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Edited Transcript of DIS.MI earnings conference call or presentation 13-Nov-19 1:00pm GMT

Q3 2019 d'Amico International Shipping SA Earnings Call

LUXEMBOURG Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of d'Amico International Shipping SA earnings conference call or presentation Wednesday, November 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Carlos Balestra Di Mottola

d'Amico International Shipping S.A. - CFO & Executive Director

* Paolo d'Amico

d'Amico International Shipping S.A. - Executive Chairman & CEO

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Conference Call Participants

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* Luigi De Bellis

Equita SIM S.p.A., Research Division - Co-Head of Research

* Matteo Bonizzoni

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the d'Amico Q3 and 9 Months 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Paolo d'Amico, Chief Executive Officer. Please go ahead, sir.

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [2]

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Hello. Good afternoon. Let's go through the executive summary of the first 9 months of the year.

Being 9 months, we already know 6 months of it, but with us rapidly through the whole thing.

As you know, in March, the DIS shareholder extraordinary general meeting authorized the Board for an increase of its share capital with an issuance of new shares. Now this increase of capital has been 97.3% placed from the total number of rights were exercised, and the remaining part was placed on our private placement.

The net result, and this is the new data, DIS posted a net loss of $32.5 million in the first 9 months of '19 versus a net loss of $41.2 million in the first 9 months of '18. But if we exclude the nonrecurring items from both years and the effects of IFRS 16 from '19, DIS net result would have amounted to $15.1 million in the first 9 months of 2019 compared to $44.4 million recorded in the same period of '18.

As you know, DIS has been, in these months, disposing of the sales. Some of the sales have been straight sales of ships belonging to the joint venture and others have been sales and leaseback, including the first JOLCO deal, which is a tax scheme -- a Japanese tax scheme that we did on one of our LR1 ships.

We amended the financial covenants on all bank loans guaranteed by DIS because the application of IFRS 16 from January 1, '19, had a negative effect of 4.3% on DIS net worth to total asset ratio. So based on this, we had a reduction of a minimum threshold ratio of 25%, when previously it was 35%.

As far as time charter equivalent, the daily spot rate has been $12,786 in the first 9 months of 2019 versus $10,574 of the first 9 months of '18. Of course, talking about outlook and time charter coverage, as you see and as you certainly know, the market improved very well, improved a lot and this is substantial, let's say, improvement, which to my mind, is not yet due to IMO 2020, but is due to a consequence -- a terminal effect of the blacklisting of COSCO ships, because this brought a very strong tightness in the crude market and, as a consequence of this, it spill over on the claimant side.

I leave now the floor to Carlos Balestra for the overview on key financials.

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Antonio Carlos Balestra Di Mottola, d'Amico International Shipping S.A. - CFO & Executive Director [3]

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Yes. Hello to everyone. So our fleet at the 30th of September consisted of 48 vessels, of which 32 either owned or bareboat and 16 on time charter. We took delivery of our [last] newbuilding on the 1st of October, which was -- is not counted in this fleet numbers as of 30th of September.

We have a very modern fleet, as you know, an average age of 6.4 years, 85% IMO class. We went through a very important fleet renewal program. We ordered 22 vessels since 2012, and they are -- which -- 10 MR, 6 Handys and 6 LR1s. The newbuilding CapEx as of 30th of September still included the installment for -- the last installment for the last vessel in our newbuilding program, the LR1 that was delivered on the 1st of October. Our equity portion of that last installment corresponded to around $11 million. The vessel is on time charter -- on a 2-year time charter at a very profitable rate, and we are going to be paying back the (inaudible) back to this TC coverage. From 2020, we only have maintenance CapEx left.

Relative to the previous presentation of the half year results, the outlay for these investments have been reduced. We now assume only $11.6 million, before we were at around $14 million. The reason for the reduction is that we had a closer look at the actual repairs that our vessels need to undertake, and we identified some potential savings there.

Also the program of the dry docks changed slightly with some of these events being postponed to 2021. In reality, we are most likely going to be selling some of our older vessels in 2020. And therefore, the actual outlay for this maintenance CapEx is going to be most likely -- substantially lower than the figure indicated here. So we're going to be much lighter in terms of CapEx requirements next year.

The same is true of debt repayments. As we have stated several times, we had this facility within [Teza], which started off at $75 million. And we had to reimburse over 5 years. So $15 million of reimbursements plus interests every year. We finalized reimbursement of this facility in December this year and thereafter, therefore, we -- our debt reimbursements fall significantly. Overall in 2019, we had $53 million in loan repayments. And for 2020, this should amount to $36 million. Of course, we assume that the balloons, which will mature -- the facilities that -- which will mature next year, we will be refinancing the balloons. In most cases, these balloons are around 50% to 55% of the vessel's value. So we don't foresee any problems refinancing the balloons

Going on to the next page. Just as a reminder, the fact that on the vessels we pursued sale leasebacks for, we have purchase options, and these are very flexible structures. And they can be exercised from the first exercise date at any point in time with 3 months' notice. Already 4 of these are, in theory, exercisable in 2019. Of all the options, some already in the money and can be exercised, some are theoretically in the money, and only one is actually out of the money. It's a high priority, but it's only slightly out of the money. So a continuing recovery. We won't need too much of an upside to asset values, which have already been rising over the last year or so for this option to become in the money.

Going on to the next page. Again, this hasn't changed much from when we last presented our first half results. We have fixed a number of our vessels this year at very attractive rates. The LR1s, in particular, at around $19,000 per day for 1 year. But also, there was an MR2 fixed for 3 years at $16,750. These period rates have been rising throughout the year as a testament to the very strong sentiment surrounding the sector, the very positive outlook, which is shared by both owners and the charters, oil majors, leading trading houses.

Today, if we were to fix 1 of our MR2 Eco vessels for 1 year, the rate would be around $17,500 per day, maybe even more, maybe even $18,000 per day. So it's a further improvement relative to our last fixture. Goes without saying that those are very profitable rates for us. Our P&L breakeven this year was below $15,000 per day.

Looking at our forward coverage and also comparing that with our historical coverage on the following page, Page 12, we see that we touched a bottom in Q2 '19, where we had an average rate of $14,400 per day for our coverage. And then it starts rising and also quite rapidly throughout 2020 and in 2021.

If we look at 2020 as a whole, we have around 41% of our days -- available vessel days covered at $16,000 per day, which is, of course, a profitable rate for us. The percentage of our Eco fleet has been rising and will continue rising over the next quarters. And the chart at the bottom of this page here doesn't include vessel disposals. Only the vessels, which we already classified as held-for-sale, which currently are the Glenda Meredith and the Cielo di Guangzhou. But as previously mentioned, in a stronger market next year, we are likely to sell some other of our older vessels. So this percentage of fleet composed of Eco vessels is likely to rise faster than what we are showing here in this chart.

On the following page, we see -- we show the fleet evolution. The average number of vessels we control, this has fallen from an average -- will fall from an average of 48 vessels in Q4 '19 to around 39 vessels in 2021 as some of our TC-INs vessels are redelivered to owners. The average number of vessels in the spot market however rises significantly from '18 and Q4 '19 to 33.1 in 2021. The sensitivity -- the next year for every $1,000 per day change in the TC equipment earnings is now of $8.4 million. Last time we looked at this, it was $9.5 million. So it came down slightly as we fixed more vessels on time charter.

On the following page, we show how the costs have been coming down quite significantly, both on the direct operating costs of our vessels and the G&A. In particular, the direct operating costs, we have worked quite hard on -- we invested quite a lot on new technology, and we are managing our vessels now through condition-based maintenance system, which -- where we have some modern equipment, which allows us to inspect the parts of several of the critical parts of our engine and determine exactly when they need to be replaced instead of relying on channel statistics. And therefore, in some cases, we can delay significantly a replacement of parts. In some cases, instead, we can anticipate problems and avoid an off-hire. So it is a big change, and it has led to some very significant savings. And in addition, also, we have been working hard to optimize our purchases, renegotiating contracts, standardizing parts that we purchase, so that we can have volume discounts. And also, thanks to the newbuilding program that we just pursued, we now have a much more homogeneous fleet, which means that we can rely on the same type of spare parts for all our vessels. We have 22 vessels, which are built from the same yard group, either in Korea or in Vietnam, and that also helps us to obtain some savings.

On the -- of course, the younger -- the young vessels are also cheaper to manage. And in that respect, the fact that our fleet has been recently renewed has helped us also to keep these costs under control.

On the G&A, the biggest factor has definitely been the strong U.S. dollar, but we have also been very careful in trying to obtain savings wherever we could on our G&A. And there, we have reorganized some of our activities to obtain these savings. And so some additional savings in this respect might also be possible next year. Although, of course, there is the currency effect, which is very important here. So a lot will depend on how the U.S. dollar will move next year, whether these savings can be maintained or not in full.

Going onto the following page. The ratio of the net financial position to fleet market value has fallen from around 73% at the end of '18 to 65% now. As of the 30th of June, it was 66%. So despite the loss we recorded in Q3, this ratio improved slightly because vessel values continued rising throughout the quarter, and this is a much more acceptable ratio. But we seek to improve further, and it will be one of our priorities going forward to further deleverage our balance sheet to position ourselves in a -- with a very strong balance sheet for the next cycle.

Going on to the next page, we look at -- we take a closer look at the results -- the P&L results. As Paolo previously mentioned, the loss in the first 9 months was of $41 million -- sorry, $32.5 million relative to $41 million in the first 9 months of last year. But excluding nonrecurring items, the improvement is much more significant. It's minus $15 million relative to minus $44 million. And for Q3 '19, excluding nonrecurring items, we are at around minus $6 million relative to minus $21 million in Q3 '18.

Also at the EBITDA level, the improvement is also very evident. Even if we exclude the IFRS impact, which is of positive around $26 million for the first 9 months of '18, our EBITDA is -- would have amounted to around $43 million, which is more than 5x more than in the same period last year. So -- of course, this was -- this improvement is mainly attributable to the stronger spot markets.

And on Page 17, we take a closer look at the results of our spot vessels as well as the vessels which are fixed on TC. And we see that for the Q3 '19, the average result of our spot vessels was $11,600, which is weak, but it is much better than in the same period last year when we averaged only $8,700 per day. Q3 is, of course, usually affected by the maintenance of refineries. And this year, this activity was a bit subdued relative to last year as a lot of refineries stopped for longer in the spring in anticipation of IMO 2020. So that is one of the reasons which explains the outperformance of Q3 '19 relative to Q3 '18.

Overall, for -- over the 9 months, we reported a result of $12,800 per day on the spot market, which is an improvement of around $2,200 per day relative to what was achieved in the 9 months of 2018. So if we include the time charter coverage, which has been very valuable to us throughout these difficult years, we have experienced our blended result for the 9 months of 2019 is around $13,700 per day. So it's really around $1,000 per day lower than our P&L breakeven. So we are not that far from our P&L breakeven.

Going onto the following page, we take a closer look at the results of our MR vessels relative to market benchmarks. As usual, we outperformed the Clarksons average, if we look at all our vessels on the spot market -- all our MR vessels on the spot market. If we look at only our Eco vessels, we outperformed significantly the Clarksons average. $15,300 per day was the result in the first 9 months of the year of our Eco vessels. So it's also quite interesting to note the outperformance of the Eco vessels relative to the conventional vessels, which was very significant this year.

Going onto the market, I pass it over to Paolo again.

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [4]

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Thank you, Carlos. Let's look, first of all, to the potential upside of rates and values -- our asset values. If we take the last peak, we see that the 1-year time charter and spot -- and the spot rates today are 47% and 56% below that last cycle peak.

And so we look at values, [in which case] the newbuilding, the 5-year-old and the 10-year-old vessel, the newbuilding are 33% below the last market peak, the 5-year-old are 44% below and the 10-year-old is 58% below. This does not mean that market will automatically [grow back there]. That means certainly that there is a lot of room for improvement on both earnings and margins.

As a matter of fact on the rates side, we can see how the 1-year time charter for an MR non-Eco is improved up to more than $16,000 a day for a 1-year charter today, which means you have to add a premium of $1,500 for an Eco ship. So you are talking about $17,500. And we are -- I would even say that we are getting close to $18,000.

The demand of the seaborne are increasing. It's been increasing all the way for the last close 20 years. But what is extremely interesting to my mind is the fact that on year 2000, the oil products were playing only by 25% of the total moved were oil products. Today, this 25% became 35%. And of course, this is going to increase more and more due to the refining capacity, which is coming in fortunately in this year, so we will see it in another slide later on.

We have an extremely -- a surge in refining volumes, which is due of an anticipation of IMO 2020. So the global refinery throughput is expected to stay very elevated over the 2020 and this final part of 2019. Here, what I was saying before, we have related growth in refining capacity in 2019, because volume in 2019 is forecast to rise by 2.7 million barrels per day. And if we take a period between '19 and '21, it's going to increase by 5.1 million barrels per day. Now I remember that high consumption reward is around 100 million barrels per day. So you have a 5 million -- 5% increase on the refining side. This is a matter of 3 years.

The landscape of refinery is changing, of course, and this is driving demand because here, again, we are moving away consumption from production of our products. European refineries are, as you know, extremely old. And with the exclusion of a few of these big investments recently we're probably going to be extremely sacrificed by the fact that they produce a lot of high sulfur fuel.

The CapEx and the price today is good enough to improve reserves and development of new oil. However, on the sale side, even if these parts are recently slowing down, and also on the offshore side, and where Brazil is a little bit of [approval] rate.

We have a very rapid growth of U.S. crude export, which is continuing. Remember with U.S. for crude export, we do not necessarily go low. We always talk about China, but big players like Korea and Japan that they are importing U.S. crude today.

IMO 2020, a game changer. I think this is something that you know very well because we have been talking about this IMO 2020 for the last 5 years. So it's something quite known.

You know that we have basically changed our fuels, and this implies for those ones who want to be scrubber-fitted to go for very extensive retrofitting. So decreasing the fleet -- so decreasing the supplies. And this will, of course, create a better trend in the market. And we see a lot of potential for floating storage because will be a moment where all these volumes have to go somewhere, talking about the high sulfur. As a matter of fact, there are some bunker hubs, minor ones, which they are in difficulty to provide the high sulfur fuel because they are cleaning all their storage, and they are more adding to the [zero side of this threat] of going -- of keeping the 3.5.

One thing which is happening in this, I mean, I just read this, yesterday, but it is quite interesting. This -- U.S. refinery are buying high sulfur fuel from Russia as a feedstock for their [cokers] in ways to make gasoline and middle distillates out of it.

So high sulfur fuel is becoming also something new, but it was not before and could end up in -- as -- in refineries for totally different reasons. So it was not going to be only in the utilities, we are going to look to it, but also the refinery -- sophisticated refineries.

We have here a series of brokers' opinion and given to you to read it, but they are all positive because it cannot be different, it's right. The fleet growth is growing. There is a very -- owners are very reluctant to place orders for 2 reasons; one, they want to see the market where it goes; but the second one, which I think is more important, they are and we are, because we do the same job, extremely worried of the future technology because as you know, 2030 is 12 years far away, and even 2050 is 30 years far away. So it's very easy that you do something -- building a ship today, you must be extremely careful on what fuel it is going to [win] in the future because you can have a modern ship getting obsolete very fast.

We have delayed the scrapping, which they are going to happen because the older ships are getting more and more noneconomic. So the high burners are going to be outplaced from the market. And even totally taking the newbuilding values, you see that there is a bigger trend in steel to steel secondhand more than building a new ship. And taking in consideration what I said before. I think with a new ship, you have to see what sort of engine you have to put on those.

The market is clearly expected to be tighter for many elements, including the fact that many ships are going to retrofit the scrubbers.

And so, I think we have finished our presentation.

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Antonio Carlos Balestra Di Mottola, d'Amico International Shipping S.A. - CFO & Executive Director [5]

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There's only the last slide on the NAV. Yes. So I would like to highlight there that our NAV after bottoming in December '18 started moving up. It moved up between December '18 and March '19, of course, after the capital increase, which was of around $50 million, it's moved up more markedly between March and June to $285 million, and then it moved, however, up again to almost $300 million in September. And I think for the first quarter in a long time, we have also, on the NAV per share, an improvement -- a slight improvement. The NAV per share went from $0.23 to $0.24.

Our share price has also moved up quite significantly here. As the 30th of September, it was still $0.10. And I calculated this, this morning. So our share price this morning was around EUR 0.116 per share, which in dollar terms is around $0.1 or a bit less at $0.13, and the discount to NAV was around 45%. But since then, I believe the share price has moved up quite a lot today. So this discount is even smaller, but still very significant, still very significant. And we believe [unjustified] given the fundamentals of the company and of the sector.

And so we are very positive also with regards to the future evolution of the share price of DIS. And I remember that in the past, we have also traded at a premium to NAV. So we don't see why that should not happen again. I think that the discount was maybe justified at the beginning of last year, where there were concerns about the potential capital increase -- diluted capital increase.

Today, with the lighter debt and CapEx repayments going forwards, the period contracts that we have in place at increasing rates throughout next year and in 2021, and the prospects for the spot markets, which are unanimously, I would say, positive, both financial analysts as well as charters, oil majors and owners seem to be very positive. And the period rates at which we are fixing our vessels reflect that. We believe that this discount is totally unjustified, and we'll definitely contract, and of course, the NAV, which should continue rising also over the next quarters.

So now I have to say that's all. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question, sir, is from Luigi De Bellis from Equita SIM.

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Luigi De Bellis, Equita SIM S.p.A., Research Division - Co-Head of Research [2]

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I have 3 questions. The first one, we have seen recently some pullback on crude tankers, VLCC spot rates. Do you expect some correction from this very high level also for clean tankers?

And the second question, where do you expect spot rates to stabilize after this important spike of October and November? Where you are quarter-to-date in terms of spot rates?

And the final question on the positioning of your fleet trading route, where are positioning now your vessels on the spot rates?

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [3]

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As I said before, the reason why the market is what it is today is more due to the blacklisting of the COSCO fleet than of IMO 2020. Because the effects of IMO 2020 are starting happening now. You see the blacklisting of the COSCO fleet meant that 44 VLCCs have been put out of the market basically. This tightened the crude oil market a lot, starting from the VLs and then went down to Suezmax and Aframax.

[As it does we have from Aframax] segment, many LR2s, who are clean vessels, and are of the Aframax size, moved from the clean trade to a dirty one. And this is pulling also LR1s. So created a tightening also in the clean market. But this is all due to the fact that a big piece of the fleet -- of VLCC's fleet, but not only the LCCs because COSCO has more different size of vessel, is being taken out of the market even if the blacklisting was hitting one single company was COSCO Dalian and another one. So -- but the trade as well, so afraid to get involved in sanctions, but we just refused to touch the old fleet altogether. This is why the market rise now.

In all this, IMO 2020 is moving in. So we start having more middle distillate move, but it's only on the beginning. So the rise of the VL rates -- VLCC's rate has been by far stronger than what happened on the clean vessels. So a correction on a VLCC will happen and probably will be very -- will be, I would say, irrelevant at the end of the day to a clean fleet.

Well, these things have to happen. On top of that, demand will improve because, as we say, all this middle distillate has to be moved. Now if we want to set a rate where will be the market in the future, the [paper] different market is talking more than $30,000 a day, that is the paper market. So it's not the -- it's not mainstream. So it's a different thing. I hope that this is -- has been in a way -- has [set it out].

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Operator [4]

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The next question is from Matteo Bonizzoni of Kepler Cheuvreux.

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Matteo Bonizzoni, Kepler Cheuvreux, Research Division - Equity Research Analyst [5]

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I have a question as regards the fleet rejuvenation or enlargement going forward. So basically, you have reduced the net debt to fleet market value to around 65%. And in 2020, considering that the CapEx will be low -- well below depreciation, you probably are going to go much below this level. So what is your, let's say, mid-term strategy in some years down the road? So in other words, should we think that at some point you start to invest EUR 40 million to EUR 50 million per year, that is what you needed to rejuvenate your fleet and to keep the fleet stable? Or are you considering at some point and, if any, when to go ahead with another major CapEx plan? So what is your view or approach on this point?

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Antonio Carlos Balestra Di Mottola, d'Amico International Shipping S.A. - CFO & Executive Director [6]

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Yes, Matteo. No, our -- thank you for the question. Our #1 priority now, as we mentioned in several occasions, is to continue deleveraging our balance sheet. I mean we went through some difficult years. Now we had to pursue a number of sale leaseback transactions, which increased our overall indebtedness.

So we want to, first of all, strengthen our balance sheet because in shipping, the important thing is to be in a position to be able to invest aggressively when the time is right. So if we cannot just pursue a strategy of constant renewal of the fleet, we need also to try to time the cycle and be able to then move in more aggressively when the values are right, when the prospects for recovery are right.

I would say that our recent renewal program was very well timed. It may be we received some vessels a bit early, and we were a bit caught out with regards to the sale of our older vessels, which we should have sold earlier, and we were a bit stuck with them at a certain point because the liquidity for these vessels fell quite significantly, and it was very hard to do outright sales. And that's why we had to pursue these sale leaseback transactions to generate the liquidity we needed to finalize our newbuilding program.

So our #1 priority will now be to sell some of these older vessels, which we would have sought to sell before, and we couldn't, so when the -- at hopefully higher volumes with a stronger market next year. And then at the right time with a stronger balance sheet, when we see a window, we will also consider new acquisition opportunities, but we cannot really tell you a figure now of how much we will be investing. It would be based on opportunities that would arise in the future.

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Operator [7]

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(Operator Instructions) Mr. d'Amico, there are no questions registered, sir. Would you like to make some closing remarks?

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [8]

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Just to thanks -- thank, everybody for being with us today, and I hope the next conference call will be even more -- on a more positive story. Thank you very much.

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Operator [9]

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