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 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Paolo d'Amico, Chairman and CEO. Please go ahead, sir.

Thank you. So, good morning, good afternoon to everybody. Thank you for joining us on this call for our first half result and second quarter. As usual, I leave the floor to Carlos, to give you the first part of the presentation. Carlos, please go ahead.

Good afternoon. Thank you, Paolo and as usual we start with a quick glance at our fleet profile. We still control 36 vessels, however, the number of owned vessels has been increasing. This is just a photograph as of 30th of June. We had 24 owned vessels and 5 bareboat chartered in vessels, 7 time chartered in vessels. Since then, we took delivery of 2 vessels on which we had exercised purchase options, so the number of owned vessels has risen to 26 and the bareboat chartered in has fallen to 3 vessels. We will look more closely at these remaining options in the -- later on in the presentation. Young fleet, average age of 8 years relative to the industry average of around 13 for MRs and LR1s and large majority ECO design, almost 80%. Way on to the following page, not much new to report here. The maintenance CapEx for the second half of the year is quite significant, USD 8.4 million, but it then does fall quite a lot next year to USD 3.3 million. We have 10 vessels which have stopped or will be stopping for dry-dock this year. So that's quite a big number relative to the total number of owned and bareboat chartered in vessels. Going on to the following page, our bank debt refinancings. We are still to roll down the refinancing of USD 20 million, which is related to the Cielo di Londra, it will be drawn down in the coming days. We don't have any balloons to refinance this year or next year. We do only have one facility relating to one vessel, with a balloon of USD 11 million to be refinanced in '25 and then the following facilities to be refinanced towards the end of '26 only. So, a good runway without having to be concerned about that. The daily bank loan repayments have been falling and will continue falling over the coming years, as we exercise the purchase options on the bareboat chartered in vessels, we are keeping them debt free. And that is the main reason why these daily repayments are falling. Also, in the new refinancings, we have been negotiating or were able to negotiate slightly longer repayment profile, so also that is helping. Going on to the following page, we show here the vessels which were already exercised, only 3 as I mentioned are left to be exercised, 2 next year, one in March and one in September and then another one in September 2025. And as it looks, given the current outlook for the market and our current situation, I would say, it's very likely that these will be exercised at their first -- at the first opportunity. Going on to the following page here, instead we show the time chartered in options, which were exercised on the left-hand side, the Adventurer delivered to us in December last year and the Explorer in May this year and then the remaining options still to be exercised. They're all in the money and we will be exercising these at a later stage, currently, according to our calculations, it's more convenient to retain the optionality and then reconsider the exercise closer to the end of the TC contracts. Going on to the following page, here we show our TC coverage. We -- this hasn't increased significantly since our last update relating to the Q1 results, but we did secure actually 2 days ago, a new OTC contract for around one year for one of our MR vessels. So, you will see that the coverage for Q4 has risen to now to 22% and that for '24 to 9% which is still very low relative to our standard. So, most likely this coverage for Q4 and in particular for 2024 will continue rising over the coming quarters as we take advantage of opportunities that will arise in the market to cover more of our fleet at attractive rates. The coverage -- we do have is at a very good level. It's -- we have now 25% of the days in the second half are covered at an average rate of [ 28-7 thousand ]. So, going on to the following page here, we provide a quick update on the trading for Q3 and we have already fixed 28% of the available days in Q3 at an average rate of USD 28,750 on the -- through TC contracts and instead we have fixed 30% through spot voyages at an average rate of USD 37,500. And therefore, 58% of the available vessel days for Q3 were already fixed at a blended rate of over USD 28,000 per day. And on the right-hand side, we show the sensitivity how the blended TC would look if we were to earn on average, USD 20,000, USD 25,000 or USD 30,000 on the remaining 3 days. So, Q3 is also looking very good, slightly less strong than Q2 potentially, although, we have seen actually rates strengthen in most basins over the course of the last 2 weeks. So, that is possibly a good sign for the rest of the quarter. And going on to the following slide, well, bottom left, we show our recurring result. So, this is what has already been fixed and therefore assuming we breakeven on the remaining 3 days, our profits for 2023 should be around USD 137 million. If, however, we are able to achieve an average rate of USD 25,000 on the remaining 3 days, our profits for the year would be around USD 172 million. So already the figure of USD 137 million is higher than our full-year profits last year. So very strong market and very strong results so far for us. Going on to the following page, here we give a quick update on the cost trends. We -- the daily operating costs, as we saw in our Q1 update have been rising this year, it was widely expected that to occur and the Q2 has confirmed these trends. We do however, expect that some of these upward pressures on costs are of a temporary nature. There is some front-loading in some of our expenses related in particular to orders of spare parts, which are concentrated in the first part of the year and therefore, we are not going to be -- we're not going to incur these expenses in the second half of '23. There are, however, also some more structural factors contributing to this increase in cost, of course, as all most other sectors we -- there were inflationary pressures which affected the cost of spare parts, of storage and [Technical Difficulty] and there was also sector-specific issue for us, which is the fact that, thanks to the very strong markets, vessel values have increased sharply and we have therefore increased the levels at which our vessels are covered to align them with the current market values and therefore resulting in quite a big increase in insurance premium. So, that is -- that was also one of the factors contributing to the increasing cost. To a minor extent also currency effects played a role. They had a slightly bigger inference on the G&A front, where the large majority of the increase instead is attributed to the effects of variable compensation and which are also attributable to the very strong performance of DIS last year and this year. So, and these are also, let's say, temporary pressures, I would say, that would unwind, of course, in a less strong market. Going on to the following page, the ratio between the net financial position and the fleet market value has further improved since Q1 and the improvement since December is quite important. The ratio moved down from 36% to 25%. The net financial position decreased from around USD 410 million to around USD 300 million and the cash and cash equivalents stayed approximately stable. We ended the second quarter with USD 113 million in cash and cash equivalents. So, if we look at where we were at the end of 2018, when this ratio was of 73%, the ratio between net financial position and fleet market value, this has been a very significant improvement. Going on to the following slide, the key line items of our P&L, the profit for the quarter was of around USD 46 million and the profits for the first half of around USD 100 million, excluding non-recurring items, USD 47.1 million for Q2 and USD 103.6 million for the first half. What is also important to highlight here is the very strong cash generation, USD 143 million in EBITDA in the first half and operating cash flow of USD 173 million during the same period. So, very strong cash generation. And finally, the last slide, a quick look at the daily results for vessels on a TC equivalent basis on the spot market in Q2, the average rate was of USD 31,700, which is lower than in Q1 USD 36,650, but above what we achieved in Q2 last year, which was around USD 28,700. The blended result for the quarter Q2 was of USD 30,800, which was well above the blended result for Q2 last year of USD 23,400, also thanks to the much higher level for the part of the fleet, which was covered through TC contracts. If we look at the first half then instead the results for the average for the spot market was USD 34,000 and given what was covered at USD 27,400, the blended result is USD 32,400. And now I pass it over to Paolo for the market overview.

Thank you, Carlos. So let me just take my slide. Okay, on page 20, what we have, freight rates have surged quite a long way due to the Ukraine crisis, but values didn't follow with -- followed, but not as much as were it tried. So, I think reasonable to expect more room for increased value on the ships, also due to a very tight supply of new ship to a market which we will talk later on. The Russian refinery export, this is something we already talked about the previous time. They had to change, of course, losing Europe, they are selling their clean products to Africa, to Turkey, to Brazil, to the Middle East, and of course to China and India. This means longer routes and so more turbine growing and more ships deployed, of course. The Russian oil output has been very resilient in '22 and the supply is expected in some ways to increase, but I'm saying in some ways because as we see Russia, it looks like it's trying to implement the cut of a 0.5 million barrel per day that are at least 6 months that we are talking about, it looks like they are going to do it now. The refining throughput and our demand is increasing. Of course, we did expect more growth in China and China is a little bit disappointing everybody, the way it's coming out of the COVID. In some ways, this is helping our industry because the Chinese are using the capacity of very fine, not to use for domestic markets for export. So, we are already seeing a lot of cargoes coming out of China and as it happened a few months earlier, we saw a lot of diesel moving east to west and going to mostly to Europe. This of course is another element of increase of ton miles and better demand for ships. Due also to the -- due to the market overall, the inventories are very low, but after this cut, we have to expect that these inventories are going to go down a lot. Normally is always the starting point for a better tanker market afterwards because you have to replenish the inventories which have been used and so this should be good news overall for us. The middle distillates are slowly and slightly we'll say decline as far as the cracks, this is being substituted a lot by the gasoline cracks, which have been improving a lot, especially in US where you know that it is in the middle of a driving season and so there is a stronger demand on this, when basically the diesel demand in this moment of the year is more concentrated in Europe. Jet fuel is rising, but we are still 70% below the pre-pandemic levels, so we can expect more-and-more. There are various type of bottlenecks to this industry due also to lack of crew on airlines. So, the various companies -- we didn't fly all the planes as we did in 2019 and this is going to, I hope to be solved in the near future. We need and we have I would say support from the crude tanker market. We need because when VLs are not earning enough money out of the crude trade, the new builds, they tend to get fixed on full cargoes of diesel and move them out of Far East to Europe to West African Europe, killing so 2 markets for VLR2s, LR1s and also MRs. So, this is a very strong element to check. For the moment, it's not happening and that is a good thing, it is a strong support for us. The changes in the refinery landscape are basically those one that we have been talking about in the previous calls. They are very much concentrated in India, in China, in rest of Asia and Middle East and this is going to be beneficial for our market in the future. US shale oil is still going on and is a little bit on a plateau position now, but the good thing that they are selling a lot of cargoes down to China, so also here you have longer ton miles and a better demand. Now, demolition, which is the most impossible to predict, let's say, elements of our supply and demand, they are certainly going to be stimulated by the new indexes which are coming in and which are already -- we are already reporting in Europe. Of course, ETS is a scheme which is working only in Europe, is affecting only either European cabotage or European trade for 50% of the trip. But certainly you are seeing a lot more-and-more charters looking at a younger fleet because they are becoming aware that to trade older vessel is going to be more-and-more expensive and more-and-more complicated. We have also to say that many terminals are not going to accept ships who are over 15 year of age. So, if you put this -- all this in the formula, you have, of course, a positive for a fleet like ours that we are 8-year old on average is a very positive factor. The candidates for demolition are growing, the poorer number of candidates, the proportion of vessel which are more than 15 years and 20 years is rising every, I would say, every quarter and the deliveries are very slow. And even if we take in consideration the new building order last year and this year and we have to say that this year, the number has been as big as the all-year last year, but we are talking still a very low number and with deliveries coming in 2025, if not 2026. So it's very much ahead in time. So we have a bottleneck on the new builds and as a consequence of all this, we have a very slow fleet growth, which I keep looking at and it is all right around 06 in '23, 03 in '24, which means basically flat. And this is it. Carlos, you want to?

Yes, thank you, Paolo and then just a last slide with which we usually end our presentations here to show the evolution of the NAV on a per share basis and in absolute levels. Relative to what we presented previously, we also have added here the value of the options on the vessels which are on TC in. Some investors we talk with asked us to do so and we thought it was a good idea. And therefore, we see here that they were worth what they were worth at the end of December and at the end of June. And the NAV rose by around USD 100 million between the end of December and the end of June and on a per share basis, our NAV in dollars was of USD 3.86, sorry, USD 7.14 NAV per share at the end of June and our share price in dollars was trading at USD 3.86. So a huge discount to NAV of 46%, one of the highest discounts for our share relative to NAV since we have been tracking this. And therefore, once again, we do believe that our shares are looking very attractively priced and especially given the very strong outlook for the market for at least the next year and a half, hopefully even longer. And I pass it over to you for the Q&A.

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

I just have a question with regard to cost evolution, you have flagged some inflationary factors which affected your cost in the latest quarter, particularly in the second quarter, I have seen a significant increase of the G&A cost, which I think you commented also with variable remuneration and also other operating cost. My question is just to have maybe an indication for the evolution of these 2 cost lines, G&A costs and operating costs for the remaining quarter of this year?

Yes, thank you for the question, Matteo. The line was not that clear, but as I mentioned, a lot of these -- a lot of the upward pressure that we experienced is temporary. We do expect that there's going to be some unwinding of this upward pressure. Nonetheless, costs will be, especially on the direct operating costs, yes, a lot of the elements were temporary. So, we do expect that the average daily value for the year will be lower than USD 7,800 that we are reporting in the first half, but we prefer not to give specific guidance as to how much lower and the same applies to the G&A. Here, I mean, the -- let's say that one of the factors which did affect the cost I mentioned, it was the variable compensation component. The bonuses that were paid out this year were higher than anticipated and accrued for last year, so that had an impact and which will not be as significant in the second half. But nonetheless, there is an increase also because we are going to be accruing for the variable compensation components that will be paid out next year in the second half of this year too. And therefore, we don't expect a marked decrease in these costs in the second half of the year. Sorry, if I cannot be more precise than that, but...

The next question is from Massimo Bonisoli of Equita.

Just a question on the recent rates strength and I saw also the profit margin cracks rebounded quite sharply. So I'm curious to hear your thoughts about the very recent strength in the day rates in the market? And you mentioned in every single at the end of the day, so it looks like demand recovered or there are maybe other issues like, the restart of refineries, I would like to understand your thoughts on that? And the second question basically, still on the market. In case the scenario of prices, especially crude and products will increase beyond [ G7 ] level of prices that allows western companies to transport crude provinces. So in that case, what would happen to the supply of -- let's say, clean products for Western companies? There would be an increase in supply in your opinion or maybe those vessel will remain in the sort of dark or shadow fleet?

I'll try to take the first one and Paolo the second one. Yes, I mean, we have been seeing this strengthening of rates across the board I would say. We have seen more volumes coming out of China over the last few weeks. Also the Middle East have strengthened more recently over the last few days and the Atlantic market is also looking much healthier. The Atlantic market is also benefiting to a certain extent from congestion in the Panama Canal. The wait times for transit on the west-east direction are up to 2 weeks now. So that is, of course, reducing fleet productivity, so we are seeing stronger rates both out of the U.S. Gulf and Northwest Europe. I would say that maybe the only region which is a bit weaker still is the Mediterranean currently and if you look at the instead the vessel types, the Handys maybe are the vessels which are performing a bit less well now and together with the LR1s. The LR2s actually bounced back over the last -- yesterday, they started moving upward quite fast and also the other ones are following, but they are still lagging behind a bit, the MRs at this point in time, but we have seen that play out several times this year. And at a certain point, there's one vessel type that outperforms the other, then the other one catches up. And so it's -- and vessels moved from one new region to the other reducing these super profits that you can earn during brief periods in one region and rebalancing the market. So -- but I think the positive thing is that we are seeing this upward pressure now in all basis. So I think that, that is quite bodes quite well for the rest of the quarter. I don't think nothing dramatic change, remaining throughputs are increasing as expected. They have bottomed a few months ago and they have already risen and they are projected to continue rising by another 1.6 million barrels per day between June and August. We were looking at the statistics, we did not report this in our presentation on Russian oil on water. And since the sanctions came into force in February, the Russian oil on water rose very steeply between February and April and then it started falling. And this decrease in the Russian oil on water coincided with the start of the refinery maintenance season in Russia. And there are still some refineries which are undergoing maintenance currently and so it is expected that Russian output and exports will increase in the coming weeks and that should be very supportive for the market because, as we know, as we mentioned several times, these are very long voyages which are being performed now by these vessels. And if there isn't enough demand from Russia for the vessels, which are performing such trades, usually then they tend to start competing for the other non-Russian business and which has a double negative effect because not only there are more vessels for this other non-Russian business, but these vessels tend to be discounted by charters. And therefore -- but they have to accept lower rate, but these lower rates tend to be promoted by the charters as the reference rates, lowering the market also for the other vessels. So I think that as the Russian business increase, that will be very supportive for the market in the coming weeks.

Going to the second question, if I got it, right? Probably, you want to know more about the dynamics of price cap and I'll give you -- the -- I give an example of what is happening today. On crude, the price of Russian Ural, its going to [indiscernible] currently [ USD 60 ], so it is more expensive than a price cap, which means that the Western, let's call it Western fleet, the legitimate fleet let's call, we cannot touch it anymore. And who is going to touch, it is the Dark Fleet, but the Dark Fleet is more expensive than the Western fleet, it's more expensive of a lot. And what you have today and this is the example, is India, for instance, today is not buying any more Russian oil because it is more expensive than buying the Middle Eastern one. So they went back to Saudi Arabia, because if you add the fact that it's more than USD 60 plus a sanctioned ship, which is more expensive and let's consider USD 60 and plus, so I don't know USD 65 on one side and the barrel, the normal barrel at USD 79.80, you have what, you have the USD 15 difference and it's not worth for the Indians anymore to buy Russian oil. So if you add all these element, the Russians are very much pushed to keep the oil under the price cap, because otherwise we lose volume and I have to say, we invented the price cap, we invented a really quite efficient system.

The next question is from Daniele Alibrandi of Stifel.

I have 2 questions. My first one is a technical one on cash flow, but it adds for modeling. I was expecting a higher outflow from the exercise of the purchase options in Q2. So can you please remind which deliveries happened in Q2? I guess 3 Freedom, Explorer and Loyalty, but maybe I'm wrong. And can you please confirm that the expected cash flow, the expected cash out for Q3 is around USD 44 million, which should be Trust and Trader, that is my first one. The second one, if -- do you see the insurance cost to decrease anytime soon, given the asset values seems to have stabilized a little bit?

So thanks for the questions, Daniele. So yes, here I think that in the executive summary, we summarized here what happened with the purchase option. So the High Voyager was delivered to us in January. Then we have the High Explorer, which was delivered to us in May and the High Freedom also in May and the High Loyalty at the end of June and the Trust and the Trader both in July. So that is the -- so they were in the first half of this year, one TCN vessel delivered to us and 5 -- well, not in the first, in the first half there was the Voyager, the Freedom and the Loyalty, so 3 bareboat charter in delivered to us and then another 2 bareboat charter in delivered after the end of the -- of the quarter -- of the second quarter.

Okay. So do you expect the 54 cash out for each -- for Q3 is corrected? It was like USD 21 million, USD 22 million each of Trust and Trader, right?

Yes, we actually include the price and so we say, you know, the Trust and the Trader and the Loyalty and the Trust and the Trader, the Trust is USD 22.2 million, the Trader is USD 21.6 million and those are the 2 vessels that will be delivered -- were delivered to us already in July.

And the second one on insurance costs, if you maybe can elaborate a little bit -- if you expect any increase anytime soon, given that the asset value seems to have stabilized a bit?

No, that we have already experienced, yes, the increase in insurance costs and we don't expect further increases from here. So if anything, if markets, let's say, asset values stay stable as our vessels get older, maybe the premiums could fall a bit, but vessel values will come down, of course, there is a possibility that vessel values can continue moving up and therefore put further upward pressure on the premiums. If we look at where vessel values are today, I think as Paolo mentioned, relative to where spot and TC rates are, there seems to be still scope for asset values to rise. So there is this risk of course, then very hard for us to make any forecast in this respect.