d’Amico International Shipping S.A. (OTCQX:DMCOF) Q1 2024 Earnings Conference Call May 8, 2024 8:00 AM ET
Company Participants
Carlos Balestra di Mottola – Chief Executive Officer
Federico Rosen – Chief Financial Officer
Conference Call Participants
Matteo Bonizzoni – Kepler
Daniele Alibrandi – Stifel
Massimo Bonisoli – Equitas
Climent Molins – Value Investor’s Edge
Operator
Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the d’Amico International Shipping First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be a question and answer session. [Operator Instructions].
At this time, I would like to turn the conference over to Mr. Carlos Balestra di Mottola, CEO. Please go ahead, sir.
Carlos Balestra di Mottola
Thank you and good afternoon to everyone. Thank you for attending our presentation today. And as usual, we will skip the executive summary and we will start with the fleet overview. This is a snapshot of our fleet as of 31st of March, 24th. We controlled 35 vessels, mostly MRs, 23 and an eco-fleet of 6 vessels in each LR1 and hand-sized segments.
The modern fleet is at an average age of 8.8 years relative to an industry average of 13.4 for MRs and 14.8 for LR1s. And 80% of the controlled fleet is eco-designed. The fleet was built mostly for an important new building program with vessels delivered to us between 14 and 19, 22 vessels. Recently, we ordered another four vessels, which are going to be delivered to us starting in the second half of 2027.
Going on to the following slide, we show here the important investments that we made since 2012. We have been working on this for a few years and then we have started reinvesting through the exercise of some time-charging options and an opportunity that was presented to us where we acquired the 50% stake of a JV partner in a vehicle and international shipping. And most recently, through the purchase of a young second-hand vessel for $43.5 million and the four LR1s that we ordered, which would entail a total investment of over $220 million, of which $43 million this year and the rest mostly in 27 with a small part at the end of 36.
I pass it now over to Federico.
Federico Rosen
Thank you Carlos. So this is the situation of our debt repayments, so very stable situation. We have no refinancing needs for ’24 and ’25. We are repaying approximately $27 million a year from 2024 to 2026. As you can see in 2024, and this is going to happen in Q2, we’re going to repay also $6.5 million, which is the debt related to Glenda Melanie, which is the oldest vessel of our fleet that we recently announced the sale of. And we’re actually going to divert the vessel from the buyers between this week and next week.
On the right side of the slide, you see our daily bank loan repayment on our own vessel. This has been falling down quite substantially, was $6,147 in 2019, went down to $3,600 a day in 2023. And we’re expecting it to be even lower than $3,000 a day in 2024. This is obviously the result of our large deleveraging plan that we implemented in the last year.
And also, right now, we have some of the vessels on which we exercise our purchase options that we previously sold and leased back that are currently free of debt. So obviously this helps this ratio to falls even lower. Carlos, on the purchase options?
Carlos Balestra di Mottola
Yes, on the purchase options, we have been very active exercising these options in the last few years. We have the three remaining. These are contracts where we have purchase obligations at the end. And so they are basically alternative financing arrangements for us. And we have exercised these mostly to lower our cost of financing, which I love the use and we could have exercised this year.
We decided not to pick out the implicit cost of financing of doing so later. September next year is actually very low, but we will be exercising the fidelity and discovery, one in September 24 and the other one in September 25. And the channel we use, we will also be exercising September 25, which is basically the purchase obligation date for that vessel.
On the PC in vessels, we exercised already the options for the adventure. And the Explorer, but we still have four vessels of which we have purchase options that are well in the money. And that we plan to exercise in the coming quarters, two possibly this year and two next year. And they are all high quality vessels built at good shipyards. And they are relatively young, eco designed vessels. So we are looking forward to add these to our fleet for a long period of time. If we were not to exercise these options, we would eventually lose control of these vessels. These are the last purchase options to exercise this year.
So, going on to the following slide. Federico?
Federico Rosen
So this is our, we show here our coverage. We had 41% of our days in Q1, ’24 covered at an average daily rate of $28,123. Q2, 2024 is going to be more or less the same level with 40% coverage at an average daily rate of slightly less than $28,000 today. Then our coverage is expected to be, so to go slightly down in Q3, ’24, 33% at an average daily rate of $27,951, and Q4, ’24 with 22% coverage at an average daily rate of $27,240.
So overall in fiscal year ’24, we are expecting to have a coverage of 34% at an average daily rate of $27,900 today, so extremely profitable rate for us. It’s interesting to see also the graph below. This goes back a little bit to what Carlos mentioned before, the large investment plan planned over the last year. And also the fact that we delivered two kind of old time-chartered-in vessels between Q1 and Q2, and we’re also going to sell the Glenda Melanie in the course of this month. So this ratio was 38% in Q1, 2018. And we are expecting it to go up to 85% of our total fleets by the end of the current year.
Here, as always, we give a little bit of an overview on how we are performing so far in the second quarter of the year. As I mentioned before, we already fixed 40% of our days at $27,932 today in terms of time-chartered coverage. Plus, we already fixed 31% of our spot days at $39,441. So this is an extremely profitable rate and even higher than what we have achieved in Q1.
So overall, we fixed more than 70% of our Q2 days, 71% of our Q2 days, to be exact. At an average, a blend that you see, so the sum of the fixed spot size and TCE size of almost $33,000 a day. And we show on the right side what our blended TCE would be should we make $27,500 a day on our remaining three days for the quarter, or $30,000 a day on our remaining three days for the quarter, $32,500 a day on the remaining three days for the quarter. So this figure could be between, as you can see, $31,400 a day up to probably $33,000 a day of blended average TCE.
Here we show at the top the estimated fleet evolution from 2024 to 2026. So we’re expecting to manage an average of 34.2 vessels in 2024. This figure should be slightly lower in 25 to 33 vessels and then 32 vessels in 2026. Then the other graph at the top shows as usual our sensitivity for each $1,000 a day of high spot rates. So for each $1,000 a day of higher or lower spot rates, we have a sensitivity of $5.3 million for 2024, based on what we’ve already fixed right now.
This obviously goes higher in ’25 to ’26, since we have a very little coverage for those years right now, and it’s in the tune of $10.3 million or $10.7 million for 2026. At the bottom, we show as usual what our estimated net result for 2024 would be. Should we run the rest of the year at a breakeven level, at a level of around $15,000 a day. So this would entail a net result already locked in, if you want, of almost $119 million for 2024. And as usual, we show also sensitivity on this figure here.
So in case we, the three day, the spot rate for the remaining three days of the year, where $20,000 a day, we would make $143 million of an approximate year. In case this figure were $25,000 a day, we would make $169 million for the year. In case it would be, in case it were $30,000 a day, we would make $195 million for the year.
In terms of cost, we discussed this several times in 2023. As for many other sectors, we had an impact, obviously, on inflation going on, where some inflationary pressures, particularly on crew costs, and also on insurance costs. On insurance, in particular, this is also the reflection of higher effects of bias, which also means a higher premium. However, this pressure is kind of tamed this year. We see this cost stabilizing.
The increase in 2024 relative to Q1 2023 is not very significant. We went from $7,000 a day to $7,800 a day. So we believe this is under control. In terms of G&A costs, our G&A, for the first quarter of the year, were $5.2 million, $1 million higher than the same quarter of last year.
This is mainly due to the variable component of our personal costs, which is really the result of a very profitable year that we achieved in 2023, and they were expecting to achieve also in 2024, which is what we mentioned before. In terms of net financial position, very strong financial structure for this. We have the ratio between our net financial position and our fleet market value is of only 11.5% at the end of the quarter, versus 18% at the end of 2023.
Net financial position was $152.5 million at the end of the first quarter of the year, compared to $224 million at the end of the previous year. Cash and cash equivalent went from $111 million at the end of 2023 up to $170.1 million at the end of March of this year. What is interesting also to show, to mention is that this ratio that is very significant for us of 11.5%, our financial leverage was 73% at the end of 2018. So this is obviously the result of our leverage plan that we were also mentioning before.
Key highlights on our income statement, very profitable quarter, $56.3 million for the first three months of the year, even better than last year, we made $54 million in the first quarter of 2023, including some non-recurring items. Our net results would have been of $56.7 million in the first quarter of this year, versus $56.5 million in the same quarter of last year.
Strong EBITDA also, $76 million. Strong operating cash flow, which was almost $77 million in Q1 2024. This is actually lower than what we generated in Q1, 2023, when we made an operating cash flow of $99.2 million. This is just the result of a timing effect in our working capital, which was very positive in Q1, 2023, because it was very negative in Q4, 2022. So it’s really a timing effect.
Moving to the next slide, our KPI for the quarter, we managed an average of 35.5 vessels in Q1, 2024, slightly lower than the 36 ships that we managed in Q1, 2023. Our three-quarter coverage we saw this before was 41.3% in Q1, 2024, higher than the 25.2% of the same quarter of last year. Our daily coverage rate was $28,123 per day, way higher of the $26,400 a day of Q1, 2023.
And in particular, our spot daily rate was $38,200 a day in Q1, 2024, compared to $36,652 in Q1, 2023. Overall, our planned TCE was above $34,000, which is the last figure that you see there in the table, which was above $34,000 a day, very much in line with the same quarter of last year, despite the higher spot rate. And this is only due to the mix, between the different mix, between spot and time-charter coverage.
And moving to Carlos for the market overview.
Carlos Balestra di Mottola
Yes, thank you Federico. So here we show the evolution of time charter rates, freight rates and vessel prices over quite a long time horizon. And we see that on the TCE rates and the spot rates, we are quite close today to the all-time highs. TCE rates, in particular one-year TCE rates on the MR vessel is currently up around $33,000 a day.
The highest we have seen in this last cycle was around December 22 at $35,000 per day, so we are very close to that level. And also from the Eco LR1 vessel, the rate, the one-year TCE rate is currently very high, around $42,500. And vessel values have continued moving up throughout the course of the first quarter.
They are now — they are still below the last super cycle peak, although especially in terms of new building prices, we are starting to get close to where we stood then, we are now 7% below. 5 and 10 year old vessels instead are still lagging and they are behind 60% below the last super cycle peak, which was a long time ago, around 2007-2008.
If we look at where freight rates are today relative to where they were in 2007-2008, TCE rates were however at the higher level today. So that seems to indicate there is more room for vessel values to potentially continue moving up.
And why do we have such a strong market? Well, there are a number of structural factors which have been playing out over a number of years and that should continue positively affecting the market going forward. But there are also some more exogenous factors which we have benefited from and which we did not anticipate occurring, such as the effects of the war in Ukraine, which has been supporting the market since the beginning of 2022 and which since February 23 caused a major change in trade flows for Russian refined product exports which have hovered at around the same level as before the war started, around 2.5 million pounds per day, but those destination has changed dramatically whilst around 50% of their products used to be exported to Europe and the UK, to the EU and the UK.
Now, only a small amount is exported to EU countries that are mostly landlocked countries which buy these through pipelines and don’t have alternatives. And with the remainder exported to much more distance locations than Latin America, Middle East and Asia in particular. Some say locally, goes to North Africa or Turkey. From Turkey it is then re-exported. They have their own refining industry so they are basically swapping Russian products for their products, but it does increase the overall amount of every time products traded and also the products which are going to North Africa are mostly then re-exported from that to other locations.
So very inefficient and of course Europe which used to source a lot of its products from Russia now is buying more from the U.S., from the Middle East and Asia. So this has led to a big increase in ton-mile demand for refined product tax. More recently, since the end of last year we have also witnessed a new trade disruption linked to the Houthis’ attacks on vessels transiting through the Bab-el-Mandeb strait. This has always been an important passageway for product tankers, but it supported increase after the onset of the war in Ukraine as we see here in January 2022, 37.5 million barrels across Suez, but this figure then rapidly rose after the war role started to be between 70 million, 80 million barrels per day. And since the onset of these attacks it collapsed to 19 million barrels per day.
So what is flowing today to Suez is mostly linked to Russian and Chinese interests which are not being targeted by the Houthis and therefore most other ship owners avoiding crossing including ourselves, of course, through Suez. The alternative of crossing Suez is sailing through Cape of Good Hope. And this, of course, is a much longer route. How much longer depends on which is the loading port and the discharge port. So here we have shown the most important routes sailing through Suez and how they were affected in terms of sailing days and percentage rise by having to sail through this longer route.
So, for example, Sikka to Amsterdam, Rotterdam, sailing days increased from 23 to 38 days. So 15 days increase which is equivalent to 65% increase. It’s a very significant increase. And how has this impacted the market? Well, of course, it did close some of the arbitrages which were open when vessels could sail through Suez, because there are higher costs entailed in going the longer routes. So overall volume sailing on these routes have fallen to some extent, but nonetheless it did have a positive impact on the market. The maximum potential impact in volumes and not being impacted would have been between 5% to 7% actually impact. This is our own estimate here. It’s probably closer to 2% which is still very significant given when we were already in a very tight market before this additional disruption started.
Panama Canal is a less important passageway for product tankers than Suez is, but it’s also quite an important disruption for our vessels, mainly because they trade trap and they cannot hook up crossings in advance, so they tend to end up at the end of the Q, which means that some of product tankers decided to sail the longer way through Magellan, so adding miles, but also that some trades which would have happened typically from the U.S. Gulf to the West Coast of the Americas, both South and North America to Panama instead were replaced by volumes imported into the West Coast of the Americas from Asia over much longer distances, so once again an increase in ton miles.
This reduction in permitted crossings was linked to low water levels in the Gatun Lake, which was linked to the El Niño effect last year. We are now moving into La Niña and also into the rainy season which starts around April, May in Panama and goes until October, November. So water levels in the Gatun Lake are expected to rise and there’s problems expected to alleviate the short term.
Longer term, however, we are likely to be confronted with other restrictions and crossings through Panama because there is a structural problem which needs to be solved and would require a new lake to be built and that requires a number of years to be done, so it is likely that this problem is not going to be as important short term but it is likely to be a recurring problem we will encounter in the future.
Moving on to the more structural factors supporting the market, oil demand has been growing very fast last year still recovering from COVID and in particular benefiting from the reopening of the Chinese economy with an important growth of 2.3 million barrels per day. In ’24, the expected growth is lower but still robust, 1.2 million barrels per day oil demand growth with increasing refined volume of around 1 million barrels per day and already a very tight market where as we will see later when we look at the supply picture, vessel supply is growing at historical lows.
As we saw from the slides presented by Federico our results in Q1 and in Q2 so far have been very strong on the spot market that despite the fact that March and April tend to be seasonally very low periods for us, because they tend to coincide with peak refinery maintenance worldwide and therefore with very low refined volumes as we see here in the graph on the right hand side and refined volumes are expected to pick up during the course, during the wraps of Q2 and Q3 reaching a peak probably around August as happened last year where the highest volume yearly volume happened in August. So we are already in a strong market, so potentially the market will get even stronger as we move into Q3.
On the supply side not the spectacular growth in supply expected this year because of the continuing OpEx cuts and also slightly lower output from Russia, but more than compensated by higher output coming out especially from the U.S., Brazil, Guyana and Canada. And the good thing is that these additional volumes are most likely going to be imported by Asian countries and in particular China contributing to a ton-miles demand for crude tankers. So we expect especially because of very low, very limited supply growth for crude tankers, very strong and improving market in ’24 and ’25 which should also support the product tanker market because of the linkages between the two sectors as we will see later which occurs mostly through the LR2 vessel.
The fine product stocks, again well below the five-year averages and this also could be a supporting factor for the market. In some locations these stocks could reach equitably low levels and then will have to be replenished leading to an additional demand for seaborne transportation which exceeds that of which we would normally have if it were only linked to the consumption growth. Going on to the following slide, refinery margins are very strong, there has been quite a lot of volatility if we look at individual products. Most recently we have seen a weakening in refining margins for diesel and jet fuel, but an important strengthening in margins for gasoline since November last year with fuel oil margins which stay at quite historically attractive levels.
Looking at the contributors to demand growth next year whilst in 2023 most of the growth was linked to an increase in consumption of jet fuel as the Chinese economy reopened and we see on the left-hand side that the number of commercial flights well above where they were in 2019 already. This year most products are contributing more or less evenly to the growth in demand and with maybe the star product being enough to be opening up these new petrochemical plants in China but also important contributions coming from gasoline, fuel oil and jet fuel.
And here we look at the crude tanker space because of these linkages we were referring to before. Here the order book has increased since the low reach at the end of 2023, but it’s still at very low levels, 5.9%. And freight rates are already at very attractive levels, but we expect them to strengthen further in the coming years and it’s also quite important to note that 62% of the LR2s are trading clean right now which is quite a high percentage.
Going back to January 2020 it was only higher in January ’23 at 64%, but it was as low as 54% for example in July 2020. So there’s a lot of scope for LR2s to move into dirty trades going forward if crude tanker markets as we expect are strong providing further support for the clean products trade. We can skip this slide and on this slide here we look at the refining landscape. This is another structure factor which has been playing out over a number of years.
We have seen a lot of refinery closures in the Oceania, in Europe and in the east coast of the U.S. Over the last few years this was accelerated during the COVID pandemic, but is expected to continue going forward as these refineries, all the refineries lose market share to the new refineries which are being built in Asia and the Middle East. We saw last year quite a big increase in refinery capacity in the Middle East. It was of course a ramp up throughout the year and we are going to be benefiting from the traditional capacity mostly this year and we see also an important increase in refinery capacity in China in the coming years, the lot of that also likely to be export driven.
And we also see Africa which is an important contributor this year that they’ve got the refinery in Nigeria is already up and running. It’s expected it’s going to be when it’s at capacity, potentially producing up to 650,000 miles per day. And it will dampen demand for imports into Nigeria but it will also lead to more exports out of Nigeria. Often refineries are not able to produce exactly what is needed for the domestic market and therefore we expect the same to happen in the case of [indiscernible] and they are probably going to have surfaces of certain products and scarcity in other products so there’s still going to be some in-protectivity but also some export activity. So it’s uncertain whether this is going to be positive or negative for the market. Time will tell.
Going back to the U.S. and to the crude oil market we see how resilient oil output out of the U.S. has been despite flat rate counts since around the middle of the last year. The high oil price re-environment we are in now should support an increase in rate counts going forward which should further stimulate U.S. production.
Moving on to the supply side, there are several factors which should be stimulating demolitions going forward, one of them is there are very high scrap steel prices we are seeing currently. Of course in the very strong environment, the trade environment we are in, demolitions have been minimal, but there are an important safety buffer we have because the fleet as we will see in the product site is aging quite rapidly and for some reasons market were to correct and this could be an important rebalancing factor which could then allow us to recover and to see stronger markets quite fast.
There are also regulatory pressures, which should penalize all the vessels, more polluting vessels which should encourage demolition of these of all the time actually. As we see here we have, as at the end of March 12.1% of the fleet which was more than 20 years of age, while the order book was at the same rate, it was 8.9%. This is an important increase from 3.5% at the end of 2022. But if you look at the delta between the vessels which are more than 20 and the order book was at 3.7% at the time, now it is at 3.2%. So it is actually not a big increase in this delta and the potential for demolitions will keep rising in the coming years by the end of ’25 we anticipate around 16% of the fleet will have more than 20 years and almost 56% will have more than 15 years.
This other line here is important because as vessels cross the 15 years of age they are limited commercially, they cannot call all terminals, as they cross the 20 years of age threshold and they face even tougher limitations and they tend to start operating in niche markets. They also are less productive as they get older, they have to stop after 15 years of age every 2.5 years for special service rather than every 5 years and of course they also usually encounter more breakdowns and more of higher.
So fleet productivity should decrease in the coming years because of this rapidly aging fleet which should provide further support for the market. And at the bottom here we see vessels which are reaching the 25 years of age threshold where most likely they are going to get demolished. Rarely do they say they operate beyond this age only in very strong markets. So we see that for example already ’27, 2.2% of the vessels reaching 25 years of age would represent 2.2% of the current trading fleet and by 2029 this figure goes up to 7% and then 11% by 2033.
So it is unlikely that the yards given that current capacity are going to be able to deliver enough vessel to compensate for the likely demolition that we are going to be witnessing from the 2028 onwards which should be very supportive for the markets in the medium term. Here we see how demolitions have collapsed because of the strong markets creating room for pent-up demolitions going forward. Here we see how there are a lot of vessels ordered in ’23 but for the reasons we mentioned just now we don’t see this as an issue.
One additional factor we didn’t refer to is the fact that vessels ordered today are for delivery in most cases in ’27, very few slots still available for delivery in ’26. So the current order book which is rather low by historical standards. If you look where we were at the end of ’27, the ratio was at 60%, is going to be delivered over a number of years and therefore that should also avoid any oversupply issues. In our case we just ordered now four L1s and we had to accept deliveries at the end of 2027. So I think that’s quite indicative of how spread out these deliveries are going to be going forward.
And here you see the anticipated fleet growth, which is of a historical lower this year, that’s about 1%, and slightly higher next year where we anticipated small increased demolitions which remain at historically low levels. And so very good supply picture. Also our NAV at the end of March in absolute numbers was at almost $1.1 billion and translated on a per share basis is equated to $9.1 per share, which at the end of March was equivalent to 24, we were trading at a 24% discounted NAV.
The share price has traded up since then, but of course also the NAV which we don’t measure that regularly but I would expect to move that because of the sum cost generation since the end of the first quarter. And a massive value sellout since then possibly they actually even increased slightly.
And finally, use of funds. Here we show the use of funds up to the end of 2027. We show what we have already committed to. Here, for example, the second-hand vessel we acquired for $43.5 million [ph]. And the investments associated with the four LR1s ordered which this year will amount to $43 million with most of these vessels occurring in 2026 and in particular in ’27 delivery. And inside the plan investments for which we are still not committed for the exercise of the purchase options on the TCE and time-chartered-in vessels in ’24 and ’25. That’s the current plan.
So for a total investment of $471 million during the period, which is quite a substantial figure but one which we don’t foresee any problems managing because of our current very strong balance sheet and the current very strong cash generation as well as because of some vessel disposals which will be generating some cash for us. The Glenda Melanie that we already sold as we mentioned which was the oldest vessel in our fleet and 2010 build vessel as well as three 2011 build vessels which we are most likely going to be selling in the coming two to three years and replacing them with the LR1s that are going to be coming in.
So, in terms of shareholder returns we have been increasing them over the course of the last years and we plan to continue doing so. Now that we have achieved most of our leveraging objectives, and so although we don’t have an explicit dividend policy as we have stated several times in the past that as we leverage our balance sheet we intended to distribute the higher proportion of our profits. So if this year will do as well as last year which came in the beginning of the year we think there are good chances we can achieve this then we are likely to be distributing more dividends than out of this 2024 results than we distributed in 2020. So I believe that is it. So I pass it over to the Q&A section please.
Question-and-Answer Session
Operator
Thank you. This is Chorus Call conference operator. We will now begin the question and answer session. [Operator Instructions] The first question is from Matteo Bonizzoni of Kepler. Please go ahead.
Matteo Bonizzoni
Thank you. Thank you everybody and good afternoon. It was a very comprehensive presentation. So we have just two detailed questions. The first one is as regards capital allocation. So since the 2023 conference call which was only two months ago, you have placed these over for four new LR1, so more than $220 million. The question is you are done for now or should you expect potentially more decision of new building for the next weeks or months? And in relation to that you have already commented at the end of the presentation that the dividend here should not be lower than the last year. So it was just to check that, what is the trade-off between CapEx potential, new CapEx and dividend? I think that there is room for both given the continuation of strong rate, but just to check.
And the second question which is just a detail on your P&L and particularly cost. I was seeing that your operating cost over the last two quarters are moving sideways in a range of $23 million to $24 million per quarter and the G&A cost probably could have some seasonality in the sense that Q4 last year was much higher than Q1 this year. So the question is, what should you expect more or less in terms of evolution of your operating cost and G&A cost including variable remuneration for 2024? Thanks.
Carlos Balestra di Mottola
Okay. Thanks Matteo. So I’ll try to answer the first two questions, I’ll leave the third question to Federico. No, in terms of investments, our plan is currently are really to keep a pretty stable fleet and the new buildings that will be coming in are going to be replacing some older secondhand tonnage that I referred to previously that we should be selling. And however, let’s say, our fleet composition shouldn’t blow over. We hopefully for the better in the coming years. So we should have, by the end of 2027, only old vessels. We should have almost exclusively, maybe with the exception of two vessels, Echo vessels. And we should have a higher proportion of LR1 vessels in our fleet.
So that’s where the direction we are moving in, pretty much keeping a stable fleet relative to where we are today. But a more modern fleet and a more competitive fleet, hopefully a more profitable fleet going forward, because of higher potential earnings, because of higher proportion of echo vessels, but also because of lower costs, as we will not have the time-chartered-in vessels and the bareboat-chartered-in vessels, which typically had higher breakevens for us. And in terms of the dividend policy, you are correct, if in ’24, our results are strong as we were in ’23, our expectation is that there will be room to distribute more dividends than we distributed in ’23, in addition to being able to pursue these investments we referred to just now.
And there’s probably not much room now for additional buybacks, which is a shame, since we see a lot of value in our shares too, but we don’t want to further reduce liquidity of our shares, giving the controlling shareholder has already a very important stake in the company. And I pass it over to Federico for the other question.
Federico Rosen
Yes, in terms of other direct operating costs, we’re currently not seeing huge increases relative to the trend of Q1 of this year. And probably over all in the year, we should lend to something similar to what we achieved in fiscal year 2023. In terms of G&A, obviously works on a accrual basis, and we obviously accrue quarter-by-quarter also the variable component of our personal cost. What up in last year, I guess you were referring to different figures in terms of G&A from a quarter to the other, I think there was a kind of a catch up in terms of these accruals which we increased in the after Q1, so Q1 G&A, we presented slightly over results which we increased these G&A in the following quarters. I would say that in 2024, probably we should expect, I’d say something close to what we had in Q1, what we had in Q1 2024.
Matteo Bonizzoni
Thank you.
Operator
The next question.
Federico Rosen
Something more stable probably relative to last year.
Operator
Sorry, the next question is from Daniele Alibrandi of Stifel. Please go ahead.
Daniele Alibrandi
Yes, good afternoon. Thanks for taking my questions. So the first one, if you can please elaborate a little bit more on the choice of expanding your exposure to LR1 rather than MR with the new building decisions from a strategic point of view, which are the reasoning behind this choice. First question. Second question, I was wondering about your coverage strategy going forward, especially going into 2025. Today is rather low, 13%. Historically, the guidance was 40%, 60%, so a midpoint 50%, the last couple of years it has clearly decreased due to strong underlying market. What you should expect going forward? And the last one, just a follow up on your commentary on the seasonality Q2 versus Q3. The spot rate was really strong in Q2 despite, I’d say, the low seasonal environment. I was thinking about Q3, if Q3 is paribus, actually we could see even an improvement…
Carlos Balestra di Mottola
Sorry, we cannot hear your last part, Daniele.
Daniele Alibrandi
Yes, can you hear me? Can you hear me now?
Carlos Balestra di Mottola
The question was a bit lower volume, if you can…
Daniele Alibrandi
Okay. The last question was around your seasonality. Before you mentioned that Q2 is a seasonally lower quarter, but you actually printed a strong spot rate so far. So what should we expect in Q3? Possibly even a better market conditions. Thank you.
Carlos Balestra di Mottola
Okay, thanks. All right. So on the LR1 versus MR, look, I mean the MR vessels are great. They represent a large majority of our fleet still. But we have seen, and we are not surprised about this, that the LR1s, especially strong markets like the ones that we are experiencing today. They tend to outperform. I mean, they provide economies of scale that their operating costs are not too dissimilar to those of MRs, but of course they can carry much more cargo, right? So their TCE equivalent earnings can potentially be much higher. The voyage costs, the fuel costs per unit transported is also much lower.
And in addition to that, they are more competitive over longer distances. And this is a trend that we have been seeing where ton-miles have been rising, average sailing distances have been increasing, so increasing the attractiveness of these larger vessels, the LR1s, another good reason why we ordered the LR1s. The third reason why we ordered the other ones is because of the very attractive fleet age profile. If you look, there is 15.4% of the LR1 fleet currently trading, has more than 20 years of age. But even more, I think, important here is 62.6% is more than 15 years of age.
If you look at the MRs, for example, MR2s, it’s around 42%, which is more than 15 years of age. So there are very few LR1s, modern Echo LR1s today in the market. Very few LR1s were delivered over the last few years. And there’s really a scarcity of quality vessels in this particular segment. And that is probably the reason why we were able to achieve these very good results on the LR1 vessels we have on the water. And why we decided to focus on this particular segment for the new building orders. In terms of coverage strategy, if we go back to the presentation, we have very good coverage skills for Q2 this year. But this then falls quite a bit going forward, also already in the course of this year. So that becomes — just to give you a more precise figure. So we go down to 22% coverage already by Q4 this year and 30% coverage next year.
We are currently not discussing. There are a few opportunities out there. We have interested parties in taking vessels for longer term business from us. So some opportunities might materialize. Not a big push at this very moment to cover a high portion of our fleet. But we would play it by year as opportunities arise. And of course, it is likely that as we move forward in the year, the percentage of our fleet, which is covered for Q3 and Q4, in particular for ’25, will increase in the coming quarter. So, as contracts, exist in contract terminates, they will be renewed. And there’s also today the opportunity to take longer term coverage at quite attractive rates. So this is also a longer term and maybe even three years coverage. So this is something that we are also looking at. Of course, it is a less, we could argue, the longer the coverage, the less deals there are out there. But if the right opportunities arise, we might decide to cover one or two vessels for longer periods.
Finally, on the seasonality, yes, it’s true that we are quite surprised by the strength of Q2 so far. Q2 tends not to be a particularly strong quarter because of these refinery outages. And as we move into the second half of Q2 and into Q3 with refined volumes scrapping ramping up, if these disruptions that we are currently benefiting from persist, we could potentially witness even stronger margins. Of course, there is a lot of volatility until a few days ago, for example, the markets west of Suez were quite weak. They were very strong, east of Suez. Over the last few days, we have seen market west of Suez strengthen, also with markets east of Suez remaining strong, and so average spot rates have risen. And so, we are quite positive on the outlook for 2024 generally.
Of course, the Suez situation is impacting the market positively. We don’t know how long that will last. Hopefully, a solution can be found for the conflict between Israel and Hamas fast and that might entail a normalization of the situation in Suez, which would be very bad for us. But we expect the market to remain very strong. We will probably not be earning any more 38,000, 37,000 39,000 on the spot market. But we would still probably be averaging more than 30,000. I mean, if we look at the — despite the volatility we saw last year, which was quite pronounced, when you look at the averages that we achieved on the spot markets from Q2 onwards, there’s actually quite a lot of stability around the 31,000 level. So, possibly, if the Suez conflict were to terminate, we would go back to similar levels that we witnessed on the spot market last year.
Daniele Alibrandi
Thank you very much.
Operator
The next question is from Massimo Bonisoli of Equitas. Please go ahead.
Massimo Bonisoli
Good afternoon, Carlos and Federico. Thank you for the presentation. A couple of follow-ups from my side. One regarding the spot rates. At the end of April and beginning of May, spot rates were slightly lower than the Q1 average as we discussed previously. Can you help us in understanding the drivers behind the recent decline? Understand the short-term market drivers are quite volatile, so maybe they are not so crystal clear. Are they related to the lower diesel crack or maybe lower refinery utilization if you can help us on this issue? The second question on the new LR1 vessels, you just recently ordered. You previously stated the reference breakeven rate for the existing fleet at more or less $15,000 per day. What would be the new breakeven rate for the new vessel that you just recently ordered? Thank you. The first question is on the spot rates, if you can comment on the very recent decline, the drivers behind the recent decline?
Carlos Balestra di Mottola
We actually haven’t seen a decline in the spot rates really. The spot rates are, you know, there is volatility and the weak that we saw was mostly linked to the west of Suez markets. The Atlantic market was a bit weaker. It was weaker in the out of the U.S. Gulf and out of Europe, export out of Europe. I would say the U.S. Gulf market was weak because there was quite a lot of refinery maintenance going on in the U.S. in March. It started a bit earlier than usual. And therefore that dampened the export out of the U.S. The weakness that we saw in the continent market was mostly linked to [indiscernible]. One of the reasons was the lower exports out of Russia partly linked to the attacks to Russian refineries by the Ukrainians where the vessels which would have typically carried Russian cargoes.
Then moving into the, let’s say, non-Russian business at the margin, negatively affecting the earnings of these other vessels which cater for this non-Russian business. And instead the markets were extremely strong east of Suez throughout, let’s say, the last few months. Of course there were ups and downs in that region too, but always at very high, very high levels. And as I mentioned over the last few days, we actually have seen some strengthening also west of Suez. And so our journey is overall back at very attractive levels. And on the other one question, I pass it over to Federico.
Federico Rosen
Yes, Massimo. Look, on the other ones we already have six LR1s in the water as you know, we’ve never seen a very different breakeven relative to other MRs. OpEx are almost the same usually for LR1. Maybe they have slightly higher newbuild costs, but nothing major that changes completely the dynamics of your breakeven. Then obviously, it depends on the price that you’re paying for your vessels and the leverage that you’re going to have on those vessels. But another one doesn’t have, per se, a higher cost. They have maybe a slightly higher cost than other MR vessels, but nothing significant.
Carlos Balestra di Mottola
The direct operating costs are quite similar. The crew costs, for example, are more than 50% of the direct operating costs, pretty much the same. The newbuild costs too, as Federico said, slightly higher insurance costs because the vessels are worth more in theory. Especially the younger vessels that benefit from lower operating costs because of those spare parts costs, maintenance costs generally. So it compensates a bit in that respect. So the higher costs are going to be mostly linked to higher depreciation, not cash costs. And then depending on the amount of leverage, we’re going to have a higher financial cost. Depending on how much leverage we might have on these vessels.
Massimo Bonisoli
Very clear. Thank you.
Operator
The next question is from Climent Molins of Value Investor’s Edge. Please go ahead.
Climent Molins
Good afternoon, Carlos and Federico. First of all, congratulations for the recent promotion.
Federico Rosen
Thank you. Thank you very much.
Climent Molins
You already provided ample commentary on your fleet outlook. But I was wondering, going forward, should we expect you to focus on exercising purchase options on list or time-chartered-in vessels? Or are additional new orders or modern second-hand acquisitions also in the cards?
Carlos Balestra di Mottola
No, I think it’s mostly the exercise of the options going forward. We did this. It was almost a concurrent swap this year where we sold the Melanie, which was the oldest vessel of our fleet, 2010 built. And we purchased a younger vessel, 2017 built Echo vessel. And we ran some figures and we thought that given the Echo Freedom that we can achieve on the younger tonnage. It made sense to do this swap. And it was a way of rejuvenating our fleet and without reducing our exposure to the market. We might look at other such transactions in the future, but we don’t have anything planned at this stage. And we will focus our investments on the items that we highlighted on the use on slides we just showed, which is the exercise of the time-chartered-in — of the options of the time-chartered-in vessels and the bareboat-chartered-in vessel, the new buildings that we ordered and the secondhand vessel that we purchased.
Climent Molins
That’s helpful, thank you. And turning towards the recent newbuild orders, what kind of loan to value do you expect to secure on those?
Carlos Balestra di Mottola
We will decide closer to delivery. I mean, we are not looking for bank financing for these vessels today, because delivery is quite far out. For such young tonnage, it shouldn’t be a problem achieving 60% of these, possibly even 65%. But we might decide to go for lower leverage ratios if we can afford to do so, and depending on our other investment and capital allocation priorities at the time. But this is something that we will decide closer to the delivery of the vessels.
Climent Molins
Makes sense. That’s all from me. Thank you for taking my questions.
Carlos Balestra di Mottola
Thank you, Climent
Operator
[Operator Instructions] Gentlemen, there are no more questions registered at this time.
Carlos Balestra di Mottola
Thank you to everyone participating in today’s call and look forward to speaking soon when we approve our half-year results. Thank you very much. Talk to you soon.
Operator
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your devices.
