Q2 2020 Diamond S Shipping Inc Earnings Call
The conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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I'd like to turn the conference over to your Speaker today, Craig Stevens Chief Executive Officer. Please go ahead.
Good morning, and welcome to Domino's second quarter 2020 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 described.
We're making statements about the future events that may or may not happen in the matter, which we described.
Lease rate page two it's in entirety far disclaimer about forward looking statements.
Please turn to slide four for a review of our operating performance.
In the second quarter of 2020.
Spot crude fully earned approximately $44215 a day.
Well our spot product fully earned approximately 19000 hours a day, which includes our MSR takers, earning $19425 a day.
All in T C.
Which includes spot and time charters was $40600 a day and $18000 a day in our crude fleet and our product fleet respectively.
A dominant we look at operating earnings our fleet, which we calculated Tc less opex less gionee.
We think it's important to highlight given the various ways. These expenses gets classified in our industry.
The fruitfully generated $32500 a day you have operating earnings while the product fleet, which includes our handysize vessels generated about $10600 today.
Reported net income was $45.7 million or or basically P.S. of $1.15 cents per share.
EBITDA was approximately $84 million and we repaid about $40 million in our revolving loans on the lower half of the slide you can see spot earnings volatility during the year as well as spot rates for 2019, and the 10 year range. So far in the third quarter, we booked approximately.
59% of the spot revenue days at an average rate of $25700 a day in the crude slate and approximately 55% as the revenue days and our product slate at approximately $11000 today.
The DSS fleet is approximately 20% booked on time charters. The details of those time charters can be found in our appendix.
On slide five the global pandemic has led to significant crude oil demand destruction.
The chart on the left shows Opex latest estimate of a 10% decline from 2019 to 2020.
The market environment remains highly uncertain and actually will decline maybe.
Higher than that.
The storage play, which we talked about in the last quarter was short lived.
And anticipated refinery capacity is still at 70% utilization global inventories, which are estimated to be at an elevated 80 days.
Forward demand is an additional headwinds.
In the short term, we expect to see some seasonal impacts to demand.
We continue to see restraint on the tanker supply side as the graph on the right hand side of page five shows an order book at 20 year lows with little supply growth across all tanker types.
This is a bullish long term signal.
With low order book combined with individual demand growth is positive, particularly since demand will likely be driven from the far east while the production growth is largely in the west.
Also we believe to the extent to pandemic.
Continues to linger into 2021 owners of older tonnage will have tough decisions to make.
Whether to put the vessels through another shipyard.
Which brings us to the next slide slide six where we present a chart that shows 77% of the Suezmax and MRF fleet is older than 20 years of age. These percentages will increase at the start of the new year.
There has not been a good deal of ordering this year and we believe the supply growth will remain low not only due to the increasing age of the fleets and scrapping.
But also the uncertainty the regulatory environments and technology on Newbuilding tonnage.
Tanker demand growth shown at the bottom of Paychex has been modified.
Downward, but is forecast to rebound in 2021 wells in crude and product tankers.
Well the demand for the crude oil in the refined petroleum products is not expected to rebound to 2019 levels. In 2021, we expect to see incremental benefit from longer haul voyages, both in crude and products.
On slide seven we show in the graph asset values relative to the 10 year average both for Suezmaxes and EMR fleet. We believe there is continued disparity in value of older tonnage, particularly on the crude side.
Which provides for upside potential for dominance and our shareholders.
We expect a large fleet of middle aged vessels can generate much better cash flows and smaller younger fleet, especially when considering the amount of capital employed to purchase assets at today prices.
This is certainly amplified by the lower bunker prices today.
I'll turn it over to Kevin our CFO to go through the financials.
Thanks, Craig.
With 45.7 million a net income dollar 15 earnings per share second quarter 2020 was the third consecutive quarter record earnings for Diamond Us.
Well, if their crude and product leads generated substantial cash flows in the quarter, producing 40 45 million EBITDA respectively.
The doubled their results from the comparable period in 2019.
On the TCT basis for the second quarter the spot crude fleet earned $44000 per day spot product fleet produced approximately $19000 per day time charters booked in prior periods at lower rates brought the quarterly Tc E down in both please.
As we discussed on last quarter's call. Our Currentc. He was negatively impacted by six stranded voyages, whereas our suezmax vessels were used to facto floating storage.
Our commercial team estimates estimates this may cost us as much as $15 million <unk> revenue and over $10000 in PCB period.
We understand this problem was faced by many owners, but with 55% of our spot fleet hung up on these wages. We believe we were disproportionately impacted.
For the third quarter 2020, we had 59% of spot crude days booked at 25700 per day, 55% its product spot days booked at 11000 a day.
Overall third quarter product bookings have been weighed down by the Handysize vessels, which are averaging just over $8000 a day and by our positioning voyages as our vessel for Weber and had been oriented product.
Given the rate outlook for the remainder of the quarter, we do expect to be below cash breakeven levels for the third quarter.
Cash flow generation, the second quarter, though was strong.
We use the earnings generated by the fleet to reduce our outstanding debt, including paying down our revolving credit lines by $40 million. These amounts can be redrawn for liquidity purposes or to take advantage of market opportunities.
Turning to the next slide and getting into the balance sheet. The story for the quarter continued to be de leveraging.
Scheduled amortization and the revolver Paydowns total debt is now 768 million, which fits net leverage on the fleet at approximately 41% based on broker values as of June Thirtyth 2020.
Working capital employed in the business declined slightly in the quarter, primarily as a result in lower bunker prices liquidity situation at quarter end was strong with approximately 128 million free liquidity available company after restricted cash in fact required minimum belt.
Our debt financing is entirely low cost senior secured ship loans from a syndicate of major international shipping banks during the quarter, we entered into interest rate swaps that semi fixed approximately 25% of our future floating LIBOR exposure, just above 50 basis points locking in a cost of debt.
On this amount just over 3%.
Moving onto the next slide in a refresh on Capex. We are reiterating the same guidance that we've previously provided regarding the cost of Capex events I will note that recent projects that come in at the high end of the ranges provided given the difficulties associated with the global.
Three dry docks were completed in the second quarter and we expect to more in the second half the year. In addition, we completed one scrubber installation in the quarter.
And have subsequently completed another high in the beginning in the third quarter.
The longer term Capex outlook has shifted as we believe that five ships initially planned for Drydocking Dwts installation in 20 to 2022 will now entered the shipyard in 2020 so.
Additionally, we now expect the final Suezmax rubber installation associated shipyard work to commence in 2020 were at 2021, rather than the fourth quarter 2020 of originally planned.
Moving onto the next slide given the global uncertainty I will again refresh our guidance on certain key cost items.
Daily Opex is expected to increase on both fleets from the second half the year, we accelerate for changes where possible.
Opportunistically stock in store, our vessels depreciation and amortization remained the same as previous figures.
On DNA, we expect Threeq and Fourq you have 2020 to finish in the seven a half a million dollar total DNA range as we have one time costs related to overhead reductions in conjunction with the movement of ships into the pool.
We will however, see the benefit of these moves in 2021, and our quarterly DNA should decline to an average below $7 million per quarter.
All prior guidance has also changed for the fourth quarter as many as I mentioned on the last slide final Scrubber shipyard <unk> has been pushed into next year.
I will now turn the call Dr. Craig for a summary.
Yes, Thanks, Kevin before we open it up to Q and a we'd like to briefly summarize our priorities to this unprecedented market environment to give a sense how dominance is positioned and our management philosophy.
First commercial scale is critical while we're happy with the size of our fleet in June we announced this strategic partnership with Norton, whereby 28 of our MSR to product tankers would leave commercially managed by the Norian product pool.
Including ships own bond oriented and others. The pool managers around 150 tankers and is one of the largest DMR tanker operators in the world.
We believe this significantly enhances our commercial side without forcing consolidation of assets.
We are certainly in the position to grow our fleet.
We'll only do so under certain circumstances.
We of course focus to maintaining our low cash breakeven levels, which are highly competitive in both crude and product fleets, maintaining a lean profile strong operating leverage in good markets and equal in pardon acts as a buffer and the weak markets.
And this brings us to our balance sheet as we stated earlier, we repaid $40 million.
Outstanding under our revolving loans in the second quarter. The net effect is to reduce our running expense while simultaneously increasing our liquidity.
Heading into what we expect will be a soft patch in the market due to the impact of covered 19, we have total liquidity of $185 million. We also have very limited capex requirements for the balance of this year.
While we expect some challenges ahead as the tanker market is impacted by the global pandemic. We believe domino's is well positioned with strong liquidity modest leverage industry, leading breakeven levels to support the downturn and prepare for when the markets return.
With natural limitations on fleet supply and the need for tankers due to regional imbalances of oil we expect the tanker market to return to fundamental supply demand. Once we work off occurred excess inventory build dominant remains exposed to the volatility in the spot market and we will utilize disciplined capital allocation.
In order to maximize.
Returned to shareholders, while maintaining a healthy balance sheet.
With that I'd like to open up the call two questions.
Operator.
Thank you I'll just start if you like to ask the question Press Star one on your telephone to withdraw your question pressed upon key please wait I'll be compiled the questions.
And your first question comes the line, it's Ben Nolan with Stifel. Please go ahead.
Great.
Thanks.
Gentlemen, so my first question relates to the the the shift of the 20 them ours and to the Orient cool.
Really a couple of questions around that number one is appreciating that some of your vessels are commercially managed by capital, but Im curious why.
28, I mean is that all that you were able to do or were there some limitations on age or or something else well I'll stop there I guess my answer though.
Oh.
Yeah, Theres, a it's not an age issue. It's it's the original transaction that we did with capital that capital.
Managers have shipped so we did we did as many of ours as we could 28.
I think one other amar that's all the time charter.
We could we could put it in the pool and when it comes off.
Once it comes up.
I see so we need when you're thinking about making that decision.
I assume you sort of compared their historical performance versus your historical performance and I'm curious if you can you maybe quantify or at least gifts and sort of anecdotal.
Yes.
Rationale or spread in terms of sort of how that that pool as don relative to sort of how you were performing or perhaps maybe we think about you know where where those may hopefully perform in the future relative to how they've done in the past.
Yeah, it's interesting so we.
We have a what I would say extensive process that we reviewed all the top performers.
That that actually have pools that you can you can access.
And so as a very thorough analysis.
Little bit more complicated than you think because they'll they'll sort of function little differently.
But I can say to you that.
In in tough years, the the outperformance actually tightened a little bit but in when markets are really strong. It's it's even more dramatic enhanced performance and so in a in a tough year, it's more like.
We felt that gives a thousand dollars a day, but it can be.
Well over double that.
In in strong markets and so it was incredibly compelling I mean, if you think about it.
Add year, so you get $28000 a day more.
And soon to be $29000 day more in a bad year, but in a good year you could you could double that per day and so it's.
Alone with the DNA savings you know, it's an enormous.
But to the company and.
And so we're very happy with that we believe in every aspect of our business that scale is super important.
Yes, better knowledge on upon which to make decisions and over time, you will just outperform what you would otherwise do.
Okay, and that's that's very helpful quick and.
Wow.
Just to sort of cap out the the pool thing.
The the rates, thus far but on the in March and particular in the third quarter, a little bit lower than I would have thought and I think Kevin maybe you had said that there was a little bit of an impact from switching them and they said.
Is it possible maybe quantify that at all.
Yeah, I mean, I think of the 28 ships I think we've delivered today 25, and so we've got a few more that are going to be delivering two noria. There is a handover that has to occur.
And so I think thats, what you're alluding to but right, but I think we can also probably tell you that.
Our ships that have delivered into the pool and note that they have all delivered post the extremely strong earnings environments. So these are all voyages that have been booked in the.
Inventory drawdown cycle, we're in now those are averaging.
Somewhere in the 12 so okay.
Yes.
All right that's sort of in the last for me.
Greg had mentioned are kept on one of the two you had mentioned that you guys felt like you were.
Robert Blake.
More negatively impacted than most from some of the demurrage stretching had been going on.
We've heard a little bit that there's been perhaps a little recapture that that maybe the market isn't really weekend you still have ships that are still have been unable to or not discharged and so the demurred grades have been in excess of where the current spot market curious if that is you anything you've been able to back.
Good problem or how is not material enough the matter.
Yes.
We have Mike poverty, who heads up the commercial side of the business, Let me let him have as David.
Yeah, Hi, Ben.
The voyages that we're talking about the six voyages that were impacted were were fixed on demurrage rates that in.
Absolute terms were quite good.
And at or maybe above what the quarter was booked at but when you had that tremendous spike in suezmaxes and all of the crude.
Avoid just went to the Tcs went to $100000 a day we missed.
We missed earning a those high paying voyages because we were stuck on demurrage and now that the market has completely turned and we're at a much lower rate call. It 15 $20000. They for Suezmaxes. Those voyages have finished unfortunately, so we kind of got a double whammy with that we'd be.
We're stuck on these lower paying voyages missing the spike and then while the 40, while you you wouldn't mind being on $40000 that they demurrage right now those those voyages have a unwound. So we would just.
Very unfortunate timing.
And it happened to Mike.
Yes, I think you.
You need to agree that inordinately long demurrage and that is very unusual links of demurrage forget about the rate.
Yes, yeah, it and do you. It's a good point Craig. It's it's it was more that the ships were being used to.
For unintended purposes, when we entered those voyages you know for extremely long periods of time.
Added to my retreat basically used for storage without using that word.
Gotcha, Alright, well, that's very helpful. I'll turn it over to get here for me my and thanks guys.
Thanks, Ben Thanks.
Can you and your next question comes on line of AMR Nox time from Clarkson Platou. Please go ahead.
Hi, Thank you.
Just on.
Maybe following up a little bit on the discussion.
But on a separate side of it with a with the pool, you're integrating the products into into Norealis here. This quarter. How do you think about the Suezmax fleet and how you commercially manage that you do have critical mass you've been able to achieve pretty strong rates over over the over time.
How do you feel about that business segment, and the thoughts of establishing a larger pool for those ships.
Yes, I mean, you think like we did and.
The virtues of scale.
Just give you.
On an advantage each and every day and into things that you can be sort of an island outside of that and consistently perform.
Against people to have a lot more market share than you do it's just tough and so I would I would tell you that theres a limited amount of resource that we have within within dominate the most important thing we did.
As to conduct a.
[noise] analysis of who the best person to go with on the product side, but quite frankly, I mean, the suezmax side is the next.
Next issue that you you look very very closely and are there opportunities to to consolidate a in a pooling way rather than in the balance sheet way.
Okay. Thanks, Greg so potentially more more to come on not frontier in the medium term potentially.
Yes, I would thanks.
Okay Cool and then maybe just separate topic.
The obviously, you've got the very strong liquidity mentioned at 185 million.
How do we feel about the share buyback and the broader context of near term weakness and some uncertainty over say the next few quarters before we head into 21 22 with the lower order book.
Yes, I mean, that's a tough call.
I think that I think the nervousness is about.
About the near term Casper and once we get through that near term cash burn in and you know as Kevin indicated earlier you know we have reduced capex is something that we will absolutely.
Give a lot of consideration to.
Yeah, we continue to think that the share buyback is the highest and best uses.
Capital, assuming we are comfortable with the liquidity situation and really we've been pretty consistent about this since the beginning of the pandemic. It's just the uncertainty as to when and if things returned to pre pandemic levels, particularly on the demand side and what that means for tankers in the intermediate term long term as Craig said were.
Really bullish just how long does it take to get there and I I don't think anybody really knows if somebody is espousing a very strong opinion on when it happens there most definitely probably not tell you the true so that uncertainty that it has made a.
I'd be cautious and we will continue to be cautious at least in the near term.
Right.
Yes that makes sense makes sense to be prudent and prepare for you know prepare for weaker periods.
Cool I'll leave it there thanks guys.
Thanks, Thank you.
And your next question comes in a line of Liam Burke with B. Riley. Please go ahead.
Yes, good morning, Craig.
Good morning, Kevin.
Yes.
Greg you you've been balancing the the fleet in terms of pooling and just discuss Suezmax plan, but looking at the fleet would you be more biased towards where in the cash flow situation kind of situation stabilizes, the adding vessels or the divesting them you know as you look at your cap in the context.
To your capital allocation strategy.
Yeah.
You know I would say to you know are in the summertime in a normal year summertime isn't at the time that you think about selling chips.
And certainly not in the code 19 summertime.
The.
Most attractive thing you can do with your capital today is is probably to sell a ship and buy back shares with the net proceeds.
From that sale.
And and so.
[music].
The stocks are trading dramatically lower I mean.
And then you're at Avi calculation would indicate the value of a ship is and so.
It's under 50% and so it is.
You know, it's an incredible opportunity.
Yeah, we're much more likely to be sellers of some of the assets that we mentioned in the past, we're looking at particularly the older assets that we own.
Rather than buyers as Craig said doesn't make a whole lot of sense to us right in to turn dollars into 50 cents by buying assets within Ts aside.
I mean that there thanks.
The newbuilding buying it is a ship on the water for instance.
Would be far less valuable than buying back your shares at these levels right and.
And so.
Let let people speculate on what you're in a V is but if you if you thought about selling a ship at that in a VP level.
Yeah.
It's an enormous ins incentive to buy back your shares.
Sure.
Kevin you've gotten some nice interest rates on the on the swaps you see any other opportunity to further tick down interest rates.
Yeah, you know we're.
We're always looking at it and.
We will continue to be opportunistic on that front.
I think you know there might be an appetite to fix more of the forward exposure.
Again, it's just where do you see the intermediate term outlook for the global and us economy.
Is there a moment in time when it might be even more favorable to to lock in rates or you know.
To be better to move now we're certainly looking at it and and would would consider we'd certainly consider swapping or fixing more of the forward exposure.
Great.
Thank you, Craig Craig and Kevin.
Okay excellent.
Your next question comes online I'd say mid Smyre into value investors. Please go ahead.
Hi, Good morning, Craig Good morning, Kevin Thanks for taking my questions.
Okay, Yes.
I saw they pretty good discussion so far about both the swaps for library straight and also for the repurchases to debate on that looking a little bit out. The swaps you did 25% I know you just kind of alluded to more opportunities was there a specific reason for restructuring it 25% was that something.
Sort of like Traunch internally, there or is it just you're you're taking one step and then going to reassess going forward.
Yes, that's exactly right it was an opportunistic.
Move where we like the levels available at the time.
Yes, I think we'd be comfortable with fixing more of that forward exposure, but didn't really see the need to jump at it.
I think the swap rates available to us remain in that same sort of level that we did back in April.
Little bit higher maybe then you would think just by looking at the curves because we also have to buy in the zero percent LIBOR floor and our loans. So.
We continue to monitor that and and certainly a might make an I'd take another chunk in the future.
Yes, definitely makes sense you did a little bit of debt prepayment this past quarter, but now you don't really have any near term maturities left there. It looks like most of it is really the 2024 chunks is there any plans to do anymore, I guess debt prepayments or anything like that or you just going to ride out the rest of those terminal counterparts.
So there's a small loan on the joint venture that's due in August 2020 on.
It's just because of the uncertainty and I think back environment, It's a little premature to get started on that.
The.
Majority of our revolver as you know, we would with excess parent debt payments beyond the scheduled quarterly repayments. If there were additional capital we would pay down those revolving loans. So that we can re borrow it in the future.
To move on opportunistic market opportunities or for liquidity purposes, if we need it.
Okay speaking of liquidity you mentioned to just a few minutes ago. You mentioned that you can buy your shares back you know it you said 50 cents on a dollar as an example, the NAV of course depends on exactly what broker quotes you use but it's very close to $20 a share generally your shares or in the.
That's right so thats almost 40 cents on the dollar at what point.
What point like how much liquidity, you need or what sort of target debt to assets ratio. What are those sort of triggers. So that you can start to correct that gap because I mean I gap is enormous I mean, if you could buy ships at 40%.
If you could buy shifted that valuation everybody would rushing into it so at what point do we start to correct that stock valuation.
Yes, I mean, it's really or.
Your view of the near term future and potential cash burn in that near to term future and.
Yeah.
And I think I think Covidien 19 makes it super difficult to sort of anticipate that.
That return to normalcy right.
A year ago, we basically had oil consumption.
102 million barrels a day in and the most optimistic I think is a 10% decline for that and so that that's a really big decline right.
Jay I think we'll know a lot more in the fourth quarter this year.
Look clearly look at some of the numbers that the analysts on this phone that are putting out for us for the third quarter, It's no secret and like I said in my remarks that we will be.
Burning cash in the third quarter.
Whether the fourth quarter comes in with a seasonal and normal winter market and the tanker.
History returns to making or at least comes out of the cash burn mode. I think makes us a lot more aggressive with potential uses of capital than we are now.
Definitely understandable cross our fingers and hope to market starts to normalize a little bit more I. It is good to hear that you're clearly looking at the NAV and that you understand that it makes a lot more sense. If you were to allocate new capital. It makes a lot more sense to buy shares by then to grow the fleet I think a lot of analyst and other companies don't quite understand that thanks for your time.
Yes.
Absolutely.
We can't.
Emphasize that.
Thanks, Jeff.
Again, if you like to ask the question Press Star one on your telephone. Your next question comes on line of Randy given with Jefferies. Please go ahead.
Hi, gentlemen has gone.
Good.
Hi, just the I guess first on an operational question. You know you operate MBR crude on the product tanker markets no kind of changes like this.
In terms of routes or valuations during this time inventory de stocking.
Hey, Mike what that's a good one for.
Yes, sure the Mone Randy.
Yes, one of the negative impacts with the Destocking is is obviously product is or isn't areas where.
You can you can use it locally and show you a ton mile demand has fallen off.
In both the crude and the products you're seeing the long hole crudes from the east from the U.S. Gulf going East have have basically stopped yeah. China is supplied basically mainly from the AG now.
On deals are the only positive story there is that there there's a lot of backlog, so you're getting delays, but but the the long hole crude from the west whether it was west Africa or the U.S. Gulf is basically stopped so.
We're gonna have to get through this unwinding period, its going to be painful it's happening you're starting to see drawdown.
But but we still have some work to do before you can get back to the normalized market and the same is true for the Queen.
It's a much more complicated route structure, but but basically the same is true for the clean. It is for the group could you just don't have the ton mile demand right now.
Sure.
Okay, and then looking that's a scrubber.
Many days of all higher with that last one done out mm goal would be 2020 ones Herbert is there.
This opportunity to perpetuate defer that if you weren't are you committed to doing that with the dry docking or how should we look at that one.
Hi, This is Sunday at I mean.
So we had wants probably installed during the previous quarter and that's what 48 days.
We also have completed once cover inflation in Q3 that took 51 days.
In terms of these covers that we're planning to installed in the future, yes, we would ideally like to combine them, but especially survey.
So hopefully we paid for.
The spread to open up and in but so yes, we will be deflating discovered to Q1 Q.
Where do you pretty well.
Okay [noise].
And then it's one last question on kind of repurchase moves and whatnot and are focused on balance sheet for per mile them.
Target cash balance or net debt to cap desired performing or so.
Or is that.
Every quarter kind of thing with the markets like what some of them like.
Yeah, we kind of look at it not on a fixed ratio basis, but on a.
Liquidity runway basis, and so what we do take a look at our total cash and our amounts available on revolvers and.
Sort of back calculate how many quarters of liquidity we have.
In various rates scenarios I think we'd like to keep on hand, you know.
At least four to six quarters of.
Liquidity available for an unforeseen pro lown prolong downturn now exactly how much you need depends exactly on what you think a downturn looks like but for the third quarter. You know I think Randy if I if I remember your model you have us burning.
Look at 20 million of cash or something in the third quarter. So.
That's that's more how we analyze whether we have excess capital and what to do it.
Got it okay.
That's it for me thanks.
And there no further question at this time I will turn to call back over to their presenters for closing remarks.
Okay, well, thanks very much for your your time today, it's a it's certainly unusual times that we're in and you know were conservatively managing the company today looking for opportunities. So thanks, so much thanks, everyone.
This concludes this concludes todays conference call you may now disconnect.
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