment we are trading well below our net asset value on a per share basis, the buying back of our stock poses us an attractive opportunity. We have to make clear once again that for Diana Shipping Inc., buying back our stock is an attractive investment.

And when we are buying back the stock, we are not doing that to support the stock price. We would like to make this distinction based on what we see from other companies that they are buying few shares here and there just to support the stock price. We strongly believe that we create value with our investments, for our shareholders and slowly we are going to be seeing the fruits of that.

Chris Robertson -- Jefferies -- Analyst

That makes sense.

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

As regards to your dividend question, sorry, I forgot. From the moment our stock prices went below, as I said, the net asset value, the dividend part of the story is not relevant, but when we will be getting closer and closer, the dividend, most probably they are going to be introduced and when the market is improving.

Chris Robertson -- Jefferies -- Analyst

OK. So speaking of market improvement, so clearly the Capesize market has been getting tighter in the past few weeks with rates tripling from $4,000 a day in April to $12,000 a day last week from what we're seeing. So what's been the main driver of the short-term run-up in the rates? And secondly, what do you think is going to cause more of a sustained strength later in the year other than maybe increasing production from Vale? I know that you hit on some scrapping and kind of IMO wildcards earlier, but --

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

Yes. If we exclude the retrofit times of ships that they're going to fit the scrubbers for the rest of the year, the supply demand ratio is not that favorable to justify huge optimism. The grounds for optimism come up in 2020, where we have more meaningful discrepancy between increases in supply and demand. And from then on, taking into account the fact that ships we have been scrapping larger numbers during the year before even.

If the scrapping doesn't continue in 2020, there should be a relatively higher shortage of ships, especially in certain areas of the world seasonally and otherwise in 2020 and we should see higher spot rates and time charter earnings.

Chris Robertson -- Jefferies -- Analyst

And then last question for me. Can you comment on the two vessels that are currently off-hire as indicated in the release, so I think the Calipso and the Amphitrite?

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

It is a customary from time to time to have some repairs that are on schedule. And as we speak those two vessels, they have some repairs and that's the reason why they are off-hire, but we are not talking about material numbers as regards the off-hire part of the story.

Chris Robertson -- Jefferies -- Analyst

Can you comment perhaps on the number of days you expect them to be off-hire they're going back into service kind of full quarter in 3Q? Or they will there be back in service during the second quarter?

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

Yes. We believe we are talking in the vicinity of around 10 to 12 days -- 10 to 12 days off-hire. The Calipso has a bigger damage and we are not in a position to know how long it's going to take to -- we had sustained damage on the main engine and we are not in a position to be able to know how long it's going to take to fix it.

Operator

The next question comes from the line of Frank Galanti with Stifel.

Frank Galanti -- Stifel Financial Corp. -- Analyst

So the follow-up on the tendering for the shares, I had a question outside of the current pending tender offer. Do you guys have an appetite to do more tenders? And then just kind of second part of that, why do you tender at all and why not purchase the shares in the open market?

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

We tried to explain that earlier. Purchasing in the open market the shares with the liquidity that the shipping stocks have to date, it's almost impossible to invest this amount of money that we are talking about. It takes forever and if you look at what the others have been doing, they're willing to their share buyback program for months and they have not come as near as what we have achieved to buy back our shares with the tender offer considering also the difference in the price of our share of the stock. So for stocks that they don't have a lot of liquidity, the share buyback program is not -- considered to be not the optional -- not the optimum way of investing in your company.

If you just want to be buying here and there few shares, it's OK. And as regard to your questions about whether we will continue buying back our stock, certainly as we said, from the moment we are trading well below our net asset value, investing in our shares is a good option. But we have to make clear that we are not here to decrease the cash position of the company or change the balance sheet view of the company. This is going to be done simultaneously with sale -- with sales of all the tonnage as we have done in the past.

We are selling two vessels, we are getting $14 million, we are buying back the stock.

Frank Galanti -- Stifel Financial Corp. -- Analyst

OK. Yes. That makes sense. And then I know Capesize rates and dry bulk rates in general have moved up a little bit in the past couple of weeks, but given the state of the market, are you starting to see any signs of distressed sellers?

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

Maybe in our industry, we have never considered the phrase distressed seller to be a correct one because even if you are a distressed seller, you will be asking for the price of the market at that time. Being in distress to sell a vessel, you are going to accept what the market value of the vessel is going to be and this is what is happening. You have the values going up and down and as we are talking today, I can say that the values of the vessels are in similar levels that we have seen even when the market was a bit higher since they have never gone up, I would say, substantially. There is this going down a little bit, but not substantially.

Distressed sellers as such do not exist. Even if you have a problematic situation with a bank, someone who owes money to the bank is going to be asking what the value of the vessel is. At that time, let's say, 5% discount, but no more.

Operator

[Operator instructions] There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Simeon Palios -- Chairman and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Edward Nebb -- Investor Relations

Simeon Palios -- Chairman and Chief Executive Officer

Anastasios Margaronis -- President

Andreas Michalopoulos -- Chief Financial Officer

Chris Robertson -- Jefferies -- Analyst

Ioannis Zafirakis -- Chief Strategy Officer and Secretary

Frank Galanti -- Stifel Financial Corp. -- Analyst

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