d'Amico (DIS) & Product Tankers Update & Outlook - Capital Link Presentation Series | 1.20.22

Welcome to Capital Link's company presentations. Here, welcome to Capital Link's company presentation webinar series. In this series, senior management of listed shipping companies provide an update on their operations, business development, strategy, and sector outlook. I'm Nicolas Borneau, President of Capital Link. Capital Link is an investor relations firm also active in event and conference organization. We work with several public and private shipping companies, including companies featured in this webinar series. We're actually working with d'Amico International Shipping as their investor relations advisor. As noted in our disclaimer, these presentations are purely for informational and educational purposes. They do not constitute investment advice or advice of any kind, and Capital Link bears no responsibility for them. Today we have with us d'Amico International Shipping. We have with us Mr. Carlos Valestra Mottola, the Chief Financial Officer. The whole session will take 45 minutes. We start with a slide presentation followed by a live Q&A. Please submit your questions through the Q&A button at the bottom of your screen. Please include your name and company affiliation. Alternatively, you can email your questions to us at [email protected]. Thank you for joining us. I'm turning over the floor to Carlos.

Thank you, Nicolas, for inviting us to participate in this event. And good afternoon to everybody participating from Europe, and good morning to everyone participating from the Americas. I would guess it's quite safe to say there's no one participating from Asia, but if there is someone, I hope we'll be giving you a rosier picture than recently about the product tankers market, and we will be able to put you to sleep soon. Well, so proceeding into the presentation, just a brief overview of our fleet for those of us that don't know us that well. We are specialized in product tankers. We control 37 vessels, most of them owned or in bare boats. The bareboat vessels for us are just alternative financing arrangements, and some of them are chartered in, mostly long-term charters in, then one short-term chartered in. Just over two-thirds of our fleet is MR, and then the rest equally split between LR1s and Handysize. We have a modern fleet, 22 new buildings ordered since 2012 that were delivered by the end of 2019, mostly IMO class. And we pride ourselves in the quality of our technical management, which allows us to employ our vessels with first-class counterparties, including the most demanding oil majors. In terms of capex commitments, as previously mentioned, we had an important investment program over the last few years to modernize our fleet, but we are now much lighter in terms of investments. Also in terms of maintenance topics, we are lighter going forward. No new buildings to be delivered over the course of the next few years, and only three million dollars in investments for maintenance capex in 2022, and just a bit more than that in 2023, around 3.9 million. In terms of debt repayments, we are also much lighter. We are glad to have refinanced all our debt maturing in 2022 by the end of last year. The last facility was drawn down in the beginning of this year, and so we now have a good runway. We are going to start soon working on the refinancing of debt maturing in 2023, which is quite a good amount, 110 million dollars almost in balloons in that year, but thanks to our strong banking relationships, we don't think that is going to be an issue, and we hope to complete that this year. Going forward, we have a number of purchase options that we will be looking to exercise. These are the vessels that we have in bare boat. We have eight of these left. One of these options we already exercised, the one for the High Priority. There are still eight which can be exercised. They are all in the money today, and seven of them can already be exercised. One can be exercised only from March 24th. They are all very flexible options, except maybe for the Cello Diffusion for which we only have two exercise days. The other ones can be exercised with 90 days notice at any time, and we will be looking to exercise these options at the right time as a way of deleveraging our balance sheet, reducing our breakeven, and making the company more competitive throughout the shipping cycles.

In terms of contract coverage, this is one of the pillars of our strategy. We always want to have around 40 to 60 percent of our fleet covered 12 months forward. So the purchase options, again, seven of these can be already exercised out of the eight. Going forward, the coverage we always want to be covered between 40 and 60 12 months forward. We have 44 percent coverage now for Q1 2022, which is a good figure given the markets are not particularly strong still right now. It's good we ended the year with a strong market. We finally saw some effects of the winter market and we had a strong December, but the markets have slightly weakened since, so we are glad that we have this coverage for Q1 2022 at a rate which is around our break-even. For Q2 2022, the coverage goes down slightly, but the average rate of the coverage increases, and so for the whole year we are covered at 27 percent at a rate which is slightly above our break-even. And the good thing is we are quite exposed to the spot market in the second half of the year and in 2023, so hopefully that will work out well because the market will start improving. We are quite confident in the second half of the year and especially in Q4, and then we are looking at quite a strong 2023.

The percentage of our fleet which is eco has been rising, and this is expected to continue. This trend is expected to continue going forward. The fleet has been falling slightly as we have had to sell some of our vessels to shore up liquidity and strengthen our balance sheet. Nonetheless, our spot exposure does increase over the course of the next two years, and therefore we will reap big benefits from a stronger market which we expect in the second half of 2022 and in 2023. We also have worked a lot on the cost side. We reduced, we have worked and achieved some quite good results on our daily operating costs, which have declined substantially since 2018, and on the G&A front we also achieved some important savings, and we will look to keep our fleet cost competitive going forward. In terms of balance sheet strength and liquidity position, we ended the nine-month period of 2021 with 42 million in cash and cash equivalents and a ratio of net financial position to fleet market value of around 60.9 percent. Through the sales of the High Venture and the High Valor in the last quarter of this year and in January 2022, we have further increased our liquidity and strengthened our balance sheet, so we are in quite a comfortable position to face temporary weak markets if that were to be the case. Going forward, asset values have started moving up, especially new building prices, but five-year-old vessel prices and ten-year-old vessel prices are still well below their peaks, so there is substantial upside for us to capture.

Quick overview of what is happening on the COVID-19 front and the Omicron variant in particular. Here we have some statistics relating to the UK where we compare the current wave of cases to that which occurred in the beginning of 2021 as a percentage of those cases, and we see that the number of cases rose dramatically towards the end of 2021, but there is also already an ongoing quite steep descent. The contagions spread so fast that it is likely that there is already some herd immunity effect happening in some parts of the UK, which is contributing to this decrease in cases. And of course, the statistics relating to the patients and the deaths are much more favorable than they were in the beginning of 2021, despite the much higher number of cases, and that is most likely because the variant is less lethal, but of course also because of the widespread vaccination of the population in the UK. So I think this is overall very good news. Most countries in Europe are a few weeks behind the UK in terms of contagions for the Omicron variant. We are starting to see in some countries a plateauing of the number of cases, and so hopefully we will have a more positive dynamic going forward also in these other countries, which means that by the spring of this year we will have a most likely a much more favorable situation for travel in particular, which is an important component of the demand for refined products.

Moving on, here is just a quick overview of the demand picture. As we know well, the COVID-19 outbreak led to a very dramatic decrease in demand for oil of 8.7 million barrels, but a good part of that was already recouped in the course of 2021 where demand increased by 5.5 million barrels, and another 3.3 million barrels increase is expected this year. So we should end the year with overall demand which is higher than we had pre-COVID. This is according to the latest forecasts of the EIA released yesterday, so they are quite bullish about the oil demand picture. In terms of refinery runs, also the recovery is ongoing and there's an acceleration forecasted for next year. Refinery runs increased by less than the increase in demand, but they rose by 3.2 million barrels per day in 2021 and they are forecast to rise by 3.7 million barrels in 2022, which would mean that the average refining throughput this year would be slightly below that in 2019, but possibly ending the year at a higher level than we had at the end of 2019. So that bodes very well for the refined products market. Another interesting aspect and statistic that came out from their report is that they say that it is possible that the supply of oil might increase by as much as 6.2 million barrels next year. Of course, the biggest contributor would be the unwinding of the OPEC+ cuts. We are seeing that unfortunately there is some underperformance in the output increases relative to what is the agreed output increases because some countries are having difficulties ramping up production, but it is possible that other countries might be able to step in to compensate the underperformance of such countries. In addition, there are a number of non-OPEC countries, the United States, Canada, and Brazil in particular, which are going to be producing record amounts of oil most likely in 2022, and of course they have strong incentives to do so given the very high oil prices that we are experiencing currently. If this were to happen, it is likely that we might go into a market which is actually slightly oversupplied with oil, so after having a market which was greatly undersupplied during the course of the whole of 2021, this might turn in 2022. Of course, there are lots of question marks here, and OPEC+ have shown that they are very disciplined in managing their production to achieve their price objectives, so it is likely that if non-OPEC countries were to increase production more aggressively than they initially anticipated, they might decide to bring less oil to the market to rebalance the market. But the inventory picture is very favorable. If you look at the industry, we find product stocks we are well below the five-year average and well below where we were at the onset of the COVID-19 outbreak, so there is room to rebuild inventories. And it might be possible that the OPEC+ countries might allow this to occur to shore up inventories to more normalized levels. And if we do see an oversupply of oil at some point in the course of 2022, it is not unthinkable that the forward price curve for crude oil might switch from backwardation, it's currently in a very steep backwardation, to contango, which would be very positive for the tankers in general. Looking at some snapshots of what is happening with demand, it is quite comforting to see that vehicles are moving very much so and more than they were pre-COVID in many regions of the world. Trucks in particular, miles driven by trucks, well above pre-COVID levels, but also if you look at all vehicles, we are pretty much already back where we were prior to the COVID outbreak in the US and in Southern Europe, and instead in South and Central America we are actually above those levels. So this is a trend that is probably going to continue, also because people are seeking to avoid public transportation and so are using their cars more often. In terms of jet fuel demand, we are also seeing a recovery. Of course, this is the big laggard in terms of refined products. Pre-COVID, it was probably the product where the sharpest increase in demand was expected. It is widely expected that travel related to business might be a bit subdued going forward, especially international business, but that there is going to be a recovery eventually. But leisure travel for domestic and international instead is forecasted to recover quite fast, and I personally believe that we could be very positively surprised already this summer in the northern hemisphere because of the dynamics that we are experiencing today with Omicron and the possibility of getting to some sort of herd immunity plus widespread vaccination meaning that we will have much more mobility and also desire to travel by individuals after being restrained in their movements for a very long period.

Yeah, this is just a longer term picture over the next three years. We're going to be seeing a very fast growth in refined products demand, cargo of almost eight percent. COVID also led to quite an important change in the refinery landscape. We saw that it accelerated a process which was ongoing. There were a lot of new refineries being built in the Middle East and Asia, but the very difficult environment for the refineries created by the pandemic meant that a lot of closures which might have taken years to occur occurred in a much faster way. Therefore, the capacity closures and conversions announced last year amounted to 1.9 million barrels per day, with an additional 0.6 million barrels per day which is currently under assessment. Most of these refinery closures were in the US, 40 percent, but also in Europe, 11 percent, and 15 percent in Australia and New Zealand, which is very good for the ton miles of our vessels because of course it is a region which is quite distant from most refineries and so it contributes, it's a very positive contributor to ton miles transportation to Australia and New Zealand. We are also seeing a comeback, a slow comeback but nonetheless a comeback, of US shale oil. It suffered greatly with COVID, and there was a change in dynamic especially for the listed companies that are now prioritizing distribution of cash to shareholders, but the private companies are picking up the button. If you look at the rigs, now 50 percent are owned by private companies relative to 30 percent pre-COVID, and they are reinvesting much more of their cash to increase production and benefit from this very high oil price environment. So rigs have been creeping up slowly but surely, they passed the 600 mark recently, and E&P capex is expected to rise by 19 percent in the US in 2022. So hopefully this will drive also more exports of US oil to Asia on very long distances and will help our cousins in crude oil, whose fortunes are linked to ours because unfortunately when their markets are not doing well, they do tend to transport also clean products especially on their maiden voyages when they are delivered from yards, so we are quite happy if they do better and that should then flow through also to the refined product tanker segment. On the supply side, the picture is very, very promising. We have very high steel prices which of course is spurring demolition, and we have seen a strong uptick in demolition in the last half of last year. The new regulations which are going to be coming into force, the Carbon Intensity Indicator and the Energy Efficiency Existing Ship Index, are also going to contribute to make all the vessels less competitive, and in particular the European Emissions Trading Scheme is going to play a big role in that, especially because the price of these allowances which will have to be bought from 2023 has been rising, and so that will penalize greatly the more polluting older vessels which are then likely to be demolished earlier. There is also of course a strong push by charterers to charter cleaner vessels. There's a move towards transparency and communication of the emissions of the vessels they charter, and so they will have a preference for chartering younger vessels. And of course the banks, especially the leading banks which provide the most competitive price financing, are increasingly preferring to finance a younger tonnage, and they have signed up to these Poseidon Principles to which they commit to reduce the CO2 footprint of the vessels that they finance. The fleet is getting older, and it's getting older fast. The percentage of vessels which are more than 15 years of age has been rising quite fast over the last few years, but you see there's the kink in this yellow curve in 2021, and the speed at which these vessels get older increases. So a lot of the vessels which were built between 2003 and 2008 are turning 15 and 20 years old over the course of the next two years, so this really increases the pool of demolition candidates. For the reasons we already mentioned, there are strong incentives to going forward to demolish older vessels, especially if markets are not strong. And here again, as I previously mentioned, we see that from Q1 to Q3 last year we saw a third in the number of tons demolished. Q4 was also quite strong, and so there was an average of 16 vessels demolished MRs and LR1s in the last three quarters of 2021. If you look at the number of vessels which are planned to be delivered in 2022 in these segments, it's less than that. It's 15 in Q2, then 11, then 15 again, so it is possible that we might experience a fleet contraction in the last nine months of 2022 if demolitions continue at the same pace as they were happening in the end of last year. Of course, if the markets were to start recovering as we expect in the second part of 2022, this would slow down the demolitions most likely, but then they would slow down the demolitions for a good reason, so that wouldn't be a concern. It's also good to see that the number of vessels ordered has been decreasing, and that is also not surprising because new building prices have increased quite sharply. Today, a new building delivered vessel costs, an MR costs around 42 million dollars, and when we ordered our vessels between 2012 and 2014, same type of vessel, they cost delivered between 32 and 34 million dollars, so that is a very significant increase in new building prices. Secondhand vessel prices are still at an important discount to new building prices, even the eco vessels, high-spec vessels, are at an important discount to the new building prices, so we don't see a flurry of new building orders arriving anytime soon. It will be rather illogical for ship owners to go and order vessels now; they're much better off buying secondhand vessels. And therefore we expect the slowdown in the fleet growth to continue, very slow limited growth in 2022 and potentially even less in 2023.

And yeah, so basically this is it in terms of presentation and I'll pass it over to you for the Q&A. Okay, I see here that there are quite a lot of questions that came in. Okay, I'll pick one here. Okay, the first one is, 'By when do you expect freight rates to become profitable?' Okay, well, I wish we had a crystal ball, it's a difficult question, but we are quite confident this should happen in the second half of this year and at the latest by Q4. But I'm also hopeful that we will have a strong summer, I was mentioning just now, and that we could be positively surprised by freight rates already this summer. And it's a very good sign that we ended 2021 on a high note with our vessels, although not for a long period, but at least in the month of December achieving some quite attractive fixtures.

Okay, another question here. 'You have a much more prudent contract coverage policy than your peers. Aren't you concerned that this might penalize you in a recovering market?' Good question. This is not the first time we are asked this. There were a lot of similar questions being asked to us at the end of 2019 as we were moving into a very strong market. Our view here is that our renewals of our time charter contracts are always staggered, so it is true that we might miss out a bit for some months if there is a very strong and fast recovery. But most likely, as these time charters terminate, we are going to be able to renew them at higher rates and capture most of the upside of a recovering market. And as I mentioned previously, we are still very exposed to the spot market in 2022 and in the second half of 2022 and 2023. Our coverage for 2023 is only five percent of our available trading days, so we can do very, very well in a much stronger market that we anticipate for 2022 and for the last part of 2023.

Another question came in here. 'Why should we invest in d'Amico if there are many other companies which are larger and whose shares are more liquid than yours?' Yeah, okay, this is also a question that we get quite often. I would say we are different than most other product tanker companies which are listed, and so that is probably what makes us attractive. d'Amico International Shipping is controlled by the d'Amico Group. The d'Amico Group has been in shipping for decades, since the 1930s, and the current holding company was established in 1952. So I would say that they know what they are doing and they have shown that they are resilient and that they can navigate different cycles and do well through different cycles. I think that is already a very good reason to trust the d'Amico family management of d'Amico International Shipping. But I would say also the fact that the family has so much of its own capital invested in the listed company is a very positive sign and a sign of alignment of interest, because they have a very strong incentive that the company does well. And there are studies out there that show that family-run companies, in some sectors at least, do tend to perform better because they can think longer term, and so they can make the sacrifices which are needed short term to achieve the long-term results, and not care too much about the next quarter only. So I think that is a very good reason to buy our shares relative to maybe other product tanker companies which have other strengths, but this is definitely one good reason to buy our shares. And I would say that the quality of our technical management is also widely recognized by the industry players, by the charterers, and this provides to us some quite unique employment opportunities. We recently, for example, we bareboat chartered out one vessel on a very long and very profitable contract for five years, but keeping the technical management. And we do have, and we have had in the past, very long contracts and profitable contracts with companies like Total and Exxon, which are very demanding charterers. So I think especially in the, well, given that very strong push towards decarbonization which touches us but touches also our charterers, having a strong and a long-standing relationship with these players is going to be a very valuable asset that we are going to be able to benefit from to find together the right projects for the future investments. So I think this is definitely one of our strengths. And then I already touched upon this, I think that we have a different strategy in terms of employment. We do fix more of our vessels through fixed rate contracts, and this means that this reduces the volatility of our earnings and it has proven a successful strategy over the last few years, and I think it will continue being a successful strategy even in a going to a strong market. We are avoiding very long-term contracts unless they are very unique opportunities as the one I mentioned on the five-year bareboat charter contract. But we are fixing mostly one-year contracts now and keeping the exposure to 2023 that we are very positive about. And finally, I think that we have also a very good reputation with our capital providers, especially the debt providers, the banks, and the providers of leasing capital, and we have benefited from that in the past. Especially in Japan, we have a very good name, and that allowed us to close some very attractively priced sale-and-leaseback transactions from 2017 to 2019. So that is of course also another strength of the company.

So yeah, here there's another question. 'What do you plan to do to reduce your NAV discount?' Okay, this is another question that we get quite often. Yes, it is true that at the end of September our shares were trading at a very wide discount to NAV of just over 50 percent. It's not the first time this happens. They have often traded at a discount to NAV, maybe not as wide as 50 percent, but it's also true that in the past we have traded at a premium to NAV, and the discount does tend to narrow as soon as the market turns and the company starts generating profit. So I think this will happen also in this case. And one of our priorities will of course be to continue to deleverage our balance sheet. We want to make the company competitive throughout market cycles. I mentioned previously that there are these purchase options that can be exercised and that we will end on these bareboat deals that we did, and we will be able to replace them with traditional debt, and we are looking forward to doing so as soon as we start generating profits and we see the market moving in the right direction. After we have done so, there's also the possibility to pursue share buybacks. Our shareholders and our board approved a share buyback program which is quite substantial last year, which allows us to buy back 15 percent of our issued shares, including the treasury shares we already have which represent around 1.5 percent of our issued shares. So there's a significant amount of shares that we can still buy back, and so when we start generating the required liquidity, we will be looking to do that. And we will also be looking to distribute dividends eventually of course. And last but not least, we will be monitoring the market constantly to find the right opportunities for new investments. Given the current new building prices, we don't think now is the right moment to commit to new investments, especially not new constructions. And there's also a lot of uncertainty regarding the technological developments to meet the ambitious CO2 reduction targets which the industry will face over the course of the next few years. And so we will wait a bit for the clouds to clear in that respect before we commit to new investments. But I'm sure we will also, thanks to the partnerships I mentioned before with some of our charterers, we will find the right projects, and I expect them to be actually very attractive projects going forward.

And well, I haven't one last question here. We don't have much time left. It's quite similar to the previous question but maybe it's slightly different. 'How do you plan to generate value for your shareholders?' Well, I would say the initiatives I just mentioned will all contribute to generating value. But in addition, we are looking very much at investing in technology, in making our fleet as efficient as possible. We have already a very modern fleet as I mentioned because we invested over 750 million dollars in buying eco vessels over the last few years. But going forward, we also plan to install propeller boss cap fins on some of our vessels, fuel injection valves, we are looking also the possibility of applying low friction paint to improve the hydrodynamics of our hulls. And we are looking also at investing in technology which will, called Eco Torque, which regulates the engine power to increase its efficiency and reduce fuel consumption. We have a fleet performance management department which is also looking at hull performance monitoring and the right time to clean our hulls to reduce the drag from fouling, but also of course without damaging the paint. And we have also been testing biofuels on our vessels, and all our LR1s are approved now to burn biofuels. So these are just some of the initiatives that we are taking to improve the efficiency of our vessels, and we expect this to be an area of focus going forward where we plan to invest quite a lot of resources over the next few years. Yeah, basically I think that we run out of time. Yeah, so I think that's it.

Carlos, thank you for an excellent presentation and you had a lot of questions. So thank you very much for sharing your insight on d'Amico International Shipping and the product tanker market. So this part will be available for replay, so investors can come and access it upon demand. So thank you very much, Carlos, and enjoy the rest of the day. And I hope we will be able to meet in person on March 28th when we have our New York Forum. So thank you.

Thank you, Nicholas, the same. Hope to meet you soon. Thank you very much. Thank you, bye-bye.