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Diamond S Shipping Inc. (NYSE:DSSI)
Q4 2019 Earnings Call
Mar 5, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Diamond S Shipping, Q4 Earnings 2019 Conference Call. [Operator Instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Mr. Craig Stevenson. Thank you. Please go ahead, sir.

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Good morning. Welcome to Diamond S Fourth Quarter 2019 Earnings Call. Thanks for dialing-in this morning. Before we begin the call, we'd like to draw your attention to our forward-looking statement disclaimer. We'll be making several statements about the future events that may or may not happen in the manner we describe. Please read Page 2 for its entirety for those disclaimers.

Now we'd like to start off on Slide 4 to review our fourth quarter operating performance. In the fourth quarter we earned approximately $43,700 a day in our Crude Fleet on the spot market and about $15,700 a day in the Products spot market which include our MRs at $15,500 per day. All-in TCE was $40,500 a day and $15,300 a day in the Crude and the Product Fleets, respectively.

At Diamond S we look at operating earnings of our fleet, which we calculate as TCE less opex, less G&A, because we think it's important to highlight given the various ways these expenses get classified in our industry. The Crude Fleet generated $31,500 a day in operating earnings while the Products Fleet, which includes our handysize vessels generated about $7,200 a day.

Our reported net income was $26.1 million, which includes a $4 million write-off of our deferred finance charges associated with the refinancing of some of our debt facilities, which Kevin will discuss later. Without the impact of this loss, our earnings per share would have been approximately $0.75 per share. Despite a decline in crude vessels thus far in 2020, at Diamond S we were able to secure longer haul voyages and have fixed 73% of our Crude Fleet at $47,000 a day.

This figure includes time charter activity, so the spot ships have been fixed in the mid-50s. We do expect the remaining voyages for the quarter to be approximately in the mid-20s, but still generating significant cash flow for the Company. The Product Fleet is 80% fixed, at about $16,000 a day, which includes vessels on time charter. Spot vessels in the fleet are in the mid-16s, which we expect to continue through the quarter.

This expectation comes with a meaningful disclaimer, which we can find on Slide 5. With continued development in the coronavirus on a worldwide scale, we are cautious about the impacts to the macro environment, and in particular oil demand. As a result, we expect to continue to see worldwide preventative measures put in place in the near-term that could have a meaningful effect on our business. We expect production declines from OPEC+ whether regulated by the Cartel or voluntarily by individual members. Refinery throughput could be reduced, but might be difficult to differentiate if this is demand-related or if it's just a result of an annual maintenance season.

On the right hand side of Page 5, we do believe the fundamentals of the tanker markets. We expect demand will rebound strongly when the uncertainty of the coronavirus gains some resolution. There is contango in the market today, which opens up arbitrage opportunities and has kept overall cost of fuel lower than expected.

Turn to Slide 6. We still see promise in the tanker markets due to the fundamentals. Tanker supply remains tighter than historical averages since a number of the vessels on order is about the same number of vessels that have potential to be scrapped. We believe supply remains constrained, not only due to the age of fleets, but also uncertainty of regulation and technology on new building tonnage.

Tanker demand growth at the bottom of Page 6 has been modified, but is forecasted to grow in 2020, both in crude and product segments. We expect that the crude oil supply growth in the Americas and Norway will lead to longer haul voyages to meet demand growth from the East on a round trip basis.

On Slide 7, we've shown in the graph of asset values relative to ten year old averages both for Suezmax and MR fleets. We believe there is a significant continued disparity in the values of older tonnage, which provides upside potential for Diamond S and return to our shareholders.

We expect that the larger older fleets will generate better cash flows than smaller, younger fleets, especially when considering the amount of capital employed to purchase assets at today's prices. At this time, I'd like to turn it over to Kevin.

Kevin M. Kilcullen -- Chief Financial Officer

Thanks Craig. The fourth quarter of 2019 produced the strongest financial results in Diamond S short history as a public Company. We believe it represent a vivid display of the return potential of our large fleet in a strong tanker market. Diving into the numbers, as Craig has already run through some of this, but Diamond S earned an adjusted net income of approximately $30 million, which equates to $0.75 a share when we exclude the loss on the write-off of deferred financing fees.

Spot Crude Fleet earned $43,700 a day and the spot product fleet produced a TCE of approximately $15,700, significantly stronger rates than prevailed in the fourth quarter of 2018. Time charters brought the quarterly TCEs down on both fleets as these have been booked in periods of lower overall rates.

For the first quarter of 2020, we have 73% of the Crude days booked at $47,000 and 80% of product days booked at about $16,000. These figures include both the spot and time charter vessels and as Craig has mentioned, the time charters are bringing those numbers down slightly. The Company produced $70 million of EBITDA in the fourth quarter.

It didn't immediately translate into cash flow as we had an unusually high number of voyages complete right around year-end, leading to a large increase in accounts receivable and net working capital. Moving on to Slide 10, we can see exactly what I was talking about in the balance sheet. Non-cash, non-debt, working capital was a use of cash in the quarter of approximately $35 million. A stronger rate environment tends to lead to higher working capital investment, especially in the Crude industry, but we believe some of this increase was due to the timing of voyages mentioned earlier and will reverse itself over time.

We are entirely debt financed with low cost senior secured ship loans for major international shipping bags. And we closed on a refinancing of approximately 60% of this debt, just before the end of the quarter. I will cover the refinancing in a little bit more detail on the next slide. The liquidity situation at year-end was solid, with almost $50 million of cash above bank [Phonetic] minimum requirements. Net leverage remains modest with LTV less than 50% based on recent broker valuations.

Cash breakevens on the fleet have shifted from what we released in the prior quarter primarily due to the refinancing. The refinancing reallocated more of the debt amortization burden to the Crude Fleet and away from the Products Fleet resulting in the numbers at the bottom right of Page 9. All other operating assumptions on the fleet remain the same.

Some details on Page 11 of the $525 million refinancing that closed on December 27th. We accomplished several important goals for the Company. Number one, we had a maturity wall of over $350 million in balloon payments on the three legacy credit facilities that we refinanced. This was coming due just around the corner in 2021. The new facility extends the final maturity on all of these payments to the very end of December of 2024.

Second, we improved the overall cost of debt by lowering our average LIBOR margin by 20 basis points, translating into interest cost savings of approximately $1 million per year. And third, we structured more of our overall borrowings as revolving credit facilities, enabling us greater flexibility in actively managing the overall leverage of DSSI.

Page 12, the overall capex outlook has not changed much since our update in November. For 2020 we have five drydocks planned with two ballast water treatment system installations and three scrubber installations. What has shifted is the timing of expected expenditures, given the uncertainty around shipyard situations in China.

We do not expect any drydockings to take place in the first quarter and have shifted estimated expenditures into the second and third quarters of 2020. On the longer term outlook, we have moved some capex initially planned for 2022 into the back half of 2021, but the overall amounts and assumptions remain consistent.

On Slide 13, based on our expectation that market conditions will normalize, Diamond S will generate substantial free cash flow in upcoming periods. In consultation with our Board of Directors, we have been very focused on capital allocation decisions. It's worth reminding everyone, not all of the cash flow the Company generates is at our disposal to deploy on a discretionary basis. In addition to minimum cash levels described earlier, our debt agreements restrict us to distributions or repurchases of no more than 50% of the net income earned in the prior quarter.

With that said, we have all the tools available to deploy our excess cash flow in the manner we think will add the most value for our shareholders. As a spot-oriented owner, some of these tools don't necessarily align well over the long term based on our relatively conservative balance sheet targets. We have announced today a share repurchase program of up to $50 million in our earnings release.

The program gives us a flexible way to return value to our shareholders and we intend to be opportunistic with repurchases. An important driver of our decision making will of course be the relationship between our share price to net asset value. Based on the feedback we have received from investors as well as our own internal analysis, this is a more prudent and efficient use of capital than a dividend for the time being.

We are not adverse to the idea of paying out dividends at some point, but we don't think it's the right lever to pull given where our stock is trading at, relative to its underlying fundamental value. We also intend to be opportunistic with respect to our leverage, in particular creating additional revolver capacity gives us the flexibility to manage the business and be able to quickly react to opportunities that present themselves in the future.

With respect to additional ship purchases, our fleet comp position has never been static. We are in the favorable position to add vessels to the fleet without adding any incremental overhead. That being said, we don't have any particular fleet size and don't plan on growing for growth sake. But we think we can build long-term value by making thoughtful decisions around acquisition opportunities at the right time in the cycle. Our overall goal for capital allocations is to be good stewards of our shareholders' funds and make decisions that we think will benefit every stakeholder in the long term. We will keep the market updated on the progress of our repurchase program and our capital allocation plan as we execute on it.

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

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Okay, thanks. Before we start the Q&A, we're optimistic about the tanker fundamentals over the long term and have positioned the Company to maximize our profitability, so we can return value back to the shareholder. With natural limitations of fleet supply combined with the growing demand for tankers, from the regional imbalances of oil, we expect a dynamic tanker market.

Diamond S remains exposed to the volatility in the spot market and will utilize our disciplined capital allocation in order to maximize our return to shareholders, while maintaining a healthy balance sheet.

With that, I'd like to open up the call to any questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions]. And your first question here comes from the line of Randy Giveans with Jefferies. Please go ahead, your line is now open.

Randy Giveans -- Jefferies -- Analyst

Hi, gentlemen how is it going?

Kevin M. Kilcullen -- Chief Financial Officer

Okay, Randy.

Randy Giveans -- Jefferies -- Analyst

Good. I will -- I had two questions from me kind of one for DSSI-specific. Obviously great to see the $50 million in share repurchase authorization, especially with the shares trading at a pretty steep discount here to NAV. I know you're restricted to that 50% of the previous quarter's net income. So should we expect to see maybe $13 million or so in share repurchases this quarter? And then also kind of going forward, would fleet sales of some of the -- maybe older tonnage be a source of cash for further share repurchases?

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Yeah, Randy. I think with respect to share repurchases, we have a relatively short open window this time to execute the program between basically today and the end of the quarter. So yes, the bucket is roughly $15 million, if we are able to achieve that, I'd be pretty surprised. I think given the uncertainty in the General Markets and Shipping around coronavirus-related activity, we're probably going to start off a little bit slowly, but we do intend to be actively engaged on the buyback program sort of ASAP.

In terms of ships sales, absolutely, I think that's, you know, certainly it's a difficult time in the S&P market as well. The uncertainty just makes the price discovery in the process of selling or buying assets pretty difficult at this time. But in the more intermediate term, the sale of older assets and redeploying the capital from that into the share buyback program is absolutely something that the Company will consider.

Randy Giveans -- Jefferies -- Analyst

Okay. And then secondly, just broadly for a timely question, looking at the possible OPEC cut of up to maybe 1.5 million barrels a day. First read, obviously a fewer barrels on the water probably a negative for tankers. At the same time if those are replaced by like you mentioned the Atlantic Basin, US, West Africa, Brazil, it could be a good thing. What are your thoughts on the kind of OPEC news and how that will likely pertain to your business in the next few quarters?

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Yeah. I think it looks like more or less a push right now and that is to the extent that OPEC + cuts you're going to have increase to barrels moving out of the United States probably going to the Far East and so, it looks like on a ton-mile basis, it's more or less a push.

Randy Giveans -- Jefferies -- Analyst

Perfect. Oh, well, that's it from me. Good quarter. Thank you.

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Thanks Randy.

Operator

Your next question comes from the line of Frank Galanti with Stifel. Please go ahead, your line is now open.

Frank Galanti -- Stifel Financial Corp -- Analyst

Yeah. Hi, thanks. I wanted to ask about IMO 2020. Have you guys run into any issues compatibility-wise or availability-wise from having to use low-sulfur fuel or MGO. And then, kind of secondarily to that, can you talk about any cargo pattern changes that have happened due to IMO 2020 that you guys have been seeing?

Kevin M. Kilcullen -- Chief Financial Officer

Yeah. I mean we've had no real issues on IMO 2020 compatibility. I would say, it's pretty difficult to sort of look at the last month or so and attribute any kind of the change attributable to 2020. A lot of things going on in the marketplace today and most of them were corona -- coronavirus issues. And so it's difficult to ascribe one, to 2020 or to corona.

Frank Galanti -- Stifel Financial Corp -- Analyst

Okay. And then switching gears a little bit, on the capital allocation, I know you guys have a decent balance sheet actually pretty good. But what does the long-term leverage ratio look like? If you guys are looking to buy back shares obviously that's a leveraging function, but I just wanted to -- what does the long-term debt ratio look like with the need kind of longer term to eventually renew the fleet?

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Yeah, I think it -- Frank, it has to be taken into account where we are in the rate cycle as well, and what the expectations for the future are. In general, toward the lower end of the cycle where we were maybe a year or so ago, the Company is comfortable with leverage ratios in the low 50s. I think as we move into a more sustained higher rate environment in tankers, we'd like to take that down closer to 40%. But at least in the intermediate term, keeping the net leverage ratio between 40% and 50% is probably where we target.

Frank Galanti -- Stifel Financial Corp -- Analyst

Okay, great. Thanks.

Operator

Your next question comes from the line of Omar Nokta with Clarksons Platou Securities. Please go ahead. Your line is now open.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Hi, thank you. Hi guys. Just wanted to ask a couple of questions. You gave Craig some good overview on the spot performance in the Suezes and on the Product. When we look at the Product performance, especially in the fourth quarter, if I recall, you guys have guided $13,500 in the last quarter as expectations for 4Q or what you had at least booked at that point, but you ended up at over $15,500. Just based on that, it clearly looks like you guys ended the quarter very strongly. But just from, maybe a commercial perspective and how you guys are seeing things, how has -- how are you seeing the Product business shaping up at Diamond S especially post the integration of the capital fleet?

Are things kind of moving a bit more smoothly than they had previously?

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Yeah, I mean, there's always an adjustment period, I mean one of the things that probably not a lot of people outside the Company realized, but we a lot of ice-class vessels and ice-class vessels are actually expensive to operate. They burn a lot of fuel. And so that does affect your performance. A number of those ships are on time charter and so they don't come into that -- to that equation, but to the extent that they are in the spot market, they absolutely do.

And so if you looked at our original guidance on the -- on the fourth quarter, it was a very low number as you indicated. And we picked up our feet. And -- but I think in the first part of the fourth quarter, we had some voyages that were more or less positioning voyages. And so when they came in roughly $2,000 a day or above that, we were quite pleased in that sense. But one of the things that is very real today is, you have a number of -- types of MRs and so you have MR eco scrubbers, you have modern scrubbers, you have older MRs, you have about four classes of MRs and the reality is, they all are in different levels.

And so one of the reasons we talk about operating earnings is because of that, and that is, we have some of the lowest cash breakevens and we have low SG&A cost per ship day. And so, operating earnings is, that's a very important metric for our Company. And so we don't have near the amount of capital tied up in these ships, yet they throw off a lot of cash. So that's something we are quite sensitive to.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yeah, that's a good point. Definitely looking at it from gross profit or as you say, operating earnings is probably more reflective of the profitability of those ships. And just maybe Craig to confirm, just to make sure I heard you correctly in your opening comments. Guidance for the first quarter when we look at it on the spot basis, you'd mentioned mid -50s for the Suezes and was that mid-16s for the products?

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Yeah. Yes, that's correct. And so that's the spot ships, so we do have three of our Crude ships on time charter. So that's excluding that business. So, the spot ships would have -- are so far earned $55,000 a day.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Okay, got it. And maybe just one sort of question back to Randy's question regarding the loan facility and the capital repayment opportunities. Kevin, there is a 50% restriction to an extent and are -- there is a 50% restriction. And what I'm wondering is, is there a certain cash threshold or liquidity threshold that Diamond S needs to achieve for that 50% to just go away to where you could have the entirety of the earnings be available? Or is that just a standard thing in the existing facility?

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

No, it's a covenant in the existing facilities in two of the existing facilities that is more or less permanent. I think it's reasonable to expect if the Company has a sustained period of strong cash flow generations that are close partners in our banking groups, which certainly think about changes to that, that are beneficial to a public Company.

But I think right now, given the uncertainty in the global economic environment, it's probably premature to enter those discussions.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yeah, that's fair enough. Kevin, thank you. Craig, thanks as well.

Kevin M. Kilcullen -- Chief Financial Officer

Okay, you bet.

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Thank you.

Operator

Your next question comes from the line of Liam Burke with B Riley, FBR. Please go ahead, your line is now open.

Liam Burke -- B.Riley FBR -- Analyst

Thank you. Good morning, Craig. Good morning, Kevin.

Kevin M. Kilcullen -- Chief Financial Officer

Hey, Liam.

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Good morning.

Liam Burke -- B.Riley FBR -- Analyst

Craig, you made a very strong case that the older vessels generate nice return and good cash flow. When you're looking at potential vessel acquisitions in the future, is there a particular age category you're looking for understanding that the older end of the fleet will be susceptible to scrapping? How do you balance that between buying an older vessel and then looking at the scrap market?

Kevin M. Kilcullen -- Chief Financial Officer

I mean, we really don't think about scrapping at all. But what we do look at, we do need to continue to modernize our fleet. And so the Product side of the business is what we look at typically first. But it's a competition for capital. So at the end of the day, to the extent that you sell an MR, it does not necessarily mean that you buy an MR. And so, it's absolutely a competition, and I would tell you that the crude side of the business looks pretty exciting these days.

Look at those operating earnings that the crude side of the business throw off in the fourth quarter.

Liam Burke -- B.Riley FBR -- Analyst

Okay. And on the cash expense side, you saw a nice drop in per-vessel expense on the Product side and you saw a modest lift on the Crude side. Is there some reason for one versus the other?

Kevin M. Kilcullen -- Chief Financial Officer

Yeah, that's -- Liam, that's entirely due to the effect of the refinancing that shifted some of the debt service burden off of the Product carriers and toward the crude carriers, obviously as there are far fewer -- few crude carriers in that facility, the relative dollar impact on the two fleets was magnified.

All of the underlying operating assumptions for the vessels remain the same. So this is purely a shift of the burden of finance costs.

Liam Burke -- B.Riley FBR -- Analyst

Great. Thank you.

Operator

And I'm showing no further questions in the queue at this time, I will turn the call back over to Mr. Craig Stevenson for closing remarks.

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Okay. Thanks everyone. It's clearly an exciting time. I think -- I think most of us in the shipping industry are closely monitoring world events and this coronavirus and how it -- how it will affect world trade. So we'll continue to monitor that, but at the same time the fundamentals look incredibly strong. And so once we get through this coronavirus, I think we're keenly optimistic about the future returns.

So with that, thanks very much. Appreciate your support.

Operator

[Operator Closing Remarks].

Duration: 28 minutes

Call participants:

Craig H. Stevenson, Jr. -- Chief Executive Officer, President and Director

Kevin M. Kilcullen -- Chief Financial Officer

Randy Giveans -- Jefferies -- Analyst

Frank Galanti -- Stifel Financial Corp -- Analyst

Omar Nokta -- Clarksons Platou Securities -- Analyst

Liam Burke -- B.Riley FBR -- Analyst

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