d'Amico International Shipping SA

MIL:DIS

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the d'Amico International Shipping First Quarter 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.

[Paolo d'Amico, executive]

Thank you. Good afternoon gentlemen and ladies. Thank you for joining our call. We have our first quarter result of 2023. I apologize, but this time, we were a little bit under pressure because we have a flight to catch, so I apologize if we work a little bit on the fast mode. At this time, I think global colleague CFO, Carlos Balestra. Please, Carlos, go ahead.

[Antonio Carlos Balestra Mottola, executive]

Yes. Good afternoon to everyone. Thank you, Paolo. Just as really, we start with the quick overview. As entered in the previous presentation, we control this of 36 vessels, the number of owned vessels at the 31 March was of 21%. We had 7 vessels and 8 vessels on time charter. This fleet composition actually changed slightly last night, and we now have 22 vessels and 6 vessels on par charter as we took delivery of the high free any still, especially relative to the industry average, an average age of 7.9 years. as saw the industry had the average age for the amount is of 12.7% and 21. It's almost 14 years.

Large proportion of Eco vessels saw 79% of all and variable and 78% of the on-time fleet. Going on to the follow page in terms of CapEx commitments, nothing new to report here. We include the tower in -- as part of our investment for ‘23, $30 million earmark for that delivery of the vessel now expected at the end of the end of May and the maintenance CapEx for the year is still excited at $14.5 million overall, of which already for were spent in another 9.7 million anticipated for the rest of the year.

It involves 10 vessels starting for dry dock in ‘23, which is a big number relative to our fleet. And therefore, however, we see the benefit of that in the following years where maintenance CapEx is anticipated to be much more especially in 2024.

in terms of the investments for ‘23, it does include also the installation of 2 scrubbers on 2 of our [indiscernible]. Going on to the following page in terms of repayments back then, good to highlight that we don't have any more balloons to refinance until 2025. And the only bad that we have to finance 2020 files in relation to 1 vessel for an amount of around $11 million. We have a loan in 24 million for one of our vessels that [indiscernible] that we reimbursed already this year in April, and we are going to be wishing this past so expecting to go down the new facility around the end of June, beginning of July. But we are progressing well through the documentation to be able to go down this facility by that date.

On the right-hand side, we show how the daily repayments on our loans have been declining quite rapidly. The future decline driven mostly demanded exercise of the purchase options on the leased vessels, which we are keeping that free at least initially. And therefore, that will hopefully contribute meaningfully to reduce our P&L cash breakevens going forward, partly compensating some of the cost pressures that we are seeing in other areas of our business, as you will see later.

Going on to the front side. We -- Page 10. Here, we show the purchase options on these vessels on the top of the page, we show those which were already exercised. So we see that the trust and the [indiscernible] which we recently announced that we have exercised, and we expect these vessels to be delivered to us around mid-July. And on the bottom, to which was still not exercised, the high loyalty most likely will be exercised in the coming weeks.

And then we have the Fidelity and Discovery, which were vessels that we refinanced recently through new leasing transactions. The discovery and as already by September 24. And then there is the channel, which is the [indiscernible] that one was a bit less flexible as a transaction. The preferred exercise date is March ‘24. And if we don't exercise in that window, we have to wait until September 25, when we effectively have a purchase of it. So we anticipate to continue gradually exercising these options on the remaining options on these lease vessels. Of course, it will depend on the market development, but we are very positive in that respect. So we expect to have ample availability of resources to be able to exercise these options.

Going on to the following page, we show the time charter in vessels. Nothing new to report here. We have exercised the Voyager and the Explorer. The Explorer, as I mentioned just now to be delivered to us around the end of May. The other options are also in the money to a lesser extent than the Voyager explore the world. But since [indiscernible] continue moving up. They are becoming increasingly interesting and most likely as we arrive closer to the another chartering contracts, the exercise of these options will be reconsidered, especially if we are still in a very strong market. And we are likely to be exercising some of these options to in the future, therefore.

Moving on to the following page. In terms of coverage, we are now -- we have had some success here in covering some of our vessels -- and we are now 24% cover for the rest of 2023 at an average rate of just over $29,000 per day. The coverage thus far a 2024. But I'd like to highlight here that we have covered one of our vessels which is [indiscernible] for 32 months. So just over 2.5 years at a very attractive rate. So there is also interest from charters for longer contracts now, which demonstrates that the players anticipate this market to last for quite some time.

Going on to the following page, we show the -- I mean we provided an outlook of the earnings in the current quarter. which despite the volatility has been so far quite a strong quarter. The days fixed on the spot vessels represent 44% of our total available days for the quarter at an average rate of just over $34,000. And the TC contracts for the quarter represent 27% of our available base in the quarter at an average rate of just over $29,000 giving a blended rate of almost $32,300 for 71% of the available vessel base, which means that even if we were to earn only $20,000 on the remaining 3 days, our blended rate for the quarter would be around 28,700, if instead of the free base, we were to achieve an average rate of 30,000 of blended rate for the quarter would be around $31,600.

So we are here not providing any guidance as to what we expect the rate on the remaining 3 days to be, but we are just providing the tools to our vessels and to the analyst to so that they can make their own calculations and assumptions in this respect.

Going on to the following page, we here take a slightly longer-term view on our results. At the bottom left, we show our potential recurring results in '23 and making an assumption of an overall breakeven of $15,000 per day for 2023. Given the contracts already in delays, given the vessels already fixed, the spot market also the result, the [indiscernible] would be of around $112 million if we were to break even on the remaining 3 days.

However, if we were to earn on average $20,000 per day on the remaining 3 days, overall results -- net results for 2020 would be of a net profit of $138 million. And in case the average earnings on the remaining 3 days were of $30,000 per day. These results would be closer to $200 million. So this gives you an idea of the profit potential for the company for the full year '23 and for the coming 2 years.

Going on to [indiscernible] page, here, we look at our costs. As anticipated in our previous calls that in next year are not as favorable as they were after successfully reducing these costs since 2018 and then keeping them under control over the course of the last few years, we have experienced significant inflationary pressures over the course of 2022, which have then led to this increase in costs in the first quarter of this year. The main items which have contributed to this increase has been crew costs, an increase in crew costs and an increase in insurance costs as, of course, because of the sharp increase in asset values, we have also realigned our coverage to cover our vessels at these higher volumes leading to an increase in the premiums that we have to pay to our insurance offices.

There were also, of course, some proxy effects, which impacted this cost. They have been more significant in relating to our G&A, where 75% of our costs are in currency, which are different from the U.S. dollar. There were also in terms of G&A upward pressures because the variable compensation component, of course, is linked to the very strong results that we have achieved last year that we anticipate to receive this year, but they are not a permanent part of our cost structure. And in a weaker market, the these part of these increases are therefore expected to unwind.

And yes, I would say that those are the, let's say, the main -- the main items. Of course, there's more traveling, which is happening that is not -- has a contributor as the other costs we mentioned, but traveling activity has resolved into also for us this year and already in the course of 2022, and that also is contributing to some upward pressure on the G&A costs.

Going on to the following page, we show we glance at indicators relating to our balance sheet. The ratio between the net financial position and the feet value improved further, decreasing from 36% to 27%, 36% at the end of last year, so 27% at the end of the first quarter. We'd like to remember that this ratio was at 73% at the end of 2018. So this is a very big improvement that we managed to achieve and that leaves us in a very strong [indiscernible] currently, and we expect this ratio to improve further in the coming quarters given the strong prospects for the market.

We ended the quarter also with $155 million of cash. We generated a very strong EBITDA first quarter of $76 million. But also, as anticipated, our cash flow generation, cash flow from operations in the quarter was actually being stronger. It was over $99 million because we had some positive working capital effects. And we had discussed this in our previous call in relation to our full year 2022 results.

Looking at -- going on to the following page, the key line items of our P&L, we -- the net profit for the first quarter was $ 54 million. Excluding nonrecurring items, it was 56.5% relative to a loss of $ 6.5 million in the first quarter of last year. So of course, a very strong improvement. Going on to the following page the daily TCE spot. The average was for the first quarter of $36,700. And that is weaker than Q4 last year, which was exceptionally strong, but it's pretty much aligned with Q2 last year where the average was just above 37,000, and it is stronger than Q2 last year. So it's still a very good result. And as we showed you just now Q2 is also -- has been so far also very strong.

I pass it over to Paolo for the market overview.

[Paolo d'Amico, executive]

Thank you, Carlos. Here, we have our now slide according to [indiscernible] today is $250 and $40 for the $1000 per day. So in a market which is absolutely volatile. And I have to say the first quarter seems me at the beginning, a little bit complicated as [indiscernible] before looking at the results, we can easily say we did very well. And of course, but it's an element of the crisis in Ukraine, which is playing a major game. Since the European sanctions, Russian exports to Europe are basically disappeared but increased tremendously to other countries like India, China, West Africa, Brazil and Middle East.

We can say that in terms of volume, vessels, they even improved the quantity traded. They certainly earn less market, but the volumes were on Asia. All this, we increased the volume of the so-called as trade, which I'd like to remember it is partially sanctioned and partially is not because we see trade we did the price caps. We can trade with Russia. We are not doing people colleagues doing it. This is creating a very strong demand of shares for the state, and we are going [indiscernible] they are taking from the same, but not satiated that we are doing. So reducing our supply on one side and moving it to the Russian side of the map. This is, let's say, medium to long term to even improve other fundamentals, which are extra see today.

We had some production cuts done by Russian [indiscernible]and then from OPEC. And this production cash should considering that we -- the where consumption should be safe around the 11 million barrel per day [indiscernible] on the second half of the year. The throughput from the refineries is recovering again from the COVID situation. The last one is coming back to the market is China. We are increasing a lot the capacity. And even with the slowdowns, which are expected, we see a decrease on the throughput of a war.

The inventories are very low level. And what we are seeing, this is probably feeling of a possibility of a recession or a very light one. The decline in middle is fracs because consumption middle [indiscernible] I would say, our diesel they are going down. But in the meantime, the consumption of gasoline and especially the consumption jet fuel. Jet fuel is really struggling to be a lot. This is due to side we mostly the says flights are recovering the number of flights we are increasing and people need [indiscernible].

Certainly, we have given a little bit of a competition from a crude tanker market was discussed the created less demand on the 2 tankers. There's nothing with them. We are really worried about because looking at the average rates we are making today, I will really see any problem. The change of the refinery landscape is, as I said in previous calls, very much concentrated in the Middle East, East, China and India. And this means that more to in for supplying markets in U.S. and Europe. So even this is a positive element for the demand.

[indiscernible] is improving, but it's not going to be a game changer because producers are very much focused in fact that in the, where is the let's say, I think the printer to our industry is on the supply side because we have elements will be pushing older assets to the evolution or to the slowdown. And I'm talking about the intensity indicators that we have efficiency indicates a come in force.

The pool of devolution categories is increasing quarter-by-quarter because [indiscernible] and -- just to give you an idea, if we take the tanker industry, as a whole, crude and clean and all the action more or other already over years of [indiscernible]. So this is something that should make us thinking on how tight supply is going to be in the future. If you want to build a share today, you are not going to see that before but 2025, [indiscernible]. So it's very much down the road.

The new building costs are extremely high, and this is stopping, of course, any sort of secular order. And the final result of this, the fleet growth is basically close to 0. So looking starting from the supply side, our fundamentals are extremely strong. We put the demand which is there and which is requiring longer routes, so more [indiscernible]. I can say that even in a very volatile world, here, we've been set due to possible recession or not. I mean, I think that we are -- we can that we are, and I think we will stay positive ground for [indiscernible]. And I'll leave it to Carlos to talk to you about the [indiscernible].

[Antonio Carlos Balestra Mottola, executive]

Thank you, Paolo. The last slide here we usually cover in the presentation [indiscernible] relating to the NAV. Our NAV since the end of last year rose from around $740 million to almost $810 million. On a per share basis, it rose from -- also in U.S. dollars from 0.6% to $0.66. That represented as at the end of March of 23% of NAV based share yet, but based on our share price is trading today, the discount is closer to 40% to NAV which is once again an enormous discount.

And our share price today is actually pretty much in line very small discount to our book value, which we think doesn't make too much sense. [indiscernible] fund last few years. So that really represents an absolute minimum at which we should be trading and it would only be justified in if we work -- we anticipated a very negative scenario going forward, which is not the case because we -- the markets are still very strong. And despite some headwinds on the macroeconomic front, there are many other assets, which will be supporting. The market, as Paolo covered, and therefore, we do still expect the markets to be very strong in the coming quarters and years. I pass it over to you for the Q&A session.

[Operator]

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

[Matteo Bonizzoni, analyst]

I have 2 questions. The first one relates to the volatility of the spot rate, which we have observed year-to-date. And also, I would say, some swings in the refining margin. So the spot rates were softened a little bit in January, if I'm correct, and strengthening again significantly in February. But then from the public information which we receive currently, we are around half of the level which you posted as an average in Q1. So there has been a significant correction numbers if you look at the refining margins that has been, for example, the results of Sarasota refinery started from April, the level of the refining margin has significantly corrected impact as regards diesel. So it's -- which proved very strong number of months and how it has significantly corrected in the last month or a month and the half. So how do you see this situation? Can you provide a little bit of color on this volatility, your expectation in the midterm remains positive but just to know your view on this kind of movements and if there could be another maybe strengthening from this level which we have seen as of late?

The second question is more an Americas question. Putting the figure in the moniker, I could not reconcile some data which you provided. So if I put a fleet market value of 1,037 and a net financial position ex IFRS 16 of $316 million, I get a loan-to-value of 30.5% and not 27.2%, which you disclosed to get that kind of loan to value, I would be to assume a fleet market value significantly above what you disclosed is the region of $160 -- just to check, as I said, missing something or if there is some delta.

[Paolo d'Amico, executive]

I pick up the first one. I mean we have to fix it. We are in a slowdown. I mean, we didn't see that there nothing is happening. And also the fact that the margin or refining margins of diesel and you know that diesel is the fuel of the economy. So if it reflects same thing by of a number of containers that they are moving less in the States and relative tracking, which is not needed anymore. Of course, the diesel is in a weak position. At this doesn't change for us too much because, as I said, where fuel is growing a lot. And we move from one commodity to another one. So yes, we are related, of course, to the energy world. But not as strong as many people think. So this is what happened.

As far as average, yes, the rate went down, but we have also to do analysis in the sense that you have the Atlantic basin which is in by far less when areas. -- arises starting not this why? Because you have this strong movements of diesel from instance, refineries [indiscernible] going to Europe and going west. So you have an increased movement of the sites going with and increasing the supply on the west side and decrease in supply on east side. [indiscernible] got our exposure on the west side is extremely emitted and our exposure on the east side is quite good, not because we are serious because I mean we try to avoid to go west when everybody was going west.

And -- so yes, from a general, let's say, look with the rates they lost ground. But if you go a deeper analysis in test, we are still running around $30,000 a day, which is not far away from the numbers that Carlos would be renewed for Q1. I hope this helps you.

[Antonio Carlos Balestra Mottola, executive]

Yes. Now I'd just like to add a few things to what Paolo said, and then I will also answer the other question. It is true that the refining margins have come down and as we showed here, but these are cracks for assuming you're buying brand, okay? I mean -- but as we know, a lot of refineries in Asia today, especially in India and China, amine very cheap Russian crude. These are also more modern refineries. And the margins that they are making are completely different from the margins that refineries in Europe are making. And shipping, I would say, is driven by -- on the demand side, by 2 main factors.

One is the demand for the final product. So if volumes consumed increase indirectly, that would throw to greater need for transportation. But arbitrages are very important and dislocation of refinance is very important. So this environment in which we are in, where you have refineries in one part of the world, which are earning margins, which are completely different from refineries in the rest of the world creates huge arbitrage opportunities. And that is driving a lot of product from the east to the west, and that is what Paolo was referring to. That is the reason why a lot of vessels have moved from East to West. And that is why the market is so weak in the West right now and one of the reasons, and it is very strong instead in the East.

And -- but this environment is very positive to us. There's a difference in net margins in these 2 different bases. And this is something that we have been talking about for a long time that was going to happen in any case, even without a war because there was dislocation of refineries as even without the cheaper product that they are buying and today from Russia, the refineries in Asia and in the Middle East that are being built are more competitive. They are more modern refineries, they can deeper conversion refineries, they can produce more of the higher value-added products.

And they were driving out the cannibalizing the production of the other refineries in Europe. That trend accelerated during COVID, and it will accelerate further in the coming years because as you saw in our presentation, over the next 2, 2.5 years, there are 7.3 million barrels per day of additional refinery capacity that is going to come online. And where is that refinery capacity coming online in India, in China and in the Middle East. So these refineries for different reasons are going to be gaining market share and this is going to be contributing to ton miles and helping our market. So I think that, that is very important to keep in mind.

In relation to the other question, if we look at our financial position, as we have a slide here in the presentation, excluding IFRS 16, it's actually of $282 million. And as you see here, it's $316 million, including IFRS 16 to $282 million, excluding free market value of just over $ 1 billion. The ratio is 27%. So I hope that answers your question.

[Operator]

The next question is from Massimo Bonisoli of Equita.

[Massimo Bonisoli, analyst]

Two questions. One is on the price of all the vessels on Page 20. They increased faster than your vessel, if I got correctly it is even more evident if we look at 20 years old vessel. I just want to understand your opinion on the implication. Does it imply that the strategy rate will decline going forward and other vessel may remain on the market, or am I wrong with that? The second question is on the cost increase on Page 15. If you can provide some indication on the inflation cost effect for the full year on 2023.

[Paolo d'Amico, executive]

Okay. Again, I'll pick up the first one. From a theoretical point of view, if you have supply, which is new vessels, which is basically blocked 3 and you have a current fleet going on, of course, the age of vessels will iterate. [indiscernible] starting very the product carriers due to the fact that they are built with coatings, which protects that corrosion and sort of how, let's say, -- we believe longer than a normal or tanker and the, let's say, to rate 25 year on ag. But that is the commercial use of the ship because already moved 20 years already over 15 years, you have charters [indiscernible] let's say, so the severance, [indiscernible], they are not sure and you're already moving to trackers.

And then going over 20, you have a number like of charters were not big. So of course, more in to go ahead and more of these ships are going to be excluded. What happens to the market, of course, has to pay more and will be an equilibrium and need a certain point of substitution beyond the fleet. We hope that we will see some business which would help us to substitute to the rest of the long term, also because the risk is that the touches, again, [indiscernible] so really to find themselves, we have availability of ship because remember, it's care.

You have to add another thing, which is the more or less sanctioned trade with [indiscernible] I mean many orders undrawn to use lease have been heavily safeness of course, and a son -- but the tension on or were not sanctioned at end of that for us and for our market, these are like to be demolished because they are going to disappear. They are not coming back to compete with us. And that is another element of reduction of supply. So where we are going to end up with all this, frankly, I have an opinion, but I mean it's very, very difficult to say. At one point, I think that the top guys, they have to stand there and say, look, we have to do some projects here because otherwise, we are not going to solve the future growth.

[Antonio Carlos Balestra Mottola, executive]

All answer the other question and also just add a comment in relation to the dynamics for the older vessels. It is not surprising that the older vessels tend to live by a larger percentage when you have very strong markets. Of course, it is cloud a lower number of years of cash flows in their valuation. So there is a very rational reason why they are more sensitive to the current market environment. In this particular case that we are experiencing now, there is an additional reason why these vessels are very much in demand. despite, of course, what we would have expected instead because, I mean, given all the push for ESG, given the fact that these vessels are going to have to be paying more for the CO2 emissions that they're going to be generating because they're going to be generating more sales emissions from next year when we are trading in European waters.

They are hugely in demand because, as Paolo was referring to, they are the vessels which are primarily trading Russian products. And they are being bought by company, which then using them exclusively for such trades. And that is putting a lot of pressure on the SFP market on these vessels on the prices of these vessels. I imagine that often the buyers of these vessels also have to buy them only with equity. I'm not -- probably they don't have access to bank financing. They are bought through vehicles which have op shareholding structures, but there is an increasing number of vessels, which are moving to that trade. And this is something we did not discuss in the call, but I mean the immediate effect of the sanctions that came into force on the 5 February from the European Union were to reduce the number of vessels that we're calling Russia because there was an initial, let's say, reaction of prudence, even by operators which were calling Russia before.

But of course, that increased the profitability of such trades to the detriment of the profitability of the other trades. So that is probably one of the reasons which explains the volatility and the weakness we are seeing in the spot markets, particularly in the west of suits area. But as more vessels migrate to these trades because of these higher profits, which are available on these rates, this will tend to self-adjust itself, and these abnormal profits which are being earned in these Russian trades by the ship owners are going to diminish most likely. And the freight rates for the other trades are going to increase. So there is -- we are going through, I would say, an adjustment phase.

For example, one immediate effect, which we saw was an increase in Russian exports to Brazil. Brazil used to import a lot of products from the U.S. Gulf. Now it is importing from Russia. It is a longer this. So if you look at the market as a whole, it is a positive development. But this positive development is being taking advantage of only currently by the by the orders, which are calling Russia. As more vessels, as I mentioned, moving to that, then the rest of the market will also benefit from this -- it's also important to note that the vessels we are whole in Russia, in many cases, are trading exclusively sanctioned trades and primarily Russia. And therefore, they're extremely inefficient because they are not able to do the usual triangulations that we do, and they have very long balance, so very unfavorable balance related ratios, which reduces their productivity. So that is also good for the market.

In relation to the other cost on the direct operating cost front, our anticipation is that the increase this year is going to be lower than what we experienced on a quarter-on-quarter basis in Q1, which was of a 10% increase. It's more likely to be in the 6% to 7% range. it's also true that a lot of these costs are front loaded. And we tend to concentrate a lot of our purchases of spare parts and for our spare parts for our vessels in the first of the year.

[Operator]

The next question is from Daniele Alibrandi of Stifel.

[Daniele Alibrandi, analyst]

[indiscernible]

[Antonio Carlos Balestra Mottola, executive]

Last question we could not hear.

[Daniele Alibrandi, analyst]

Yes, question was on basically also on the [indiscernible] the best order have picked up a little bit over the last weeks. So are you seeing an increase in trend of this.

[Paolo d'Amico, executive]

[indiscernible] American oil company. [indiscernible] at we have to see and how we are going to feel the market points make a decision And, of course, we are [indiscernible] we believe that next year is going to be a reasonable market. I don't want to satiate I think that on the numbers late as this. [indiscernible].

[Antonio Carlos Balestra Mottola, executive]

I mean if you look at the segments we operate in, we did provide an update here. So it's still very much under control, and we would like to highlight 2 things in other facts. One is that is 33. The delta between the order book and the fees, which has more than 20 years, despite these orders that you are referring to in the segments we operate in increased. So it was of 3.7% at the end of 2022, and it moved to 4.1%. Therefore, the pool of the demolition candidates increased faster than the order book despite this small increase in the order. So overall, 28 vessels were ordered 1 segments as of the end of March.

So it's definitely not a very high number. If you analyze that, then, of course, we continue ordering at these rates, then that can be more concerning. But yes, the outlook as it stands is still very positive in this respect. There were more orders however placed for [indiscernible]. So if we were to include LR 2 here in the picture, we wouldn't look as good as it was by excluding that. Now other LR 2, however, they also compete with the after taxes. And so they do move quite a lot from the 1 to 3 trades -- and the order book for the affect is much more limited than the order book for the LR 2.

And in general, for all the crude tankers, the focus minimum and currently allows much lower than the product banks we for 3%, around 3%. So we are not too concerned about the orders for the LR2s. The [indiscernible] sector is the one which has been benefiting most from the current environment on a relative basis. And so that is probably why this has to have some ship orders to focus their orders on the LR2 sector.

[Operator]

And there are no more questions registered this time. I'll turn the call to you for any closing remarks.

[Paolo d'Amico, executive]

This point, I just thank you all for being with us. And if there are not any more questions, thank you very much. And we will meet again at our next call. Thank you.

[Operator]

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