Shipping Companies’ Financial Performance Measurement

using Industry Key Performance Indicators

Case Study: The highly volatile period 2007 -2010

Maro Varvate
Managing Director, OceanFinance Ltd

SNAME - 18 November 2010

 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

SNAME - 18 November 2010

 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 Fleet Profit&Loss Associated Risk

 Fluctuation in Revenues
Voyage Hire (Revenue) Freight Market Volatility
 Fluctuation in Bunker Prices
- Voyage Costs Bunker price volatility
-OpEx ForEx fluctuation
Ownership Risks
= Operating Profit
 Fluctuation in Vessels Market Values
- Interest Expense Interest rate fluctuation
 Fluctuation in Vessels Scrap Values
+ Profit (Loss) of S&Ps Vessels Price Volatility
= Net Profit
Financial Risks - Loan Repayment
 Fluctuation in Interest Rates (Debt finance)
Net Cash Flow
 Fluctuation in ForEx (Revenues vs Obligations)

Counterparty (credit) Risks

 Charterers financial capacity

SNAME - 18 November 2010

 Shipping Market and Macroeconomic Environment

300
Macroeconomic Indices 2007 - 2010

BDI Euribor 3m Euro/USD BRENT

250

200

150

100

50

Mar-10
Mar-07
Jun-07

Mar-08
Jun-08

Mar-09
Jun-09

Jun-10
Sep-06

Sep-07

Sep-08

Sep-09

Sep-10
Dec-06

Dec-07

Dec-08

Dec-09
SNAME - 18 November 2010
 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
- Interest Expense Free Cash Flow
Inventories Total Current Liabilities
+ Profit (Loss) of S&Ps
Other current assets Long term Debt

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
Fleet Utilization
Available days

Common stock price

SNAME - 18 November 2010

 Liquidity Ratios

BALANCE SHEET
Current _ Assets
Current _ Ratio Assets Liabilities & Equity
Current _ Liabilitie s
Cash and Cash Equivalents Accounts Payable
Short-term investments Accruals
Current _ Assets Inventories Accounts receivable Short term debt
Acid _ Test _ Ratio
Current _ Liabilitie s
Inventories Total Current Liabilities
Other current assets Long term Debt

Cash & Cash _ Equivalents
Cash _ Ratio
Current _ Liabilitie s
Total Current Assets Total Non-Current Liabilities
Vessels 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

SNAME - 18 November 2010

 Liquidity Ratios – Trend Analysis

DRY
6

-
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

6
WET DVRS
3.0

5 2.5
Acid-test Ratio Cash Ratio
4 2.0

3 1.5

2 1.0

1 0.5

- 0.0
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
SNAME - 18 November 2010
 Asset Management Ratios (Fleet)

INCOME STATEMENT BALANCE SHEET

REVENUES Revenues Assets Liabilities & Equity
Fixed _ Assets _ Turnover
Net _ Fixed _ Assets - Voyage Costs Cash and Cash Equivalents Accounts Payable
- Operating Expenses Short-term investments Accruals
= Operating Profit (EBIT) Accounts receivable Short term debt
REVENUES
Total _ Assets _ Turnover - Interest Expense Inventories Total Current Liabilities
Total _ Assets
+ 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

SNAME - 18 November 2010

 Asset Management Ratios (Fleet) – Trend Analysis

0.30
DRY
0.25

0.20

0.15

0.10
Non Current Assets Turnover
0.05
Total Assets Turnover
-
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
WET DVRS
0.20 0.70
0.18
0.60
0.16
0.14 0.50
0.12
0.40
0.10
0.08 0.30
0.06
0.20
0.04
0.02 0.10
-
-
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
SNAME - 18 November 2010
 Debt Management Ratios
BALANCE SHEET
Total _ Liabilitie s Assets Liabilities & Equity
Debt _ Ratio
Total _ Assets
Cash and Cash Equivalents Accounts Payable
Longterm _ Debt Short-term investments Accruals
Longterm _ Debt _ to _ Equity
Equity
Accounts receivable Short term debt

Equity Inventories Total Current Liabilities

Equity _ to _ TotalDebt
Total _ Debt
Other current assets 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

SNAME - 18 November 2010

 Debt Management Ratios – Trend Analysis

2.50
DRY

2.00

1.50

1.00

0.50

-
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

WET DVRS
1.60 2.50
Equity to Total Debt Long Term Debt to Equity
1.40
2.00 Total Debt Ratio
1.20

1.00 1.50

0.80
1.00
0.60

0.40 0.50

0.20
-
-
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
SNAME - 18 November 2010
 Profitability Ratios

INCOME STATEMENT BALANCE SHEET

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

The combined effects of

liquidity, asset management and debt on operating results

SNAME - 18 November 2010

 Profitability Ratios – Trend Analysis
DRY 1.0 Profit Margin
40%
Return on Assets (ROA) After Tax Diversified
Return on Equity (ROE) After Tax 0.8
30% Wet
0.6 Dry
20%
0.4

10%
0.2

0% 0.0
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
-10% -0.2

WET 14%
DVRS
10%

12%
8%
10%
6%
8%
4%
6%
2%
4%
0% 2%
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
-2% 0%
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
-4% -2%
SNAME - 18 November 2010
 The DuPont System

Net _ profit Net _ profit revenues Assets

ROE Pr ofit _ m arg in Assets _ Turnover Leverage _ ratio
Equity revenues Assets Equity

0.45 asset turnover profit margin ROE Leverage

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

-0.05 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

A meaningful link between profitability and efficiency ratios

SNAME - 18 November 2010

 Market Value Ratios

INCOME STATEMENT CASH FLOW STATEMENT

SHARE _ PRICE Revenues Cash at the beginning of the period
P/E
NET _ PROFIT
- Voyage Costs +/- Cash Flow form Operating Activities
- Operating Expenses +/- Cash Flow from Investing Activities
SHARE _ PRICE = Operating Profit (EBIT) +/- Cash Flow from Financing Activities
P / Cash _ Flow
Cash _ Flow - Interest Expense Free Cash Flow
+ Profit (Loss) of S&Ps

= Net Profit
- Capital Payments
- Dividends
=Net Cash Flow
OPERATING AND SHARE DATA
An indication of Time Charter Equivalent Rate (TCE)

what investors think of Income days

Fleet Utilization
Available days
company’s past performance Common stock price
and future prospects

SNAME - 18 November 2010

 Market Value Ratios – Trend Analysis

30
DRY
P/E Basic - Average of VALUE
25
P/E Basic - StdDev of VALUE
20

15

10

0
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

50
WET DVRS
45
45
40
40
35
35
30
30
25
25
20
20
15 15

10 10

5 5
0 0
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

SNAME - 18 November 2010

 Fleet Utilization & TCE

INCOME STATEMENT CASH FLOW STATEMENT

Income _ Days
Fleet _ Utilizatio n Revenues Cash at the beginning of the period
Available _ Days
- Voyage Costs +/- Cash Flow form Operating Activities
- Operating Expenses +/- Cash Flow from Investing Activities
REVENUES
Time _ Charter _ Equivalent = Operating Profit (EBIT) +/- Cash Flow from Financing Activities
Income _ Days
- Interest Expense Free Cash Flow
+ Profit (Loss) of S&Ps

= Net Profit
- Capital Payments
- Dividends
=Net Cash Flow

Boom and Bust cycles OPERATING AND SHARE DATA

Time Charter Equivalent Rate (TCE)
are caused due to Income days
Fleet Utilization
disequilibrium of Available days
Common stock price
supply/demand equation

SNAME - 18 November 2010

 Fleet Utilization & TCE – Trend Analysis

DRY 100%
Fleet Utilization
200

TCE AverageBDI
150 95%

90% Diversified
100
Wet
85% Dry
50

80%
0
H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010
H2 2006 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

200
WET DVRS
200

150 150

100 100

TCE
50 50
AverageBCTI (clean tanker)
AverageBDTI (dirty tanker) TCE AverageBDI AverageBDTI
0 0
H2 2006 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H2 2006 H1 2007 H2 2007 H1 2008 H2 2008 H1 2009 H2 2009 H1 2010

SNAME - 18 November 2010

 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(-35274924, 48172545, 16.930)

0.9

0.8

Financial 0.7

Values x 10^-7
Simulation 0.6

0.5

Scheme 0.4

0.3

0.2

0.1

0.0

10

20

30

40

50

60
-10

0
Values in Millions

< 14.8% 85.2% >

8.17 60.00

SNAME - 18 November 2010

 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

SNAME - 18 November 2010

 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

SNAME - 18 November 2010

 Thank you for your attention

SNAME - 18 November 2010