d'Amico International Shipping SA
MIL:DIS

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d'Amico International Shipping SA
MIL:DIS
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Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
Operator

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the d'Amico International Shipping First Quarter 2024 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Carlos Balestra di Mottola, CEO. Please go ahead, sir.

A
Antonio Carlos Balestra Mottola
executive

Thank you, and good afternoon to everyone. Thank you for attending our presentation today. As usual, we will skip the executive summary, and we will start with the fleet overview.

This is a snapshot of our fleet as at 31st of March '24. We controlled 35 vessels, mostly MRs, 23 and then [indiscernible] presence of 6 vessels in each of the LR1 and handysize segments. Modern fleet [indiscernible] with an average age of 8.8 years relative to an industry average of 13.4 for MRs and 14.8 for LR1s and 80% of the controlled fleet is [indiscernible].

The fleet was built mostly to an important newbuilding program with vessels delivered to us between 14 and 19, 22 vessels. Recently, we ordered another 4 vessels, which are going to be delivered to us starting in the second half of 2027.

Going on to the following slide, we show here the important investments that we made since 2012. [indiscernible] of course a few years and then we have started reinvesting through the exercise of some time charges an option and an opportunity that was presented to us where we acquired the 50% stake of a JV partner in a [indiscernible] international shipping and most recently, through the purchase of young secondhand vessel of $43.5 million. And the 4 LR1s that we ordered which would [indiscernible] totaling [indiscernible] over $120 million, of which $43 million this year and the rest mostly [indiscernible] with a small part of the end of '26.

I'll pass it over to Federico.

U
Unknown Executive

Thank you, Carlos. So this is the situation of our debt repayments. So very stable situation. We have no refinancing needs for '24 and '25. We remain approximately $27 million a year from 2024, 2026. As you can see, in 2024, and this is going to happen in Q2, we're going to repay also $6.5 million which is the debt [indiscernible] Glenda Melanie, which is the oldest vessel of our fleet that we recently announced the sale of and we're actually going to deliver the vessel by -- between this week and next week.

On the right side of the slide, you see our [indiscernible] loan repayments on our own vessels. This has been falling down quite substantially. It was $6,147 in 2019 went down to $3,600 a day in 2023, and we're expecting it to be even lower than $3,000 a day in 2024. This is obviously the result of our large deleveraging plan that we implemented in the last year. And also, right now, we have some of the vessels that -- on which we exercise our purchase options that we had previously sold and leased back, that are currently free of that. So obviously, this helps this ratio to force even lower. [indiscernible] purchase options.

A
Antonio Carlos Balestra Mottola
executive

On the purchase options, we have been very active exercising these options in the last few years. We have 3 remaining. These are contracts where we have purchase obligations at the end. And so we are basically [indiscernible] financing arrangements for us.

And we have exercised the mostly to lower our cost of financing which [indiscernible] could have exercised this year, we decided not to because the implicit cost of financing of doing so later September next year is actually very low, but we will be exercising the fidelity and discovery in in September '24 and the other one in September '25 and the [indiscernible], we will also be exercising September '25, which is basically the purchase obligation date for that vessel.

On the PC investments, we exercised already the options for the Adventure and the Explorer, but we still have 4 vessels [indiscernible] we have purchase options that are well in the money and that we plan to exercise in the coming quarters, possibly this year and 2 next year. And they are all high-quality passes built good shipyards, and they are relatively young ecodesign vessel. So we are looking forward to add these to our fleet for a long period of time. If we were not to exercise these options, we would eventually lose control of these vessels. These are the last purchase option exercise dates here.

So going on to the following slide. Frederico?

U
Unknown Executive

Yes. [indiscernible] show here our coverage. We had 41% of our days in Q1 '24 covered at an average [indiscernible] rate of $20,123. Q2 2024, it's going to be more or less at the same level with 40% coverage at an average daily rate of slightly less than $20,000 a day. Then our coverage is expected to be to -- go slightly down in Q3 '24, 33% at an average daily rate of $27,151. And in Q4 '24, with 22% coverage at an average daily rate of 27,240. So overall in fiscal year '24, we're expecting to have coverage of 34% at an average daily rate of 27,900 [indiscernible], so extremely profitable rate for us.

It's interesting to see also the graph below. It goes back a little bit to what Carlos mentioned before, [indiscernible] a large investment plan of the last year. And also the fact that we delivered 2 kind of all time [indiscernible] vessels between Q1 and Q2. And we're also going to sell the Glenda Melanie in the course of this month. So this ratio was 38% in Q1 2018, and we are expecting to go up to 85% of our total fleet by the end of the current year.

Here, [indiscernible], we gave a little bit of an overview on how we are performing so far in the second quarter of the year. As I mentioned before, we already fixed 40% of our days at $27,132 a day in terms of time charter coverage plus we already faced 31% of our spot days at 39,441. So this is an extremely profitable rate and even higher than what we have achieved in Q1.

So overall, we fixed more than 70% of our Q2 date, 71% [indiscernible] at an average blended TCE, so the sum of the fixed [indiscernible] the spot side on the [indiscernible] side of almost $33,000 a day. And we show on the right side what our blended TCE would be should we make $27,500 per day on our remaining 3 days for the quarter. Or $30,000 a day on the remaining 3 days for the quarter, $32,500 a day on the remaining 3 days for the quarter. So this year could be between, as you can see, $31,400 a day up to probably $33,000 a day of blended average TCE.

Here, we show, at the top, the estimated fleet evolution from 2024 to 2026. So we're expecting to manage an average of 34.2 vessels in 2024. This figure should be slightly lower in '25 to 33 vessels and then 32 vessels in 2026. Then the graph at the top shows, as usual, our sensitivity for each $1,000 a day of higher spot rates. So for each $1,000 a day of [indiscernible $5.3 million for 2024 [indiscernible] right now. This, obviously goes higher in '25, '26 [indiscernible] coverage versus years right now, and it is in the tunes of $10.3 million, $10.7 million for 2026.

[indiscernible] the bottom, we show as usual of what our estimated net results for 2024 would be, should we run the rest of the year at a breakeven level at a level of around $15,000 a day. So this would entail a net result already locked in, if you want, of almost $119 million for 2024.

And as usual, we show also [indiscernible] on this figure here. So in case the 3 days, the spot rate for the remaining 3 days of the year, we have $20,000 a day, we would make $143 million of net profit this year [indiscernible] figure were $25,000 a day, we would make $169 million for the year in case [indiscernible] $30,000 a day, we would make $195 million for the year.

In terms of costs, we discussed this several times in 2023. As for many other sectors, we had a [indiscernible] obviously, inflation going on, inflationary pressures, particularly on crude costs and also on insurance costs, insurance particularly, this is also the reflection of high [indiscernible] which obviously [indiscernible] a higher premium. However, this pressure is kind of [indiscernible] this year we see these costs stabilizing. The increase in 2024 relative to Q1 2023 is not very significant. We went from $7,700 to $7,800 a day. So we believe this is under control.

In terms of G&A costs, our G&A for the first quarter of the year were $5.2 million, $1 million higher than the same quarter of last year. This is mainly due to the variable component of our personnel costs, which is really the result of very profitable year that we achieved in 2023 and that we're expecting to achieve also in 2024 [indiscernible].

In terms of net financial position, very strong financial structure for this. We have the ratio between our net financial position and our fleet market value is of only 11.5% at the end of the quarter versus 18% at the end of 2023. Net financial position was $152.5 million at the end of the first quarter of the year, compared to $224 million at the end of the previous year. Cash and cash equivalents went from $111 million at the end of 2023, up to $170.1 million at the end of March of this year. But it is also to show [indiscernible] that this ratio is very significant for us of 11.5%. Our financial leverage was 73% at the end [indiscernible]. So this is obviously the result of our deleveraging plan that we also mentioned before.

Key highlights on our income statement. Very profitable quarter, $56.3 million for the first 3 months of the year, even better than last year, we made $54 million in the first quarter 2023, excluding some nonrecurring items, our net EBITDA would have been $56.7 million in the first quarter of this year versus $56.5 million in the second quarter of last year. Strong EBITDA also $76 million, strong operating cash flow, which was almost $77 million in Q1 2024, which is actually lower than what we generated in Q1 2023 when we made an operating cash of $99.2 million, this is just a result of a timing effect in our working capital, which was fairly positive in Q1 2023 because it was very negative in Q4 2022, so its really a timing effect.

Moving to the next slide. Our KPIs for the quarter. We managed an average of 35.5 vessels in Q1 '24, slightly lower than the 36 ships that we managed in Q1 '23. Our fleet [indiscernible] coverage, we saw this before, was 41.3% in Q1 '24, higher than the '25 of 2% the same quarter of last year. Our daily covered rate was $20,123 per day, way higher of the $26,400 a day of Q1 2023. And in particular, spot daily rate was $30,200 per day in Q1 2024 compared to $36, 650 in Q1 2023. Overall, our blended TCE was above $34,000 in the last year that you see there in the table, was above $34,000. They very much in line with the same quarter of last year despite the highest spot rate. And this is only due to the mix between the different mix between spot and time charter coverage.

And I leave it to Carlos for the market overview.

A
Antonio Carlos Balestra Mottola
executive

Yes. Thank you, Federico. So here, we show the evolution of time charter rates, freight rates and vessel prices over a long time horizon. And we see that TCE rates and spot rates, we are quite close today to the all-time highs. TCE rates, in particular, 1 year TCE rates [indiscernible] MR vessel, is currently up about $33,000 per day, the highest we have seen in this last cycle was around December '22 at $35,000 per day, so we are very close to that level.

And also from the [indiscernible] LR1 vessels, the rate, the 1-year TCE rate is currently very high, around $42,500. And vessel values have continued moving up throughout the course of the first quarter. They are now -- they're still below the last super cycle peak. Although, especially in terms of [indiscernible] prices, we are starting to get close where we stood down. We are now 7% below. [indiscernible] vessels instead are still lagging a bit behind 16% we know the last super cycle peak, which was a long time ago around 2007, 2008.

If we look at where the freight rates are today relative to where they were in 2007, 2008 [indiscernible]. We are, however, at a higher level today. So that seems to indicate that it's more room for vessel [indiscernible] to potentially continue moving up.

And why do we have such a strong market? Well, there are a number of structural factors, which have been playing out over a number of years, and that should continue positively affecting the market going forward. But there are also some more exogenous factors, which we have benefited from and which we did not anticipate the [indiscernible] such as the effects of the war in Ukraine, which has been supporting the margin since the beginning of 2022 and which since February '23 was a major change in trade flows for Russian refi product exports, which have hovered at around the same level as before the war started around $2.5 million per day but whose destination has changed dramatically, whilst around 50% of their products used to be exported to Europe and the U.K. -- to the U.K. and now only a small amount exported to new countries are mostly [indiscernible] countries, which [indiscernible] through pipelines and [indiscernible] have alternatives.

And with the remainder exported to much more distance locations, Latin America and Middle East and Asia, in particular. Some sales locally in goes to North Africa or Turkey. From Turkey, it is then reexported, they have their own refining industry. So basically swapping Russian products for their products. But it does increase the overall amount of refined products traded and also the products which are going to North Africa are mostly that we reexported from that to other locations. So very inefficient.

And of course, Europe, which used to source a lot of its products from Russia, now is buying more from the U.S. from the Middle East and Asia. So big increase in -- this has led to big increase in ton mile demand for refined product tax.

More recently, since the end of last year, we have also witnessed a new trade disruption link to the [indiscernible] attacks on vessels translating through the [indiscernible]. This has always been an important part [indiscernible] for product tankers, but it supported increase after the onset of the war in Ukraine, and we see here in January '22, 37.5 million barrels across [indiscernible]. But the figure then rapidly roll after the war started to between 70 million, 80 million barrels per day. And since the offset of these attacks, it collapsed to 19 million barrels per day.

So whilst it's flowing through [indiscernible] mostly linked to Russian and China's interest, which are not being targeted by the [indiscernible]. Most other shipowners avoiding crossing, including ourselves, of course, through [indiscernible]. The alternative of crossing [indiscernible] is [indiscernible]. And this of course is a much longer route, how much longer it depends on which is the loading port and the discharge ports [indiscernible]. We have shown important -- most important routes [indiscernible] through [indiscernible] and how they were affected in terms of saving [indiscernible] and percentage [indiscernible] by having to say through this longer route. So for example, [indiscernible] saving days increased from 23 to 38 days. So it's a 15 days increase, which is a [indiscernible] 65% increase. So it's very, very significant increase.

And how has this impacted the market? Well, of course, it did close some of the [indiscernible], which were open when vessels could sail [indiscernible] because there are higher costs [indiscernible] going the longer routes. So overall volumes in all these routes have fallen to some extent. But nonetheless, it did have a positive impact on the market. The maximum potential impacted volumes are not being in [indiscernible] would have been between 5% to 7% actually impact. This is our own estimate here, it's probably closer to 2%, which is still very significant, given we were already in a very tight market before this additional disruption start.

Panama Canal is a less important passage way for product tankers and [indiscernible] it's also quite an important disruption for our vessels. Mainly because they trade trap and they cannot book crossings in advance. So they tend to end up at the end of the queue which means that some of product tankers decided to sell the longer way through modular, so adding miles, but also that -- some trade, which would have happened typically from the U.S. Gulf to the West Coast of the Americas, both South and North America, to Panama instead were replaced by volumes imported into the West Coast of Americas from Asia over a much longer distance. So once again, an increase in more miles.

This problem was linked -- this reduction in permitted crossings was linked the low water levels in the [indiscernible] Lake, which was linked to the El Nino effect last year. We are now moving into La Nina and also into the rainy season, which starts in around April, May in Panama and goes until October, November. So what the levels in the [indiscernible] Lake are expected to rise and this problem is expected to alleviate short term.

Longer term, however, we are likely to be [indiscernible] other restrictions and crossing through Panama because there is a structural problem which needs to be solved and would need -- would require a new lake to be built and that would -- that requires a number of years to be done. And so -- it [indiscernible] that this problem, is not going to be as important short term, but it is likely to be a recurring problem we will encounter in the future.

Moving on to the more structural factors supporting the market. Oil demand has been growing very fast. Last year, still recovering from COVID and in particular, benefiting from the reopening of the Chinese economy with a [indiscernible] of 2.3 million barrels per day. In '24, the expected growth is lower, but still robust, 1.2 million barrels per day in oil demand growth, with increase in refined volume of around 1 million barrels per day and already a very tight market, where as we will see later when we look at the supply picture, [indiscernible] supply is growing at historical lows.

We -- as we saw from the slides presented by Federico, our results in Q1 and in Q2 so far have been very strong on the spot market. That despite the fact that March enabled them to be seasonally very low periods for us because they tend to [indiscernible] big refinery maintenances worldwide and therefore, with very low refined volumes as we see here in the graph on the right-hand side. And refined volumes are expected to pick up during the course -- during the rest of Q2 and into Q3 reaching a bit probably around around [indiscernible] as happened last year where the highest volume yearly volume happened in orders. So -- and we are already in a strong market. So potentially, the market will get even stronger as we move into Q3.

On the supply side, not a spectacular growth in supply expected this year because of the continuing OpEx cuts and also slightly lower output from Russia but more than compensated by higher output coming out, especially from the U.S., Brazil [indiscernible] and Canada. And the good thing is that these additional volumes are most likely going to be imported by Asian countries and in particular, China, contributing to ton mile demand for crude tanker. So we expect, especially because of very low -- very limited supply growth for crude tankers, very strong and improving market in '24 and '25, which should also support the product tanker market because of the linkages between the 2 sectors as we will see later, which occurs mostly through the LR2 pass.

Refined product stocks are again well below the 5-year averages, and this is also could be a supporting factor for the market. In some locations, it starts could reach at critically low levels and then will have to be replenished leading to an additional demand for [indiscernible] transportation, which exceeds that of which we would normally have if it were only linked to the consumption growth.

Going on to the following slide, refinery margins are very strong. There has been quite a lot of volatility. If we look at individual products. Most recently, we have seen a weakening in refining margins for diesel [indiscernible] but an important strengthening in margins for gasoline since November last year with fuel oil margins, which stayed at quite historically attractive levels.

Looking at the contributors to demand growth next year, whilst in 2023, most of the growth was linked to an increasing consumption of jet fuel as the Chinese economy reopened, and we see on the left-hand side that the number of commercial flights are well above where they were in 2019 already. This year, the most products are contributing more or less evenly to the growth in demand. And we have maybe the star product being [indiscernible] the opening of these new petrochemical plants in in China, but also important contributions coming from gasoline, fuel oil and jet fuel.

And here, we look at the crude tanker space because of the linkages we were referring to before, yes, the order book has increased since the [indiscernible] at the end of '23, but it's still at very low level, 5.9%. And freight rates are already at very attractive levels, but we expect them to strengthen further in the coming years. And it's also quite important to note that 62% of the LR2s are [indiscernible] right now, is quite a high percentage. It was going back to January 2020 was only higher in January '23 at 64%, but it was as low as 54% to [indiscernible] July 2020. So there's a lot of scope for LR2s to move into [indiscernible] trades going more if group tanker markets as we expect, are strong, providing further support for the clean product trade.

We can skip this slide. On this slide here, we look at the refining landscape. This is another structural factors, which have been playing out over a number of years. We have seen a lot of refinery closures in the Oceania, in Europe and in the East Coast of the U.S. over the last few years, it was accelerated during the COVID pandemic but is expected to continue going forward. As these refineries, all the refineries, lose market share to the new refineries which are being built in Asia and the Middle East.

We saw last year quite a big increase in refinery capacity in the Middle East. It was, of course, around [indiscernible] throughout the year, and we are going to be benefiting from the additional capacity mostly this year and we've seen also an important increase in refinery capacity in China in the coming years, a lot of that also likely to be export driven.

And we also see here Africa, which is an important contributor this year, they got the refinery in Nigeria is already up and running. It's going to be, when it's a capacity, potentially producing up to 650,000 barrels per day. And it will dampen demand for imports into Nigeria, but it will also lead to more exports out of Materia. And often refineries are not able to produce exactly what is needed for the domestic market.

And therefore, we expect the same to happen in the case of [indiscernible] and we are probably going to have surpluses of certain products and scarcity in other products [indiscernible]. So there's still going to be some import activity, but also some export activity. So it's uncertain whether this is going to be positive or negative for the market. Time will tell.

Going back to the U.S. and to the crude oil market, we see how resilient oil output out of the U.S. [indiscernible] despite flat rig count sales around the middle of last year. The high oil price environment we are in now should support an increase in rig counts going forward, which would be further iterate U.S. production.

And -- then moving on to the supply side. There are several factors which should be stimulating the [indiscernible] going forward. One of them is the very high scrap steel prices we are seeing currently. Of course, it's a very strong environment -- freight environment we are in, demolitions have been minimal. But the [indiscernible] an important safety buffer we have because the fleet, as we will see in the following slide is aging quite rapidly. And for some reasons, market were to correct, this could be an important rebalancing factor, which could then allow us to recover and to see stronger markets quite fast. There are also regulatory pressures, which should penalize all the vessels -- polluting vessels, which should encourage the demolition of these over time.

As we see here, we have, as at the end of March, 12.1% of the fleet, which was more than 20 years of age, whilst the [indiscernible] at the same day was at 8.9%. So this is an important increase from 3.5% at the end of 2022. But if you look at the delta between the vessels, which are more than 20 and the order book, it was at 3.7% at the time, now it's 3.2%. So it's actually not a big increase in this -- or big decrease in this delta. And the potential for the [indiscernible] will keep driving in the coming years as by the end of '25. This is around 16% of the fleet will have more than 20 years and almost 56% will have more than 15 years.

This other line here is important because as vessels across the 15 years of age, they are limited commercially. They cannot call old terminals. As they cross the 20 years of age [indiscernible], then they take even tougher limitations and we tend to start operating in the niche markets. They also are also less productive as they get older, they have to stop after 15 years age, every 2.5 years for special surveys, rather than every 5 years. So -- and of course, they also usual encounter more break downs and more [indiscernible].

So fleet productivity should decrease in the coming years because of this aging -- rapidly aging fleet, which should provide further support for the market. And at the bottom here, we see vessels, which are reaching the 25 years of age threshold where most likely, they're going to get the [indiscernible] they say that they operate beyond this age in very strong markets.

So we see that, for example, already 27 and 2.2% of the vessels -- the vessels reaching 25 years of the age would represent 2.2% of the current trading fleet. And by 2029, this figure goes up to 7% and then 11% by 2033. So it is likely that the yards given the current production capacity are going to be able to deliver in that fast. So to compensate for the likely demolition that we are going to be witnessing from [indiscernible], which should be very support -- supported for the markets in the medium term.

[indiscernible] how the [indiscernible] have collapsed because of the strong markets, creating room for pent-up demolitions going forward. Here, we see how there are a lot of vessels or in '23. But for the reasons we mentioned just now, we don't see this as an issue.

One additional [indiscernible] factor, we didn't refer to is the fact that that's order today for delivery in most cases, in '27, various fuel slots still available for delivering in '266. So the current order book, which is rather low by historical standards. If you look where we were at the end of 2017, the ratio was at 60%. And is going to be delivered over a number of years. And therefore, that should also avoid any oversupply issues.

In our case, we just ordered now LR1s, and we had to accept deliveries at the end of 2027. So I think that's quite indicative of how spread out these deliveries are going to be going forward. And you see the anticipated fleet growth, which is a historical lower this year, less than 1%. And of slightly higher next year where we anticipated a small increased simulations, which remains at historically low levels. And so a very good supply picture.

Also, our NAV at the end of March in absolute numbers was at almost $1.1 billion and translated on a per share basis, it equates to $9.10 per share, which as at the end of March was equivalent to 24, we were trading at a 24% discount [indiscernible]. The share price has traded up since then, but of course, also the NV, which we don't measure that raise, but has I would expect to move up because of the strong cash generation since the end of the first quarter. And vessels values held up since then, possibly actually even increase slightly.

So -- and finally, use of funds. Here, we showed the use of funds and up to the end of 2027. We show what we have already committed to here for teeth second as million and the investments associated with the clans ordered, which this year would amount -- will amount to $43 million with most of the [indiscernible] occurring in 2026 and 2077 and in particular in 27 at the delivery and inside the plan investments of the for which we are still not committed for the exercise of the purchase option on the PC and the moratorias in '24 and '25. That's our currentplan.

So for a total investment of $471 million during the period. which is quite a substantial figure on one, which we don't foresee any problems managing because of our current, very current, very strong balance sheet and current very strong cash generation. as well as because of some nasal disposals, which will be generating some cash for us. The Glenda Melanie, that we already sold. That Carlos mentioned, which was the oldest vessel in our fleet 2010 milled vessel as well as to 2011 in those vessels, which we are most likely going to be selling in the coming 2 to 3 years and replacing them with the LR1s that are going to be coming in.

So in terms of shareholder returns. We have been increasing them over the course of the last years, and we plan to continue doing so, now that we have achieved most of our deleveraging objectives. And so although we don't have an explicit dividend policy as we have stated several times in the past that as we even have on our balance sheet, we intended to distribute a higher proportion of our [indiscernible]. So if this year we do as well as last year, which came in the beginning of the year, we think there are good chances we can achieve this, and we are likely to be distributing volume, out of this 2024 results then we distribute the in 2025.

So I believe that is it. So I pass it over for the Q&A section, please.

Operator

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

M
Matteo Bonizzoni
analyst

It was an impressive presentation. So I have just 2 detailed questions. The first one is as regards to capital allocation. So since the 2023 conference call, which was only 2 months ago, you have placed this order for 4 new LR1, so more than $220 million. The question is you are down for now? Or should we expect potentially more decision of new building for the next weeks or months?

And in relation to that, you have already commented at the end of the presentation that the dividend this year should not be lower than the last year. So it was just to check that what is the trade-off between CapEx potential and CapEx dividend, I think that there is room for both, given the continuation of strong rates, but just to check.

And the second question, which is just a detail on your P&L and particularly cost. I was seeing that your operating cost over the last few quarters are moving sideways in a range of $23 million to $24 million per quarter. And the G&A cost probably could have some seasonality in the sense that Q4 last year was much higher than Q1 this year. So the question is, what should you expect more or less in terms of evolution of your operating costs and G&A costs, including reliable remuneration for 2024?

A
Antonio Carlos Balestra Mottola
executive

Matteo, so I'll try to answer the first 2 questions. I'll leave the third question to Federico. Now, in terms of investments, we -- our plans currently are really to keep a pretty stable fleet and the new buildings that will be coming in are going to be replacing some older secondhand [indiscernible] that I referred to previously that we should be selling.

And however, let's say, our fleet composition should improve, we hopefully, for the better in the coming years. So we should have by the end of 2027, only [indiscernible] vessels. We should have almost exclusively -- maybe with the exception of 2 vessles, eco vessels. And we should have a higher proportion of LR1 vessels in our fleet. So that's where the direction we are moving in, pretty much keeping a stable fleet relative to where we are today.

But a more modern fleet and more competitive fleet, hopefully, a more profitable fleet going forward because of higher potential earnings because a higher proportion of eco vessels but also because of lower costs as we will not have the time charter in vessels and the [indiscernible] charter vessels, which typically had higher breakevens for us.

And in terms of the dividend policy, you are correct, if in '24, our results are strong in Q1 '23, our expectation is that there will be [indiscernible] to distribute more dividends than we distributed in '23, in addition to being able to pursue these investments we referred to just now. And there's probably not much room now for additional buybacks, which is a shape since we see a lot of value in our shares too, but we don't want to further reduce liquidity of our shares, given the controlling shareholder has already a very important stake in the company.

And I pass it over to Fredrico other questions.

U
Unknown Executive

In terms of other direct operating costs, we're currently not seeing huge increases relative to the trend of Q1 of this year. And probably overall in the year, we should land to something similar to what we achieved in fiscal year 2023. In terms of G&A, what -- obviously works on an accrual basis. So -- and we obviously accrue quarter-by-quarter, also the variable component of our personnel costs.

What happened last year, I guess, you were referring to different figures in terms of G&A from a quarter to the other. I think there was a kind of a catch-up in terms of these accruals, which we increased in the -- after Q1. So Q1 G&A represented slightly lower results in which we increased this G&A in the following quarters. I would say that in 2024, probably we should expect, I'd say, something close to what we had in what we had in Q1 2024.

Operator

The next question...

A
Antonio Carlos Balestra Mottola
executive

Something more stable probably relative to last year.

Operator

Sorry. The next question is from Daniele Alibrandi of Stifel.

D
Daniele Alibrandi
analyst

So the first one, if you can please elaborate a little bit more on the choice of expanding your exposure to LR1 rather than MR with the new building decisions from a strategic point of view, which are the reasoning behind this choice? First question.

Second question, I was wondering about your coverage strategy going forward, especially going into 2025, today is rather low, 13%. Historically, the guidance was 40%, 60% so midpoint 50%. But in the last couple of years, it has clearly decreased due to a strong underlying market. What you should expect, say, going forward?

And the last one, just a follow-up on your commentary on the seasonality Q2 versus Q3. The spot rate was really strong in Q2 despite the say, the low seasonal environment was thinking about Q3 if [indiscernible], actually, we could see even an improvement...

P
Paolo d'Amico
executive

[indiscernible]

D
Daniele Alibrandi
analyst

Can you hear me? Can you hear me now?

A
Antonio Carlos Balestra Mottola
executive

The question was a bit lower volume [indiscernible].

D
Daniele Alibrandi
analyst

Okay. No. The last question was around your seasonality. You -- before you mentioned that seasonally, Q2 is a seasonally lower quarter, but we actually printed a strong spot rate so far. So what should we expect in Q3 possibly even better market conditions.

A
Antonio Carlos Balestra Mottola
executive

All right. So on the LR1 versus MR, look, I mean the MR vessels are great. They are still represent the large majority of our fleet still. But we have seen, and we are not surprised about this that LR1 was especially strong markets like the ones that we are experiencing today they tend to outperform. I mean they provide economies of scale that their operating costs are not too dissimilar to those of MRs. But of course, they can carry much more cargo, right?

So the TCE equivalent earnings can potentially be much higher. The [indiscernible] cost, the fuel cost per unit transported is also much lower. And in addition to that, they are more competitive over longer distances. And this is a trend that we have been seeing where total miles have been rising, average saving businesses have been increasing. So increasing the attractiveness of these larger vessels, the LR1 ones. Another good reason why we order the LR1s.

The third reason why we order the LR1 is because of the very attractive fleet age profile. If you look, there is a 15.4% of the LR1 fleet currently trading is -- has more than 20 years of age. But even more, I think, important here is 62.6% is more than 15 years of age. If you look at the MRs, for example, MR2, it's around 42%, which is more than 15 years of age. So there are very few LR1s, more than [indiscernible] today in the market, very few LR1s were delivered over the last few years.

And there's really a scarcity of quality vessels in this particular segment. And that is probably the reason why we have -- we were able to achieve this very good results on the LR1 vessels we have on the water and why we decided to focus on this particular segment for the new building orders.

In terms of coverage strategy to go back on the presentation, we have very good coverage still for Q2 this year. But this then falls quite a bit going forward also already in the course of this year. Just to give you more precise figures. So we go down to 22% coverage already by Q4 this year and 13% coverage next year. We are currently not discussing -- there are a few opportunities out there. We have interested [indiscernible] taking vessels for longer-term business from us. So some opportunities might materialize. There's not a big push at this very moment to cover a high portion of our fleet but we will play it by year as opportunities arise.

And of course, it is likely that as we move forward in the year, the percentage of our fleet, which is covered for Q3 and Q4, in particular, for '25, will increase in the coming quarters. So as contracts, existing contracts [indiscernible] would be renewed. And there's also today the opportunity to take longer-term coverage at quite attractive rates. So this is also longer term, I think even 3 years coverage. So this is something that we are also looking at. Of course, it is a less liquid part, the longer the coverage, the less deals there are out there. But if the right opportunities arise, we might decide to cover 1 or 2 vessels for longer periods.

And finally, on the seasonality. Yes, it's true that we are quite surprised by the strength of Q2 so far. Q2 tends not to be a particularly strong quarter because of these refinery outages. And as we move into the second half of Q2 and into Q3, with refined volumes ramping up, we -- if these disruptions that we are currently benefiting from [indiscernible] we could potentially witness even stronger margins. Of course, there is a lot of volatility until a few days ago. For example, on the market [indiscernible] was quite weak. They were very strong [indiscernible] over the last few days, we have seen market well [indiscernible] but also with markets [indiscernible] remain strong. And so average spot rates have risen. And so we are quite positive on the outlook for 2024, generally.

Of course, the [indiscernible] situation is impacting the margin positively. We don't know how long that will last. Hopefully, a solution can be found for the conflict between Israel and Hamas fast, and that might entail a normalization of the situation in [indiscernible], which would be [indiscernible] for us, but we don't -- we expect the market to remain very strong. We will probably not be earning anymore 38, 37, 39 in the spot market but we would still probably be averaging more than 30,000. I mean that is -- if we look at the -- despite the volatility we saw in was last year, which was quite pronounced when you look at the averages that we achieved on the spot markets from Q2 onwards, there's actually quite a lot of stability and around the 31,000 levels. So possibly, if the [indiscernible] conflict were to terminate, we would go back to similar levels that we witnessed on the spot market last year.

Operator

The next question is from Massimo Bonisoli of Equita.

M
Massimo Bonisoli
analyst

A couple of follow-ups from my side. One regarding the spot price. At the end of April and beginning of May, spot rates were slightly lower than the Q1 average as we discussed previously. Can you help us in understanding the drivers behind the recent decline, understand the short-term market drivers are quite volatile. So maybe they are not so crystal clear. Are they relative to the lower diesel crack or maybe lower refinance utilization, if you can help us on this issue?

And the second question on the new LR1 vessel just recently ordered you previously stated the reference breakeven rate for the existing fleet more or less 15,000 barrels per day. What would be the new breakeven rate for the new vessel that you just recently ordered?

U
Unknown Executive

[indiscernible]

M
Massimo Bonisoli
analyst

There is a background noise. The first question is on the spot rate, if you can comment on the very recent decline, drivers behind the recent decline?

A
Antonio Carlos Balestra Mottola
executive

No, we don't see a -- no, we actually haven't seen a decline in the spot rates, really. I mean spot, there is volatility. And the weakness we saw was mostly linked to the West of [indiscernible] markets. The Atlantic market was a bit weaker. It was weaker in the -- out of the U.S. Gulf and out of Europe exports out of Europe, I would say the U.S. Gulf market was weak because there was quite a lot of refinery maintenance going on in the U.S. in March. It started a bit earlier than usual. And therefore, that [indiscernible] exports out of the U.S.

The weakness that we saw in the continent market, was mostly linked to -- apparently, one of the reasons was, the lower exports out of Russia, partly linked to the attacks to Russian refineries by the Ukrainians with vessels, which would have typically carried Russian cargoes then moving into the let's say, non-Russian business at the margin negatively affecting the earnings of these other vessels, which came for this non-Russian business.

[indiscernible] the margins were extremely strong [indiscernible] so throughout, let's say, the last few months of course there were ups and downs [indiscernible] and as I mentioned over the last few days, we actually have seen some strengthening also [indiscernible]. And so our journey is overall are [indiscernible] at very attractive levels.

And on the other one question, I pass it over to Federico.

U
Unknown Executive

Massimo, look, on the LR1s ones, we already have 6 LR1s in the water, as you know. We've never seen a very different breakeven relative to our MRs. OpEx are almost the same, usually for an LR1, maybe they have slightly higher [indiscernible] breakeven. Then obviously, it depends on the the price that you're paying for your vessels and the leverage that you're going to have on those vessels. But another one doesn't have per se a higher cost they have maybe a slightly higher cost than LR1 vessels, but nothing significant.

M
Massimo Bonisoli
analyst

The direct operating costs are quite similar?

A
Antonio Carlos Balestra Mottola
executive

Yes. [indiscernible] for example, more than 50% of the direct operating costs are pretty much the same. So [indiscernible] slightly higher insurance costs because the vessels are [indiscernible] more in theory and of course, especially younger vessels. But younger vessels benefit from lower operating costs because of those spare parts costs, maintenance cost, generally. So it compensates a bit in that respect. So the higher costs are going to be mostly linked to higher depreciation, [indiscernible] cost and then depending on the amount of leverage, we are able to [indiscernible] high financial costs how much leverage we will have on these vessels.

Operator

The next question is from Climent Molins of Value Investors Edge.

C
Climent Molins
analyst

First of all, congratulations for the recent promotion. .

You already provided ample commentary on your fleet outlook. But I was wondering, going forward, should we expect you to focus on exercising purchase options on lease or time serving in vessels or are additional newbuild orders or modern secondhand acquisitions also in the cards?

A
Antonio Carlos Balestra Mottola
executive

No, I think it's mostly the exercise of the options going forward. We did that -- was almost a concurrent swap this year where we saw the Melanie, which was the oldest vessel of our fleet, 2010 built. And we purchased a younger vessel, 2017 built, eco-vessel. And we ran some figures, and we thought that given the [indiscernible] that we can achieve on the [indiscernible], it made sense to do the swap and it was a way of rejuvenating our fees and without reducing our exposure to the market.

We might look at other such transactions in the future, but we don't have anything planned at this stage. And we will focus our investments on the items that we highlighted on the use of [indiscernible] we just showed, which is the exercise of the tax chartering of the auctions and the type charter vessels [indiscernible] vessels, the new buildings that we ordered and the secondhand vessel that we purchased.

C
Climent Molins
analyst

That's helpful. And turning towards the recent newbuild orders, what kind of loan to value do you expect to secure in those?

A
Antonio Carlos Balestra Mottola
executive

We will decide closer to delivery. I mean we are not looking for bank financing for these vessels today because delivery is quite far out. For such knowledge, it shouldn't be a problem achieving 60% [indiscernible] possibly even 65%. But we might decide to go for lower leverage ratios if we can afford to do so. And depending on our other investment and capital allocation priorities at the time. So this is something that we will decide closer to the delivery of the vessels.

Operator

Gentlemen, there are no more questions registered at this time.

A
Antonio Carlos Balestra Mottola
executive

Thank you to everyone participating in today's call and look forward to speaking soon when we approve our half year results. Thank you very much

Operator

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

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