D’Amico closes 2016 with $12.8m loss

d'Amico

The Board of Directors of d’Amico International Shipping S.A., a leading international marine transportation company operating in the product tankers market, announced the approval of the draft of the 2016 full year financial statutory and consolidated results.

MANAGEMENT COMMENTARY

Marco Fiori, Chief Executive Officer of d’Amico International Shipping commented:

DIS’ Net Result was negative for US$ 12.8 million in the full-year 2016, including US$ 6.6 million impairment on ‘assets held for sale’. Such negative result was due to the soft market scenario we experienced in the second half of the year, when rates hit historically low levels. The substantial level of inventories built up in the previous months and in 2015 together with a relatively high influx of newbuildings coming into the market in 2016, put downward pressure on freight rates.

However, DIS maintains a very positive view on the product tanker market in the medium-term. I am a strong believer that our industry has very strong underlying fundamentals, which will benefit us in the years to come. On the demand side, we are expecting a good level of growth on the back of the trend of refineries moving away from main consuming regions, which will increase ton-mile demand. On the supply side, we have a historically low fleet growth expected over the next two years, with the current MRs orderbook close to its 20 years’ low and very limited ordering activity at the moment. At the same time, the new environmental rules, which are gradually coming in place, will lead to a further reduction on the supply side, benefitting owners of very young fleets like ourselves.

I am rather satisfied about the way DIS managed to minimize the negative impacts of this market correction. On the one hand, we benefitted from our traditional high level of ‘time charter-out’ coverage (46% of its available vessel days at a daily average fixed rate of US$ 15,214) which provided a good hedge against the spot market volatility; on the other hand, we gradually shrank our short-term ‘time charter-in’ fleet during the year, reducing our market exposure. I think this proves DIS has been implementing a successful chartering strategy and has a flexible cost platform, which we can quickly adapt to changes in market conditions. In addition to the above, we are very active on the sale market. We recently announced the disposal of two of our oldest ships and we are currently working on other similar deals. In most cases, we will charter back for a few years the vessels we intend to sell, positioning ourselves to keep our tonnage capacity in an expected strengthening market whilst increasing at the same time our liquidity and financial flexibility.

As at the end of 2016, our Company had a Net Asset Value (NAV) of US$ 222 million which translates into a NAV per share of Euro 0.49 which is almost 50% lower than the current stock price.’ Carlos Balestra di Mottola, Chief Financial Officer of d’Amico International Shipping commented: ‘The product tanker market was rather challenging in the second part of 2016 but thanks to our prudent commercial strategy we managed to limit our loss to US$ 12.8 million or US$ 6.2 million, excluding the impairment we booked on 5 vessels ‘held for sale’.

DIS was able to achieve a FY 2016 EBITDA of US$ 55.0 million, which represents a 21% margin on TCE Earnings. Such good level of EBITDA, led DIS to generate a positive operating cash flow of US$ 55.7 million during the year. At the same time, DIS continued the implementation of its US$ 755 million investment plan in 22 newbuildings, with US$ 151 million invested in 2016, mainly in connection with 5 new vessels delivered from the yards.

The remaining investment plan amounts to US$ 223.4 million and 74% will be financed with bank debt, already fully secured as of today.’

Financial Review
Summary Of The Results In The Fourth Quarter And Twelve Months Of 2016
The IMF said in their January 2017 update that after a subdued global growth in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging markets and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications.

The IEA in their most recent February 2017 report, revised upwards for the third consecutive month 2016 oil demand growth, to 1.6 million b/d. Although oil demand growth is still forecast to decelerate in 2017 to 1.4 million b/d, recent improvements in industrial activity are providing some support. Oil product stocks are still at historically high levels. OECD industry refined product stocks, however, after rising in the first part of the year and peaking in August at 1.58 billion barrels, started falling thereafter reaching 1.50 billion barrels in December 2016, recording an overall decline in the period of around 80 million barrels (-5.1%). OECD Refined product stocks are still significantly higher than in December 2014, when they are amounted to 1.40 billion barrels, but are at back to levels last seen at the end of 2015 (1.50 billion barrels).

In Q1 2016, freight markets were mixed. In the first two months of the year the market still benefited from the buoyant markets at the end of 2015. However, as the oil prices started rising in February and refining margins declined, refinery throughput dropped. At the end of Q2 and beginning of Q3 a pick-up in refining activity was not enough to compensate for the fast pace of vessel deliveries. As refineries went into maintenance refinery throughput fell again with the freight market following suit. In Q4 2016 product freight rates West of Suez improved, reflecting the return of many refineries from maintenance and open arbitrage windows for several oil product markets. In this period freight on the UK Continent-US Atlantic Coast route strengthened significantly. Rates at the end of December were 55% higher than the beginning of the month. They continued to improve into January with arbitrage opportunities to export gasoline from Europe to the US. However, freight on the US Gulf Coast-UK Continent route fell in December with below-normal shipments of diesel linked to an oversupply situation in Europe. December naphtha shipments from the Middle East also improved. The Asian naphtha market was buoyant in early January, leading to increasing activity and higher freight rates. Freight on the Middle East – Singapore route also rose in January with generally higher demand for oil products linked to colder temperatures.

DIS’ Net Result was negative for US$ (12.8) million in full-year 2016, mainly due to the weak product tanker market experienced in Q3 and at the beginning of Q4. This result compares with a US$ 54.5 million Net Profit posted in 2015. The variance compared with the previous year is largely due to a much weaker freight market in 2016. In fact, DIS’ daily spot rate was US$ 13,302 in the full-year 2016 vs. US$ 18,814 achieved in the prior year.

At the same time, 45.9% of DIS’ total employment days in 2016, were covered through ‘time charter’ contracts at an average daily rate of US$ 15,989, which represents approximately the same percentage as the previous year but at a higher average rate (full-year 2015: 46.0% coverage at an average daily rate of US$ 15,214). Such high level of time charter coverage is one of the pillars of DIS’ commercial strategy and allows it to mitigate the effects of spot market volatility, securing a certain level of earnings and cash generation. In fact, DIS’ total daily average rate (which includes both spot and time charter contracts) was US$ 14,534 in 2016 compared with US$ 17,159 achieved in the previous year.

In comparison with the previous year, 2016 results were also negatively impacted by: i) US$ 6.6 million impairment booked in 2016 on three vessels, which are currently under advanced sale negotiations. In fact, based on IFRS 5 these three vessels were classified as ‘assets held for sale’ and the difference between their appraised market value and their book value was charged to the current year profit and loss; ii) US$ 5.8 million positive Result on disposal achieved in 2015, following the sale of one of DIS’ owned vessels last year; iii) US$ 7.5 million extraordinary positive result generated in 2015 from the Company’s treasury and risk management.

These negative variances year-on-year, were partially compensated with a more efficient cost structure, with significant savings achieved on ‘Time charter hire’ costs (partially due to fewer TC-In vessels managed during the period) and on daily ‘Other direct operating cost’.

This explains why DIS was able to achieve a FY 2016 EBITDA of US$ 55.0 million and an ‘EBITDA Margin on TCE Earnings’ of 21%, despite the weak spot market characterizing a significant part of the second-half of the year (full-year 2015: US$ 97.1 million and EBITDA margin of 31.3%). Such level of EBITDA together with an efficient management of the working capital, led DIS to generate a positive operating cash flow of US$ 55.7 million in FY 2016 (US$ 68.5 million in FY 2015). In 2016, DIS had US$ 151.2 million in ‘capital expenditures’, mainly in relation to its new-building plan. Since 2012, DIS has ordered a total of 22 ‘Eco design’ product tankers1 (10 MR, 6 Handy-size and 6 LR1 vessels), of which 151 vessels have been already delivered as at the end of the year. This corresponds to an overall investment plan of approximately US$ 755.0 million and is in line with the Company’s strategy to modernize its fleet through new-buildings with an eco-design.

The remaining investment plan amounts to US$ 223.4 million and 74% will be financed with bank debt, already fully secured as of today. In addition, DIS has already fixed 14 of its new-building vessels on longterm time-charter contracts with three oil-majors and a leading refining company, all at profitable levels.

OPERATING PERFORMANCE
Time charter equivalent earnings were US$ 261.4 million in 2016 vs. US$ 310.7 million in 2015. The variance compared with last year is due to the softer product tanker market of 2016. In particular, DIS realized a Daily Average Spot Rate of US$ 13,302 in 2016 compared with US$ 18,814 achieved in the previous year. After a very positive first quarter of the year (Q1 2016: US$ 18,076), the spot market softened in the second quarter (Q2 2016: US$ 15,560) and hit historically low levels between September and November, with DIS achieving a Daily average Spot Rate of US$ 10,101 in Q3 2016 and US$ 10,120 in the last quarter of the year.

The market started firming up again in the last part of Q4 and going into January 2017. Following its strategy, in 2016 DIS maintained a high level of ‘coverage’ (fixed contracts), securing an average of 45.9% (2015: 46.0%) of its available vessel days at a Daily Average Fixed Rate of US$ 15,989 (2015: US$ 15,214). In addition to securing revenue and supporting the operating cash flow generation, these contracts enabled DIS to strengthen its historical relationships with the main oil majors, which is one the pillars of its commercial strategy.

EBITDA was US$ 55.0 million in 2016 compared with US$ 97.1 million achieved in 2015 (of which US$ 5.8 million related to gain on disposal). The reduction relative to last year, is mainly due to lower ‘TCE Earnings’, partially compensated by lower ‘Time charter hire costs’.

Consequently, DIS’ EBITDA Margin was 21.0% in 2016 compared with 31.3% in 2015. EBIT was positive for US$ 10.1 million in 2016 compared to US$ 63.8 million in 2015. Net financial charges were negative, amounting to US$ (22.4) million in full-year 2016 vs. US$ (8.0) million in 2015. Last year’s amount included a US$ 7.5 million positive impact arising from the Company’s treasury and risk management activity (mainly on foreign exchange, bunker costs and pre-hedge interest rate swaps (IRS) agreements).

The Net Result for 2016 was US$ (12.8) million compared with a Net Profit of US$ 54.5 million posted in the same period of 2015 (2015 was the most profitable year for DIS since 2008).

CASH FLOW AND NET INDEBTEDNESS
DIS’ Net Cash Flow for 2016 was negative for US$ 20.1 million, mainly due to US$ 151.2 million gross capital expenditures, partially compensated by US$ 55.7 million positive operating cash flow and US$ 73.4 million positive financing cash flow.

Cash flow from operating activities was positive for US$ 55.7 million in 2016 vs. US$ 68.5 million in 2015. Taking into account a very different market scenario relative to the previous year, 2016 positive operative cash flow was also the result of a prudent management of the working capital in addition to a still healthy level of EBITDA. DIS’ Net debt as at December 31 2016 amounted to US$ 527.8 million vs. US$ 422.5 million at the end of 2015. The increase compared to the previous year is mainly due to the implementation of DIS’ US$ 755.0 million newbuilding plan, with total investments of US$ 151.2 million made in 2016. Expecting more favourable market conditions in the near future our controlling shareholder d’Amico International SA, has decided – consistently with the past practice – to provide full financial support to the current activity of the Company including for, but not limited to, the completion of the fleet management program. This will allow the company to finalize its asset disposal program renewal its results.

BUSINESS OUTLOOK
Freight rates have now corrected from the improved levels at the end of 2016 and beginning of this year, back to the Q3 levels of last year. IEA’s forecast for refinery throughput in Q1 2017 was revised down in January 2017 by 260,000 b/d, corresponding to only 80,000 b/d year on year growth. After peaking in August 2016, OECD industry refined product stocks have fallen significantly, by around 80 million bpd or 5.1%. They remain, however, elevated by historical standards and further drawdowns are still necessary to set the stage for healthier growth in demand for the seaborne transportation of such products. In this respect, a prolonged refinery maintenance in the spring could contribute to a further reduction in inventories.

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