Earnings Call Transcript - DSX Q2 2023

Operator, Operator

Greetings and welcome to Diana Shipping Inc. Second Quarter 2023 Conference Call and Webcast. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ed Nebb, Investor Relations advisor with the company. Thank you. You may begin.

Edward Nebb, Investor Relations Advisor

Thanks, Daryl, and thanks to everyone who is joining us today for the Diana Shipping Inc. 2023 Second Quarter Conference Call. With us today from management are Semiramis Paliou, Chief Executive Officer, who will introduce the other members of the management team. And so without further ado, I will turn it over to Semiramis.

Semiramis Paliou, CEO

Thank you, Ed. So good morning, ladies and gentlemen, and welcome to Diana Shipping Inc.'s Second Quarter 2023 Earnings Call. My name is Semiramis Paliou, the CEO of the company, and it is a great pleasure to have the opportunity to present to you today. I am joined by our esteemed team, Mr. Stasi Margaronis, Director and President of Diana Shipping, Inc; Mr. Ioannis Zafirakis, Director, CFO and Chief Strategy Officer; Mr. Eleftherios Papatrifon, Director of Diana Shipping, Inc; and Ms. Maria Dede, the company's Chief Accounting Officer. Before we begin, I would like to remind everyone to review the forward-looking statements applicable to today's presentation, which can be found on Page 4 of the accompanying second quarter 2023 presentation. Q2 2023 has proven to be a profitable quarter for our company despite less robust conditions prevailing in the market. Our disciplined charter-in strategy once again has largely insulated us from the market weakening and has allowed us to generate positive free cash flow. In line with the guidance provided during the company's previous earnings call, we are pleased to declare the distribution of a dividend for this quarter amounting to $0.15 per share, which will be paid in shares or at any shareholders' election in cash. We aim to continue rewarding our shareholders when conditions allow us to do so. Turning to Slide 5. I will provide an overview of the company's snapshot as of today. We currently own and operate a fleet of 42 vessels in the water, including a partial interest through a joint venture arrangement in 1 Ultramax with a carrying capacity of approximately 4.7 million deadweight tonnes. Our fleet utilization has remained consistently high, reaching 99.6% for the second quarter of 2023. Additionally, we employed 1,024 people at sea and ashore as of the end of the second quarter. Moving on to Slide 6 and then 7. We'll go over the key highlights from the second quarter and recent developments. In April, we successfully secured a USD 100 million term loan facility from Danish Ship Finance, which has been drawn down to refinance existing loan facilities secured by 9 vessels. Within the same month, we acquired the longer vessel DSI Drammen for a purchase price of USD 27.9 million. The vessel was delivered to the company in April. And within the same month, we completed the joint venture for ownership and procured debt financing from Nordea Bank. Moving on to May 2023. We declared a quarterly dividend of $0.15 per common share, amounting to approximately USD 16 million. Shareholders have the option to receive the dividend in the form of DSX shares or cash according to their election. During June, we took further steps to optimize our financial position. We signed and utilized a $22.5 million term loan facility with Nordea Bank to refinance existing loan facilities secured by 4 vessels. Additionally, we entered into another USD 100 million term loan facility with DNB Bank to refinance existing loan facilities secured to 10 vessels. After this refinancing, we do not have any debt maturities from now until the end of 2025. Lastly, within the same month, we repurchased approximately USD 6 million of our 8.375% senior unsecured bonds listed on the Oslo Børs. In July, we signed an amended and restated term loan facility on the Export-Import Bank of China for the transition into the secured overnight financing rate software. As a result, all our debt agreements have now been successfully converted into software. Today, we are pleased to announce a quarterly dividend of $0.15 per common share, totaling approximately USD 16 million to be paid in the form of DSX shares or at the election of any shareholders in cash. As of July 27, we have secured revenue for 80% of the remaining ownership days of 2023, amounting to approximately USD 87.5 million of contracted revenues. Additionally, we have secured approximately $77.7 million of contracted revenues for 2024, representing 31% of the available ownership days for the entire year. Ioannis will provide a more detailed analysis of our cash flow generation potential based on the current market environment. Turning to the financial highlights of the second quarter of 2023 on Slide 8. As of June 30, 2023, we held a cash and cash equivalent position of USD 197.6 million, including restricted cash and time deposits compared to USD 143.9 million as of December 31, 2022. Our net debt, including deferred financing costs, stood at USD 671.9 million at the end of June 30, 2023, compared to USD 663.4 million at the end of December 31, 2022. Time charter revenues for the second quarter of 2023 amounted to USD 67.4 million compared to USD 74.5 million for the same period in 2022. Lastly, our earnings per share for the second quarter of 2023 came in at $0.09 compared to $0.42 per share for the same period in 2022. Ioannis will provide a more detailed analysis of these numbers later in the presentation. Moving on to Slide 9. Let's review a summary of our recent chartering activity. We have continued to implement our disciplined charter-in strategy by securing profitable time charters for 3 vessels since our last earnings presentation in May 2023. To provide some detail, we have charted 1 Ultramax vessel with a daily rate of USD 13,800 for a remaining average period of days. Additionally, we have chartered 1 Kamsarmax and 1 Capesize vessel with a daily rate of USD 12,650 and the remaining average period of 470 days and at a daily rate of USD 16,000 and the remaining average period of 439 days, respectively. We intend to continue chartering our vessels in a staggered manner, focusing on locking in cash flows and positioning ourselves in a balanced way to participate in the market efficiently. I will now pass on the floor to Ioannis to provide a more detailed analysis of our financials.

Ioannis Zafirakis, CFO and Chief Strategy Officer

Hello everyone. The numbers we will discuss show that the market has worsened, and financing costs have risen over the past 6 months and this quarter. As Semiramis mentioned, the time charter revenues for the three months ending June 30 were $67.4 million, down from $74.5 million in 2022. However, this decline is with a larger fleet, having 41 vessels compared to 35 last year. Time charter rates also fell, with the equivalent rate at $17,300, down from $24,600 in the previous quarter and the same quarter last year. Daily operating expenses rose to about $6,000 this quarter, compared to $5,700 in 2022. For the first 6 months, time charter revenues remained at $140 million, which is the same as the same period in 2022, but with fewer vessels. The equivalent time charter rate for 6 months was $17,900, compared to $23,400 in 2022. Operating expenses were roughly the same, at $5,700 compared to $5,600 last year. The income statement shows higher interest expenses and financing costs due to slightly more debt, reflecting the current rate environment, totaling $23.8 million compared to $11.2 million for the same 6-month period last year. Overall, diluted earnings per share for the 6 months were $0.30, down from $0.73 the previous year. For the 3-month period, diluted earnings per common share were $0.09, compared to $0.42 in the same quarter of 2022. Regarding our balance sheet, Semiramis mentioned $197 million in cash and cash equivalents, along with restricted cash and time deposits. This must be considered alongside long-term finance liabilities of $671.9 million. Previously, our December 31 figures showed $143.9 million in cash and equivalents compared to $663.4 million in long-term debt and finance liabilities. It's important to note the net debt position of our company compared to last year. We have no maturities until the end of 2025, with the only maturity being the senior unsecured bond due in 2026, which we plan to handle earlier. We have reduced the amount from $125 million to $119.1 million through bond repurchases. Our debt appears manageable for the coming years, with a projected total of just under $350 million by 2026 and around $500 million in 2024. Our free cash flow breakeven this quarter is roughly $15,600. For 2023, our average daily time charter rate for fixed revenues is above this at $16,800 for 80% of fixed days, and for 2024, it's $16,700 for 31% of fixed days. Our charter-in strategy shows that we are staggering the openings of charters for each vessel, with an average contract duration of 1.3 years, securing $87.5 million for the remainder of 2023. Even with the current low FFA curve for 2023, we anticipate remaining positive on a cash flow basis if we fix vessels according to this curve for the rest of the year. Now, I will hand the call to Stasi for a discussion on the market outlook.

Anastasios Margaronis, Director and President

Thank you, Ioannis. Thanks, and welcome to all the participants of this conference call on Diana's second quarter financial performance and the latest on the industry outlook. Without a doubt, the dry bulk carrier market clocked in the poor performance this year-to-date of all major shipping sectors. We will look at the possible reasons for this and present the outlook given by the most respected shipping analysts. To illustrate the statement about dry bulk earnings in 2023, we only need to look at the Baltic Indices since the beginning of this year. The Baltic Dry Index started the year at 1,250 and closed yesterday, July 31, at 1,127. The Baltic Cape Index moved from 1,653 on January 3 to 1,873 yesterday. The Baltic Panamax Index went from 1,438 to 996 over the same period, while the Baltic Supramax Index stood at 968 on January 3 and closed yesterday at 719. So what about the freight market conditions prevailing? Now, according to Clarksons, demand improvements this year have been led by slightly firmer trends in China. But these were accompanied by weaker trends in key other regions, which have marginally prevailed thus far. At the same time, lower levels of port congestion have added to active tonnage supply. For this year, we will most likely witness more moderate bulker markets overall, compared to the strong conditions experienced in 2021 and the first half of 2022. However, Clarksons foresee some improvements in earnings materializing in the coming quarters. The reasons will be analyzed later in the short presentation on the state of the market. So the earnings trend now. According to figures published by Clarksons and other analysts, average voyage earnings for Capes and Panamaxes have been coming steadily down over the last several weeks. 12-month time charter rates have also dropped across the board by about 10% for Capes and 20% for Panamaxes and Supramaxes compared to the 2023 average. The 11- to 13-month time charter rate stands at around $14,250 per day for Capes, USD 12,750 for Kamsarmaxes, a bit less for Panamaxes and around $11,900 per day for Ultramax. Turning to the macroeconomic development now. According to the IMF, China is expected to grow by 5.2% this year and by 4.5% in 2024. For the U.S., growth predictions stand at around 1.8% this year and 1.1% next year. For the Eurozone, about 0.9% for this year and 1.5% for 2024. As regards to China, Commodore Research reports that their research indicates that finally, consumer spending recovery is indeed underway. They expect industrial recovery to resume during the third quarter but acknowledge that the housing market remains a problem. Even though China's housing supply has continued to decline, current vacant flow space marked the largest amount available since 2016. This is bound to act as a drag to any recovery scenarios in China. On a more positive note, the IMF last week raised its forecast for global GDP growth by 0.2 percentage points from 2.8% in April to 3%. This was despite the slowing momentum from China witnessed this year to date. The 2024 growth forecast was kept at 3%. Let's have a quick look at the environmental issues affecting shipping now. According to Hartland Shipping Services, the recent 80th Marine Environment Protection Committee meeting came up with a new timeline for decarbonization. It was agreed to reach net zero by or around 2050, taking into account different national circumstances. So the question in everybody's mind is, how does shipping reach such targets? What policies need to be implemented to enable this to happen? The IMO has pledged to review an emissions pricing scheme, a carbon tax scheme, and the fuel standard, but there is no guarantee that these will be implemented soon. We have yet to see an IMO policy in play that actively encourages decarbonization. The CII and energy efficiency exist in ship index schemes, are just a steppingstone and in themselves do not serve the purpose of reaching the stated goals. In theory at least, carbon taxes promote fewer emissions and allow the market to find the best way there. However, the level at which tariffs would need to be set to equalize the cost of low carbon fuel is unrealistically high. The higher end of proposed levies of about $100 per tonne of CO2 is broadly in line with current EU emission trading scheme prices. This would not make e-fuels or biofuels anywhere near profitable against fuel oil, except if shippers accept to pay for green freight. To state an example, the above-mentioned levy of $100 per tonne of CO2 at about $320 per tonne of CO2 to the cost of marine fuel oil. Even optimistic estimates put the cost of e-methanol and e-ammonia at a minimum of $800 per tonne. Their energy densities are about 50% lower than fuel oil. So where very low-sulphur fuel oil, including the carbon tax would come to around $900 per tonne. It could still be at least $800 cheaper than e-fuels priced at $800 per tonne. To equalize costs, the carbon tax should go to about per tonne of CO2 that would be required to incentivize adoption. It is therefore clear from the above that shipping is one of the trickiest industries to decarbonize. Even though the IMO needs to do more, governments and power grids need to remove the obstacles to decarbonization by helping to bring down the cost of e-fuels mentioned above. As regards to alternative fuels, according to Clarksons, about 156 alternative fuel capable ships of all types were ordered from January to the end of May this year. This represents about 40% of the tonnage contracted during this period. There has been firm interest in methanol dual-fuel vessels, with 42 such ships contracted so far in 2023, which represents 34% of all alternative fuel ships ordered during this short period. Overall, 109 units or 11% of alternative fuel tonnage ordered to date are set to be methanol capable, while 48% of all ships on order have some kind of alternative fuel capability. So turning to Slide 21 and looking at iron ore. According to Clarksons, world shipments of iron ore are expected to grow 2% in 2023 and reach about 1.5 billion tonnes. Next year's volumes are expected to increase by a further 1% as steel demand potentially begins to rebound in key economies outside China. As regards to coking coal, again, Clarksons tells us, a global coking coal seaborne trade is projected to grow by 4% in 2023 and by a further 1% in 2024. According to Braemar, weather conditions have restricted exports of coal, both coking and steam coal from Australia and South Africa during the first half of this year. If weather improves, it is reasonable to assume that production and supply chain operations can improve between July this year and next January for Capes and Panamaxes. This would create more trading opportunities than at present. The only negative factor is the currently subdued steel sector demand in East Asia, particularly China. On steam coal, Clarksons reports global seaborne thermal coal trade is expected to grow by 5% this year to 1 billion tonnes and move higher by another 1% in 2024. For this year, Chinese imports are projected to increase by 23% in 2023 to 243 million tonnes amid increased energy demand from improved economic activity, weaker hydroelectric output, and restrictions to domestic production. However, landborne imports from Mongolia will need to be monitored closely for their impact on sea transportation volumes. On the grain trade, global seaborne grain trade is currently expected to grow by 4% year-on-year in the 2023 grain season, amidst ample seaborne supply notably from Brazil, Canada, Australia, and the U.S. as mentioned below. This will be met by firm demand across key importing regions. In response to the end of the Black Sea grain initiative by Russia, and the apparent targeting of portside grain stocks in Odessa by Russian missiles, the Chicago Board of Trade Grain futures made the biggest gain since the immediate aftermath of the invasion of Ukraine. Most grain prices have increased by an average of 15% as a result, according to Bloomberg. In the meantime, according to Braemar, five Eastern European states, among which Bulgaria, Poland, and Croatia are discussing Ukrainian grain transit through their territories rather than Ukrainian Black Sea ports. However, the question for consumers and shippers is where will the Ukraine equivalent grain cargoes come from. Most analysts believe these will come from Brazil, the U.S., and Canada. However, there are pricing and logistical problems to be dealt with. Nevertheless, as regards tonne-miles, any of these countries present an opportunity for shipping to absorb more tonnage on longer voyages from the Americas to China and Europe. On the minor bulk trade, according to Clarksons, minor bulk trades are now projected to increase by 2% in 2023 to about 2.1 billion tonnes supported by improved industrial trends in China and easing demand headwinds in other regions. The Russia-exposed trades, such as forest products and fertilizers are the most important unknown in this apparently benign supply/demand equation. Turning to demolition now. With weak market conditions, many owners have been considering scrapping older vessels. Overall, about 8% of all bulker tonnage is over 20 years old. The younger sector at Capes consists of only 2% of the fleet that falls in that age category, while 13% of Panamaxes are over 20 years old. In the Handymax segment, the percentage is 10%. So all in all, there is no doubt that there are plenty of scrapping candidates, which if market conditions dictate, would head for the breakers. Clarksons are forecasting a total of about 6 million deadweight of bulkers will be sold for demolition this year and about 12 million in 2024. So on Slide 22, we look at newbuildings. According to figures presented by Clarksons, the overall order book for bulkers stands at 73.2 million deadweight or 7.4% of the existing fleet. For Cape, the percentage stands at just 5.1%; for Panamaxes at 9.1%; and for Handymaxes at 8.5%. Cape and Panamax delivery is equally split between 2024 and 2025, while most Handymaxes will be delivered next year and very few from 2025 onwards. So let's look at the overall supply/demand outlook. According to Clarksons, headline supply/demand fundamentals in the bulker sector appear balanced for 2023 with about 3% projected tonne-mile demand growth versus 2.9% fleet growth. Slower speeds are moderating active supply in the sector. Compliance with emissions regulations would reduce available bulker supply by an estimated 2% to 2.5% per annum on average across 2023 to 2024 through lower speeds and retrofit time. Uncertainty remains over the scale and timing of potential market improvements for the rest of the year, and global economic weak spots need to be closely monitored. China's major coal port stockpile keeps falling according to Commodore Research, and so too did the nation's iron ore stockpile. Additionally, bullish was the most recent data showing that China's steel output most recently grew year-on-year by 7%. So according to Commodore Research, China continues to fare better than narratives continue to suggest. On the other hand, Commodore Research believes that much of the rest of the world is performing worse than narratives suggest. The firm believes that dry bulk rates should rise in the near term, taking into consideration near-term supply and forecasted demand. However, weakness outside China should be monitored closely in case things deteriorate going forward. Looking ahead, Clarksons also forecasts some further improvements to the bulker market from the back of more positive supply-demand fundamentals. Dry bulk tonnage demand is initially projected to grow by about 2.5% in 2024, while total fleet capacity growth is expected to come in at less than 2% given slower deliveries and potentially increased demolitions for reasons stated above. This environment is not causing senior management to waver in any way from our repeatedly stated business strategy, including the buy, sell, and charter-in of the company's fleet. Balance sheet strength has always been one of our top priorities and has been firmly supported by our CEO, our senior executives, and the Board of Directors. So going forward, we believe we are prepared for any contingency, good or bad, and that things might look mildly positive going forward will not affect this strategy. I will now pass the call to our CEO, Semiramis Paliou, for the closing remarks.

Semiramis Paliou, CEO

Thank you, Stasi. And before we open up the call to questions and answers, I would like to summarize the key points from today's presentation. Our ongoing focus remains on generating and securing positive free cash flows. Starting from November 2021, we have consistently distributed substantial cash and in-kind dividends. Additionally, we have communicated our clear intention to declare a quarterly dividend of $0.15 per share for the upcoming quarter. Secondly, our company maintains its strong balance sheet through active capital structure management, which enables us to act opportunistically in renewing and modernizing our fleet and taking advantage of enticing sustainable shipping projects. Thirdly, we remain committed to our strategy of providing stability in a cyclical business while maximizing long-term shareholder value. Thank you all for joining us today, and we look forward to addressing your questions during the Q&A session.

Operator, Operator

Our first questions come from the line of Omar Nokta with Jefferies.

Omar Nokta, Analyst

I just wanted to check on how you're doing things strategically. You just gave us a pretty solid update on your views. But I just wanted to kind of get a better sense; you've reaffirmed the $0.15 dividend for next quarter. In the past, Diana has, during times of market weakness, held back on dividends and maybe looked at acquiring tonnage on the cheap. We're in somewhat of a soft period right now. How do you think about capital allocation today versus back then? And are dividends a key part of the story for Diana at this point?

Ioannis Zafirakis, CFO and Chief Strategy Officer

Omar, this is Ioannis. The reality is that we made acquisitions after being at a low point in the cycle for some time. It's important to remember that the market was at a low for 2 to 3 years before we began to buy vessels or repurchase our stock in a gradual manner, which took around 3 years. Therefore, I don't believe we are currently in a position where we see attractive opportunities to acquire more vessels. Regarding cash allocation, you can see our available cash, and we are comfortable paying another $0.15 as a dividend. We continue to follow the same charter-in strategy. We are unable to determine if the market will stabilize or decline significantly. Additionally, we need to differentiate between the spot market and the time charter market. The current levels are not the lowest we could see, nor are they particularly low to suggest we are at the bottom of the cycle. We are somewhere in the middle concerning time charter rates, and the spot market is certainly not performing well. In summary, we do not see this as an investment period for us. On the other hand, we are prepared to be defensive, but we still have the capacity to pay another dividend.

Omar Nokta, Analyst

Okay. That's pretty clear. It seems that regarding acquisitions, nothing currently appears to be compelling. Is that simply...

Ioannis Zafirakis, CFO and Chief Strategy Officer

I apologize, Omar. Currently, we don't see any particularly attractive investments. However, there are changes occurring in vessel fuel consumption, fuel burning, and the types of fuel we will be using. We need to monitor these changes closely. If we take action in that area, it will be in response to the challenges and changes that are emerging. But right now, we don't identify a clear investment opportunity that makes sense. I apologize for the interruption.

Omar Nokta, Analyst

No, no, that was helpful. I just wanted to dig a little deeper and understand if this is primarily due to the current softness in the market, with spot rates being low, or if it’s because asset values are too high compared to where you think they should be. I realize this is somewhat circular, but could you clarify why you...

Ioannis Zafirakis, CFO and Chief Strategy Officer

No, no. The prices of the vessels have not gone as usually, there is a time lag where we have not gone to the levels where the rates are today. The big question is whether they're going to stay at this level for a while or whether they're going to keep going even further down or they will change the caution that will go higher. What I'm saying is that you should not be acting very quickly when you see market movements and especially on the charters. And of course, you know better after so many years, but the values of the vessels, they do not follow immediately. There is a time lag between where the market is and where the vessel values are, and also, they are correlated to the sentiment. And I have to remind everyone that when the market has dropped from high levels, there is usually the expectation that this is going to be temporary, and people think that there is plenty of wishful thinking in the way they see the market. This is why the values are kept higher than what the charter rates dictate. So at this time, I don't think that anyone is in a position to foresee or guess what is going to happen after 3 months. And you know that we are one of these companies that we definitely don't do that. We keep our course regardless of how the market is going to evolve.

Omar Nokta, Analyst

Indeed, you have adhered to your long-term allocation policy, and the deployment of the fleet will continue as planned.

Operator, Operator

I'm showing no further questions in the queue. I'd like to hand the call back over to management for any closing remarks.

Semiramis Paliou, CEO

Thank you all for joining us today. We look forward to speaking to you again at our next earnings call. Thank you very much.

Operator, Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.