d'Amico International Shipping S.A.

Good afternoon, this is the Chorus Call Conference Operator. Welcome, and thank you for joining the D'Amico International Shipping third quarter and nine month 2020 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Paolo D'Amico, Chairman and CEO of D'Amico International Shipping. Please go ahead, sir.

Hello, everybody, and thank you to be with us. Let's go straight to the executive summary. As a net result, DIS posted a net profit of $15.4 million. in the first nine months of 2020. This is against the loss of 32.5% in the first nine months of 2019. And in the third quarter of 2020, this posted a net result of a loss of 1.7 million against a loss of 8.2 million recorded last year. TCA, Time Charger Equivalent. This daily spot rate was 18,592 on the first 9 months of 2020 against 1,2786 achieved last year for the same period. In Q3 2020, this generated a daily spot average rate of 12,866 against 11,616 of last year. The DIS achieved a total daily average rate of 16.973 on the first nine months of 2020, against 13,674 of last year. And of this, 14,860 in Q3 2020, against $13,264 last year. Leverage reduction, the net financial position, excluding IFRS 16 to fleet market value ratio was 65% at the end of September 20, versus 64% at the end of September 2019. And this compared against 72.9% at the end of 2018. As far as the vessel sales, Glenda, which is a 50-50 joint venture with Glencoe, sold one ship, Glenda Meredith, And this transaction generates around $18.8 million in cash. In May 2020, the EIS announced that Damico Tanker signed a memorandum of agreement for the sale of Cielo di Guanzu. In Q2 2020, this transaction allowed Damico Tanker to generate around $8.8 million in cash. in cash net of commission. All this has been already delivered. In July 2020, DIS announced that Damico Tankers signed an MOA for the sale of two MRs, the high progress and high performance. This transaction will allow Damico Tankers to generate a total net cash around $16.3 million in the second half of 2020, of which 8.3 million already in Q3 of 2020. In September 2020, this announced that D'Amico Tankers signed a memorandum of agreement for the sale of the high courage. This further transaction will allow D'Amico Tankers to generate a total net cash around 8.9 million between November 2020 and January 2021. I would move directly at this point to the overview and key financial because the market will touch it later on, so it's useless to do it twice. And I leave the floor to Carlos. Thank you.

Yes, good afternoon to everyone. Just a quick look at our fleet profile as of the 30th of September. It consists of 41 vessels, of which 21 on and 9 on the bare boat side. I would say 30 on and the remaining on time charter. Of course, our main presence has always been and is still today the DMR segment. So we control 29 vessels in that segment. We delivered today one of the vessels that Paolo was mentioning we sold to the new buyers. So as of today, our fleet falls to 40 vessels from 41. We have a young fleet with an average age of 6.8 years. 78% is IMO class and 70% is ECO. This percentage has been rising and is going to continue rising for us as we sell our older non-ECO design vessels. As you all know, we underwent an important new building program to which we ordered 22 new buildings since 2012, and we completed this new building program in Q4-19. In terms of CAPEX commitments, this is also a graph that we look at on a regular basis. This has been falling this year significantly after we completed the new building program. We only had the maintenance capex left. It was a big figure if we take into account it only related to maintenance capex. It was 10.2 for the year. Only 1.1 left for Q4. That is because we had a number of vessels which had to start for a special survey this year. They also had to install water ballast tank systems. This figure falls to 6 million next year. and then to $4 million in 2022. So we are already much lighter, and we're going to become even lighter in terms of capital commitments going forward. The same applies to debt repayments. As we mentioned several times in the past, on the front page of the presentation, page 9, we finished reimbursing the median retirement data facility in the end of 2019, and therefore principal repayments fall quite significantly in 2020 from to $36 million and they continue falling over the course of the next few years. The other positive aspect here on the bank financing side is that we signed last night the loan agreement to refinance all the balloons we had for 2021. We had a number of vessels with balloons in early 2021 and one with a balloon in October We refinance all of these through one facility, which we signed last night, and we are going to be drawing down next week. And so the next balloons to be refinanced are only 2022, and we are going to be working on those in the second half of 2021, most likely. And hopefully we expect in a much better market after the rebalancing, which still is ongoing, but which we hope will have finished by then. Going on to the next page, the purchase options of these vessels. We have nine vessels for which we closed the early spec transactions over the course of the last few years. Six of these are already exercisable. A seventh one will become exercisable in December. And they are all in the money or theoretically in the money. And so this is a potential use of funds. We have been, we build up quite a comfortable cash position over the course of the first nine months of this year through vassal disposals and through the strong performance especially in the first half of the year. So this is something we will look at and at the right time we might decide to leverage a bit our balance sheets by optimizing some of these options and therefore reducing the cost of our debt financing. Going on to page 11, we show the coverage, the forward coverage through PC contracts at fixed rates. We managed to keep quite a good level of coverage for Q3 and Q4. Q3, we were 63% covered. Q4, just slightly less, 58%. And that drops in Q1 to 38%. The average rate for Q3 and Q4 is around 16.3, almost, and so that is quite positive. Of course, as some of these contracts that expire in Q4 and Q1 2021 arrive close to termination, we are most likely going to be asked by the charters to renew them on TC at the going levels, of course, which are nonetheless decent. Today, one year TC for an ECHO-MR vessel is around 14,500, so it's not too distant from our break-even, overall P&L break-even. going on to the yeah so we also highlight at the bottom that the percentage of the echo fleet has been has been rising and it's forecasted to continue rising and that of course is a tailwind for our results going on to the following page we show the fleet evolution and there is a small decrease expected in the fleet mostly as a as a result of the delivery of assets on TCN. But since the coverage through period contracts falls over time, actually our sensitivity to the spot market rises, and in 2021, it's around $10 million for every $1,000 per day change in the TC equivalent earnings, and it's almost $12 million in 2022. it's only $1.5 million in Q420. Going on to the following page, we have done quite well in terms of becoming more efficient in the operation of our vessels, so the daily operating costs have fallen from $7,300 in the first nine months of 2018 to $6,700 in the first nine months of this year, which is pretty much aligned with the $6,700 we had in the first nine months of 2019. The savings are attributable to, I would say, mostly also investments in technology. which allows us through condition-based maintenance to identify problems ahead, but also to lengthen the average lifespan of a lot of our spare parts. So we reduce the breakdowns and we increase significantly the average lifespan of our spare parts. But it's also the result of operating with a more homogeneous fleet and through the 22 new buildings that were delivered over the last few years and also a younger fleet. So that also helps in terms of cost of the operating costs. as well as, of course, some efficiency in purchasing arrangements that we are always trying to improve on and which also to some benefits. The GNAs also improved, although to a lesser extent. There was a bigger improvement between 9 months 18 and 9 months 19. Some of that improvement we lost in the first 9 months of 2020. We must also highlight that there was an element of administrative income that was being offset against these administrative costs that we lost in the first nine months of 2020. There's also some exchange rate differences which play a bigger role here, and in particular in this year. So they penalized us a bit here in terms of the GMA. And then finally, the fact that our fleet has been decreasing means that overall general administrative costs have spread out over a smaller number of vessels. And therefore, that contributed to this increase we experienced between 9 months 19 and 9 months 20. And let me say that relative to our peers, I would say that our GNAs are still very, very competitive. And also peers which have much larger feeds than us. Looking at the balance sheet of liquidity position and looking at the key ratios, the ratio between the net financial position and the fleet market value remained stable this year. It improved still significantly relative to the end of 2018 where it was 70%. Then it declined to 64% at the end of 2019 and it increased only very slightly to 65% at the 30th of September. This is despite a decrease in asset values this year. They rose in the beginning of the year by a few percentage points before declining after peaking in May by around 15%. 5-year-old vessel and 10-year-old vessel declined by between 10% and 12% the asset value. But thanks to the profits and the cash that we generated during the year, we managed to keep this ratio stable. And of course, also thanks to the vessel sales, we managed to help to keep this ratio stable. So this and we are particularly happy with the cash and cash equivalent position, which is a 59.3 million at the end of the quarter. And that does not include, of course, the cash that we generated of around 8 million through the vessel that we delivered to the new owners today. And it doesn't include the cash that we will generate with the vessel that we expect to deliver to the new owners in January next year of around 8.9 million. So this position Even in a weak market that we are seeing today, a weak spot market, given the coverage we have and these vessel disposals, we expect this cash position to keep improving slightly over the coming quarters. And that leaves us in a very comfortable position, I would say, to confront this near-term weakness. In terms of the key items of the P&L, on page 15, the nine months profit, cumulative profit is of 15 million. If we include non-recurring items, it's of 26, which is already, I would say, a number we can be a bit more satisfied with. And if we look only at Q3, the losses of 1.7 million, but excluding the non-recurring items, the losses of 0.4 million. And that is basically break-even, given the size of our fleet. It's basically break-even. Going on to the next page, we look at the daily results. of our vessels from an employment perspective. The Q3 results, we earned 12,900, so it's of course not brilliant, but putting it in context, comparing to Q3 2019, it was actually better than Q3 2019. And thanks to the strong coverage we had this year, 63% at a rate of $16,000, which was also higher than the rate we had in Q2 2019, we managed to achieve a blended average rate in Q3 of $14,900 almost. So that's not bad at all. And as I was mentioning, it's basically, if we exclude no recurring items, it's equivalent to our break-even. And in the nine months of 2020, of course, the figures are much better because we benefit from the very strong results in the first half, and the daily average on the spot market was almost 18.6, and the daily average on the TC contracts was 16,000, leading to a blended average of almost 17,000. I pass it over to Paolo again for the market overview.

Thank you, Carlos. Now, looking at time chart rates and asset value, since October 2016 and up to just before the COVID exploded, the market has been with various bumps, but recovering, and we were basically at the beginning of the year with good fundamentals and a good spirit. Then the COVID arrived and it created two consequences. First, the spike. I mean, first you had the collapse of a barrel. That created a rush of traders and oil companies to store oil and to store crude oil and also clean cargo. And this clearly created a very strong spike in the market. But it all collapsed in June 2020. And because at a certain point we filled up whatever was possible to fill. And at that point, basically, they stopped buying. Not only, but the OPEC realized that they could make, because there has been two problems. One has been the COVID, and the other one who created the collapse of the barrel. And the second one was Saudi Arabia and OPEC. And Russia, they didn't agree on a cat on the beginning, as you remember, and they start pumping like hell, and then the market has been oversupplied. So you had two elements which made the barrel drop, and the contango went out, the super contango, as it was called. There's been a highly storage rate, which has been, of course, good for us in those days, but very short-sighted because in June we were back again down. And at the end, the fundamentals came out. The fundamentals of COVID were basically flights are all grounded. People are not moving at all. We were in a lockdown, so cars were not circulating. The only thing was tracking. That created a huge drop in oil demand. At a certain point, up to more than 10 million barrels per day. And at the end of 2019, the oil demand was close to 100 million barrels per day, so it was a 10% drop. And then at the end of the lockdown, people restarted slowly on the opening apps to drive and then to consume, and we recuperated something of this terrible drop. So from the peak of a 10.5 million barrels per day lower than last year, we think that the drop average on all the year would be around 8. Now, as I say, they create a built-up floating storage. And the floating storage, as far as the refiner product, increased from 25 million barrels in December 2019 to a peak of 75 million barrels early in May 2020. Now, the market has been rapidly rebalancing with 70% of the COVID-related increase in floating storage already unwound by the end of September 2020. 70% of the storage already in September was gone. The long-term demand growth is still there because, of course, COVID is very limited, even if it's very cruel and very strong, but it's a very limited and, I would say, emergency situation. the market is on fundamentals, on long-term fundamentals, is in demand growth. And certainly this is something that we are going to see once this pandemic will be over. Of course, and I am in page 22, the potential for upside on asset value is very strong because we were already coming because we have this vision starting from 2016. We were already coming a long way from a valley in the market's value. And COVID exaggerated the whole thing. So we have a very strong potential upside as we are today because value, of course, are still depressed. due to the COVID effect. Still on long-term, there is a strong growth in refining capacity. And this growth is by 76%, and this 36% is of planet refining capacity coming in, is all, I mean, 36% is all in Asia and Middle East. So we are, as you can see, the growth on the refineries will be far away from the consumer market like Europe and the United States. And not only this, with being a new generation of refineries and with high technology and also high productivity, we will put certainly the European refining system, which is mostly in a non-competitive position. We do expect a reduction of refining capacity in Europe and also some reduction in the United States. These reductions are already happening because, as you probably know, European refineries and American refineries are running at lower productivity. And some refineries are really closing once forever. So the landscape will change. We change also because, as you know, by January, from January 2020, we are using fuels with low content of sulfur. And these are all produced by new generation of refineries. The old refineries in Russia and Europe are big producers of fuels with high content of sulfur. And this will create, here again, the difficulties that we were talking about before. On the supply side of the market, the ship supply, We have a very slow fleet growth and are slowing even more because the new order contracts are minimal. Also due to the fact that ship owners, they do not know as consequence of the IMO rules on emission or CO2 emission. They don't know yet what is going to be the propulsion of the future. So today you take a risk of building a ship which will be outdated already during his life, not at the scrapping moment, but before that. So there is a lot of uncertainty and this is bringing to low new building orders. As a matter of this, as a consequence of this, there is a reduction in fleet growth expected already in the second half of 2020. I have to tell you that on the first half of 2020, due to the COVID and due to the lockdown, the scrapyards were closed. Now the scrapyards are open. And so we do expect a higher rate of scrapping. Now, you also always said it's COVID consequence. The second-hand ship's values are by far more competitive than the new building prices. So the market, well, the purchase market of ships is very much focused today on second hand than new building. This is a good thing always for the supply side because we have less money going to new buildings. COVID really changed the dynamic of everything. change also the dynamic of our market. We are very much COVID related, I would say, and I think more we go ahead and more we are solving this problem and more the market will come back to us because more we will feel free to move at a certain point. It's not the case now because we are still in a moment of lockdowns, but will happen that we will overtake this thing and everybody, not only me, I mean just everybody in the system, is expecting a very strong rebound of the market because the consumption at that point will fly again. Thank you.

Thank you.

So just one last page in the presentation, page 30. quickly look at the evolution of our NAV and our NAD per share and the discount to our... So, as we mentioned, there was a decrease in the values, in the asset values of this year. And that, of course, had a negative impact in our net asset value, overall net asset value, which declined relative to December 19. On a per share basis, it declined from $0.25 to $0.22. But nonetheless, we were, the 30th of September, still trading at a very deep discount to NAV of $0.25. around 53%. So given we don't expect this rebalancing that we have been discussing to be that long, almost 70% of the floating storage was already reabsorbed. It's true that the second wave of lockdowns might delay a bit of this process, but nonetheless There's also good news out there. I mean, we all heard about the developments in the vaccines of Pfizer and BioNTech. And good news is also expected soon in the vaccine of Moderna, which is also undergoing phase three trials and uses the same technology. And it's benefiting from the high contagions out there in this efficacy test. So hopefully we will be able to roll out, there will be a good rollout of vaccines in the first quarter, first half of next year, which will then contribute to a much healthier market in the second part of 2021. And so once again, we feel that this deep discount in RNAV is not justified by the fundamentals of our company and of the sector we operate in.

Thank you all, and I'll pass it over to you.

If you have some questions, please let us know.

Excuse me. This is a chorus call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove your question, please press star and two. The first question comes from Matteo Bonizzoni of Kepler. Please go ahead.

Good afternoon. I have some questions. The first one is on your expectation about the asset values. We have seen in the chart which you presented today that the asset values are actually declining by 15% since last spring. Do you expect quite depressed? Do you expect some continuation of this deflation of the asset values in relation to this point? I would like to know if you are planning the disposal or the sale at least back on some of your vessels. The second question is about the coverage strategy. So we have seen that after 2020 in which you benefited particularly the last quarter, so Q3 from a high coverage at good rate. You say that the coverage is down quite significantly. Currently, it's 38% for the first quarter of 2021, down to 15% in the fourth quarter, so quite low compared to normal and compared to this year. On the other side, the coverage rate you have said is $14,500, so not particularly attractive. My question is, Should we expect more coverage in 2021, or maybe with these low rates, you will stand by, and so we are going to remain exposed more to the spot rates for the next year. And then I would, third and last question, I would like to know the cost of the recent $42 million balloon refinancing, which you commented on. when compared to the loan which was expiring. Thanks.

I can, if you want, answer for the coverage and Carlos can answer for the rest. But as far as the coverage, as you said, going down because, of course, it is the expiration of the actual time chart as we are locked in for that moment. But We know already that the charters that are using our ship, they keep using it. I'll give you an example. There is a first class European charter which a few days ago renewed one ship of ours for another year at $14,500 a day when the spot market today is paying around $8,000. So we have a huge differential. the charter took our ship and is keep using it because of course the way the market is is a picture of the COVID going ahead the more we go versus the solution of the COVID the more we are going towards improving of the market because the two things are extremely related now When this will happen, nobody knows. But we know that in 2021, somewhere, a big part of this COVID problem will be over. And I can tell you, also a big part of the market rates, the way they are today, will be over. It's a direct consequence. So to lose, let's say, coverage in 2021 and is more, let's say, toward the second quarter of 2021, I would say, and the third quarter of 2021. To lose coverage there could be a benefit more than a real risk because probably rates will be on different grounds in those moments. On the other question, I'll leave it to Carlos to answer.

Exactly, yeah. Hi, Mattel. Yes, and also, if I understand correctly, your question is relating to the refinancing, to the balloons, the facility that we are drawing down now to refinance the balloons in January. And the facilities would basically refinance the amounts outstanding under the existing facilities. There's some marginal differences. That's the intention. And the facility also allows us to refinance another vessel if we seek to. So we have the option of including another vessel at a later stage in the facility. But for now, it only refinances these vessels which had balloons which were upcoming in January. with the exception of the high carriage, which we will be selling beside the BOA for an expected delivery in January. So we are not going to be refinancing the balloon of this vessel for that particular reason.

Thank you. The next question is from Massimo Buonassoli of Equita.

Please go ahead.

Yes, good afternoon. Thank you for the presentation. Three questions.

One is back to the question of Matteo on the coverage. Just if you have a trigger level to increase the coverage again in 2021, just to understand if the level of TCRase goes up to a certain level, you start again to cover it. and the second question is on the implication of the election of biden in u.s if you have any any thoughts on the implication for the refining industry especially for the refining product shipping industry as well so what what would be the next the next step there and the third is on the spread between high sulfur fuel oil and the ultra low sulfur diesel which Currently, it's very narrow. So what are the implications for your cost and also for the crowd demand right now?

Let's start from the last one. The spread is very low. It's around $40, but it depends very much where you are going to banker. Because we have three elements. We have to look at the high sulfur fuel oil, you have the low sulfur fuel oil, and then you have a diesel. I can tell you, for instance, that the diesel in this moment is at the same level of very low sulfur fuel oil. So it's already more competitive. than the low sulfur fuel oil because diesel is more efficient by 5%. The spread with high sulfur is a big average around $40 and is going to repay those scrubbers in by far a longer period of time than what was forecasted in the beginning. To my mind, Scrubber has not been a good thing. At the end, it's been only complicated life and a lot of money spent, from my point of view, in a useless way. This is not affecting us at all because we have only one ship with Scrubber. We did that more for technical experience than really economic belief. I think we have been right. This ship is chartered up on Time Charter already and is getting a premium because we did this contract way before the delivery of the ship, so it was in a better period. We got a premium for the scrubber on the Time Charter, which at the end of the charter will repay completely the scrubber. the company is not going to be affected at all by the scrubber elements. On the other question, I don't remember the second one, sorry.

It was the implication of the election of Biden in the U.S. on the industry in general, just as a general thought.

I don't know. To be frank, I don't know. It's something which... But, I mean, we are not very much... I mean, yes, if they were to exclude movement of oil, of course we would be affected. But, I mean, this is not certainly possible now. So I wouldn't say he's a threat. As Trump, he was not a gain. So we are totally neutral to this.

And the first one... And the first one on the coverage of the...

again on the trigger level of the coverage.

Yeah, but there is not really a trigger level. I mean, when we are due to expiration of the charters, we start talking with our charter and we see what level we are talking about. Certainly, if we have, let's say, If we still are in the defensive as we are today because we have to with COVID, which is around still, then we look always to levels which are close or just over our break-even rates. Up to now, we managed to do so. When we will be out of COVID, then we will talk by far different numbers. By far different numbers, I mean high teens close to the 20s. If not over the 20s, it depends very much what will market will tell us.

Okay, very clear.

Mr. D'Amico, so there are no questions registered at this time.

Okay, then thank you. Thank you to everybody for being with us and looking forward to to meet you on the phone at the next call. Thank you very much from my side and bye bye.