Diana Shipping Inc. Q1 FY2020 Earnings Call

Greetings and welcome to the Diana Shipping Incorporated 2020 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ed Nebb, Investor Relations Advisor. Thank you, sir. Please go ahead.

Thank you, Donna, and thanks to all of you for joining us for the Diana Shipping Inc. 2020 first quarter conference call. The members of the management team who are with us today include: Ms. Semiramis Paliou, Acting Chief Executive Officer and Chief Operating Officer; Mr. Anastasios Margaronis, President; Mr. Ioannis Zafirakis, Interim Chief Financial Officer, Chief Strategy Officer, Treasurer and Secretary; and Ms. Maria Dede, Chief Accounting Officer. Before management begins, let me briefly summarize the Safe Harbor notice. Certain statements made during this call, which are not historical fact are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. And such forward-looking statements are based on assumptions, expectations, projections, or beliefs as to future events that may not prove to be accurate. For a description of the risks, uncertainties and other factors that may cause results to differ from the forward-looking statements, please refer to the company’s filings with the SEC. And with that, let me turn the call over to Ms. Paliou.

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 2020. I am addressing you today in my capacity as acting Chief Executive Officer. I also bring greetings from our Chairman and CEO, Simeon Palios. He asked me to tell you that he looks forward to joining us on future calls. As individuals, businesses and governments around the world continue to deal with the challenges of the pandemic. The near-term outlook for the dry bulk shipping sector is uncertain. What is certain, however, is that Diana Shipping Inc. has successfully navigated previous difficult economic cycles. We are confident in our strategies and our ability to emerge from this period as a strong shareholder-focused company. To summarize the results of the 2020 first quarter, the company’s financial performance primarily reflected lower time charter revenues and impairment loss on vessel values, a loss from the sale of a vessel and higher expenses related to the economic impact of the COVID-19 pandemic. Nonetheless, we continued our strategic approach managing our fleet, announcing an agreement to sell an older vessel. And we have once again returned capital to our shareholders in the form of a self-tender offer early in the quarter and share repurchases under our share repurchase plan. With respect to our financial results for the first quarter of 2020, Diana Shipping reported a net loss of US$102.8 million and a net loss attributed to common stockholders of US$104.3 million, including a US$93.1 million impairment loss. This compares to net income of US$3.0 million and net income attributed to common stockholders of US$1.5 million in the first quarter of 2019, including a US$4.8 million impairment loss. Loss per share for the first quarter of 2020 was US$1.21 compared to earnings per share of US$0.02 for the same period in 2019. Adjusted loss per share excluding impairment loss was US$0.13 for the recent quarter, compared to adjusted earnings per share of US$0.07 for the same quarter of 2019. Time charter revenues were US$43.8 million for the first quarter of 2020 compared to US$60.3 million for the same period of 2019. This was primarily due to decreased average time charter rates, as well as the sale of one vessel in the first quarter of 2020 and six vessels in 2019. Turning to the balance sheet, cash and cash equivalents, including restricted cash totaled US$111.2 million at March 31, 2020. Long-term debt, including the current portion was US$465.4 million, while stockholders equity was US$467.7 million. Consistent with our commitment to return value to shareholders, the company completed a new self-tender offer to purchase 3,030,303 shares on February 3, 2020. Additionally, during March, the company repurchased 1,088,034 shares under the company’s share repurchase plan. Continuing our active management of the company’s fleet, we completed the sale of the 2002 built vessel, Norfolk, in February for a sale price of US$8.75 million before commissions. We will continue to manage our fleet in a responsible manner that promotes the balance of time charter maturities and produces a predictable revenue stream. As we look ahead to 2020, we will continue the prudent management of our financial position and our fleet, and we will maintain our focus on delivering value to our shareholders. With that, I will now turn the call over to our President, Anastasios Margaronis for a perspective on industry conditions. He will then be followed by our Interim Chief Financial Officer, Chief Strategy Officer, Treasurer and Secretary, Ioannis Zafirakis, who will provide a more detailed financial overview. Thank you.

Thank you, Semiramis, and welcome to all who have made the effort to participate in this conference call in spite of the prevailing difficulties created by the current pandemic. The dry bulk market started the year with rather promising prospects. Unfortunately, the rapid expansion of COVID-19 has certainly created havoc in commerce, and the dry bulk trade was no exception. The Baltic Dry Index, which started the year at 976, closed yesterday at 398. The Baltic Panamax Index stood at 1,003 on January 3 and closed yesterday at 628. The Baltic Cape Index was at 1646 at the beginning of the year and closed on May 13 at minus 17. We will look at these two types of vessels, the Panamax and Cape, and their current as well as prospective earnings later on in this short presentation. Starting as usual with some macroeconomic developments, it’s worth noting that the IMF has cut its 2020 global GDP growth figures down to a minus 3% contraction for the year versus 3.3% growth in its latest set of forecasts. In 2021, growth is expected to rebound to 5.8%, which is 2.4% higher than it previously predicted. Unfortunately, according to the IMF, this rebound will not bring global output quite back to its pre-COVID-19 level. According to the IMF, GDP growth in the Eurozone during the first quarter was a negative 3.8% quarter-on-quarter. For this year as a whole, Europe is expected to contract by around 7.5%. In the United States, second quarter contraction is expected to be 10%. For the year, the IMF expects the U.S. economy to contract by as much as 6.1%. About three weeks ago, China reported that its GDP declined by 6.8% year-on-year during the first quarter of this year, marking the first official quarterly contraction in almost half a century. In March, Chinese fixed asset investments in both infrastructure and manufacturing fell between 21% and 25% year-on-year. Clarksons reported that China’s manufacturing PMI rebounded from February 35.7 to 52 in March, which was a welcome sign of stabilization in the country’s huge manufacturing base. Analysts at China International Capital have lowered their expectations for Chinese GDP growth for 2020 from 6.1% to 2.6%. For 2021, GDP growth has been revised upwards by 3.4% to 9.2%. The IMF highlighted COVID-19 effects on commodity prices. In these predictions, demand for dry bulk goods is forecast to fare better than that for other commodities such as oil and gas. For example, iron ore prices are expected to take a 10% hit on average as a result of the current pandemic. For thermal coal, prices might grow by around 8%, which is far less than other energy goods. Meanwhile, prices for agricultural bulks are predicted to be the most resilient, with soybean prices expected to take a 5% hit, while the effect on wheat and coarse grain products is expected to be negative. Turning to demand now, according to Clarksons, the dry bulk trade is expected to contract by 3.7% this year, mainly as a result of the COVID-19 virus pandemic. The same analysts expect demand to grow by 5.3% in 2021 and reach 29.762 billion tons. As for iron ore, again according to Clarksons, total seaborne trade of iron ore is expected to be flat this year at around 1.456 billion tons, while next year the forecast is for growth of about 2%. Because of weakening steel demand this year, iron ore imports across a range of importers from Europe to Japan and South Korea are now expected to come under downward pressure. However, Clarksons points out that with China gradually getting back to work, there is some potential for a gradual improvement of seaborne iron ore trade with lower prices and stockpiling efforts boosting imports into China. Chinese iron ore imports are currently projected to grow by 2% this year to just over 1 billion tons. On steam coal, according to Clarksons, seaborne steam coal trade is expected to shrink by 5% this year and grow by 2% in 2021. A steeper decline this year cannot be ruled out completely. So far in 2020, Chinese seaborne steam coal imports appear to have held up very well, in part reflecting disruption to local coal production. Unfortunately, Clarksons points out that it now appears likely that imports will come under pressure in the coming months with domestic coal production back to near normal levels. European steam coal imports are initially projected to fall by almost 20% this year, which will be the third consecutive year of sharp declines. Coal shipments into India could come under pressure from weaker demand and an abundance of domestic supply. A piece of good news on the China-U.S. trade prospects was that China announced that it was dropping 27% tariffs on U.S.-origin coal from March 2. Some ships already loaded with coal on that date sailing in the Pacific were rerouted into Chinese ports for discharge. Coking coal, now, Clarksons reported that the COVID-19 pandemic is expected to severely impact the steel industry worldwide. As a result, global seaborne coking coal trade is projected to decline by 7% compared to 2019 and by 253 million tons during the year. Imports into Europe, Japan, and South Korea are likely to come under significant downward pressure in the short-term as a result of reduced demand, primarily in the car production and construction industry. Total seaborne exports are expected to increase by 5% in 2021. Chinese coking coal imports could remain stable this year compared to 2019 as land-born imports from Mongolia have been significantly disrupted during the first two quarters, while gradually resuming economic and industrial activity during the remaining two quarters of the year might support demand if it materializes. As for grain cargoes, on a worldwide basis, seaborne grain trade is expected to increase by 2% this season and reach 485 million tons. In 2021, a further increase of 3% is expected to bring a total volume to about 500 million tons. As usual, the soybean trade will play a crucial role in how projections on the grain trade will evolve. Chinese buyers are expected to increase purchases of U.S. soybeans later this year as part of commitments made in the Phase 1 of the U.S.-China trade deal. Global seaborne soybean trade is projected to grow by 2% to around 150 million tons in 2020. According to Howe Robinson, soybean shipments from Brazil benefited from a good crop and low local currency, shipments rose 14% year-on-year to 18 million tons in the first quarter of 2020 with almost 74% of those volumes going to China. Chinese soybean and seaborne imports from around the world are projected to increase and reach just over 92 million tons during this coming grain season, an increase of 5% year-on-year. Turning to scrapping, according to Banchero Costa, during the first three months of 2020, 37 bulk carrier units for 4.9 million tons of all sizes were sold for scrap. Clarksons reports that after the firm start to the year, bulk recycling effectively came to a halt in late March and early April. This was due to the lockdowns across the Indian subcontinent. These lockdowns have made the deliveries of ships to breakers nearly impossible. At the end of April, a limited workforce was allowed to start working at the Indian demolition facility. However, this does not mean that the markets are suddenly reopened; this could be a positive sign for things to come if the pandemic does not worsen over the next few weeks. According to Clarksons, total bulker scrapping is now projected to reach 15.2 million deadweight during 2020; if this materializes, it will be 92% higher than last year. According to Clarksons, the weak outlook for the bulker market together with the significant macroeconomic uncertainty has severely limited bulker contracting activity so far this year, with only 1.6 million deadweight worth of bulk carrier tonnage ordered during the first quarter of this year, a drop of 76% compared to the same period last year. As well, the new building order book, according to Clarksons for bulk carriers as a whole at the end of March this year, there were orders for 75.7 million deadweight worth of tonnage, which represented 9% of the current fleet. Clarksons also reported that there were 19.2 million deadweight worth of Panamax vessels, representing about 9% of the existing fleet. From this total tonnage, about 11.3 million are scheduled to be delivered this year and 6.8 million next year. There is little doubt that several of the 2020 deliveries will be pushed back or fall back by necessity into 2021. As regards Capesize vessels, a total of 39.3 million deadweight worth of ships were on order as of the end of March this year, from which 20.4 million deadweight are scheduled for delivery this year and 15.4 million deadweight in 2021. This tonnage on order represents about 11.1% of the trading fleet. It is interesting, though, to note that regarding additional Capes, from 120,000 to 190,000 deadweight, the order book represents a mere 3.6% in deadweight terms of the trading fleet. So obviously, the order book is concentrated in the larger size capes up to 220,000 deadweights. Here, the order book represents 28.5% of the trading fleet. The same point made on slippage from 2020 to 2021 for Panamax deliveries mentioned earlier holds true for contracts of this type of vessel. Let’s turn to supply and net fleet growth. According to Clarksons, on the supply side growth of all types of bulkers is expected to remain limited at about 2.5% this year, with a small order book and delivery delays expected to increase. In 2021, the fleet is expected to grow by approximately 1.9%. With demand expected to shrink by 3.7% this year as mentioned earlier, and increase by just over 5% next year, there is potential for a meaningful improvement next year in the dry bulk trade. According to Banchero Costa, net fleet growth for ships over 120,000 deadweight is expected to remain at around 4% year-on-year in 2020, after expanding by 4% again in 2019. This expansion is expected to slow down to 3% in 2021. Additional cases are expected to shrink in numbers and volume this year by about 1%. Growth will come from 192,000 to 220,000 deadweight vessels, where the fleet is expected to expand by 16% year-on-year in 2020. As for Panamaxes and Post-Panamaxes, the same analysts will see in 2020 a delivery total of 11.8 million deadweight, even after accounting for slippage. This category includes a shift from 65,000 deadweight to 120,000 deadweight. Panamax fleet growth is expected to be 4% this year and 2% in 2021. A quick look at bunker prices, it is interesting to have a quick look at this. As of the end of April this year, in Rotterdam, the heavy sulfur fuel oil 380 CST was trading at around $111 per ton with very low sulfur fuel selling at 146 per ton, a difference of about $53 per ton. In Singapore, the corresponding prices were $164 per ton and $216 per ton for very low sulfur fuel, a difference of $52 per ton. Opinions vary as to the future trend of this price differential. The proponents of the, by now much talked about scrubbers believe that the price difference will increase together with the price of fuel oil. The rest of us believe that with the supply of very low sulfur fuel oil increasing and its availability becoming more abundant, the price difference going forward might very well be reduced even further. This price differential is material to owners who have decided to install scrubbers on board their vessels that involve significant costs to purchase and fit as well as lost earnings during the fitting period. Finally, let’s have a look at the outlook for our industry. It has always been very difficult to make any credible statements regarding the outlook of the dry bulk trade. Now with the effects of the pandemic on worldwide trade, it is practically impossible to do so, as the variables have increased even more. For example, now Commodore Research predicts that going forward with weakness in much of the global economy is likely to persist. China continues to fare relatively well, and Chinese iron ore imports are expected to remain reasonably strong. It is also encouraging that, according to Commodore Research, China appears likely to significantly increase its grain imports from the United States. However, there is much uncertainty for the future of the shipping market and the world economy as a whole as a result of the latest pandemic. There will certainly be a recovery at some stage. But what appears to be clear by the day is that this is not going to happen over the short term. The forecast of a global recovery in 2021 is heavily dependent on the pandemic easing in the second half of this year, and on the success of policy actions to prevent bankruptcies, sustained job losses, and system-wide financial strain. It is not until the world comes together to find a long-term solution for COVID-19 that we will begin to see any signs of a sustained recovery. This is the unenviable business environment we have to face in the dry bulk sector of the shipping industry. Once again, our strong balance sheet will help provide us with options as regards our business strategy going forward. Among these options are the sale of older tonnage and active management of our capital structure. Investment in younger tonnage and reinstatement of a dividend to our shareholders will probably follow in due course when prevailing conditions make this an attractive proposition. I will now pass the call to our interim Chief Financial Officer, Ioannis Zafirakis, who will provide us with the financial highlights of the first quarter of this year. Thank you.

Hello, good morning to everyone. I am very pleased to be discussing today with you, Diana’s operational results for the three months ended March 31, 2020. From my new position as an interim CFO of this company, I think I’m getting very old for this, but never mind. During this quarter, we recorded a net loss attributed to common stockholders of US$104.3 million or US$1.21 per common share. However, these results included the US$93.1 million of impairment loss from vessel values, which is equal to US$1.8 loss per share, which means that per share loss adjusted for impairment was – if I can say – only US$0.13 per share. As you are aware, during 2019, we sold six of our vessels and another one in the first quarter of 2020, which decreased the ownership days this quarter to 3,801 compared to 4,320 for the same quarter of 2019. Of course, we had less ownership days together with deteriorated market conditions which led to lower revenues of $43.8 million compared to the $60.3 million in the first quarter of 2019. Another reason for the decrease in revenues was fleet utilization, which was 96.4% compared to 99.7% for the same quarter of 2019. You can understand that this is mainly due to COVID-19 related issues. The daily time charter equivalent rate that we achieved during the specific quarter was $11,377 compared to $13,453 for the same quarter of 2019. Additionally, we had an increase in voyage expenses, which amounted to $3.7 million for the quarter compared to $2.8 million for the same quarter of 2019. This increase in voyage expenses was due to a loss from bunkers that amounted to $1.3 million compared to a $0.4 million gain that we had in the same period last year. During the first quarter, our vessel operating expenses amounted to $21.3 million compared to $22.4 million. Although this total number of operating expenses was lower than the previous year’s quarter, daily operating expenses were a bit higher at $5,608 compared to $5,175 for the same quarter of 2019. Our general and administrative expenses increased to $9.5 million compared to $7.5 million for the same quarter last year, resulting from the resignation of two Board Members, whose shares had to be vested in the first quarter of 2020. The good news for this quarter was the interest and finance costs, which amounted to $6.4 million compared to $7.7 million in the same quarter of 2019. This decrease was attributable to the decreased interest rates and, of course, decreased average debt compared to the same quarter of 2019. We thank you for your attention. Now, we are pleased to respond to your questions and we will turn the call to the operator, who will instruct you as to the procedure for asking questions.

Thank you. The floor is now open for questions. Our first question is coming from Omar Nokta of Clarksons. Please go ahead.

Thank you. Hello, everyone. And hi, Semiramis, it’s good to speak to you and looking forward to speaking again with Mr. Palios.

Thank you, Omar.

Yeah, so just wanted to - you’ve obviously, you and the team, you’ve given us a sobering overview of the dry bulk market and the broader economic backdrop. The write-down on the ships today, it’s not a surprise, given the extreme weakness that we’ve been seeing in charter rates and the pressure on ship values. And apologies if you already addressed this in your opening remarks, but I want to just get a sense of how many of the 41 ships you own does that impairment apply to? And was it vessel-class-specific? Was it age? Just some color on that would be helpful. Thank you.

Hi, Omar. This is Ioannis. We’ve had nine of our vessels that we’ve had to take impairment on, and I cannot say that it is class-specific. We had some Capesizes and some Panamaxes that we did that. You understand that the environment is different. You know how the test is done. You have to take assumptions as regards future revenues, together with increased values – with increased operating expenses, you come up with a number that forces you to take impairment and bring the value of the vessel closer to the actual value of the ship rather than the book value. Impairment is not a bad thing. It gives a clearer picture, I think, to everyone. And from the moment we have to take it, we take it.

Yeah. And I think I know the answer, but any minimum net worth, covenant thresholds that have been used as a result?

No.

No.

The answer is no.

Yeah, good to hear, and…

And don’t forget also that most of the terms in the loans refer to actual values rather than book, but there are some on book, but they are higher than the market values.

Yeah. And, Ioannis, as Interim CFO, according to the 20-F, it looks like debt repayments are pretty manageable for this year. I think it was around maybe $48 million, $50 million, if I recall. And maturities in next year were maybe about $140 million or repayments are $140 million. As you think about refinancing and looking at the capital structure of those, the $48 million call it for this year, the $140 million for next year, how much of these payments did you see being able to defer just by virtue of refinancing balloon payments?

Thank you for that question. We are about to issue a press release tomorrow, talking about some of these facilities. So you know it very well, to know that we are proactive on that respect. We will certainly be in a position to conclude something soon.

Okay, alright. Well, I look forward to that. And maybe just one more if you don’t mind. Just want to think about the cash, obviously, in a nice cash position, excluding restricted cash at $90 million. When we think about just the cash coming in, in the second quarter, I know the Norfolk you had sold for the $8.75 million, are those proceeds already in the balance sheet or is that coming in the second quarter?

No, they are already in the balance sheet, the proceeds.

Okay. Alright, well, that’s it for me. Thank you.

Thank you, Omar.

Thank you. Our next question is coming from Randy Giveans of Jefferies. Please go ahead.

Howdy, Semiramis, Stacey, and Ioannis? How’s it going?

Hi, Randy.

Hi, Randy.

Here we are, hopefully, yeah. Hey, hey, hopefully. Simeon’s doing better. And, Ioannis, congrats on the new role here.

Yeah, thank you very much.

Alright, well, yeah. So, last quarter, we saw the sales of Calipso and Norfolk, both get canceled. The Norfolk has since been sold. But just trying to get a sense for your plans for the Calipso, maybe some of your older vessels in the near-term. Are vessel sales even an option kind of in this environment? And would the proceeds be used for share buybacks or just further kind of debt deleveraging?

Again, you know us very well. Certainly, we have not given up the thought of selling the older tonnage and the un-mortgaged vessels. This is something that we are considering. As regards the proceeds from that sale, you know very well that today, as we speak, the main name of the game for ourselves is defense. Therefore, the most probable scenario is that we will keep the money aside from the sales. However, having said that, we should not exclude the extreme situation where the value of our stock is very, very depressed, and we may do some repurchases. Having said that, you understand that we have taken the position that we are in a very – we are in uncharted territory. We should not be investing large amounts of money into anything and be ready for in case the scenario is the worst one expected.

Sure. It’s understandable. Now, you mentioned kind of uncharted territory. Clearly, the first half of 2020 has been weak. But we’ve seen some weak periods before, the first half of 2016, even the first half of last year with the crude – damp there and stuff. How does this year kind of compare to those periods? And do you expect a rebound in the coming months?

I know that toddlers, they have found valid arguments to try to persuade themselves and the others that the market may turn in the second half of 2020. But we are of the opinion that this is the first time that we see a drop in demand due to many world economies having a problem. It’s not as if we have one or two economies that are having a problem. We are talking about almost the entire world. Too many parts of the chain have been broken. Therefore, I don’t think that anyone should be in a position to be talking about speedy recovery because you understand that everything depends on too many countries. Now, I know that a lot of money is going to be spent as stimulus packages around the world. Certainly, it depends on what type of stimulus packages and where the money is going to be spent. There is a good scenario where this money is spent on infrastructure and things that we carry raw materials for. But I don’t think that anyone should take that scenario as being the most probable.

Okay. And kind of with those sentiments, how are you kind of preparing for that, in terms of either short-term chartering, three, six, nine months versus the longer term twelve, eighteen, twenty-four months?

No, we keep our hedging strategy. We secure some long-term and some short-term. What we don’t want to do is have a lot of vessels opening at the same time and not end up in a period where everything is really bad and have a lot of vessels opening. So you should be expecting the company to do the same thing that we have been doing the last fifteen years. You have to understand that when you have a hedging strategy, you do not amend based on what’s happening around you. Otherwise, it’s not a hedging strategy. We have too many safety valves, and one safety valve is not to take the position that the market is going to be better after six months and, therefore, go short-term now. This is not what we’re going to do.

Yeah, that’s it. That’s it for me. Good chatting and we’ll talk soon. Take care.

Thank you, Randy.

Thank you. At this time, I would like to turn the floor back over to management for closing comments.

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.

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time and have a wonderful day.