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 International Shipping Second Quarter and First Half 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Paolo d'Amico, Chairman and CEO of d'Amico International Shipping. Please go ahead, sir.

Thank you and good afternoon to everybody. Welcome to our conf call. And let's go straight to the presentation. If you don't mind, I would skip the executive summary and we are not doubling things. And I leave for the starting to the -- floor to Carlos Balestra for the overview and the key financials. Carlos, to you.

Thank you, Paolo. Good afternoon, everyone. So as usual, we start just a quick glance of our fleet. We controlled 38 vessels as at 30th of June. We are mainly an MR player. We have, however, a small presence also in the LR1 and Handysize segment with 6 vessels in each of these segments. Mostly owned vessels, 20 out of 38, 8 on bareboat chartered, which we consider as own vessels because they either have purchase obligations or purchase options at very attractive prices in one case only. And then we have the time chartered-in vessels, which are mostly long term, 9 out of the time chartered -- 9 out of the 10 time chartered-in vessels. The fleet is 76% IMO class and it is still a young fleet, 6.9 years average age relative to an average for the industry, which is closer to 12 years in the sectors we operate in, also mostly by now an Eco fleet, 75% of the owned and bareboat vessels, and 74% of the entire fleet. And well, these results were achieved thanks to an important newbuilding program as we already talked about several times in the recent past. We ordered 22 newbuildings since 2012 and they have all been delivered to us, the last one in Q4 '19. CapEx program, not much change since our last presentation relating to the CapEx that was flat for 2021. The large majority was already invested, $4.2 million, had only $2 million left. 2022, we only have planned investments for such purposes of $3.1 million, so around half as much as in 2021. So -- and this figure has been declining since 2020. And yes, of course, we only have a maintenance CapEx left for now and because our priority, as we have mentioned several times in the past, currently is to continue on a deleveraging process of our balance sheet. In terms of also cash flow commitments, well, we are also lighter in terms of bank debt repayments. We have no balloons due in the second half of this year and we have a $65 million due in 2022. And we are already working on the refinancings of these and quite a few of them we expect to be able to refinance before the end of 2021. The first balloon due here is in April and all the other ones are in the second half of '22 in any case. So yes, still quite distant. We are also lighter in terms of bank debt repayments. This is also positive, not only in terms of CapEx repayments. It has declined quite sharply between '19 and '20. After we terminated reimbursing the $75 million facility with Intesa, which had to be reimbursed over 5 years. And it will continue declining more gradually going forward. So that will also help us from a cash flow perspective. On the purchase options front, as we announced in the past -- in the recent past, we have exercised the purchase option on the high priority. We did so because this vessel, in any case, had quite a short lease, which was going to mature in October '22. And therefore, since we have a very -- we had a very comfortable cash position, and we still do at the end of the year, we decided that it was a good idea to exercise this option to save on quite a substantial amount in interest expense because this was also the most -- by far, the most expensive bareboat in we had. And the other ones are much -- at a much cheaper cost, and they are much longer. They have much longer tenors. So we are not in a hurry to exercise this, but if the circumstances are right because we see the market moving in the right direction and our balance sheet allows us to do so, we look forward also to exercising some of these other options and saving some money on interest expense also on -- also in this respect. Of the remaining options we have 8, 7, either in the money or theoretically the money, only one is slightly out of the money, the high trader. And yes, 7 of them are already exercisable. Only the Cielo di Houston we have to wait until 2024 to be able to exercise. Going on to our TC coverage. We have been working on this throughout the second quarter, increasing fixing -- increasing the forward coverage by fixing vessels on time charter. And therefore, we have 48% coverage now for Q3, which is not a bad figure at around $15,000 per day. So that allows us to weather quite comfortably the current weak markets. And this coverage declines in Q4 to 36% at an average rate of $14,800 around. So for -- if we look at the second half year, at around 42% at just below $15,000, which is pretty much aligned with our P&L breakeven. We have much more exposure of course in '22 and '23. But we are having exposure in these 2 years because we expect the market to be much stronger by then. As previously mentioned, the percentage of Eco fleet has been rising and it's expected to continue rising as we dispose off some of our older non-Eco vessels over the course of the next few years. And here, we show the fleet evolution. We are not assuming any vessel sales here, but as we delivered some of our TC-IN vessels this fleet it declines only very slightly over the course of the next 2 years. However, of course as -- because of the declining TC coverage, our overall spot exposure increases and so does our sensitivity for every $1,000 per day change in the TC equivalent earnings, which is of $4 million in the second half of 2021 and rises to $11 million in 2022. On the cost side, we have also been working very hard and we achieved very significant savings between '18 and '20, with a slight uptick in 2021, both on the direct operating costs and on the general and administrative costs. On the direct operating costs, of course we benefited also from the fleet renewal program. We have all of our new buildings where the 22 vessels were built at the same group, either in Vietnam or Korea. Having modern vessels, of course, also helps in terms of cost savings. And also we invested in technology for condition-based maintenance, which allows us to increase the average lifespans of our spare parts and also reduce off hires by preventing faders. On the G&A front and on the OpEx front -- well, on the OpEx front, we benefited in 2020, unfortunately of course from the fact that we could perform less crew rotations, but it did lead to some cost savings in 2021. Fortunately, we can perform more crew rotations and that did have an impact on our costs. There were also some currency effects, which affected both the operating costs, but more significantly, the G&A because especially in the first half of 2020, the U.S. dollar was very strong. Going on to the following page, our financial structure. We are quite happy to highlight that our ratio of net financial position to fleet market value has improved relative to December 2020 despite the losses that we recorded this year and this is mainly due to the increase in asset values in Q2. The market -- the asset values started moving up in Q2. Also, I would say, because of the increase in steel prices, which was very significant that we have been experiencing this year, which has led to a sharp increase in the new building costs. And so that pushed out also the prices of the younger vessels in our fleet. But of course, also the demolition prices have been moving up quite significantly and that provided support for the vessel values of the more middle age vessels and all the 5-year older vessels in our fleet. Going forward to the following page. Of course, the increase in asset values also reflects the positive fundamentals and the fact that there is an expectation that the current REIT markets won't last long and that we will soon be operating in a much stronger market. The -- in terms of financial results, quick look at the main line items of the P&L. We lost $5.4 million in Q2. And in the first half, it is $15.2 million. So quarter-on-quarter, it is a big improvement relative to the $9.8 million we lost in Q1 this year. Excluding nonrecurring items, we lost $5 million in the second quarter of this year and $14.4 million in the first half of this year. Despite the weak markets, we did generate a good level of EBITDA for [ $50 million ] in the first half of this year. Going on to a quick look at the daily TC equivalent results for both the spot and the time-chartered vessels. Spot vessels in Q2, $12,720 per day. I believe we did very well here relative to the market. Our vessels were properly positioned with scale a bit lack, I would say. I believe even if we look at H1, the result for our spot vessels of $11,300 per day is quite strong relative to the weak markets we experienced. So we did underperform a bit in Q1 '21, but we more than compensated for that in Q2. In terms of spot employment, of course if we then include the time-chartered coverage that we had, that allows us to -- which was at about $15,000 per day, $15,800 per day in Q1 and $15,200 per day in Q2 this year. This allowed us to achieve a blended rate of $13,900 per day in Q2 '21 and of almost $13,400 per day in the first half of the year, which is -- which I believe is actually quite a good result given the circumstances and also, I would say, relative to many of our peers, which are more exposed to the spot market than we are. And I pass it over to Paolo for the market overview.

Thank you, Carlos. So the market you know very well where we are coming from. And I have a feeling and it is a general opinion that the market did bottom. And we are entering in a period where we should see some improvements on the second half. Second half is already on, but I mean on the actual quarter on and especially on the last quarter of the year. We are seeing a recovery in demand on the refining throughputs. We think -- I mean we expected that we have a recovering of 2.7 million barrels per day between June and August '21. You know where we are coming from in term of floating storage because when coal is started, the price of oil collapsed and everybody start buying oil. Oil went even in negative territory for a couple of days, started a very strong storage program. And this has been very good on the moment that they start chartering ship for restorage, but afterwards we paid that in a very expensive way. Now all this is gone and the market is rebalancing from that situation. What's happening today is more vehicles are rolling in the street. People are getting vaccinated. They are more confident. We still have this delta variable, which is of course creating some problems. But overall, I would say consumption of gasoline is a certainly recovering and U.S. is close to 2019 levels. And even here in Europe, we see more cars in the street. What is missing to the equation is jet fuel. We are still 24% lower than 2019 in terms of commercial flights. There is some recovery, but we're still a way to go. And of course that is cargo missing on the market. But on longer term, we see a healthy demand growth with a stronger participation of clean products to the sea-going total seaborne trade from 25% in 2000, we are close to 33% in 2020, and we expect to go to 44% in '21, '22. And so there is a longer term, a large potential upside on asset values because of course we are getting out of the negative cycle and we are rather optimistic for the future. There is -- on longer term always there is a dramatic change in the refinery landscape. Older and inefficient refineries in Europe are closing down. And also in Australia and New Zealand. New Zealand lost -- is total refining capacity was only one refinery. And Australia lost most of them. And we have a growth, which is basically all in Middle East and in China. This is creating more ton miles, so is more demand for product carriers. On the supply side, so on number of ships on the fleet growth, we have one strong demolition market, which is -- which stimulate a lot ship owners with older ships with 20 years old, 15 -- 18 years old ships to scrap their vessel where price is very good because we are talking of something around $600 per lightweight ton. And not only, but the new regulation coming in, renew indexes, which we have to match starting from 2023, creating more pressure to recycle older vessels. So this is increasing the number of demolition candidates. Most of the MR fleet is being built in the first half of, let's say, the first 3 quarter of year 2000, so up to 2006, 2007. And so they are getting over the 15 years of age and we are feeling this demolition already because last year, in 2020, only 10 MR and LR1s are being scrapped. This year, already 26. We have been demolished in the first half of 2021. So double -- we did in half of the time with double of a number. There are still limited newbuilding orders. So the supply side will be -- I mean, we are having a very slow fleet growth, which is a very positive thing for us. And so we think that we were rebound of demand that is happening because our consumption is going up, and more and more countries at least trying, but also succeeding in many case to go back to normal life. And this will overtake -- demand will overtake certainly supply at a certain stage, which is for us not far away in the future. We think that the second half of '21 will be certainly by far much better than the first and '22 will pay us back what we have been severing up to now. Carlos? Hello? Carlos?

Yes. Sorry, I was on mute. Sorry. Just a quick look at the NAV evolution in our fleet. Yes, this has been declining after peaking in March 2020 at $320 million. It troughed in March -- end of March this year at $213 million and it then rebounded because of what we just mentioned, the increase in asset value to $245 million. This, of course, as mentioned in the past already, is based on the broker valuations that we receive for -- also for testing, loan-to-value covenants on our loans. And on a per share basis in U.S. dollar terms, the NAV per share bounced back from $0.17 to $0.20 between the end of March and end of June this year. So we are now trading, again, at a very big discount to NAV, 39% which we deem is excessive given the positive fundamentals that we see for the sector for the reasons we recovered, I would say, in this presentation. So the recovery is not too distant. Maybe some -- there is a still soft patch in front of us as we needed more jet fuel to be consumed. But the trend is quite clear in that respect. And we need especially some areas of the world which are a bit further behind in the vaccination programs to accelerate. And that of course would then rise demand. And as we are seeing OpEx seems to be prioritizing a market in equilibrium, although probably slightly undersupplied, but they seem to be following through and adopting the supply to what are the expectations on the demand side. And we expect this behavior to continue going forward. So it's really -- demand is the key here. And in that respect, we believe vaccination programs are key. And -- yes, but the path forward is pretty clear and we definitely expect an improving market going forward. And I believe that is it. So I pass it over to you to the question and -- to the question-and-answer session.

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

Just one question is related to the asset value strength. So we have seen a reversal finally after some several quarter of slide in the asset values. You commented that this is also very much connected to the inflation of the raw material spend of the steel. Just on -- so we have recovered basically $0.03 in the last quarter compared to Q1 and the loss to value has also improved as a result. I just want to have a flavor about your expectation on the asset value's evolution going forward. Basically do you expect it to be lower? Or do you expect that further improvement of the asset value is also driven by the potential recovery of the rate and the improvement of your reference market?

Carlos, over to you.

No, I can go, Paolo. I can go. Yes. No, on the asset values, I think that the increase in the steel prices will provide support going forward, especially -- well, I think on both sides of the curve for both the young and the older vessels as we mentioned, but further appreciation, as you correctly pointed out, will depend on better markets and on a recovery in freight rates. Of course there's an extremely strong correlation in that respect. And we expect that to happen for the reasons we covered in the presentation. The big question is when are we going to be seeing -- we are seeing already more volumes. We are definitely seeing bigger, more refining throughput. A lot of this additional refining throughput is now being consumed domestically. So there isn't as much as we would hope for being transported by sea. But the additional barrels most likely will flow through the sea, will be exported. In particular, in the U.S., for example, we have seen a very strong recovery in demand and also in refining activity. But a lot of that additional refining activity has been focused on serving the domestic market. So the U.S. refineries are important suppliers to Central and South America, for example. And if we don't see demand recovering in those regions, then the exports from the U.S. will also probably remain a bit subdued, but that is why I was mentioning before that it is important that, for us, very important that the vaccination campaigns in the emerging economies which is currently well behind that, which we have seen in the U.S. and in Europe also accelerate. I hope I answered your question, but I cannot be more precise, unfortunately.

The next question is from Daniele Alibrandi of Stifel.

I got 2. The first one, if can you please elaborate a little bit on the reason behind the outperformance relative to the market on the spot market. The spot rate that we saw in Q2 is a significant outperformance relative to the Clarkson data also I typically look at. So if you can a little bit elaborate on this? And then the second question on the exit rate that you've seen in the last -- over the last month, basically if you can also give us a sense of what you are seeing. I know that Q3 is not very much a seasonal quarter, but it can help us to understand how things are going, even that you commented that probably the trough is behind us.

No. I mean, as far as the spot -- the spot time-charter rate, we -- indeed on the first half has been also what Carlos said before, the result of positioning the vessel in the best way we could and the best way we try to understand the market. And of course, as I say, also a bit of luck in certain situation, but we are working with 3 chartering offices, one in New York, one in London and one in Singapore. And we are trying to get as much intelligence we can get on the field and try to position the ships as a consequence. It's not very easy to move ships from east to west. It's easier to move them from west to east because of veg oil cargoes and that we are moving from South America to the Far East. In this exact moment, it's better to stay west than to stay east, but every month is a different story. And where we are, I don't talk about spot rate at this exact moment because they are not great numbers, I can tell you. But what we are seeing is a lot of -- a lot, I mean quite a number of traders who are taking position for 6 months, 1 year, 3 months plus 3 months of various option. So we see all this is happening because there is from the trading oil industry an expectation of increase of demand and we are taking cover. So the demand is there. To put it in numbers is quite difficult in this exact moment because rate which I can tell you today, this afternoon, tomorrow would be already too old. So it's a very volatile market, even in a depressed situation. But the expectation is strong because we are seeing -- we participant at -- on the demand side, that we are taking more and more cover. And this means only one thing that we are seeing an improvement on the market, at least over the next 6 months.

The next question is from Massimo Bonisoli of Equita.

I have 2 questions. One is regarding the implication of the new package of [ 54, 55 ] to stimulate sustainable maritime fuels and zero-emission marine propulsions. So what are the implications for your long-term strategy coming from this new kind of regulation in Europe? And if you're thinking to have a different source of fuel as well as the different source of engine for your next few vessels? And the second question is on the cash flow generation. First half also free cash flow generation was positive despite the weak realized price and negative income. So what would be the level of realized prices that would bring your free cash flow to breakeven more or less?

I pick up the first question. What we are doing today, we are testing with one of our main clients, a trader called Trafigura, you certainly know. And we are testing a biofuel of second generation on the actual ships. So there is no need to change engines or change ships I mean on today's fleet, and we are having a very good and positive results on the exhaust gas and reduction of CO2 emissions. So we should -- probably we will be moving more and more on buyers, bankers, biofuels for propulsion. And this should bring us over the first target, which is 2030, with a reduction of 40%. Now we -- what is certainly happening that all this is in a way also positive for us because having a fleet of Eco ships, which have been built all recently, this new implementation coming in will boost more and more owners to scrap the old vessel. So the supply side will have what we -- for us is a positive factor, which it should reduce the fleet growth and certainly create a better balance between supply and demand.

Yes. Regarding the second question, on the free cash flow, our financial, let's say, breakeven is actually not that far from our P&L breakeven today and they are both around $15,000 per day -- just below $15,000 per day. So we are not that far from that figure. Our time charter coverage is at around that level. And of course the spot fixtures aren't so. But we are not that far.

[Operator Instructions] The next question is a follow-up from Matteo Bonizzoni of Kepler.

Just one question. As regard the refinancing of your balloon in 2022, which is worth around $65 million, can you elaborate on the expected cost in terms of financing cost vis-a-vis the current one?

Yes. I -- yes, we started as I mentioned already. We have ongoing conversations with banks to refinance these balloons. We are seeing banks seem to be quite keen, the ones we have contacted so far. And I would say that the conditions we are going to be able to achieve should be slightly better actually than in our last refinancing where we achieved a margin of 250 basis points. So we should do at least as well or better and I expect us to be able to do better than that. And that the usual terms that are today available on this type of loans, so 5-year terms on 17-year profiles age adjusted to 0.

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

Yes. Thank you. And thank you very much for joining us in this conf call. And at this point -- I mean I hope that we are going to deliver better news at the next quarter. And -- but certainly things are getting in one direction, I think. And as Carlos said, more people are getting vaccinated and better will be for our market. So we must just look at really at that. Thank you very much and talk you to at next conf call.

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