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Edited Transcript of DIS.MI earnings conference call or presentation 12-Sep-19 12:00pm GMT

Q2 2019 d'Amico International Shipping SA Earnings Call

LUXEMBOURG Sep 16, 2019 (Thomson StreetEvents) -- Edited Transcript of d'Amico International Shipping SA earnings conference call or presentation Thursday, September 12, 2019 at 12:00:00pm 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 International Shipping Second Quarter and First Half 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Paolo d'Amico, CEO. 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 to everybody. Good afternoon. Thank you to being with us. Let's go straight to a summary presentation.

As you know, last March we had an extraordinary general meeting, which authorized the Board to increase the share capital. The operation ended up on April 16 with 97.3% of the total number of rights exercised. And on April 24, the unsubscribed new shares remaining have been sold on private placement and resulting in 100% subscription to a dollar equivalent of EUR 44 million.

DIS posted on the first half of '19 a loss of $24.3 million. But if we exclude nonrecurring items and the effect of IFRS 16 from the first half of 2019, the net result would have amounted to $9.2 million loss in the first half, compared with $23.6 million of previous year.

Talking about liquidity, we had generated cash around $30.3 million in liquidity through a series of sale and leasebacks and we -- on value stack, including JOLCO, which is -- we have been basically the first one, which is a Japanese tax scheme.

Also while joint venture that we had with VSL, with Eco Tanker, finalized the sale of a 2014-built MR, generating $12.8 million in net cash proceeds for the joint venture, of course.

In June -- last June, DM Shipping, another joint venture with Mitsubishi, agreed the sale of remaining vessel, generating approximately $13.2 million in net cash proceeds.

And in August, of course now here we are in the second half of a year, but another ship is being agreed to be sell -- is being basically sold, which is with Glencore or Glenda, Glenda Megan and will approximately generate $8.2 million, and we expect the delivery of this vessel to happen at the end of this month.

Talking about the application of the IFRS 16 from January 2019, this had a negative effect of 4.3% on DIS ratio net worth to total assets. This is based on company's consolidated financial as 31st March, 2019. To offset the impact of this new accounting standard, all banks agreed to amend the financial covenants on loans guaranteed by DIS, with a reduction of minimum threshold for this ratio to 25% from January 2019 when previously was 35%.

The daily spot rate achieved by DIS in the first half has been $13,326 versus a spot rate of $11,526 on the first half of 2018.

47% of DIS employment days were covered through time charter contracts at the daily average rate at $14,496. DIS achieved a total daily average rate of $13,879 on the first half of '19. This is against $12,625 on the first half of 2018.

I leave the floor to Carlos Balestra, our CFO, for the overview and key financial. And I will get back to you with the market.

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

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Thank you. Good afternoon to everyone. So -- okay. So just a quick update on our fleet composition. We as you know mainly focus on the MR segment. We have been growing, however, on the LR1 segment and we also have a presence on the Handysize segment.

Overall, we -- at the 30th of June, we were controlling almost 50 vessels and -- of which 36.5 MRs, 5 LR1 and 8 Handy. One LR1 still to be delivered as we will see on the following page. And we have a young fleet, an average age of 6.4 years and mostly IMO class. It's 84% IMO class.

So our vessels -- we underwent an important newbuilding program, where we ordered 22 vessels. So we have a very modern fleet, Eco design in most of our vessels. And we -- that allows us to work with the most demanding charters. We have very good relationship also because of the quality of our technical management with the main oil majors who are important clients, but also the important trading houses.

On the following page, we show our CapEx commitments and also our historical investments since 2012. And we have invested -- as I mentioned, we had a very important newbuilding program, contract price, the investments were around $750 million then -- on that. You have to add extras, newbuilding supervision, first supply. So the overall investment for the newbuildings was significantly higher.

Since 2012, we have invested $890 million, so there's only now, regarding newbuilding, $31 million left to be invested, of which $11 million will have to be funded with our own funds and the rest with committed bank debt. So we are really at the end of the newbuilding program. This last vessel will be delivered at the end of September or possibly beginning -- very beginning of October. And as we will see later, the vessel has already been employed through a very profitable contract for us. So we are very happy with that.

From 2020, we will only have the maintenance CapEx left. It is quite an important year in terms of maintenance CapEx. As you can see also relative to history, the yellow bars, the amount we have to invest for such activities is usually between $1 million and $4 million. And the last big year we had was 2015, and it's not a coincidence that 2020 is a big year again because these vessels have to stop every 5 years for special survey.

So in reality, the actual amount we will be spending will probably be lower than that, because in a stronger market that we are seeing already the first signs of, we expect to be able to sell some of the older vessels on our fleet, which were supposed -- which are supposed to stop for dry dock in 2020.

I also remind you that in 2020, on a number of these vessels, we are going to have to install water ballast tank systems if we don't sell them before. And that's why the figure is so important.

Going on to the next page, we highlight how our debt repayments are falling next year and that will have a big impact on our cash breakeven that from next year will be pretty much aligned with our P&L breakeven. We have 1 facility with bank guarantees, which is in addition to the traditional vessel financing, which will be fully reimbursed by the end of '19. And that is why there is this important drop in the reimbursements from 2020 onwards.

Also, I would like to highlight the gray bar indicates the balloon repayments, which we assume we are going to be refinancing. There's not too much to refinance in 2020. There are only 4 vessels that are in JV with Glencore and Glenda International Shipping, for which balloon repayments are due in 2020. So 2021 is a more important year in terms of refinancing. So we have very low refinancing risk in 2020.

Going on to the following page, we have here a slide just to highlight the -- where we stand relative to the purchase options on the vessels that we have pursued sale and leaseback transactions for. We have additional purchase options also on some of the vessels we time charter in. We have not included them here in our table. These purchase options are more distant in time. But on the vessels we pursued sale and lease backs for, out of the 9 vessels 8 -- on 8 of this -- of these, today the first purchase options are theoretically in the money. So the way we calculated this is by looking at today's market value of the vessel, amortizing it on a straight line basis and comparing it with the first purchase option price. So just to give a rough indication of whether these options are already exercisable.

Also important to highlight that 4 of these options are exercisable in 2019. And of these 4, 3 are in the money. That -- as I mentioned, that does not mean that we will be exercising these options at the first opportunity because in most cases these are actually very attractive financings we manage to negotiate long-term financing also. They are the -- in all cases, except one that the balloon -- let's say, the purchase obligation is only 10 years after the anniversary -- 10th anniversary of the deal. So it is very long-term money, much longer than what can usually be obtained from banks today, which is usually 5 to 7 years' money.

So -- but we will monitor the situation closely. And if the options are very much in the money and our cash generation permits and we can obtain very attractive bank financing terms, we might repurchase some of these vessels to refinance again with traditional bank debt further down the road. It -- as I mentioned, it's not our #1 priority right now.

On the following page, I show the fixtures -- recent fixtures. This is a slide that we had already in Q1 and we haven't updated it. We -- and in Q1, we mentioned that the peer rates were moving up, and we can confirm this is still the case. We continue to be fixing vessels at higher and higher rates, which shows that there is a very positive sentiment out there, very strong expectations by market players of a much better market going forward. In particular, I'd like to highlight 1 MR2 Eco vessel that we fixed for 3 years at $16,750 and also 3 LR1s, which were fixed for 1 year at $19,000 per day.

And as I mentioned previously, also the vessel to be delivered with scrubber has been fixed on a TC. The charter asked us to keep this information, the details of the deal confidential for now, but we can say that it is at a significant premium to the LR1s that we fixed at $19,000 per day without scrubber.

So we are very happy with that deal. It's a 2-year deal. We have an option for the charter for another year.

Going on to the following page, we show the average rates on our TC contracts and also the percentage of the fleet which are covered through such contracts. We show the historical evolution since Q1 '18 and then we show, going forward, how this coverage rates and percentage coverage changes based on contracts already signed. So the positive aspect we want to highlight here is that once from Q1 '18, the average rates have been decreasing gradually from $15,000 to $14,400 in Q2 '19, so this quarter that we are presenting right now. From now onwards, so from Q3 '19, the average rates are going to be increasing. So this will provide a very positive tailwind to our results. And already by Q4 '19, the average rate will be $15,600, which is a profitable average rate and we have 54% of our fleet covered at such rate. And this rate reaches $16,600 in Q4 '20 and then $16,700 in 2021.

And on the bottom chart, we show also how the percentage of our fleet, which is Eco, this is based on all vessels, so also TC-IN vessels is increasing. This, of course, also implies that our earnings potential of our vessel are increasing today. Eco vessels are -- only Eco MRs are earning a premium of around $2,000 per day, relative to conventional MRs. So that should also be one of the drivers of our future performance.

On the following page, we show the fleet evolution.

The reason the fleet -- the average number of vessels controlled over the next few years declined is related to the redelivery of some vessels we have on TC-IN. But on the right-hand side, we see on the chart that actually our spot exposure increases from H2 '19 to 2021 from an average of 22.5 vessels to 34 vessels, so also does our sensitivity for every $1,000 per day change in the TC equivalent rate, which is of only $4 million in H2 '19, but rises to almost $10 million in 2020 and $12.5 million in 2021.

On the following page, we show that we have worked not only on our top line, but we have also worked quite hard on our costs and to manage our vessels as efficiently as possible, both from a technical perspective but also on the onshore structure, which directly affects, of course, our G&A. So we have obtained significant savings on our direct operating costs, which have declined from $7,500 in H1 '18 to $6,800 in H1. But also daily G&A has fallen from $810 to $662, so an 18% decrease. And this is, to a certain extent, also attributable to currency effects. The strong dollar has helped especially regarding the G&A, but also helps us to a certain extent regarding the daily operating costs. But in particular, regarding the G&A, 75% of our G&A costs are not U.S. dollar costs. Most of them -- of these non-U. S. dollar costs are in euros, then the second most important currency for us is GBP and then the Singapore dollar. So the very strong dollar helped us in this respect. But there were also other cuts that were, thanks to a very careful evaluation of potential savings that we could achieve without, of course, compromising the quality of the management and the quality in general of the work we do.

On the following page, we show our indebtedness situation. We show the ratio of the net financial position to fleet market value. For the 73% at the end of '18, this declines to 66% at 30th of June '19. 66% is pretty much aligned with the initial advanced ratios on our newbuildings. So given we have quite the young fleet, an average age of 6.4 years as I was mentioning, this is a much more acceptable level. And hopefully, of course, with the positive results that we expect to generate going forward, this ratio should decline further.

We have pursued, as I mentioned, a number of sale and sale leasebacks in the past few years, 9 vessels. But we have now more recently focused mostly on straight sales of vessels, in particular vessels -- all the vessels which we have in -- we had in JV with some of our partners. So we sold 1 of the vessels, which was on -- and delivered to the buyers, one of the vessels which was in the -- in JV with Mitsubishi and another vessel we already signed the MOA and is going to be delivered by the end of September to its buyers and also on the joint venture with Glencore, 1 vessel we signed an MOA for and we expect to deliver it to its buyers by the end of September. And there is another vessel which we classified as held for sale also in our financials as of 30th of June, because we intend to sell possibly before the end of the year. So also these straight sales will be further strengthening our balance sheet going forward.

On the following page, we show our key highlights in terms of our P&L. The bottom line for the first half is not brilliant, of course, $24 million loss. But if we analyze the results more carefully and we exclude nonrecurring items, the picture looks quite different. So whilst the bottom line for the first half, as I mentioned, is minus $24 million relative to a loss of $20 million in the first half '18, excluding nonrecurring items, the loss in the first half '19 is of $9 million, relative to $24 million in the first half '18. The main item -- nonrecurring item is the asset impairment on the 2 vessels held for sale that I was just mentioning on -- which we have in JV with Glencore. So -- then there are also some financial items relating to mark-to-market on interest rate swaps and also a loss of $0.9 million on disposal of vessels and IFRS 16 effect of almost $1 million in the first half of this year.

Going on to the following page, we take a closer look at the results of our vessels operating with a detail of both the results of the vessels operating in the spot market and of the average TC rates and the evolution since the first quarter of 2018. So comparing the first half of '19 with the first half of 18, we see that there was an improvement -- marked improvement. The average rate in the first half '18 was $11,500 and in the first half '19, it's $13,300, so $1,800 more.

If we look only at the second quarter '19, the average rate for our vessels on the spot market was around $13,000 relative to $10,300 in the second quarter '18. So it's an even more pronounced improvement of $2,700 per day in the second quarter '19.

Second quarter '19 was negatively affected on a relative basis by the lower average rate as we mentioned previously on the TC contracts, which was of only $14,400, whilst in the second quarter '18, the average rate of the TC contracts was $14,900. But this is, as I mentioned previously, going to change going forward as the average rate on the TC contracts is going to be rising.

Going on to the following page, we look only at the MRs here, the earnings on the MRs and on the spot market. And we compare it to the Clarksons average. So there is an outperformance if we look at all our MRs on the spot market of around 10% relative to the Clarksons average. But if we look only at our Eco MRs, then we see that the result is $15,500, which is a much more attractive figure, relative to $12,500 for the Clarksons average, so an outperformance of 24%. If we include also the TC contracts, then our MRs are both conventional and Eco, blended spot and TC $14,000 per day.

I pass it on to Paolo again for an overview of the markets.

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

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Basically, we are -- if we look at historical MR TC rates and spot rates, for TC rates we mean 1 year time charter and we look at MR asset values. Looking at the TC rates and spot rates, today we are 52% on the TC rates and 73% on the spot rates below over where the market was at the peak.

Now it does not mean that, of course, things will go back where they were. But historically, the market was there. So potentially, it can go either way and also very close to it. So there is a long way to go, as you can see.

Looking at values, we took the newbuilding value and the secondhand. Secondhand normally is the 5-year-old. And on newbuilding value, we are 32% under where we were at the peak of the market and 44% as far as the secondhand one, below the last cycle peak. So both in rates and values, we have a lot of space.

We are improving asset values. The bottom is being October 2016 and since then, assets for younger vessel have been recovering. A 5-year-old MR recovered 36%, and the time charter rates also improved about 22%. So this trend is physically there, you can see it.

The growth on demand has been of 3.6% over the last -- since year 2000. And what is extremely important, and this is the fact that if you take all the oil seaborne trade, in year 2000, 25% of that oil seaborne trade were products. Today, it's grown up to 35%. So today, more than 1/3 of oil moves around the world are products, and it is growing. This percentage is growing. So I will say the results, the tendency of using more product carried through those ships.

We have a surge in refining volumes. They are all expected on the second half of this year. I would like to remind, it has been one of the reason for the poor market on the first half of this year, that big part of the refineries around the world went in very heavy maintenance. Historically -- I mean, historically -- usually, refiners, they do 2x maintenance period, once in spring and one in fall. This year, due to incoming 2020 and so the need of very big runs on middle distillate, it looks like they are concentrating on only one maintenance period, but of course is getting longer, and is getting more and more prolonged. This is the reason why many refineries are not being producing and the volumes remain, which were basically -- you can see on the chart on the left, volumes in May were under the volumes of last year. This -- even if we had a growth of the overall volumes. This is only due to refining maintenance.

Record growth in refining capacity in 2019. I mean, it has never been registered growth as big as is happening this year. We are talking of 2.7 million barrel per day. Most of this expansion is in Middle East and China. So this means what? This means that the world -- the consuming western world needs a lot of product out of the Far East and the Middle East, and which increase ton mile and consequently increase demand.

And here, again, we are talking about basically the landscape driving the demand. European refining capacity are in the downward trend. We have to say that mostly -- the old I say -- old generation of refineries are in Europe. Some of them need investments, some of them need some upgradings, but most of them did not. And many of them, even landlocked are refineries which are internal, supplied by pipeline. And the big producer of every fuel oil, every sulfur fuel oil, which as you know is not going to be the massive end product in the future. So we probably are going to see also reduction of refinery capacity in Europe coming in.

If the oil price stays high and at this volume, it looks like it's justifying already. We are going to have an increase of exploration and production activity. And even here, we do not expect -- everybody knows because it is written everywhere, that the growth will come not from OPEC countries but non-OPEC countries, i.e. American shale and Brazilian products.

We are going to have rapid growth of U.S. crude export will continue. The -- most of the logistic problem that U.S. was suffering, the bottom line was in the pipeline capacity mostly, and some on terminal capacity. We are going to -- we are under, let's say, solution. I mean we are -- a lot of pipeline capacity entering in service this year. And -- so America will be in condition to export more -- crude mostly, which of course, to Asia.

If you consider that American refineries are running at very high rate, whatever is produced as oil on top of it has to go basically on export. 2020, I think, everybody knows what is all about. What we expect? Number one, we expect, of course, the major demand of middle distillate. This is due to the fact that in many situation, 0.5% will not be available, sometime even 0.5% is in the end of supply of not trusted. As you know, ship owners are very careful and extremely worried of the compatibility of the products. So marine gas oil is going to be a player in that case. Marine gas oil is nothing else than a diesel for the sea. So its middle distillate increase in demand.

Number two, we have the fact that the 0.5% sulfur fuel, which start existing now, didn't exist yesterday, has to be distributed. So you have the totally new product, which is going to substitute most of the 3 million to 4 million barrels of the market, which has to be moved around. I can tell you it's not really moved or has not been moved around yet. They will do it as soon as they have storage space prepared. And of course, they are waiting on the last minute to do so, but this will demand a lot of tolerance.

And in the meantime, you still have the high sulfur fuel going on. I mean, it is still in production. It will still be in production. So the high sulfur fuel not found in space -- physical space in the storage, which will be switched to the low sulfur fuel, should -- this is, of course, a theoretical hypothesis, but I suppose is logical, [will find its place in] floating storage. So I think we are going to see a good quantity of such storing high sulfur fuel quite soon. So this is the reason why IMO 2020 for quite a while will be the changer.

We have then -- okay, we -- the positive view of most important brokers. I'll leave it to you to read it because me intervening -- I think it was self-explanatory.

And then we have fleet growth. The fleet growth, which is -- we are talking about 2.5% in 2019, and we are assuming 1.6% on 2020. So I have also to add with a good level of satisfaction that our colleagues, shipowners, they didn't run to the yards, at least for the moment. They did it in the past. But for a moment, they are staying quiet. So we don't see another supply coming in somewhat. There's also one reason for this, and it is technological. It goes to build the ship today considering that we have -- after 2020, we have 2030 and 2050 on CO2 emissions, which are going to make 2020 a joke, I can tell you, because they are by far more challenging. Today, to order safely really is a question mark on what sort of proportion you are going to put on the ship, because setting up for 2050, but 2030 is basically 10 years down the road. So you are at 2/3 of the commercial life of a ship. And you can easily end up with a newbuilding done today, which will grow out of -- will be [decommissioned]. So the growth of the fleet is very limited. We still have delays. We have some scrapping. This will contribute, of course, at the support of the market. I would say also we have more and more products getting older than 15 years. I'm saying that because -- not because of 15-year old ship is a problem, no way. But it is very unlikely that the top charters, the blue chips are going to precap ships older than that age. They do it only with operators that they totally trust.

The limited newbuilding order is also due to the fact that the value of the 10-year-old ship is by far more interesting than the newbuilding value today, compared of what you can do with on the market outside the... So in fact, on the 10 year -- on ships built in 2009 and 2010, we see that there's a lot more liquidity. And so the interest, I will say, of the buyers are more concentrated on that.

Now it is -- we see expected demand for product, Clarksons is talking about 2.7% in 2019 and even 5% on 2020. This really how is the demand -- let's forget for now there is second by the way, by far higher that what we know the supply is, because the supply is -- I mean, this -- the demand is theoretical, but the supply is concrete.

So everybody is looking to the improvement for the second half of 2019, and I'm sure I'm not the only one telling you this. And then, we think things are going -- at the end of the day is reflected in what Carlos was saying on the rates that we are actually don't repeat. So as you see, more we add and more we are increasing under the time charters of our fleet. We are very well increasing our rates.

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

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In this respect, I also wanted to mention that on the paper market, if you look at the paper market on the [annuals, '13, '14], the rates in November, the December, January are extremely strong. So that is to a certain extent also driving the time charter market. But because a lot of the big trading houses which are taking that as on time charter, they are then hedging part of their exposure on the paper market and locking in a profit. Of course, they are taking some basics by doing that, but that is their bread and butter. So they -- that is one of the strategies they are using and that is the reason they are paying up and always more to take prices on TC.

Finally, we just wanted to have a quick look here at the historical NAV evolution for our fleet. And we see that the -- after bottoming in December '18, the NAV at $218 million, which has increased over the last 2 quarters from March to increase from $230 million to $285 million. This is despite the losses we made in the period and it is attributable to decrease -- increase in the fleet market value that we have seen over the period, as well as, of course, to the capital increase that we closed in April this year. The capital increase increased the overall NAV, but of course it had a dilutive effect on the NAV per share, which fell from $0.35 per share to $0.23 per share. It -- the share price today, which is hovering more or less at the same level as it was at the end of June is at the discount of around 50%, or even slightly more to this NAV. So it is -- the company's shares from a fundamental perspective look very attractive, and also given the prospects for the recovery of the market that we have just mentioned and that we are already starting to see concretely, both in terms of period rates and in terms of asset values.

Thank you for your attention, for your time. And please let me know -- please let us know, if you have any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Matteo Bonizzoni of Kepler Cheuvreux.

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Matteo Bonizzoni, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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I have 3 questions. First one is on the Slide 17, the outperformance versus the reference market, in second quarter was 12%, in the first quarter was much lower than that, 4%. Are there specific reason for these improvement in the outperformance on the rates versus the market? And do you think it's sustainable?

Second question is on the Slide 12, where we see that the size of your fleet should decline over the next couple of years, because as we are now the number of chartered new vessel is going to significantly decrease, basically to half from 16, 17 currently to 8 in 2021. What is your strategy with regard the time charter in fleet? So in other words, is it possible that you are going to sign new contracts, at which conditions and fronts?

And then the last question is on the sale and leaseback. We have continued to see very recently other sale and leaseback of vessel. Should we expect an interruption of that, particularly if the market should -- as basically everybody expects should improve in the next quarter?

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

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Okay. So starting with the outperformance that you mentioned. I would say that the exception is not this quarter's result, but it's the first quarter result. And we usually do outperform the market more -- by more than we did in the first quarter of this year. It was an unfortunate positioning of vessels, which led to a result in the first quarter, which was actually, even compared to our peers, slightly disappointing, not only the overall market, but the peers that report their result, which are listed and we did mention that in the call for the first quarter results.

So as often happens, there was this underperformance in the Q1 was there, then there was a catch-up effect in Q2. It -- maybe we had a few vessels performing long [ballast] in Q1 and then in the start of Q2, they were very -- they were positioned in good areas and they could achieve very attractive rates that helped our performance in the second quarter. So it is very hard to look at only 1 quarter. There's a lot of volatility, and come to conclusions about our ability also to perform and to outperform the market. So it has to be measured over a longer period of time.

Regarding the decline in the fleet, the -- as we mentioned, there are a number of vessels which are on TC-IN, i mean, mostly relatively short-term TC-INs, which are going to be delivered over the next few years. The good news there is that we are going to be keeping the good vessels because we are going to be keeping the Eco vessels. So the percentage of Eco vessels in our fleet is going to be rising. And of course, we might opportunistically later on, not necessarily over the next 2 years, if there are the right commissions, we would reconsider taking vessels on short-term TC-IN. We are probably not as keen on doing long-term TC-IN deals as we were a few years ago, but short-term TC-INs we can and we will look at the right time. We will not do it in a booming market most likely because then we are exposing ourselves to a lot of downside. In the booming market, we were -- we will be looking more to cover over vessels and in depressed market to increase our exposure to the market also to short-term TC-INs.

And on the sale and leasebacks, as we mentioned, we did quite a few. We are satisfied with what we did. We don't believe we will need to do more. And we will prioritize going forward straight sales, rather than sale and leasebacks that does not rule out completely the fact that we might do one other sale leaseback, but it's not really in our radar, in our plans right now.

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Operator [4]

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The next question is from Luigi De Bellis of Equita SIM.

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Luigi De Bellis, Equita SIM S.p.A., Research Division - Co-Head of Research [5]

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Three questions for me. The first one on the IMO 2020. Generally speaking, when do you expect an inflection point also for the spot rates for the IMO effect?

Second question, usual question on the current trading. Could you give us some indication about the trend in August and September with respect for Q3 and 2019 for the spot rate?

And the last question on the financial charges. We have seen a strong decrease in interest rate. Could you elaborate on your cost of debt? How much is fixed or swapped, and your expectation for the financial charges and cost of debt going forward?

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [6]

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Going to 2020, we -- let's say is consequence of various factors, and one of these factors is the distribution of 0.5% sulfur fuel. Now everybody we have been talking to, because unfortunately, this is in the refiner's end, it's not in shipowner's end. And on this subject, they are all very secretive. Don't ask me why because I don't know, but it's not really a big reason.

But from what we understand, it will start moving in October in way of having averaging distributed within December. They are, for the moment, and I said before, they are cleaning up the storage space, which was used for the high sulfur before, to be prepared to receive low sulfur afterwards.

So I think the movement on the market will start now, and will start from the dirty side, but they will be using, most probably, product carriers to do the job. Because on a dirty ship, our issue was on fuel -- on crude, you have residuals which can contaminate your cargo. So you have a very beautiful cargo, 0.5% sulfur. You put it on a ship which has been trading on fuel oil but with 3.5% sulfur, the residual of the previous cargo can contaminate your cargo. So we are avoiding that. I'm talking from a theoretical point of view. But every time I put that question to traders, I have the same answer. To avoid that, I will use newbuildings, which are not being trading at all, or you are taking ships with clean history, which are not going to put your cargo at risk.

So we expect that on the front end of this process, which I repeat, should in theory happen during October, we expect the increase of demand substantially from that side.

Then the middle distillate will move in, but the middle distillate, asking from my point of view, will move in after January because the middle distillate will move on top of the real demand from shipowners. And shipowners are going to demand middle distillates mostly after, when the law can't be forced basically, which is January 1.

As far as the market today, I can say that it did improve as far as spot rate, much more than what it was before. So do not expect from a spot anything new. What we are doing is we are improving our average rate using time charter, that was more or less long, but anyhow we are paying by far more than was thought.

So today, the situation is still there. Of course, it's not only us, but I mean the entire industry are faring well, the game changer is going to happen on the last quarter.

So with third question, I leave it to my CFO.

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Antonio Carlos Balestra Di Mottola, d'Amico International Shipping S.A. - CFO & Executive Director [7]

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Yes. No. Regarding our financial costs, as we covered in the presentation, we don't have many vessels to refinance in 2020, only 4. And for a total balloon of around $11 million, which have to be refinanced.

So we don't expect our financial costs to change significantly over the next 2 years. The new facilities we will be renegotiating, there are changes ongoing out to the banking landscape to banking regulations at Basel IV. So there is a risk that they could be marginally more expensive than what we -- and what we have paid historically, in particular the Glend International Shipping vessels, they have benefited from very attractive financing terms because they were playing -- paying a margin of 1% only on their loans. So when these are refinanced, it will most likely be more expensive than that, it will certainly be more expensive. And we believe that by -- when we need to approach the banks for this refinancing, we will be in an even stronger position than we are now and that also be the risk appetite of bank goes through cycles. And so we do expect we are going to achieve attractive terms. We will -- we always receive strong support from our banks even in difficult times. And in the good times that we are going to be facing over the next 2 years, I don't see that changing. So I think that our financing costs should not change significantly over the next 2 years.

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Luigi De Bellis, Equita SIM S.p.A., Research Division - Co-Head of Research [8]

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Okay. Just a follow-up on the IMO 2020. Do you see the risk of delaying the implementation as of today?

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [9]

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Delay on the implementation, no. What we are -- this is -- we are doing well through various association. We are asking to post the controls who are doing -- who is going to be our police force, taking care of controlling the ships and the enforcement of the rule. We are asking to have a certain degree of flexibility at least on the first quarter of the year. Because there are going to be problems. It is not because low is not going to be implemented. We are probably going to face some technical and operational problems with certainly some of this going to be late in the cleanup of the ship, can be anything.

So what we are really asking there, we are asking this to IMO to do to it through IMOs, basically is the United Nation agency for this, to give us a certain level of flexibility. But this is very -- I will -- let's say -- I mean, it is very subjective. It's not rude. It's not weak. I mean, it can end up with a very severe [cost of] control as you can come up with a very flexible one. And if you have a problem, you can end up in different ways.

So on the implementation itself, there are no delays.

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Operator [10]

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The next question is from Daniele Alibrandi at MainFirst.

(Operator Instructions) Gentlemen, there are no more questions registered at this time. I'll turn the floor back to you for your closing remarks.

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Paolo d'Amico, d'Amico International Shipping S.A. - Executive Chairman & CEO [11]

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No. We have no really more remarks. If this is the end, then we thank everybody for being with us today. And I hope that our answers have been more than satisfactorily. So thank you very much, and bye-bye.

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Operator [12]

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