d'Amico International Shipping SA

MIL:DIS

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the d'Amico Second Quarter and First Half 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Paolo d'Amico, Chairman and CEO of d'Amico. Please go ahead, sir.

[Paolo d'Amico, executive]

Hello to everybody, and thank you for joining us to our result call. Let's go straight to the results. On the first half of 2020, our company posted a profit -- a net profit of USD 17.1 million. This is versus $24.3 million loss in first half '19. And adjusted net result, excluding nonrecurring noncash items from both periods, we have $26.4 million in first half 2020 versus a loss of $9.2 million first half of 2019. So we have an increase of $35.6 million year-on-year. In Q2, 2020, the company posted its first quarterly result since Q2 '15, with a net profit of $15.6 million versus a loss of $18.8 million last year. Here, again, excluding nonrecurring items from both Q2 2020, Q2 2019, the net result would have been $20.1 million profit this year against a loss of $4.8 million last year.

The daily spots rate on the first half of 2020 has been $21,238 per day against $13,326 achieved last year. So it is 59.4% improvement for if you refer $7,900 per day improvement. In Q2 2020, DIS generated its best quarterly spot since Q3 '08, with a daily spot average rate of $25,118. So 92.1% higher than the $13,000 achieved on Q2 of '19. On 63% of the company DIS on first half 2020 were covered through Time Charter Contract at an average daily rate of $16,042 against the coverage of the first half of 2019, of 47.3% coverage at $14,496. So the company achieved a total daily average rate of $17,930 on the first half of 2020 versus $13,879 of last year. And $19,555 on Q2 2020 against $13,700 and then on Q2 '19. The net financial position, excluding IFRS 16, to replete market value ratio was 62% at the end of June 2020 versus 64% at the end of 2019 and compared with the 72.9% at the end of 2018. In April 2020, DIS announced that GLENDA International Shipping, a 50/50 joint venture with Glencore, signed a memorandum of agreement for the sale of the MR vessel GLENDA Meredith.

In Q2 2020, this transaction allowed GLENDA to generate around $18.8 million in cash, net of commission. In May 2020, DIS announced that d'Amico Tankers signed a memorandum of agreement for the sale of the Handysize vessel Cielo di Guangzhou. In Q2 2020, this transaction allowed d'Amico Tankers to generate $8.8 million in cash, net of commissions. Both of these vessels were delivered to their new owners before the end of the first semester. In July 2020, DIS announced that d'Amico Tanker, signed a memorandum of agreement for the sale of 2 MRs, High Progress and High Performance. This further transaction will allow d'Amico Tanker to generate a total net cash around of $16.3 million in the second half of 2020.

Talking about the market. At the beginning of the year, the general idea and outlook was quite positive based on the fundamentals due to the implementation on IMO 2020. So we were expecting a very good period.

Of course, the sentiment has changed rapidly at the end of January when COVID arrived in China, the COVID-19. Basically killing the demand and refining activity under the biggest importer of crude oil in world. In March, the OPEC members and Russia, they didn't agree on the price and this took basically the oil market to a price war, which killed the level of a barrel at very low levels. And this sparkle rush from many traders and oil company to try to stock as much oil as we could. As you know, the oil storage onshore has been rapidly filled up and then they start moving into steep. This has been taking in a lot of crude oil tankers and also product tankers went on [indiscernible]. The storage moved also a lot on products.

Anyhow, after this war OPEC+, we agreed to reduce the production in 2 tranches, one in June and another one will be now in July. And this is already improving the price of a barrel. Certainly, for us, today, we are very much in different markets since the last 3 to 4 months, but we look at the end of the year in a very positive way because we think the fundamentals are still there. Of course, we must see how COVID will, let's say, behave. If we are going to have a cycle weighed, if we are going to have a lockdown again, I don't think so and how this will fall on our system. Saying that, I leave the word to Carlos.

[Antonio Carlos Balestra Mottola, executive]

Good afternoon to everyone. Just a quick look at our fleet, which is at June 30 was composed of 42 vessels. Fortunately, thanks to the strong markets over the last year or so -- the strengthening markets over the last year or so and very strong markets over the last 6 months, we had the opportunity to sell some of our older vessels, which we have intended to do for some time now. And we found much greater liquidity in the market over this period. And so we managed to execute on this plan. Therefore, we have now very young fleet, 6.8 years, of course, also young because of the important new building program that we executed between 2012 and 2019, which entailed the delivery of 22 new buildings to us and over $750 million in investments, just in terms of payments to the yards. We have basically an MR player with presence also most recently in the LR1 segment that we built. There are old eco-vessels in the Handysize segments, too.

Going on to the following page, the new building, the CapEx commitments. Important to highlight that they now don't comprise any more investments for new buildings. So we are much lighter in that respect. And it's only maintenance CapEx over the next -- over the foreseeable future. And also the second half of the year in terms of maintenance CapEx, it's much lighter than the first half. It's only around $3 million in investments against $7 million in the first half of the year. The CapEx commitments fall further in 2021, where we only have $5 million in commitment in 2022, which is around $4 million.

Going on to the next page, bank debt repayments also going to be light from this year following the reimbursement of the Intesa facility, which we had, which entailed $15 million in the payments every year. And that was in addition to the traditional bank financing we use, and that has been fully reimbursed in December '19.

In terms of refinancing needs, balloons, upcoming balloons. We still have some -- we show in 2020, and those are relating to vessels, which are in joint venture with Glencore to GLENDA International Shipping and we are in advanced discussions already work on the loan documentation for the refinancing the vessels. And for those -- for the balloons, which are here shown in 2021 of $26 million, we are in advanced discussions with some banks to refinance these and we hope to finalize these in Q3 this year. And so then, it will be -- we'd only have, if we manage to execute on this plan, the $65 million to be refinanced in '22. So we believe we are in a very strong position also in terms of a bank debt repayment.

In terms of purchase options, all the purchase options we have on the 9 sale lease back deals, we closed on theoretically in the money, and 6 of these are already exercisable today. Another 3 will become so soon, one in September this year, another one in April '21. The fact that they are in the money, doesn't mean we won't be exercising them because, they would, in any case entail quite high LTV loans, which cannot be obtained today with traditional lags, and therefore, they would require additional equity, which we right now prefer not to invest. But for this purpose, given the uncertainty regarding the timing of the recovery because of COVID. But at a later stage, when we have more visibility in the firming markets, that is -- that could be a potential use of funds for the cash that we have been generating this year, both operationally and through vessel disposals.

Going on to the following page. The coverage, we benefited from the very strong markets in Q2 this year. And for a lesser extent, also in Q1. And -- but we, nonetheless, kept our feet firmly on the ground. We realized that the strong markets was based on imbalances. As Paolo was mentioning, we entered the year with very strong fundamentals and a very positive outlook for completely different reasons. But things change fast with COVID. And so we continued taking contract coverage throughout Q2 when the markets were booming, and we managed to increase our contract coverage for the second half of the year to 57% at an average rate of 16.4 million. So this positions us very well to confront the weak markets we have right now and particularly in Q3, we are 62% covered. So it's almost 2/3 at 16.3. And hopefully, this soft patch will not last that long. Fleet has been increasing as we have been standing the older vessels that's previously mentioned.

Going on to the following page, we showed the fleet evolution this is, let's say, the organic fleet evolution, if we don't do anything and the fleet decreases naturally as the TC -- in some of these TCMs terminate and the sensitivity to every $1,000 per day change in TCE equivalent earnings. We show at the bottom right of the page, and it is actually quite low today for 2020, it's is only $3 million, but it rises considerably in 2021 to $10 million because we are still very exposed to the spot market in 2021, although we have slightly smaller fleet

Going on to the following page, the daily operating cost, they have been falling for -- this is for the half year 2020 compared to the half year '19 and '18. So there was a slight improvement also relative to the first half of 2019. Of course, the biggest improvement was between in the first half of '18 and the first half of '19. But overall, we have an 11% decrease since the first half of '18. And it is due to the fact that we are managing a younger fleet more efficiently to changes in our purchasing strategy and to the stronger dollar, to a small extent, also that we experienced during this period, mostly, I would say, to investments also in technology and the adoption of condition-based maintenance, which allowed us to considerably lengthen the life of spare parts, and bringing -- generating important savings for us in this respect.

On the G&A, we reorganized some of our activities, and we managed to achieve some savings. We also benefited to some extent of the strong dollar, and we achieved the savings relative to the first half of '18. There's an increase relative to the first half of '19. And this is -- these are daily figures. So the increase is mostly attributable to the fact that we are managing in the first half of 2020, slightly smaller fleet than we did in the first half of '19. But I can assure you, our G&A is of very competitive on a daily basis still today in the first half of 2020 relative to most of our -- or if not all of our listed peers.

Going on to the following page. On the ratio of net financial position to fleet market value. This is also a key indicator we follow, and we aim to keep within certain levels. And it has been falling since December '18 when it was at 73%. It fell to 64% by the end of '19. Also, thanks to the capital increase that we pursued that year and it fell further to 62% at of 30th of June. It benefited from the -- in addition to the capital increase, mentioned, of course, from the strong operating cash flow generation in the first half of the year. We finished the half -- the first half with over $50 million in cash, which is quite a comfortable position to be and given that our minimum liquidity covenants in our bank financings is of $25 million. And as I mentioned, the sensitivity for every $1,000 per day change in the TC equivalent, I think it is only $3 million, around $3 million for the second half of 2020. So -- and in addition to that, as Paolo mentioned in the beginning of the presentation in July, we signed MOAs for sale of 2 additional vessels, which should bring in another $16 million to our profits. So a very much stronger financial position, and liquidity positioned generally.

And looking at the key line items of the P&L, as Paolo mentioned in Q2 '20, the profit of $15.6 million and excluding nonrecurring items of $20 million, this figure is the strongest since Q2 '15 and then, of course, it was driven mostly by the very, very strong markets in the second quarter of the year. On the -- if we look at the first half, the bottom line figure of $17 million and excluding our recurring items, we are on at $26 million.

If we look in detail at the daily results of trading on the spot market and employ through TC contracts on Page 16, we see that the average rate for the vessels operating in the spot market was of $25,000 in Q2. And that is the highest since Q3 2008. So it is a very, very strong result. And even if we look at the first half, we are above $20,000. We are at $21,200, coupled with the TC contracts, which were around 60% -- just over 60% for Q2 on the first half. We have an average -- blended average of $19,500 for Q2 and $7,900 for the first half 2020.

I'll pass it over to Paulo again for the market overview.

[Paolo d'Amico, executive]

Thank you, Carlos. So going back to the market, as I said, we started the year with a very positive note and of course -- and of course, I mean, unfortunately, at the end of the first half, the outlook changed immediately with COVID in China. Of course, world has been in a lockdown. Half of the planet is being closed. So the demand structure of crude oil and refinery products has been extremely poor. It's been [indiscernible]. OPEC+, we did not agree on the price. This took them to the price war, and this started the market because there's been a big rush to storing oil and sorting products. The crude oil market was so strong that many product carriers got their way of taking better rates. So also the product market [indiscernible] and so we got very good rates for certain period of time.

Of course, this demand was driven by the storage factor basically because the final demand as we say, it was not there. And once that the Russians and the Saudis agreed again on the cut of production, things went worse for us because oil market went back where it really were the fundamental of the minutes. We've seen a large drop in oil demand, also in refining throughputs. So it looks like according to IEA oil demand is expected to fall by 7.9 million barrels per day, which means 92.1 million barrels per day in 2020. This relative to last year -- we were close to 100 million. And we think that we'll recover 5.3 million in 2021. The global refinery runs are forecast to fall by 6.4 million barrel group in 2020 to 75.1 million barrels.

So this is the -- let's say, yesterday story. This is the impact of COVID on our system, but still looking at tomorrow and the day after tomorrow, we think when the fundamentals are there. We think that -- we see that the participation, for instance of products on the total oil seaboard trade increased from year 2000 was 25%, today, it's 34%. And there is a long-term growth on refining capacity. We are talking about something like between 2020, 2024, $6 million, and 75% of this 6 million barrels, let's say, faraway from Europe. And this is a substantially Europe, which is the main diesel market. So the turmoil elements should be more than positive, should increase giving a better outlook for the product carriers. Against all this, we have a very low growth of our fleet. The supply is -- #1 has been postponed because during the lockdowns, ships have not been delivered basically and now we are carrying back. And even with very low scrapping, the fleet growth is expected to be only 2% in 2020 and 1.2% in 2021 and we should even expect a reduction on the fleet growth already on the second half of this year. Due for many reasons, one of these we answer the entity of the key receivables. And I say worries about probably the sports in general. But is very limited new building order.

So putting all this together, we think the fundamentals will play in our favor in the future. Of course, the big question mark is how deep, how strong is going to be the second wave of COVID, if it ever comes. Thank you very much.

[Antonio Carlos Balestra Mottola, executive]

Let us per share of 0.25 cents on Page 32. So a small decrease relative to March 21, it was at $0.26 per share and the overall NAV after peaking in March 20, 320 is dropped to 313. Despite the profit, despite the cash generation because of softening in vessel values in the second quarter of the year, reflecting the much weaker markets in June this year after the April and May peaks, we experienced.

Basically, that's it. Shares are trading at huge discount to NAV, nonetheless. And we are in a, I believe, very strong financial and liquidity position. And therefore, the rate of diluted capital increases, I believe, are very limited. And therefore, I believe also this discount is excessive. Is not justified by the fundamentals, which as Paolo exposed, although there's a lot of uncertainty around the short term. And there's, of course, a period of adjustment to digest these excess inventories, which have built up as a result of the imbalances related to COVID and to the flooding of oil in March by OpEx plus. We believe that this process should not -- we should not be very long. Half of the excess of -- half of the let's say, increase in floating storage since December was a part we already we absorbed in a few months since the OPEC cut production. So that is a very positive sign. And medium and longer term, we are very positive on the fundamentals. And therefore, we don't feel this discount is justified.

Thank you very much. And I pass it over to you for the questions.

[Operator]

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

[Matteo Bonizzoni, analyst]

I have some question. The first one is what are you seeing on the asset values? So are you seeing some deflation in the transaction values? Yes or no? And what are your expectations going forward. Then I would like to know as regards the net financial position, we have seen a nice deleverage over the last couple of quarters, driven by low CapEx. And also, I think the asset disposal, if you can clarify how much was included already in first half and how much of the recently announced fit disposal should be included there in terms of cash in the second half? So should we expect net financial debt, excluding IFRS 16, to be somewhat below or in the region of $500 million at the end of the year?

[Antonio Carlos Balestra Mottola, executive]

Yes. So regarding the -- I'll start with the second question, and regarding the CapEx and the vessel, the vessel disposal, the cash from the sale of the Cielo di Guangzhou and the GLENDA Meredith already part of our first half financials. But the cash that we would receive on the sales of the High Progress and High Performance will be around $16 million will come in, in the second half of the year. And it is possible that we might be -- another vessel before the end of the year. So -- and then regarding asset values, they have come down, but not in a considerable way. And so we are still able to sell vessels at quite attractive values. So let us remember that they had increased, they have increased considerably. We have a slide in the presentation where we look at this. We can go back to that particular slide. It's on Page 18, and there we show the 5-year old and 10-year old asset values. And we see that there is this decrease for the 10-year old asset values from $20 million to $18 million. So it's a 10% decrease. And we see the similar decrease also for the 5-year old vessels from $31 million peak around February, March to $27.5 million, but $27.5 million, it's still considerably higher than the $22 million than that we had in October 16, also considerably higher than the $15.5 million, we had in October 16. So yes, there was a correction. It reflects the weaker spot markets, the uncertain outlook over the next at 12 months. But the fact that the values, asset values haven't increased by more is a testament to the fact that mostly is still very confident in the medium to longer-term fundamentals of the sector. And so people are not ready to just sell at any price. And they want to hold on to their good assets to be able to participate in the recovery when it happens, which will be driven by the same fundamentals which were driving the recovery until the end of last year, beginning of this year before COVID-19. And, if anything, I think that in terms of order bookings improved further because, as Paulo mentioned, there was very, very little demolish over the last 18 months. And therefore, the potential for demolition increased going forward and we have today the proportion of the fleet that is greater than 20 years is higher than the order book and that is a very good sign.

[Operator]

The next question is from Bonisoli Massimo (sic) [ Massimo Bonisoli ] with Equita.

[Massimo Bonisoli, analyst]

A couple of questions. One regards the coverage of your spot rates, considering the increase in the coverage that you have taken? Thanks to the quite high prices on the market. What are the level of prices that could trigger further coverage in the future in the sense that no key market seems to be less stronger than before. And the second question is considering the leverage of the balance sheet that took place over the past few quarters. What is the leverage range that you would consider as normal in your balance sheet and maybe that could trigger some dividend payment going forward. We have been talking about this in Q1. I don't know if this has changed over the first quarter?

[Paolo d'Amico, executive]

Talking about the rates, today rate for a 1-year period should be around 13,400 for, let's say, for an non-eco-ship and it should increase, let's say, by close to $1,000 for an eco-ship. And this is a ballpark. Going longer is impossible because there is no market today. I mean there have been some tentative deals for 3 years, that, of course, due to the uncertainty charters, they remove the way and they are not taking position longer than a year time. And as far as the second question, excuse me, can you repeat it?

[Massimo Bonisoli, analyst]

In the sense that you have been deleveraging the balance sheet recently. So now we have a leverage that is quite sound considering the, say, the fleet available. Do you consider this leverage already a level in which you can start paying dividend going forward or let's say, you wait for the deleverage to consider dividend payments?

[Paolo d'Amico, executive]

We think that we have seen on our deleverage rule and that is our opinion because we want to have a very prudent approach to the future.

[Operator]

[Operator Instructions] The next question is from Daniele Alibrandi with MainFirst.

Mr. Alibrandi, maybe your line is on mute, we cannot hear you.

[Daniele Alibrandi, analyst]

Can you hear me?

[Operator]

Yes, now we can.

[Daniele Alibrandi, analyst]

Okay. Just a question actually on how do you see EBITDA evolving in 2020. We've seen the market is not as buoyant as in April or May, rates have a little bit come down. So just how do you see -- maybe if you can be more -- can give us more business deals. We are in early August, maybe on EBITDA, also continue to succeed, but quite wide, around 140 so do you see maybe this is -- this level is achievable?

[Paolo d'Amico, executive]

Look, unfortunately, today, to look at the future market, you must be more a virologist than a supporter. So it's complicated to say. We had a just one moment in South America a few weeks ago, where there has been a lack of targets. The market moved immediately from $10,000 to $20,000 a day for one ship on one trip. So there is a sensitivity in the market which is very strong, means that the product has to be moved. And in some cases, has to be more fairly enough at any cost. So we -- it is difficult to say what is going to happen tomorrow. If we keep growing the way we are, we are seeing anyhow some improvement move -- improvements coming in. Of course, today, it take -- for instance, this month and next month, this should be the gasoline period because Americas will be driving its cars on the streets. Unfortunately, they are not because they are most of them locked down at home. But as you see a movement in the streets, you have more people coming out, you realize immediately, it's a very strong. You realize immediately, I think to me possible to give a serious assets, what is going to happen from here to the end of the year. The only thing I know that this COVID is going to finish and then other courses will come in. And the fundamentals as we see are there and are positive.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time. Gentlemen, would you like to add any further comments to conclude the conference?

[Paolo d'Amico, executive]

Not really. Thank you very much to everybody.

[Antonio Carlos Balestra Mottola, executive]

Thank you.

[Operator]

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