Shipping Companies Financial Performance Measurement using Industry Key Performance Indicators Case Study: The highly volatile period

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1 Shipping Companies Financial Performance Measurement using Industry Key Performance Indicators Case Study: The highly volatile period Maro Varvate Managing Director, OceanFinance Ltd

2 Scope of the project and cognitive fields The Scope of the project is to Develop a Financial Performance Measurement tool based on Corporate Valuation of shipping companies using Shipping-related Key Performance Indicators Research method Industry Benchmarking to assess a company s risk and its ability to generate free cash flows in comparison with its universe Evaluate trends in the firm s position over time in terms of Liquidity, Fleet Management, Debt Management, Profitability and its Market Value Added - Value is created for Key executives Shipping analysts (incl. bank officers and private equities) Stock analysts and Investors

3 Objective Function THE VALUE OF A SHIPPING COMPANY IS DETERMINED BY THE SIZE, TIMING AND RISK OF ITS EXPECTED FUTURE FREE CASH FLOWS Operational Risks Fluctuation in Revenues Fluctuation in Bunker Prices Ownership Risks Fluctuation in Vessels Market Values Fluctuation in Vessels Scrap Values Financial Risks Fluctuation in Interest Rates (Debt finance) Fluctuation in ForEx (Revenues vs Obligations) Fleet Profit&Loss Associated Risk Voyage Hire (Revenue) Freight Market Volatility - Voyage Costs Bunker price volatility -OpEx ForEx fluctuation = Operating Profit - Interest Expense Interest rate fluctuation + Profit (Loss) of S&Ps Vessels Price Volatility = Net Profit - Loan Repayment Net Cash Flow Counterparty (credit) Risks Charterers financial capacity

4 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Shipping Market and Macroeconomic Environment Macroeconomic 300 Indices BDI Euribor 3m Euro/USD BRENT

5 Corporate Fundamentals BALANCE SHEET INCOME STATEMENT CASH FLOW STATEMENT Assets Liabilities & Equity Revenues Cash at the beginning of the period Cash and Cash Equivalents Accounts Payable - Voyage Costs +/- Cash Flow form Operating Activities Short-term investments Accruals - Operating Expenses +/- Cash Flow from Investing Activities Accounts receivable Short term debt = Operating Profit (EBIT) +/- Cash Flow from Financing Activities Inventories Other current assets Total Current Liabilities Long term Debt - Interest Expense Free Cash Flow + Profit (Loss) of S&Ps Total Current Assets Total Non-Current Liabilities = Net Profit Vessels Common Stock - Capital Payments - Dividends =Net Cash Flow Other fixed assets Retained Earnings OPERATING AND SHARE DATA Total Fixed Assets Total Equity Time Charter Equivalent Rate (TCE) Income days Available days Fleet Utilization Common stock price

6 Liquidity Ratios Current _ Ratio Current _ Assets Current _ Liabilitie s BALANCE SHEET Assets Liabilities & Equity Cash and Cash Equivalents Accounts Payable Acid _ Test _ Ratio Current _ Assets Inventories Current _ Liabilitie s Short-term investments Accounts receivable Inventories Accruals Short term debt Total Current Liabilities Other current assets Long term Debt Cash _ Ratio Cash & Cash _ Equivalents Current _ Liabilitie s Total Current Assets Vessels Total Non-Current Liabilities Common Stock Other fixed assets Retained Earnings Total Fixed Assets Total Equity The ability of the company to pay off its debts as they come due over the short term period

7 Liquidity Ratios Trend Analysis 6 DRY WET 3.0 DVRS 5 4 Acid-test Ratio Cash Ratio

8 Asset Management Ratios (Fleet) INCOME STATEMENT BALANCE SHEET Fixed _ Assets _ Turnover REVENUES Net _ Fixed _ Assets Revenues - Voyage Costs Assets Cash and Cash Equivalents Liabilities & Equity Accounts Payable - Operating Expenses Short-term investments Accruals Total _ Assets _ Turnover REVENUES Total _ Assets = Operating Profit (EBIT) - Interest Expense Accounts receivable Inventories Short term debt Total Current Liabilities + Profit (Loss) of S&Ps Other current assets Long term Debt = Net Profit Total Current Assets Total Non-Current Liabilities - Capital Payments Vessels Common Stock - Dividends Other fixed assets Retained Earnings =Net Cash Flow Total Fixed Assets Total Equity The ability of the company to effectively manage its vessels

9 Asset Management Ratios (Fleet) Trend Analysis 0.30 DRY WET Non Current Assets Turnover Total Assets Turnover DVRS

10 Debt Management Ratios BALANCE SHEET Debt _ Ratio Total _ Liabilitie s Total _ Assets Assets Cash and Cash Equivalents Liabilities & Equity Accounts Payable Longterm _ Debt _ to_ Equity Longterm _ Debt Equity Short-term investments Accounts receivable Accruals Short term debt Equity _ to_ TotalDebt Equity Total _ Debt Inventories Other current assets Total Current Liabilities Long term Debt Total Current Assets Total Non-Current Liabilities Vessels Common Stock Other fixed assets Retained Earnings Total Fixed Assets Total Equity It measures the percentage of funds provided by sources other than equity

11 Debt Management Ratios Trend Analysis 2.50 DRY WET Equity to Total Debt Total Debt Ratio DVRS Long Term Debt to Equity

12 Profitability Ratios INCOME STATEMENT BALANCE SHEET PROFIT _ MARGIN Net _ profit REVENUES Revenues - Voyage Costs Assets Cash and Cash Equivalents Liabilities & Equity Accounts Payable - Operating Expenses Short-term investments Accruals ROA ( return _ on _ assets) Net Total profit Assets = Operating Profit (EBIT) - Interest Expense + Profit (Loss) of S&Ps Accounts receivable Inventories Other current assets Short term debt Total Current Liabilities Long term Debt = Net Profit Total Current Assets Total Non-Current Liabilities ROE ( return _ on _ equity) Net Total profit Equity - Capital Payments - Dividends Vessels Other fixed assets Common Stock Retained Earnings =Net Cash Flow Total Fixed Assets Total Equity The combined effects of liquidity, asset management and debt on operating results

13 Profitability Ratios Trend Analysis 40% 30% DRY Return on Assets (ROA) After Tax Return on Equity (ROE) After Tax Profit Margin Diversified Wet 20% Dry 10% 0.2 0% -10% % WET 14% DVRS 8% 6% 4% 2% 0% -2% -4% 12% 10% 8% 6% 4% 2% 0% -2%

14 The DuPont System ROE Net _ profit Equity Net _ profit revenues revenues Assets Assets Equity Pr ofit _ marg in Assets _ Turnover Leverage _ ratio asset turnover profit margin ROE Leverage A meaningful link between profitability and efficiency ratios

15 Market Value Ratios P / E SHARE _ PRICE NET _ PROFIT INCOME STATEMENT CASH FLOW STATEMENT Revenues Cash at the beginning of the period - Voyage Costs +/- Cash Flow form Operating Activities - Operating Expenses +/- Cash Flow from Investing Activities P / Cash _ Flow SHARE _ PRICE Cash _ Flow = Operating Profit (EBIT) +/- Cash Flow from Financing Activities - Interest Expense Free Cash Flow + Profit (Loss) of S&Ps = Net Profit - Capital Payments - Dividends =Net Cash Flow An indication of what investors think of company s past performance and future prospects OPERATING AND SHARE DATA Time Charter Equivalent Rate (TCE) Income days Available days Common stock price Fleet Utilization

16 Market Value Ratios Trend Analysis DRY P/E Basic - Average of VALUE P/E Basic - StdDev of VALUE WET DVRS

17 Fleet Utilization & TCE Fleet _ Utilization Income _ Days Available _ Days INCOME STATEMENT CASH FLOW STATEMENT Revenues Cash at the beginning of the period - Voyage Costs +/- Cash Flow form Operating Activities Time _ Charter _ Equivalent REVENUES Income _ Days - Operating Expenses +/- Cash Flow from Investing Activities = Operating Profit (EBIT) +/- Cash Flow from Financing Activities - Interest Expense Free Cash Flow + Profit (Loss) of S&Ps = Net Profit - Capital Payments - Dividends Boom and Bust cycles are caused due to disequilibrium of supply/demand equation =Net Cash Flow OPERATING AND SHARE DATA Time Charter Equivalent Rate (TCE) Income days Available days Common stock price Fleet Utilization

18 Fleet Utilization & TCE Trend Analysis 200 DRY 100% Fleet Utilization 150 TCE AverageBDI 95% % Diversified Wet 50 85% Dry 0 H % 200 WET 200 DVRS TCE AverageBCTI (clean tanker) 50 0 AverageBDTI (dirty tanker) H TCE AverageBDI AverageBDTI H2 2006

19 Values x 10^-7 Risk Assessment & Risk Management Industry Benchmarking measures Value Risk Assessment and Risk Management increases Value Financial Simulation of the company Assessment of Risk Factors and development of path generation stochastic models Measure Company s Cashflow-at-Risk Define risk-averting strategy 1.0 LogLogistic( , , ) 0.9 Financial Simulation Scheme Values in Millions < 14.8% 85.2% >

20 Risk Assessment & Risk Management Industry Benchmarking facilitates a shipping company to: Efficiently monitor and assess its exposure to commercial and operating risks Quantify its hedging needs using as objective function its cash flow position, where all external and internal volatile parameters are calculated and use FFAs, Interest rate swaps, FoEx futures, Bunker options to stabilize its expected cash flows Create a fleet portfolio based on its perception for shipping market prospects Define the optimum hedging ratio in between an excessive risk hedging which leads to poor financial performance and a moderate risk hedging which leads to bearing extreme risks

21 Looking beyond the numbers Industry Benchmarking can only be constructive, by taking into account Company s charterers base Company s fleet portfolio both in terms of market segment and size diversification Employment strategy Average age of fleet and investments in modern tonnage Growth and external financing Industry s fundamentals (supply, demand, orderbook, international trade dynamics) THE COMBINED EFFECT OF INDUSTRY BENCHMARKING AND RISK MANAGEMENT IN COMPANY S PERFORMANCE IS EFFICIENCY, EFFECTIVENESS AND HIGH GROWTH PROSPECTS

22 Thank you for your attention

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