d'Amico International Shipping S.A. (DIS) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the d'Amico Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Paolo d'Amico, CEO of the company. Please go ahead, sir.

Thank you. Welcome to everybody. Hello. Today for us is our sort of surreal conversation because we are all spread out. Our CFO is in Monaco; and myself, I am in the middle in Italy in -- as you can imagine, closed up in a room. But anyhow, we are here to do our job, and we are going to do it the best way we can. So let's go to the executive summary first. As you remember, in 2019, we had a share capital increase. The subscription have been basically subscribed by 97.3% of the right. And the remaining part is being private placed. So we basically had a capital increase amounting at EUR 44 million. Now net results. DIS posted a loss of $27.5 million in full year '19 and this is versus $55.1 million in full year '18. On Q4 '19, DIS made a profit of $4.9 million and -- versus a loss of $13.9 million in Q4 '18. Here again, if we exclude the nonrecurring items from both years and the effects of the IFRS 16 from '19, DIS' net result would amount to USD 7.7 million for the full year loss, for the full year '19 compared with USD 57.4 million full year '18. And the result of Q4 '19 would have been $7.4 million profit versus $13 million loss in Q4 '18. So the trend is very evident. The Q4 '19 represents the first profitable quarter since Q1 of 2017. Vessel disposal and sale and leaseback, DIS raised around $41.2 million in liquidity through such transactions in full year '19. We also had amendments to our financial covenants on all bank loans because the application of the IFRS 16 from January 1, 2019, had a negative effect of 4.3% on our net worth-to-total asset ratio. So we had a reduction of the minimum ratio to 25% from 35% as it used to be before on our covenants. Time charter equivalent, DIS daily spot rate was in full year '19, $13,600, a little bit more than that, against $10,798 achieved in full year '18. In Q4 '19, the time charter equivalent has been $17,242 against $11,617 in Q4 '18. DIS achieved a total daily average rate of USD 14,239 in full year '19 versus USD 12,184 in full year '18. Now market outlook and time charter coverage. 54.9% of our available vessel days in 2020 are covered at the daily rate of $6,200 (sic) [ $16,200 ], which is a profitable level for our company. We are having other time charter renewals coming in due for the remaining of the year, and we will, of course, negotiate, and we see that every time that we are renewing as far up to now, we achieved always a better rate. Of course, what's going on today is a big question mark. I don't want to quote on this because is -- I think it's out of everybody's capability. Certainly, what we can say with the strong reduction of oil price should -- let's say, should induce traders and oil companies to rush and buy at least to store, not only crude, but also product. We also expect -- I mean it's been declared strong stimulus from various countries starting from China, but also from the United States. Saying that, the DIS fleet continues being extremely young. We took deliveries of last new buildings in September, and we will keep looking for opportunities to sell the older vessels and a way to deleverage the company. Saying that, I would like to leave over to -- the floor to Carlos where he can go more on the numbers. Thank you.

Yes, hello to -- good afternoon to everyone. Going on to Page 8. This is a slide that we present regularly. Our CapEx commitments, as we stated several times, we didn't -- we invested a lot to renew our fleet. We ordered and took delivery of 22 new buildings. We terminated our newbuilding program in October last year. And therefore from 2020, we are much lighter in terms of CapEx commitments, which are only linked to maintenance CapEx. And 2020 is actually quite a big year in terms of maintenance. It's just a coincidence linked to the deliveries, the date of deliveries of vessels. We own a lot of vessels. It's not a coincidence that 2015 was also -- was a big year in terms of CapEx. So -- but from 2021, this number falls further to around $4 million and the same applies to 2022. The CapEx numbers are a bit inflated relative to usual because it includes also the installation of the water ballast treatment systems. If we go on to the following page, once again, also here we have a big improvement relative to '19. In 2020, we are much lighter in terms of loan repayments. We fall from $52.5 million to $34.4 million, that's excluding balloons. So that is because there was a -- of 17.5 which entails reimbursements of $15 million per annum principal repayments that we fully reimbursed by the end of '19. So there was a facility that was on top of the traditional bank financing that we take when we buy our vessels. So that we terminated, reimbursing that facility, and we are therefore much lighter in terms of debt repayments from 2020 onwards, which means more cash that is being generated for our shareholders. On Page 10, we showed purchase options on the leased vessels. They are now all in the money. Last time we looked at this, there was one which was out of the money, but vessel prices moved -- continue moving up in the last quarter of the year. And that, however, does not imply we are going to be exercising soon these options because the LTVs, if we were to exercise, would still be quite high and not consistent with traditional bank debt financing, which can take you up to LTVs around 65%. Therefore, since these are also in terms of cost, quite competitive structures and quite flexible and the long-term money, usually banks tells us do not exceed 5 years. But a lot of these facilities when they were -- when they started, they had 10-year maturities. We -- and they're also very covenant light or most of them without any financial coverage. So we will keep them going until we can potentially refinance with bank debt without putting additional equity or if we intend to exercise the option to then sell the vessels, but that is not the case right now because these are part of younger vessels, Eco vessels that we want to keep for quite some time still. As Paolo mentioned and said, there are some other vessels that we plan to sell over the next few years into the stronger market that we are starting to experience. And -- going on to the following page, just a bit more detail on the fixtures that Paolo referred to. We continue to fixing vessels at increasing rates throughout '19. For example, the last fixture on an Eco MR1 was at $18,000 per day. Eco MR2 for 1 year. We fixed MR1, so that's the heavy sized vessel for 1 year, this year at $17,750 per day. So that's almost $20,000 per day for an MR2 equivalent. So that's also an Eco vessel. So that's a very strong rate. And therefore, this rate was not as aligned with the market when it was down. It is a reflection of also a relationship, a very strong relationship we have with the charter that wanted a specific platform at that point in time in that location. So -- but nonetheless, it does confirm the trend on the strengthening market also on period contracts. And going on to the following page, we give more detail on the average rates for our period contracts and the percentage of the available vessel days that are covered through such contracts and we show that in Q2, we have 61% covered. In Q1 2020, we had 67% covered. If we look at 2020 as a whole, our coverage is around 55%. So it does decline quite fast throughout 2020, and we are already 19% covered in 2021. The good thing also is that the average rate at which these contracts -- for these contracts rise throughout the year. So they rise from $15,900 in Q1, which is already significantly higher than the average rate of Q4 '19 to $16,700 in Q4 -- almost $16,800 in Q4 2020. So that should definitely help us going forward, especially if we also are supported by the spot markets. And in this respect, also the fact that we have an increasing proportion of our fleet, which is Eco, that is also going to be helping us going forward because these vessels do run on a premium, which today's lower oil price is slightly smaller, but we saw this premium not long ago arrive at around $2,000 per day. With today's oil price, maybe the premium of the Eco vessels, is probably around $1,000, $1,250 per day, but it's still significant. So going forward, on Page 13, we show the fleet evolution. The average number of vessels we control and how that changes over the next 3 years. Our fleet falls slightly as we [ deliver important TC ] vessels, but our exposure to the spot market actually rises, so does our sensitivity for every $1,000 per day change in TC equivalent earnings. And it increases from $6.5 million in 2020 to $11.5 million in 2022. Going on to the following page. Daily operating costs. The -- confirming the trend that we have been seeing throughout '19, also on a full year basis, we have a decrease, an important decrease in the daily operating costs relative to 2008 -- to 2018, which, as previously mentioned, is attributable to a younger fleet. The deliveries of all the newbuildings over the last few years, a more homogeneous fleet and also to technology, [ relative ] adoption of condition-based maintenance system, which through equipment analysis to monitor the actual state of the spare parts, critical spare parts and increasing the average life of these parts significantly and also reducing off hires. So when necessary, we can replace earlier and avoid a breakdown. But on average, we can keep these parts going for much longer. And also very strong U.S. dollar in '19 relative to '18 also helped in that respect. The same applies and even more so to G&A because 75% of our costs, G&A costs and currency -- currencies, which are different from the U.S. dollar, mostly the euro. So we did benefit from that. Going forward on Page 15, we show a ratio of the net financial position to fleet market value. It fell from 73% to 64% in 2019. So 64%, which is the figure at year-end '19. It's one which we are not happy with, but we want to reduce this further going forward. As Paolo mentioned, with the cash profits we expect to generate for '20 with the vessels we intend to sell, we believe we can bring this ratio down significantly. The factors which contributed to the reduction in ratio in '19, mainly the increase in vessel values and the capital increase that we closed in April of '19 of EUR 44 million. In terms of vessel sales. This was already covered in effect with summary by Paolo. We did raise around $40 -- $41 million through sales and leaseback transactions. We closed 2 sale and leaseback transactions in the beginning of the year. And then we sold 4 vessels that we had in JVs. They're all JV vessels. So one owned by Eco Tankers on which we had a 33% participation. 2 vessels were owned by DM shipping in which we had 51% participation and 1 vessel owned by Glenda International Shipping in which we had a 50% participation. So that, of course, helped our liquidity position throughout the year. Going forward, on Page 16, we show our key line items of our P&L. In '18 -- in, sorry, 2019, we lost $27.5 million, which is much better than the $55 million we lost in '18, but even if we exclude nonrecurring items, then the result is even better. We lost only $7.7 million in '19 against a loss of $57.4 million in '18. And if we look at only Q4 '19, the profit was of almost $5 million against a loss of almost $14 million last year, and excluding nonrecurring items, the profit was at $7.4 million in Q4 '19, against a loss of $13 million in Q4'18. So the profit in Q4 '19 is almost the same as the full year loss for '19. And the full year loss on '19 on a per day, per vessel per day basis is equivalent to around $400 only. So it really gives an idea of how close we were to our breakeven in '19. Going on to the following page, yes, just a small comment on the EBITDA. So even excluding the IFRS effects -- 16 effects, which improved the EBITDA in '19. Our EBITDA in '19 is almost 4x higher than in the previous year. On the following page, we have a closer look at the daily TCE equivalent earnings of our vessels, both the spot and the cover and the blended result. And so the spot average for the year was $13,700, which is not a great result. But the important thing is that Q4 '19 was the average of $17,200, which is already a much more satisfactory results. It's a very profitable level for us. The -- in 2019, we had contracts at an average rate of $14,760. So the blended result was $14,200, which is, as previously mentioned, not very far from our P&L breakeven. And if we look at only Q4 '19, our blended results including the contracts at $15,100 was almost $16,000. So going on, we have just a comparison of our results, only looking at the MR2 this year and not all our vessels. We also have some handling on the spot. So [indiscernible] through the contracts. We see that MR2 is on the spot an average of $14,200 relative to $13,700 for the Clarksons average. Obviously, if we look at only the Eco vessels, then the outperformance is bigger. It's 14%. We earned %15,700, rather than $13,700 for the Clarksons average. And yes, the blended rate of all our MR2s, including period contracts was $14,300. And that is it for the financial highlights. So I'll pass it over to Paolo again for the market overview.

Thank you. Now Page 20, you can see that there is still a very strong potential upside, not only on rates, but -- rates and asset values. I mean since the last peak on the 1-year time charter, we are respectively 49% and 65% below the last cycle peak, which as far as 1-year charter rate. It really started as values, a 5-year old and a 10-year-old vessel are respectively, 34% and 33% below the cycle. So I mean this doesn't mean that we are going back to the peak again. This means [indiscernible] [ true-up ] still very long and there is still a lot of potential in both -- in earning and values. And this improvement you can see it in Page 21, when we started with a very low $12,000 -- in excess of $12,000 rate in '16. And we are today in excess of $15,000 for 1-year time charters means the market is, as you certainly know, improving very well. And so are the values. The demand growth, now this is, of course, it grows on whatever coronavirus is going to leave us with. But let's say, the fundamental are still, our demand growth. Even if today, there are a lot of corrections, which have to be taken on the expectation that the various agencies and brokers did at the beginning of the year. But something is really important, and this is not going to change because of the virus. It's the participation of refinery products trade to the total oil trade. So refinery products are becoming more and more actors in the oil trade because from 25% as they were in 2000, today they are basically at 35%. So we are increasing their share. This is due to the displacement of refineries from the actual consumption market. The recovery has been, so far, driven by factors that you certainly know very well, which are supply-driven. We had various factors from the bunkering, which has been a huge problem from the beginning of 2020, but already on the end of 2019, you had a ramp of refineries from even these delays, you had even too much, but was there. And when 1st January went it, we had a lot of logistical problems also because suppliers were not ready yet with all their storage for the very low south of Cielo. And this, of course, creating inefficiency on the fleet ships in Singapore, which is the biggest bunkering hub in the world, since they've been waiting 15 days to bunker. We had a weather effect, which is typical in winter time. But we have to say we had a very heavy weather in the Mexican Gulf, and we still have very heavy weather in the Mediterranean. Scrubber installation, this is on through old shipping. I mean a lot of ships have been sent to the shipyards to retrofit scrubbers. And I would say -- I would add to this 2 things: #1, installation of the scrubber has been totally undervalued by the owners and by shipyards. So the time-consuming is, by far, longer than what was thought. And to this, you have to add now coronavirus because a lot of this activity was happening in China. And China, as you know, declared force majeure of many of the works done, not only on new buildings, but also on the retrofitting and other dry dock issues. Then we had the strong element, which, of course, hits the crude oil -- the crude market. But at the end, cascade comes down to us also on the clean has been -- the sanction on the Costco fleet in October, end of September, beginning of October, which, as you know, took off a fleet of VLCC, which close to 40, 44 ships. This has really been pushing the market up. I would say this has been the first element to turn around the market when many of us came in. Floating storage, which we suppose is going to increase now due to the low price of a barrel is already that. You understand that there is Saudi companies looking for something like 18 VLCCs. And of course, we have coronavirus which the only, I would say, positive effect is the fact that is delaying ships in the shipyards, so is keeping down the supply side of the thing. If we move on to Page 24. The impact that coronavirus had on product tankers has been, not only -- not always negative. Because I have to say, you had, of course, Chinese refinery where they start slowing down their throughput because they were already on surplus of product. But we had a market which was not following this refining slowdown. In fact, we had rising cargoes from China to the U.S., coastal United States, and not only China also Korea with jet fuel where U.S. was in deficit. We had refining activities coming back from the Middle East that are coming out. Some refineries are coming out of maintenance period. We have a continued strong exports of products from the U.S. Gulf to South America, which has not really been affected by coronavirus at all. And we have lower vessel deliveries. I remember you would normally, the big bulk of the newbuilding delivery happens in January, February, March because whatever is ready in November, December is postponed to January in way of gaining 1 year. These deliveries are being delayed by coronavirus because, of course, the Chinese yard, they couldn't deliver. And this, of course, adds to the ships, which are -- were to retrofit their scrubbers. What is possible after all this that has been in the press that China certainly is going to come in with a huge stimulus program, something which is equivalent at 4% of its GDP. So we are talking really big numbers, but we have said already is the monetary policy and they are coming out with something more. And something certainly has to be expected from Europe. So if we sum up all these things and if coronavirus, let's say, is not going to be too long, that we can have a big counter effect due to all these interventions. Of course, refining volumes have been, in 2020, didn't start very well because, as we say, China had to slow down its production. We expect so a slight decrease in 2020 from whatever it was forecast at the end of last year. Now how much to be frank? Nobody knows because it all depends really how long this thing is going to go. I mean today, now -- with the news of today that America stopped all flights from Europe to United States. So this is another hit, of course. I mean we are going to have a lot of jet fuel to store, which can easily end up also in floating storage by the way. But talking about growth in refinery capacity, 2019 has been a record year. We -- it has been estimated some -- the growth of 2 million barrels per day. But if we look at the period of 2019 to 2023, the growth looks something like 6.4 million barrels. Now this, 80% of these numbers is going to happen between Middle East and China and the rest of Far East. So here, again, far away from Europe. And this, we go to Page 28, is a change in the refining landscape and European refining capacity is certainly a downward trend, and this will create an increase of demand for shipping -- for seaborne transportation. The OPEC gas -- reversal of OPEC gas. So the fact that the Saudis and Russians didn't agree basically will benefit my tankers initially, but can be a long-term threat to U.S. crude exports because as you know, Saudi Arabia is by far closer to China than America. And this is less ton miles, if China will start rebuying from Saudi Arabia than the United States. Page 31, we have a slowing fleet growth looking at MR and LR1, very -- we expect a growth of only 2% in 2020 and 0.8% in 2021. And this sums up, I would say, today, a slowdown in ordering due to the fact that shipowners are also afraid of building ships with technology and known and is -- and there is not too much activity out there to do it. The big guys of -- the big investors are not moving that much anymore on newbuildings, at least up to now. So we can think that the supplies will stay the way it is for a while. The expectation, the expectation is the market is indeed to get tighter. Clarksons after they revised the expectation on -- due to coronavirus, expect an expansion of a product tanker demand of 3.7%, which as you -- as I said before, will exceed totally the supply of newbuilding expected. On Page 35, we have the opinions of various brokers that I leave it to you to read and why invest in this. And with this, I leave the floor to Carlos to do it. Thank you.

Yes, just quickly to look at our NAV. And so if we look at the net asset value in absolute terms, not on a per-share basis, after reaching a bottom in '16 and then we touched a similar level in December '18, it has been moving up. Of course, this is also thanks to the capital increase that we pursued in 2019. But to a large extent, the improvement also reflects the increase in asset values that we have been experiencing throughout 2019. So from a bottom of $218 million in December in '18, the NAV of the company rose to $314 million. On a per-share basis, in U.S. dollars, our NAV now is at -- as of the end of December was at $0.5 -- $0.25 per share. And we -- so that means that at the end of December, we were trading at almost 40% discount to NAV. As you can imagine, now this discount is actually significantly higher given the turbulence in the market and there was surrounding the coronavirus, which has hit the shares of our company as well as those of many of our peers. But as you saw from the results that we are publishing today and from the market insights we provided to you relating to Q1 this year, the concerns seem to be largely overdone. Then, of course, we don't have a crystal ball. We -- the coronavirus issue is a very serious one. Firstly, from a human perspective, but of course, also from an economic perspective. We don't underestimate it in any way. And in that respect, I just want to mention that we, as a company, have taken many initiatives to protect our employees, not only those which have been mandated by governments, but also often going beyond that in countries which are a bit slower to respond to the crisis than Italy, which is at the forefront today in terms of intervention. So the effects that, as Paolo mentioned, of the OPEC -- reversal of OPEC cuts are extremely important for our sector. We saw that already in 2015, which was a very good year for us, where we earned over $50 million. And the same dynamics seem now to be at play again. And also at that time, the world economy was slowing. This time, it's probably going to be more serious because of this coronavirus. But a big -- it's a big question mark. If they are able to deal with it in a short -- relatively short period of time because governments deal with it aggressively, then there's a very good chance of recovery already in the second half of this year. Otherwise, we might -- for an economic recovery -- I mean otherwise, we might have to wait for next year. But we counter cyclically in 2015, although the world economy was slowing, we did very well. So it is not -- the same could happen in 2020, because the world could be flooded with oil. We saw that the crude oil curve went into contango. This contango is steepening. Today, oil is down again another 6%, the front end of the curve. Also refined petroleum products, forward curves like contango. So there is a big incentive to -- and a growing incentive to store oil also on boats and take capacity out of the system and buy cheap oil today, process it and set it in the -- for sale in the future at a higher price. So it could really play out in our favor. And surprisingly so given the very complicated and delicate economic scenario that we are facing today. So I believe that's it. And I pass it over to you. Please let us know if you have any questions.

[Operator Instructions] The first question is from Matteo Bonizzoni with Kepler.

I have 2 questions. The first one, in your presentation, you show that the demand growth according to Clarkson should be 3.75% while the fleet growth should be in the region of 2%. Can you provide a little bit of sensitivity on this 3.75%? In other words, is it recent estimate that already includes the potential impact of the epidemic or not? Do you think we could be materially below this 3.75% demand growth? The second question is about the discount at which our stock is trending versus NAV. So the net asset value is largely increased to $0.25 per share, and the stock is trading now, I would say, in the region of 70% discount versus your net asset value. So I mean apart that we are in a very peculiar market condition, but do you think that the asset values could, for example, go down from this level? So do you see a risk of deflation in the asset value for your ships?

On the Clarksons number, just quick answer there. The value is from a March update of Clarksons, okay? But it's not our estimate. It's their estimate. And I'm not 100% sure what kind of considerations they made to arrive at that figure. But it is a March estimate as I'm saying it is then, of course, there is some estimation of the impact of the coronavirus, but this virus is developing very fast. And so I don't know what scenarios they developed when they arrived at this forecast. For sure, they haven't included in this estimate the decision which the breakdown of the negotiations of OpEx of -- of OPEC on Friday -- on last Friday. So -- and that is short term, much more important as we have seen because we have seen the rates of our vessels move up over the last few days. It is more important. It is outweighing the effects of the virus short term. Then longer term, it's a big question mark. But right now, that seems to be the case. And I assume that they haven't included this effect in their forecast. So it is a big question mark. Unfortunately, it's not a perfect science, forecasting for shipping and especially for product tankers. And especially in this environment we are in right now, where there are a lot of very important variables out there that have to be better evaluated the path to be able to really make a better forecast. So -- but the -- if we look at the facts, the spot market has moved up considerably this week and not so much for our margins, were already very strong. They were -- they have been outperforming all the other product tankers this year by a big margin. They have been doing better than the LR1s and LR2s not only on a relative basis, on an absolute basis. But it was very beneficial for the LRs because they are more correlated -- immediately correlated with the crude tankers, and we had seen the LR rates go up to, again, on certain routes $100,000 per day or more. Suezmax rates also go up considerably, and that has pulled up also the bigger product tankers, which are now trading at a premium to the MRs, which is not surprising. So I think this is really something which has happened over the last 5 days only. And we have to see how this plays out throughout the rest of the year. But as we were mentioning, in 2015, we had a very similar scenario, but with a much higher fleet growth. The fleet growth was of around 5%. And this year, the fleet growth is around 2%. So we had an exceptionally strong market in 2015 despite a fleet growth of 4.6%. With a fleet growth of 2%, maybe you can you can imagine what could happen this year. So yes, that I believe answers the first question.

Okay. And then the discount?

On the NAV, the net asset values, look, we have 5 vessels that we classified as held for sale on our financials. So we are currently not marketing all the vessels, all those vessels, but we intend to sell them over the next 12 months. We -- it is -- because we believe there is going to be a strong enough market to do so at attractive values. So we are positive on the second-hand vessel values. On the negotiations that we are now performing, we are not seeing any difference, any decrease in value, I would say. So we have to see because, of course, there's a lot of uncertainty out there. But the rates are good and that -- and so as long as the freight rates are positive, the period rates are good, the vessel values, which are very correlated with that, should stay up. So we don't see currently the risk of a big correction in vessel values.

The next question is from Daniele Alibrandi with MainFirst.

We've seen last week of the production cut and the cooperation between OPEC and non-OPEC producers collapsing. Now it seems that the OPEC and non-OPEC countries are basically free to produce as much as they want. I was wondering if further oil downturn, how would you benefit from this situation and if you maybe are concerned on the demand side? My second question is if you can elaborate a little bit more on what will be your approach on being more aggressive on fixing rates, which is exploiting the spot market. How would you balance this?

If I understood well the first question is, if further reduction on the barrel, what is the benefit for us, and the first benefit, of course, is our bunker cost, which is going down. And as you know, it's the #1 cost we have. This is, of course, we're talking about our spot ships is -- and we are already coming from a long slide because if you think that in January, the loss of fuel was at $700 a ton. You can imagine how much we are saving today. As far as our strategy has been that we have over 50% of the fleet, which is covered by term contracts. Some of them are due now, and we are renewing them at very profitable rates. We just fixed one MRV for 1 year, [ just a slight under ] $18,000 a day, and we are offered for the next shift come in due, which is one LR1 now for a very, very good rate. I cannot unfortunately make a number now because it's not fixed yet. But we are extremely -- talking of extremely profitable rates. And there are still people looking for ships of 3 years. I'm talking about major oil companies and also that we are negotiating. So our attitude is to take certainly the cover where the money is good, is profitable and it is big. But in the meantime, we are playing with something less than 50% of our fleet, the spot market. And I think we've very good earnings today. Not I think, I know, I mean.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. Mr. d'Amico, Mr. Mottola, I give the floor back to you.

Okay. Then I thank you very much for participating to our call. I hope we have been explanatory enough. As I say, it's a little bit surreal because Carlos is in one place, I am in another one. And so I hope we satisfied all your questions. So from my side, I say just hello and to the next time.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.