Earnings Call Transcript - DSX Q3 2021

Operator, Operator

Hello, and welcome to the Diana Shipping Inc, Third Quarter 2021 conference call webcast. 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 turn the call over to Ed Nebb, Investor Relations for Diana Shipping. Please go ahead, Ed.

Ed Nebb, Investor Relations

Thank you very much, Kevin. And thanks to all of you for joining us today for the third quarter conference call of Diana Shipping Inc. Before management begins their remarks, let me briefly remind you of the safe harbor provisions, which you can see the notice attached to today's news release. Certain statements made during this conference call, which are not historical facts, are forward-looking statements as defined by the Private Securities Litigation Reform Act. Such forward-looking statements are based on assumptions, expectations, projections, or belief as to future events that may not prove to be accurate for a description of the risks, uncertainties, and other factors that may cause future results to differ from what is expressed in forward-looking statements, please refer to the Company's filings with the SEC. And now I'd like to introduce Mr. Simon Palios, Chairman, and Ms. Semiramis Palios, Chief Executive Officer. And I will turn it over now to Semiramis.

Semiramis Paliou, CEO

Thank you, Ed. Good morning, ladies and gentlemen and welcome to Diana Shipping Inc. third quarter 2021 earnings call. My name is Semiramis Paliou, the Company's CEO and this is an honor to have the opportunity to present to you today. Joining me this morning on the call, we have Mr. Stacey Margaronis, President of Diana Shipping, Mr. Ioannis Zafirakis, CFO and Chief Strategy Officer, Mr. Eleftherios Papatrifon, Chief Operating Officer, and Ms. Maria Dede, the Company's Chief Accounting Officer. Before I begin, I kindly ask everyone to review the forward-looking statements applicable to today's presentation, which can be found on page 2 of this presentation. Turning to Slide 4, I will briefly update you on the Company's snapshot as of today. Not much has changed since our second quarter call as we continue owning and operating 36 vessels with a carrying capacity of approximately 4.6 million deadweight tons. However, we expect our fleet to grow by one vessel in the first quarter of next year after we take delivery of our announced acquisition, the motor vessel Magnolia. Our fleet utilization has remained at very high levels, coming in at 98.9% for the third quarter of 2021 as compared to 99.6% for the second quarter of the year. Moving on to slide 5, I will go over the highlights of the third quarter and recent developments. Market conditions remained robust during the last quarter and continue to be positive to this date, although we have witnessed some volatility recently. This has resulted in the Company producing a strong third quarter and achieving the strongest 9 months results since 2012. This strong profitability and positive cash flow generation has enabled us to introduce a cash dividend of $0.10 per share. As we have mentioned in the past, we would only start paying a dividend again when market conditions would allow the dividend to be sustainable for a reasonable period of time. We feel that such conditions have arrived currently, and as such, we have initiated the dividend. Together with the dividend, we announced a separate transaction that we believe rewards and at the same time creates value for our shareholders. This is the creation and subsequent spin-off of Ocean Pal. OceanPal will acquire 3 of our oldest vessels and will trade separately on the Nasdaq capital market under the ticker symbol OP. Every Diana Shipping Inc. shareholder will receive 1 share of OceanPal for every 10 Diana shares held on the record date. The specific spin-off structure, the rationale of the transaction, and the potential benefits for our shareholders are analyzed in detail in the OceanPal registration statement filed with the Securities and Exchange Commission. While the consummation of this spin-off has been delayed pending the effectiveness of the OceanPal registration statement filed with the SEC, we anticipate that it will be completed in the next couple of weeks with no changes to the terms that we have previously announced. As previously announced in June of this year, we successfully issued a 5-year $125 million senior secured bond listed on the Oslo Stock Exchange. In September, we utilized some of the bond proceeds to repurchase the remaining old bonds due in 2023. In August, we successfully concluded our tender offer and repurchased approximately $3.33 million common shares at the price of $4.5 per share. We believe that this return to our shareholders presented a strong vote of confidence for the long-term prospects of our Company. Lastly, our consistent chartering strategy has allowed us to have currently secured approximately $209 million of contracted revenues for the full year 2021 with a 97% contract coverage and $83.2 million of contracted revenues for 2022 with 27% contract coverage. Janice will provide later on a more detailed analysis of our cash flow generation potential based on the current market environment. One can also find on our website the Company's 2020 environmental, social, and governance report, which was released in October. Turning to the financial highlights of the third quarter of 2021 on slide 6, we find ourselves as of September 30, 2021 with a cash and cash equivalents position of $146.2 million, including restricted cash as against $82.9 million as of December 31st, 2020. Our debt net of deferred financial costs stood at $434.7 million at the end of the third quarter of 2021, as against $420.3 million at the end of 2020. Our time charter revenues for the third quarter of 2021 amounted to $57.3 million, as against $42.3 million for the third quarter of 2020. Lastly, our earnings per share for the third quarter of 2021 came in at $0.16 versus a loss of $0.17 per share for the same period of 2020. Ioannis will go over this as well as the 9-month numbers in more detail further on in the presentation. Moving on to Slide 7, we find a summary of all our recent chartering activity. Consistent with our conservative and disciplined chartering strategy, we have taken advantage of the improving chartering markets and have secured attractive time charters for 11 vessels of our fleet. More specifically, we chartered 9 vessels in the Panamax to post-Panamax side at the weighted average daily rate of $25,858 for a remaining average period of 336 days per vessel. This can be compared to the $25,693 weighted average daily rate we achieved for the fixtures presented during our last earnings call, an indication of the markets remaining robust. We have also targeted 2 Capesize vessels at the weighted average rate of $33,437 per day for a remaining average period of 148 days, an improvement from the $25,957 we achieved as an average weighted daily rate for the last quarter's Capesize fixtures. We intend to continue chartering our vessels that will be redelivered to us in a similar way by staggering maturities, locking in cash flows, and positioning the Company in a manner that will allow us to continue to participate in the market in a balanced way. I will now turn the call to Ioannis to go over the third quarter 2021 financials in more detail.

Ioannis Zafirakis, CFO and Chief Strategy Officer

Thank you Semiramis, and good morning to all of you. I'm very pleased to be discussing today with you the Diana Shipping Inc. financial results for the third quarter and the nine months ended September 30, 2021. In slide number 8, you can see that during the quarter we recorded a net income of approximately $15.3 million or $0.17 per basic share, or $0.16 per diluted share. Our revenues increased from $42.3 million in the third quarter of 2020 to $57.3 million in the third quarter of 2021, an increase of about 35%. Despite the reduction in the number of vessels in our fleet, this increase is attributed to the rise in the charter rates that we achieved for our vessels. The voyage expenses also decreased to only $0.7 million in the quarter compared to $2.9 million for the same quarter of 2020, mainly due to a $2.4 million gain from bunkers compared to a $0.5 million loss we had last year. Vessel operating expenses for the third quarter of 2021 decreased by about 12% to $18.8 million compared to $21.3 million last year. This decrease was primarily due to having fewer vessels in our fleet following recent sales, and also to decreased spare parts, repairs, and other operating expenses. However, this decrease was partially offset by increased crude costs, insurance, stores, and provisions. Our general and administrative expenses also decreased to $7.2 million compared to $9.5 million for the same quarter last year, mainly due to decreased payroll costs. Interest and finance costs increased this quarter due to higher average interest rates and increased average debt compared to the same quarter last year, mainly due to our new $125 million bond. Additionally, the Company incurred a loss of extinguishment of debt of $0.8 million due to the call advantage of our 9.5% senior bond. For the nine months ended September 30, 2021, net income attributed amounted to $11.9 million or $0.15 per basic share or $0.14 per diluted share. Time charter revenues increased to $145.4 million compared to $127.1 million for the same period last year, for the same reasons mentioned above. Voyage expenses decreased in the nine months ended September 30, 2021, to $4.7 million compared to $10.5 million for the same period of 2020, due to a $3.1 million gain from bunkers compared to a $3.5 million loss we had last year. The vessel operating expenses were $56.6 million compared to $63.4 million for 2020, attributed to fewer ownership days along with decreased spare parts and other operating expenses. We've had some increases in insurance, stores, and provisions. General and administrative expenses decreased to $21.1 million compared to $25.7 million for 2020, mainly due to the accelerated vesting of restricted stock shares of board members in 2020 and lower payroll costs. Interest and finance costs amounted to $15 million compared to $16.9 million last year due to decreased average debt and interest rates. On the balance sheet, as of September 30, 2021, our cash and cash equivalents and restricted cash increased to $146 million compared to $82.9 million as of December 31, 2020. This increase is primarily attributed to the refinancing agreements we entered into during this nine-month period, including a $91 million loan agreement, a $75 million unsecured senior bond, and other refinancing efforts. This brought long-term debt, net of deferred financing costs, to $434.7 million compared to $420 million as of December 31, 2020. Additionally, we have agreed to share 3 vessels, which were delivered to new owners in the first quarter of 2021. However, our utilization rates improved to 98.5% for the third quarter of 2021, compared to 97.3% for the same quarter last year. Better utilization rates and higher averages resulted in an increase of our daily time charter equivalent rate to $17,143 compared with $10,735 per day for the third quarter last year. Furthermore, we aim to reduce our daily operating expenses to $5,335 compared to $5,732 for the same quarter of 2020. Moving to the nine months ended September 30, 2021, our utilization increased to 98.9% compared to 97% in 2020. Daily operating expenses slightly decreased to $5,577 compared to $5,639 for the same period last year. I would like to point out that during this nine-month period, we've gone through three loan refinancing agreements with different entities, which have all contributed to strengthening the company’s balance sheet and our positioning in the market. Our break-even rate, which includes all of our expenses, has been $9,800 per vessel per day, and we believe that this will allow us to achieve net income probabilities. Looking at the next slide, we project revenues of $58.2 million through the remaining fixed days into the end of the year, with an additional $263.5 million in revenue for 2022, resulting in net income operations.

Anastasios Margaronis, President

Thank you, Ioannis, for your insights. This third quarter of the year has reminded us all of the tremendous volatility characteristic of the dry bulk market, which is indicative of a healthy industry, where supply and demand play their expected roles without external distortions. The Baltic Dry Index started the third quarter at $3,338 and reached a high of $5,650 on October 7th. As of yesterday, November 16, we've closed at $2,591. The Baltic Cape Index moved from $3,690 on July 1st to a high of $10,485, only to drop to $3,383 yesterday. The Baltic Panamax Index started the quarter at $4,237 and closed yesterday at $2,675, having retreated from a high of $4,328 on October 25th. As evidenced by the fluctuations of these indices, after reaching levels not seen since 2009, rates in all major dry bulk vessel sectors have dropped well below their recent highs, yet they still remain at healthy levels by historical standards. According to Clarkson’s data, the Baltic Capesize 5TC average rates for 2020 were $13,070 per day. By early November this year, they increased by over 150% to around $33,000 a day. As for Panamaxes, the average rate rose from $9,918 in 2020 to about $27,000 in early November 2021.

Ioannis Zafirakis, CFO and Chief Strategy Officer

The reasons for the recent weakness in rates are multifaceted. The most prominent reasons include the release of several vessels from congested ports, primarily in China, and a sharp slowdown in Australian iron ore shipments. According to Braemar, these shipments are projected to decline in October by 6.5% compared to September, resulting in a year-on-year decline of approximately 3.4%. Shipping analysts expect that the bottom will be found as more of the spot tonnage has cleared, and owners surrender to weaker bids for their tonnage. It appears that we are not far off from that point in the cycle.

Anastasios Margaronis, President

As we look at global GDP growth, the IMF forecasts a 4.9% increase this year, with around 5% for 2022. Chinese GDP growth is expected to come in at 8% this year, dropping to 5.6% in 2022. It's important to consider that Chinese growth has significantly decelerated during the third quarter, which is not reflected in the average annual growth figure. This decline might impact demand for commodity imports in China for the fourth quarter. The U.S. economy is projected to expand by approximately 6% this year and by 5.2% in 2022, with revised growth figures reflecting anticipated high infrastructure spending and a stronger vaccine-fueled rebound in early next year. The euro area is expected to see a growth of 5% this year, and around 4.3% next year.

Ioannis Zafirakis, CFO and Chief Strategy Officer

In terms of iron ore prices, we are witnessing a significant drop due to production cuts, power issues, falling steel demand, and oversupply. According to Clarkson’s benchmark, iron ore prices in China fell to above $96 a ton, which is down 40% from records set in October. Total steel output in China during the first nine months of this year was 804 million tons, an increase of 2.6% compared to 2020. Charges of thermal coal prices also corrected in early November to about $140 per ton, down approximately 40% from their records set in October.

Anastasios Margaronis, President

The bulk carrier order book has slightly increased, now reaching 6.8% of the total trading fleet, close to the 30-year low seen in previous quarters. We see limited yard slot availability, uncertainty surrounding upcoming environmental regulations, and tight bank financing as main factors keeping order placements at low levels. Despite current earnings, the trend indicates a cautious approach from investors towards ordering new vessels. In continuing with our growth strategy, we aim to provide the opportunity for our vessels to continue to generate positive cash flows. As we look to the future, we are staying committed to our balanced strategy that should allow us to generate shareholder value throughout various market cycles. Thank you all for your attention.

Semiramis Paliou, CEO

Thank you, Stacey. So, before we move on to this question-and-answer session, I would like to sum up by pointing out the following. We are taking advantage of the strong markets and have continued strengthening our balance sheet that we believe will enable seamless continuous operations of our Company. Our low cash flow break-even points, in conjunction with a high rate, result in positive cash flows that we consider sustainable for the medium-term. We have initiated the dividend and will closely monitor our cash flow generation ability when deciding on paying future dividends. Additionally, we find ourselves in the fortunate position that market conditions are such that we could potentially allow for fleet growth and renewal. Finally, we remain committed to our disciplined and balanced strategy that should continue to allow us to generate shareholder value throughout various market cycles. Now, I turn over to the Operator to commence the Q&A session.

Operator, Operator

Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, one moment please, while we pull for questions. Our first question today is coming from Randy Giveans, from Jefferies. Your line is now live.

Randy Giveans, Analyst

Howdy team Diana, how's it going?

Semiramis Paliou, CEO

Hi Randy.

Ioannis Zafirakis, CFO and Chief Strategy Officer

Hi Randy.

Randy Giveans, Analyst

So, I guess starting here with some of the return of capital to shareholders, if you can give a little more color commentary on why you decided to spin off the 3 older vessels and instead of kind of what you've done in the past, right? Selling them and tendering for shares. And then secondly, on the dividend, right? Great to see the dividend back at Diana. How did you come up with that $0.10 a share number?

Ioannis Zafirakis, CFO and Chief Strategy Officer

Hi, Randy. This is Ioannis. The reason why we decided to do it that way is due to several factors. We've previously mentioned why we consider it to be the right period to initiate the dividend. We see the fundamentals as being strong enough to support a sustainable dividend. Instead of selling the vessels and paying a large cash dividend, we thought it would be better to pay in kind and satisfy investors wanting the company to retain older vessels. So, we created another company with a management team that has the necessary expertise to handle this transition. Our strategy behind Ocean Pal was to provide a separate company for those who might not want to directly engage with the older vessels. We introduced the $0.10 dividend, which translates to $9 million per quarter, a manageable level considering our free cash flow. I hope this helps answer your question.

Randy Giveans, Analyst

Every day I do. So, that's fair. That is fair. And I guess secondly, kind of looking at your chartering business and strategy, following the recent drop in spot rates and the FFA curve. How has that impacted the time charter market, what's the availability for longer-term time charters, and I guess more strategically now that rates have softened, are you more likely to operate in the spot market or maybe sign short-term charters?

Ioannis Zafirakis, CFO and Chief Strategy Officer

No, we don't take decisions based on current market conditions. Our strategy remains unchanged, and you will see us fixing for either a year or two years, regardless of the current rates. Our approach will maintain the average we have managed to keep since 2005. We are sticking to our proven strategy, and despite market fluctuations, we maintain confidence in our performance.

Randy Giveans, Analyst

Got it. Yeah, and that's clear. Good deal. Well, that's my two questions. Thank you so much.

Semiramis Paliou, CEO

Thank you, Randy.

Operator, Operator

Our next question today is coming from Ben Nolan from Stifel. Your line is now live.

Ben Nolan, Analyst

So, I wanted to go back to the OceanPal idea and just in general, I'm curious, one of the things that stands out to me is that these are generally older, less expensive assets. Ultimately, this is going to be a very small company. And relative to the cost of filing costs and G&A and all of those kinds of things, it seems like it might be somewhat inefficient to have it as a standalone vehicle. How do you think about that?

Anastasios Margaronis, President

Your points are certainly valid. This is one of the reasons why we created the company. Those older assets become more challenging to manage with a long-term charter strategy. By placing them in a more spot-oriented structure, we offer the opportunity for those vessels to continue generating cash flows while creating value for our shareholders. The intent is to provide an outlet for investors who may prefer to engage with a different set of assets and strategies.

Ben Nolan, Analyst

Okay. Well, or maybe another way to think about it is why only three? Obviously, they’re the oldest, but there’s the next oldest behind that. Just trying to think through getting something that has some level of critical mass. I mean, it's subscale when you—

Anastasios Margaronis, President

There are additional vessels that have been carved out for potential inclusion. We have another six older vessels on the radar. These will be assessed for suitability in the future, offering the opportunity for growth while keeping the focus on maintaining a positive financial position. Additionally, there will be the chance to acquire assets from other sources, providing more opportunities to increase company scale over time.

Ioannis Zafirakis, CFO and Chief Strategy Officer

The key point remains that Diana Shipping Inc. aims to showcase its ability to distribute dividends on a quarterly basis effectively. This can be in the form of assets rather than purely cash payouts. Ultimately, we want to present a value proposition that emphasizes the strength of our business model and capacity to reward shareholders.

Ben Nolan, Analyst

Okay. And then my second question is your closing remarks referenced fleet growth. Given the market efficiency viewpoint and cautious approach to acquisitions, especially with new building costs and second-hand prices rising, how do you view potential growth? Is it something that may happen soon or is it more about being able to capitalize on opportunities as they arise?

Ioannis Zafirakis, CFO and Chief Strategy Officer

We've stated in the past that we prefer not to expand during the upper part of the cycle. However, as equity and capital allow, we may pursue opportunities to modernize the fleet, whether through buying new assets or replacing older tonnage. This would be a strategic process with a long-term view aimed at ensuring sustainable cash flows and enhancing our dividend capacity.

Ben Nolan, Analyst

Would you consider ordering new builds?

Ioannis Zafirakis, CFO and Chief Strategy Officer

Ordering new builds is not preferable to us as it involves a delivery time of around two years. Given the current uncertainty surrounding market conditions in that timeframe, it poses risks we prefer to avoid. Instead, we focus on readily available resale options and ensure that our decisions align with our long-term growth strategy.

Ben Nolan, Analyst

Alright. That does it for me. Appreciate it. Thank you.

Ioannis Zafirakis, CFO and Chief Strategy Officer

You're welcome.

Semiramis Paliou, CEO

Thank you.

Operator, Operator

Thanks, guys. Our next question is coming from Magnus Fyhr from H.C. Wainwright. Your line is now live.

Magnus Fyhr, Analyst

Good afternoon, gentlemen. I just had a couple of questions as a follow-up on your chartering strategy. You mentioned that it hasn't really changed, but with the volatility in the market, has anything changed among your clients? Do you think their appetite has declined, or do you still see opportunities for attractive charters in the near term?

Anastasios Margaronis, President

In terms of rates, they've indeed declined. The FFA rates on average for this quarter and for 2022 have dropped by about 20% as of a few weeks ago. Despite that, there remain opportunities for attractive charters, even if at lower numbers. Our free cash flow generation is still quite robust, supporting our operations and dividend distributions.

Ioannis Zafirakis, CFO and Chief Strategy Officer

Magnus, as you know from our history, we have maintained a disciplined approach unaffected by surrounding market conditions. We focus on remaining committed to our established strategy and ensuring that we reach our goals.

Magnus Fyhr, Analyst

Okay. That's good to hear. Just as a follow-up on OpEx, you've been selling assets, and I've noticed your G&A has also been declining. Could you comment on whether you've seen any easing in cruising costs due to COVID-related factors or if you think costs may rise or maintain going forward?

Anastasios Margaronis, President

We are seeing reduced average OPEX on a daily basis, but inflationary pressures are impacting us, even aside from COVID. COVID-related factors have introduced additional costs, particularly with travel and logistics. We hope that by 2022, these excess expenses will decline, leading to lower operational costs. However, we are committed to keeping both OpEx and G&A as low as possible without compromising operational quality and seafarer safety.

Magnus Fyhr, Analyst

Very good. That's all I had. Thank you.

Ioannis Zafirakis, CFO and Chief Strategy Officer

Magnus, I would like to emphasize that during this call, our message is clear: Diana Shipping Inc. aims to provide substantial yields to shareholders as we navigate this period. This can manifest as cash or assets.

Semiramis Paliou, CEO

Thank you.

Operator, Operator

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Semiramis Paliou, CEO

Thank you all for joining us today. We look forward to talking to you again on our next financial earnings call. Thank you very much.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.