d'Amico International Shipping S.A.

Good afternoon. This is the Coruscant Conference Operator. Welcome and thank you for joining the D'Amico International Shipping Second Quarter and First Half 2021 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.

Thank you, and good afternoon to everybody. Welcome to our conf call, and let's go straight to the presentation. If you don't mind, I would skip the executive summary in the way of not doubling things. And I leave for starting to the floor to Carlos Balestra for the overview and the key financials. Carlos, it's your turn.

Thank you, Paolo. Good afternoon, everyone. So, as usual, we start just a quick glance of our fleet. we control the 38 vessels as at 30th of June. We are mainly an MR player. We have, however, a small presence also in the L01 and Handy size segments with six vessels in each of these segments. Mostly owned vessels, 20 out of 38, eight on Beryl Chartered, which is We consider it as owned vessels because they either have purchase obligations or purchase options at very attractive prices, in one case only. And then we have the time-chartered-in vessels, which are mostly long-term, nine out of the ten time-chartered-in vessels. The fleet is 76% IMO class, and it is still a young fleet, 6.9 years average age relative to an average for the industry, which is closer to 12 years in the sectors we operate in. Also, mostly by now, an echo fleet, 75% of the own and wearable vessels and 74% of the entire fleet. And, well, these results were achieved thanks to an important new building program, as we already talked about several times in the recent past. We ordered 22 new buildings since 2012, and they have all been delivered to us, the last one in Q419. APEX program, not much changed since our last presentation. relating to the CapEx that was planned for 2021, the large majority was already invested, 4.2 million, only 2 million left. 2022, we only have planned investments for such purposes of 3.1 million, so around half as much as in 2021. And this figure has been declining since 2020. And, yeah, of course, we only have a maintenance capex left for now. And because our priority, as we have mentioned several times in the past, currently is to continue on the leveraging process of our balance sheet. In terms of also cash flow commitments, well, we are also lighter in terms of bank debt repayments. We have no balloons due in the second half of this year, and we have a 65 million due in 2022. And we are already working on the refinancing of these and Quite a few of them we expect to be able to refinance before the end of 2021. The first balloon due here is in April, and all the other ones are in the second half of 2022 in any case. So they're still quite distant. We are also lighter in terms of bank debt repayments. This is also positive, not only in terms of CapEx repayments. It has declined quite sharply between 2019 and 2020. after we terminated reimbursing the $75 million facility with Intesa, which had to be reimbursed over five years, and it will continue declining more gradually going forward. So that will also help us from a cash flow perspective. On the purchase options front, yes, As we announced in the past, in the recent past, we have exercised the purchase option, the high priority. We did so because this vessel, in any case, had quite a short lease, which was going to mature in October 22. And therefore, since we had a very comfortable cash position and we still do at the end of the year, we decided that it was a good idea to exercise this option to save on quite a substantial amount in interest expense, because this was also by far the most expensive bare boat inn we had. And the other ones are at a much cheaper cost, and they have much longer tenors. So we are not in a hurry to exercise these, but... If the circumstances are right, because we see the market moving in the right direction and our balance sheet allows us to do so, we look forward also to exercising some of these other options and saving some money on interest expense also in this respect. Of the remaining options we have, eight, seven, either in the money or theoretically in the money. Only one is slightly out of the money, the high trader. And yeah, seven of them are already excitable. Only the cello, the hues, we have to wait until 2024 to be able to exercise. Going on to our TC coverage, We have been working on this throughout the second quarter, increasing the forward coverage by fixing vessels on time charter. And therefore, we have 48% coverage now for Q3, which is not a bad figure at around $15,000 per day. So that allows us to weather quite comfortably the current weak markets. And this coverage declines in Q4 to 36% at an average rate of 14.8% around. So if we look at the second half, we are at around 42% at just below 15,000, which is pretty much aligned with our break-even. We have much more exposure, of course, in 22% and 23%. But we are having exposure in two years because we expect the market to be much stronger by then. As previously mentioned, the percentage of eco fleet has been rising and it's expected to continue rising as we dispose of some of our older non-eco vessels over the course of the next few years. Here we show the fleet evolution. We are not assuming any vessel sales here, but as we re-deliver some of our TC and vessels, this fleet declines only very slightly over the course of the next two years. However, of course, because of the declining TC coverage, our overall spot exposure increases, and so does our sensitivity for every $1,000 per day change. in the TC equivalent earnings, which is of 4 million in the second half of 2021 and rises to 11 million in 2022. On the cost side, we have also been working very hard and we achieved very significant savings between 18 and 20 with a slight uptick in 2021, both on the direct operating costs and on the general and administrative costs. On the direct operating costs, of course, we benefited also from the fleet renewal program. We have all of our new buildings where the 22 vessels were built at the same group, either in Vietnam or Korea. Having modern vessels, of course, also helps in terms of cost savings. And also we invested in technology for condition-based maintenance, which allows us to increase the average lifespans of our spare parts and also reduce off-hires by preventing failures. On the GNA front and on the OPEX front, well, on the OPEX front, we We benefited in 2020. Unfortunately, of course, from the fact that we could perform less crew rotations, but it did lead to some cost savings. In 2021, fortunately, we can perform more crew rotations, and that did have an impact on our costs. There were also some currency effects, which affected both the operating costs, but more significantly the GNA, because especially in the first half of 2020, the US dollar was very strong. Going on to the following page, our financial structure. We are quite happy to highlights that our ratio of net financial position to fleet market value has improved relative to December 2020, despite the losses that we recorded this year. And this is mainly due to the increase in asset values in Q2. The market, the asset values started moving up in Q2 also I would say because of the increase in steel prices which was very significant that we have been experiencing this year which led to a sharp increase in new building costs and so that pushed up also the prices of the younger vessels in our fleet but of course also demolition prices have been moving up quite significantly, and that provided support for the vessel values of the more middle-aged vessels and all the slightly older vessels in our fleet. Going forward to the following page, of course, the increase in asset values also reflects the positive fundamentals and the fact that there is an expectation that the current wheat markets won't last that long and that we will soon be operating in a much stronger market. In terms of financial results, quick look at the mainline items of the P&L. We lost 5.4 million in Q2. And in the first half, it is 15.2. Quarter on quarter, it is a big improvement relative to the 9.8 million we lost in Q1 this year. Excluding no recurring items, we lost $5 million in the second quarter of this year and $14.4 million in the first half of this year. Despite the weak markets, we did generate a good level of EBITDA, 30T million in the first half of this year. Going on to a quick look at the daily TCA equivalent results for both the spot and the time-charted vessels. Spot vessels in Q2, 12,720. I believe we did very well here relative to the market. Our vessels were properly positioned, a bit skill, a bit luck, I would say. I believe even if we look at H1, the result for the upper spot vessels of 11.3 is quite strong relative to the weak markets we experienced. We did underperform a bit in Q1, 21, but we more than compensated for that in Q2. In terms of spot employment, of course, if we then included a time charter coverage that we had, that allows us to, which was at about $15,000 per day, $15,800 in Q1 and $15,200 in Q2 this year. This allowed us to achieve a blended rate of 39 in Q2 2021 and of almost 13.4 in the first half of the year, which I believe is actually quite a good result given the circumstances. And also, I would say, relative to many of our peers, which are more exposed to the spot market than we are. and I pass it over to Paolo for the market overview.

Thank you, Carlos. So the market, you know very well where we are coming from, and I have a feeling and there is a general opinion that the market did bottom, and we are entering in a period where we should see some improvements on the second half. The second half is already on, but I mean on the actual quarter and especially on the last quarter of the year. We are seeing a recovery in demand on the refining throughputs. We think, I mean we think, we expected that we have a recovery of 2.7% million barrels per day between June and August 21. You know where we are coming from in terms of floating storage because when COVID started, the price of oil collapsed. Everybody started buying oil. Oil went even in negative territory for a couple of days. It started a very strong storage program. And this has been very good on the moment that they start chartering ship for the storage, but afterwards we paid that in a very expensive way. Now all this is gone, and the market is rebalancing from that situation. What's happening today is more vehicles are rolling in the street. People are getting vaccinated. They are more confident. We still have this delta variable, which is, of course, creating some problems. But overall, I would say consumption of gasoline is certainly recovering, and the U.S. is close to the 2019 levels. And even here in Europe, we see more cars in the street. What is missing to the equation is jet fuel. We are still 24% lower than 2019 in terms of commercial flights. There is some recovery, but there is still a way to go. And, of course, jet is a cargo missing on the market. But on longer term, We see a healthy demand growth with a stronger participation of clean products to the seagoing total seaborne trade. From 25% in 2000, we are close to 33% in 2020, and we expect to go to 34% in 2021-2022. So there is, on longer term, a large potential upside on asset values because, of course, we are getting out of the negative cycle and we are rather optimistic for the future. There is, on longer term, always a dramatic change in the refinery landscape. older and inefficient refineries in Europe are closing down, and also in Australia and New Zealand. New Zealand lost its total refining capacity, was only one refinery, and Australia lost most of them. And we have a growth which is basically... all in Middle East and in China. This is creating more ton miles, so is more demand for product carriers. On the supply side, so on number of ships, on the fleet growth, we have one strong demolition market, which stimulates a lot ship owners with older ships with 20 years old, 18 years old ships to scrap their vessel. The price is very good because we are talking of something around $600 per lightweight ton. And not only, but the new regulation coming in, the new indexes which we have to match starting from 2023, creating more pressure to recycle older vessels. So this is increasing the number of demolition candidates. Most of the MR fleet has been built in the first half of, let's say, the first three quarters of the year 2000. So up to 2006, 2007, and so they are getting over the 15 years of age. And we are feeling this demolition already because last year, in 2020, only 10 MR and LR1s have been scrapped. This year, already 26... They have been demolished in the first half of 2021. So the double we did in half of the time, the double of a number. There are still limited new building orders. So the supply side will be, I mean, we are having a very slow fleet growth, which is a very positive thing for us. And so we think that we have a rebound of demand that is happening because our consumption is going up and more and more countries are at least trying but also succeeding in many cases to go back to normal life. And this will overtake, demand will overtake certainly supply at certain stage, which is for us not far away in the future. We think that the second half of 21 will be certainly by far much better than the first, and 22 will pay us back what we have been suffering up to now. Carlos?

Hello? Carlos? Yeah, sorry, I was on mute.

Sorry, just a quick look at the NAV evolution in our fleets. Yeah, this has been declining after peaking in March 2020 at $320 million. It troughed in March, end of March 2020. this year at 213, and it then rebounded because of what we just mentioned, the increase in asset values to $245 million. This, of course, as mentioned in the past already, is based on the broker valuations that we receive also for testing loan-to-value covenants on our loans. And on a per share basis in the US dollar terms, the NAV per share bounced back from 0.17 to 0.20 between the end of March and the end of June this year. So we are now trading again at a very big discount to NAV, 39%, which we deem is excessive given the the positive fundamentals that we see for the sector, for the reasons we covered, I would say, in this presentation. So the recovery is not too distant. Maybe there is still a soft patch in front of us as we need more resources more jet fuel to be consumed. But the trend is quite clear in that respect. And we need especially some areas of the world which are a bit further behind in the vaccination programs to accelerate. And that, of course, would then drive demand. And as we are seeing, OPEC seems to be prioritizing a market in in equilibrium, although probably slightly undersupplied. But they seem to be following through and adapting the supply to what are the expectations on the demand side. And we expect this behavior to continue going forward. So it's really a Demand is the key here. And in that respect, we believe vaccination programs are key. And yeah, but the path forward is pretty clear. And we definitely expect an improving market going forward. And I believe that that is it, so I pass it over to you to the question and answer session.

Excuse me, this is the Coruscant 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 touchtone telephone. To remove yourself from the question queue, please press star and two. We kindly ask to use handsets when asking questions. Anyone who has a question may press star and one at this time. The first question is from Matteo Bonizzoni of Kepler. Please go ahead.

Yes, thank you. Good afternoon. We have just one question. Is it related to the asset values trend? So we have seen a reversal finally after several quarters of slide in the asset values. You commented that This is also very much connected to the inflation of the raw materials and of the steel. So we have recovered basically 3 cents in the last quarter compared to Q1, and the lot of value has also improved as a result. I just want to have a few words about your expectation on the asset values evolution going forward. Basically, do you expect it to be over, or do you expect further improvement of the asset values also driven by the potential recovery of the rates and the improvement of your reference market?

Thanks. Carlos Umi.

Yes. No, I can go, Paolo, I can go. On the asset values, I think that the increase in the CEO prices will provide support going forward, especially, well, I think on both sides of the curve, for both the younger and the older investors, as we mentioned, but further appreciation, as you correctly pointed out, will depend on on better markets and on a recovery in freight rates. Of course, there's an extremely strong correlation in that respect. And we expect that to happen for the reasons we covered in the presentation. The big question is when are we going to be seeing, you know, we are seeing already more volumes. We are definitely seeing bigger, more refining throughput. A lot of this additional refining throughput is now being consumed domestically. So there isn't as much as we would hope for being transported by sea. But the additional barrels most likely will flow through the sea. uh, will be exported, uh, in particular in the U S for example, we have seen a very strong recovery in demand, but, and also in refining activity, but a lot of that additional refining activity has been, uh, focused on serving the domestic market. So, uh, the U S refineries, uh, uh, important suppliers to central and South America, for example. And, uh, if we don't see demand recovering in those regions, uh, then the experts from the U.S. will also probably remain a bit subdued. But that is why I was mentioning before that it is important that for us, very important that the vaccination campaigns in the emerging economies, which is currently well behind that which we have seen in the U.S. and in Europe, also accelerate.

I hope I answered your question, but it cannot be more precise, unfortunately. Yeah, thank you.

The next question is from Daniele Alibrandi of Stifel.

Please go ahead.

Yes, good morning, and thanks for taking my question. I have two. The first one, if you can please elaborate a little bit on the reason behind the outperformance relative to the market on the spot market, the spot rate that we saw in Q2, since significant outperformance relative to the clerks on that also I typically look at. So if you can a little bit elaborate on this. And then the second question on the exit rate that you've seen earlier, over the last month, basically, if you can also give us a sense of what you are seeing. I know that Q3 is not very much seasonal quarter, but it can help us to understand how things are going, given that you commented that probably the trough is behind us. Thanks.

No, I mean, as far as the... The spot time charter rate we did on the first half has been also what Carlos said before, the result of positioning the vessel in the best way we could and the best way we tried to understand the market. And, of course, as I said, also a bit of lack in certain situations. But we are working with three chartering offices, one in New York, one in London, and one in Singapore. And we are trying to get as much intelligence we can get on the field and try to position the ships as a consequence. It's not very easy to move ships. ships from east to west. It is easier to move them from west to east because of veg oil cargos and that they are moving from South America to the Far East. In this exact moment, it is better to stay west than to stay east, but every month is a different story. And where we are, I don't talk about spot rate in the exact moment because they are not great numbers, I can tell you. But what we are seeing is a lot of, a lot, I mean, quite a number of traders who are taking position for six months, one year, three months, plus three months of various options. So we see all this is happening because there is from the trading oil industry an expectation of an increase of demand, and they are taking cover. So the demand is there. To put it in numbers is quite difficult in this exact moment because the rate that I can tell you today, this afternoon, tomorrow, would be already too old. So it's a very volatile market, even in a depressed situation. but the expectation is strong because we are seeing the participants on the demand side that they are taking more and more cover, and this means only one thing, that they are seeing an improvement on the market at least over the next six months.

Thank you. Thank you.

The next question is from Massimo Bonisoli of Equita. Please go ahead.

Good afternoon. Thank you for taking my question. I have two questions. One is regarding the implication of the new package of FIT-455 to stimulate sustainable maritime fuels and zero-emission marine propulsion. So what are the implications for your long-term strategy? coming from this new kind of regulation in Europe and if you're thinking to have different source of fuels as well as this different source of engine for your next few vessels. And the second question is on the cash flow generation. First alpha, first free cash flow generation was positive despite the weak realized price and negative income. So what would be the level of realized prices that would bring your free cash flow to break even more or less?

I pick up the first question. What we are doing today, we are testing with one of our main clients, a trader called Trafigura. You certainly know him. and we are testing a biofuel of second generation on the actual ships, so there is no need to change engines or change ships. I mean, on today's fleet, and we are having very good and positive results on the exhaust gas and reduction of CO2 emissions. So we should... probably we will be moving more and more on biofuel for propulsion, and this should bring us over the first target, which is 2030, with the reduction of 40%. Now, what is certainly happening is that all this is in a way also positive for us because having a fleet of eco ships which have been built all recently uh these new implementation coming in will push more and more owners to scrap the old vessel so the supply side will have what we for us is a positive factor which it should reduce the fleet growth and certainly create a better balance between supply and demand.

Regarding the second question on the free cash flow, our financial break-even is actually not that far from our P&L break-even. And they are both around $15,000 per day, just below $15,000 per day. So we are not that far from that figure. Our time charter coverage is at around that level. And, of course, the spot fixtures aren't. But we are not that far.

Very clear and interesting. Thank you very much.

As a reminder, if you wish to register for a question, please press a star and one on your telephone. The next question is a follow-up from Matteo Bonizzoni of Kepler. Please go ahead.

Thank you. Just one question. As regards the refinancing of your balloon in 2022, which is worth around $65 million, what Can you elaborate on the expected cost in terms of financing costs?

Yeah, we started, as I mentioned already, we have ongoing conversations with banks to refinance these balloons. We are seeing banks seem to be quite keen the ones we have contacted so far. And I would say that the conditions we are going to be able to achieve should be slightly better actually than in our last refinancing where we achieved a margin of 250 basis points. So we should do at least as well or better, and I expect us to be able to do better than that. and the usual terms that are today available on this type of loan, so five-year terms on 17-year profiles, age adjusted to zero.

Okay, thank you.

Gentlemen, there are no more questions registered at this time. Mr. D'Amico?

Yes. Thank you. Thank you very much for joining us in this conference call. And at this point, I mean, I hope that we are going to deliver better news at the next quarter. But certainly things are getting in one direction, I think, and As Carlos said, more people are getting vaccinated and better will be for our market. So we must just look at really at that. Thank you very much and talk to you at the next conference call.