Bahri Annual Report-2016

Table of Contents

The Chairman’s Message

5 7 8

The CEO’s Message

Bahri’s Board of Directors

Bahri Annual Report

The Chairman’s Message

Bahri Annual Report

The Chairman’s Message

As a leading maritime transportation and logistics company, with a Saudi DNA, a global presence and publicly listed in TADAWUL; Bahri is in the midst of a strategic realignment journey that began in 2015. Bahri undertook an assessment of its strategic objectives, given its position as a global leader in logistics and transportation and the still unrealized market opportunity. With its diverse service offering that includes: shipping of crude oil, oil products, chemicals, bulk and general cargo, the journey is about redefining Bahri’s purpose in light of the company’s priorities and the need to implement an ambitious and targeted strategy. The plan called for a complete revamping of Bahri’s business lines, initiate a company- wide cultural change and align the company’s people and corporate structure with a comprehensive strategic business outlook. Despite the pessimistic news from the maritime sector, for Bahri, 2016 was defined as a year of ‘performance and transformation’. Through Bahri’s internal efficiencies, Bahri compensated for the market downturn and performed above market expectations. Bahri handled and overcame the challenges that the maritime sector faced in 2016, due to a persistent supply and demand imbalance, through the deployment of ‘data’ intelligence, scale, commercial acumen, an aligned people and corporate outlook. The application of aproactiveandpredictive information technology infrastructure, allowed Bahri to surpass its competitors in asset utilization. Moreover, it was a competitive differentiator, as it allowed Bahri to optimize the voyage of its vessels and routes, thus, achieving higher revenue per ship.

Bahri’s success, is not only built on the deployment of analytical technology that provides innovative and predictive data applications. It also includes a technology management platform that underpins Bahri’s safety, quality and cost structure optimization. The company’s objective is to increase shareholder value, therefore, Bahri engineered and implemented a cohesive corporate plan that combines a customer-centric approach that builds long-term and resilient partnerships, and provides non-commoditized solutions. Bahri’s above business success, did not occur in a vacuum nor did it happen by accident, it is underpinned by a stringent quality regime that does not follow the industry average, rather, Bahri is the reference standard for the industry. Quality is part of the Bahri’s DNA, giving it a differentiated outlook, whilst being supported by a cohesive team of business development, data technology science and commercial specialists. The Bahri team enabled the company to outperform the industry and helped it achieve the outstanding results during 2016. The company’s above market ‘performance’, helped it lay the foundation for its intended ‘transformation’, which will herald pioneering and disruptive breakthroughs in the maritime industry. Bahri’s aim is to become a diversified logistics provider, through the deployment of innovative data solutions that will lead to greater value creation and shareholder value.

The Chairman’s Message

Bahri’s success, is not only built on the deployment of analytical technology that provides innovative and predictive data applications

Abdulrahman Mohammed Al-Mofadhi Chairman

Bahri Annual Report

The CEO’s Message

Bahri Annual Report

The CEO’s Message

By the grace of Allah, Bahri ends 2016 on a very buoyant note, Bahri’s financial results showed a 6.4% net income increase in comparison to 2015. While the industry’s new normal is depressed rates and low- cost operations, Bahri’s above market performance that was underpinned by a robust strategic realignment, allowed it to weather the storm and to produce above industry results. While 2016 was a year of uncertainty for many maritime players, with a lot of apprehension towards any new investments, Bahri’s ambitious vision, coupled with its financial strength, allowed it to sign a SAR 5.6 billion financing agreement. Although this agreement, which went towards the purchase of 15 VLCC’s, will increase Bahri’s net debt, it will have a positive and fundamental effect on the company’s operational growth, during the short term. In addition, Bahri invested in Big Data, which improved Bahri’s operational and financial efficiency and it will have a transformative effect on the maritime sector during the coming period. Since the 2007 – 2009 global financial crisis and recession, the maritime industry has been suffering and has not been able to adequately respond to the sector’s structural challenges. While some industry players embarked on traditional operational cost-cutting programs, organizational cost-cutting initiatives and modernization of its information

technology systems. They have failed to address the systematic problems that are causing the industry its debilitating distress. On the other hand, Bahri embarked on a different route, a five-year strategic reorganization, whose aim is to leverage the company’s long-term customer relationships, to become a customer-centric company. Learning about its customer’s requirements, also necessitated that it understands the challenges in the market and fundamental changes that are taking place. This undertaking, helped Bahri to identify the tools needed to fulfill the company’s long-term strategic realignment efforts. This approach, laid a firm foundation for Bahri, helping it to build a more resilient customer focused outlook that provides solutions and not commoditized offerings. The sector’s future trends became clearer; invest in quality enhancing tools and platforms, which will become key differentiators and a source of comparative advantage. This in turn will help refine Bahri’s market positioning, a global company that will help connect the region to the world.

The CEO’s Message

Ibrahim Abdulrahman Al-Omar Bahri CEO

While 2016 was a year of uncertainty for many

maritime players, with a lot of apprehension towards any new investments

Bahri Annual Report

Bahri’s Board of Directors

Bahri Annual Report

Bahri’s Board of Directors

Mohammed Abdulaziz Al-Sarhan - Vice Chairman

Abdulrahman Mohammed Al-Mofadhi - Chairman

Saleh Abdullah Al-Debasi Board Member

Essa Hamad Al-Mubarak Board Member

Abdullah Ali Al-Ajaji Board Member

Farraj Mansour Abothenain Board Member

*Saee Abdullatif Al-Hadrami Board Member

Saleh Nasser Al-Jasser Board Member

**Ibrahim Qassim Al-Buainain Board Member

Ahmed Ali Al-Subaey Board Member

*Resigned from the board on September 1, 2016

**Joined the board on September 1, 2016

Recognitions

Awards & Accolades 12 Bahri Spearheads Building a Saudi Shipbuilding Industry 13

Bahri Annual Report

Recognitions

Bahri Annual Report

Recognitions

Maritime Standard Awards (TMS) for Ship Owner/Operator of the Year Award. This accolade is further testament to Bahri’s business success

and its continued focus on creating and driving greater value for its shareholders and its stakeholders.

In recognition for its pioneering efforts and impressive contribution to transforming the maritime sector, Bahri received two highly prestigious awards from Lloyds List; in the Innovation Category (Big Data) and Big Data & Intelligence categories. The above accolades were the result of Bahri Data team’s collaborative engagement that included data scientists, commercial managers and technical ship managers. With

their combined 350 years of domain knowledge, Bahri Data’s team are the vanguard of Bahri’s pioneering transformation that will eventually allow it, through focused investments, to combine its operational and commercial knowledge with ‘Big Data’. This will strengthen Bahri’s pioneering position within the industry and enhance its customer- focused approach that is built on deploying a proactive and predictive information technology platform.

Awards & Accolades

In line with Bahri’s commitment towards playing an integral and leading role in realizing Saudi Arabia’s 2030 Vision, and given its transformation efforts that will contribute to Saudi Arabia’s economic diversification efforts, Bahri signed a Joint Development Agreement, JDA, with Saudi ARAMCO Maritime Offshore Limited, Hyundai Heavy Industries and Lamprell. The objective is to establish a maritime yard at Ras Al Khair, in Saudi Arabia’s Eastern Province, which will contribute to increasing local manufacturing and developing the services sector, while supporting the kingdom’s economic efforts and

increasing employment and growth opportunities. Moreover, the above partnerships will underpin the Saudi Arabia’s efforts in knowledge transfer and will help with the creation of 80,000 direct and indirect jobs, both skilled and semi-skilled. In addition, it is expected to spur potential entrepreneurial spin-offs, thus creating even greater employment opportunity. The JDA, which calls for the construction of aworld classmaritime yard, is part of Bahri’s strategic vision to invest in the Saudi economy and expand into adjacent businesses. Bahri’s stake is expected to be 19.9%.

Bahri Spearheads Building a Saudi Shipbuilding Industry

efficiency and financial gain for the company.

Bahri was also awarded an equally respected accolade, the USCG Quality Award, which is given to only 10% out of the 4,800 vessels that call on US ports per year. This award is further testament to Bahri’s superior safety and quality standards that outperformed the industry benchmarks and resulted in

Under the patronage of His Highness Sheikh Ahmed Bin Saeed Al Maktoum, President, Dubai Civil Aviation Authority and Chairman and Chief Executive, Emirates Airline and Group, Bahri also scooped The

The Maritime Sector in 2016

Bahri’s Performance & Strategic Focus Bahri’s 2016 Financial Performance & Comparison with 2015

Bahri Annual Report

The Maritime Sector in 2016

Bahri Annual Report

The Maritime Sector in 2016

exceeded its competitors, which is a testament to its ability to act in the face of market challenges. Thus, placing it firmly on the path to becoming a global leader in logistics and transportation. objects to seamlessly communicate, thus strengthening its pioneering position within the industry and enhance its customer-focused approach that is enhanced by its proactive and predictive information technology platform.

The turbulence that the maritime sector went through in 2016, was due to a major slowdown in global trade, which affected many shipping companies; some of whom reported poor financial performance. On the other hand, Bahri’s financial results embarkedonamoreground-breaking approach. Its ultimate objective is not to provide interim relief and immediate tangible benefits that will dissipate in the face of the industry’s systematic structural challenges. Rather, Bahri is harnessing ‘Big Data’ to allow ships, those inanimate

Despite the turbulent and economic challenges that the maritime industry faced, Bahri stood out and achieved operational and financial results that was above the industry average. This can be attributed to Bahri’s ability to act, adapt, change and diversify. Thus, realizing its ambitions of becoming a global leader in maritime logistics and transportation. Bahri’s 2016 maxim of ‘performance’ and ‘transformation’, was thoroughly demonstrated through its financial and operational results, which allowed it to surpass its competitors, while executing its strategic pivot that aims to pioneer and implement a fundamental and largescale change to the maritime industry. Through its differentiated business model and strategy, which includes a more robust capital asset deployment and utilization, Bahri aims to lead the industry in value creation and enhanced revenue. This will be realized through the development and application of innovative intellectual property- based technology that is predictive, customer-focused and will lead to superior operational efficiency. Fleet size gives maritime companies commercial viability and operational flexibility, which ensures reliability. Yet having a large fleet is also a two-edged sword, as 2016 results showed languishing demand for maritime transport and tremendous financial challenges for many operators. This was the result of the shipping industry confronting the twin challenges of falling growth in demand and over capacity, leading to too many bigger ships chasing far fewer cargo. While some maritime companies saw their earnings and profit margins plummet, Bahri’s 2016 results showed a 6.4% increase on its

return on sales (net profit margin) in comparison to 2015. It managed to achieve these results, by capturing market opportunities during the first half 2016 and relying on long-term partner arrangements that allowed it to realize focused costs efficiency across its operations and without jeopardizing its above industry safety and quality standards. Moreover, given Bahri’s operational ability and financial performance, which outperformed the industry benchmarks, in comparison to its competitors, Bahri managed to expand its operation during 2016. This took place through the acquisition of new vessels, by leveraging its solid position and this is despite the slight drop in its revenue. Bahri’s expansion reflects on its financial strength and differentiated business model, which has allowed it to leverage its assets more efficiently and to absorb the industry’s slowdown. On the other hand, Bahri’s safety and quality standards, which it implements, based international best practice, enhanced its top quartile positioning within the industry. In turn, this ensures that Bahri’s top- of-mind awareness remains strong with its customers, which translates into lower customer acquisition and retention costs and a steadier and more enhanced revenue stream. Moreover, Bahri’s commitment to pro-active safety and continual improvement has led to increased reliability and less downtime; all of which has led to reduced costs and improved resource optimization. Furthermore, instead of adopting short-term tactical and operational cost-cutting initiatives and information technology related modernization programs, Bahri

Bahri’s Performance & Strategic Focus

Bahri’s 2016 Financial Performance & Comparison with 2015

Business Units Performance & Achievements

Performance and Achievements of Strategic Business Units during 2016

Bahri Oil

Bahri Chemicals Bahri Logistics

24 26 28 29

Bahri Dry Bulk

Bahri Ship Management

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri Oil, is a leading owner and operator of one of the largest VLCC fleets in the world. With 36 VLCC’s currently on water, Bahri Oil’s fleet is expected to grow by more than 40% over the next 2 years. As part of its fleet expansion strategy, Bahri acquired 5 VLCCs during 2016 and has an additional 10 VLCC’s on order, which will be delivered over during 2017 and 2018. In its continuing effort to optimize its commercial operations, expand its asset base and maximize its profit margins, Bahri Oil signed a memorandum of agreement with the Arab Petroleum Investments Corporation (APICROP). This agreement stipulated the setup of an investment fund, with a total value of $1.5 billion (SAR 5.6 billion), to acquire up to 15 VLCC’s. Bahri will commercially and technicallymanage the funds’ fleet monetization, through the Asset Management Company (AMC). This business venture will provide Bahri with controlled tonnage, at guaranteed discount, thus replacing spot in and it adds a new revenue stream through a third- party ship management service fees. Bahri Oil’s commercial acumen, coupled with its fleet size and ship management quality helped it to successfully establish a long-term strategic partnershipwith some of the largest oil companies and refineries across the globe. In addition, it diversified its trade routes, increased its global reach and penetrated new markets, thus providing its partners and global customers with efficient transport services and became a reliable supplier for their energy needs. Central to Bahri Oil’s 2016 performance, was its fleet deployment diversification strategy and an energetic pursuit of its growth plans, which were based on expanding its fleet size and customer base. This is due to Bahri above market performance, during which it outpaced the industry’s operational

and financial indicators. Thus, Bahri Oil outperformed the market by maintaining high quality, reliable tonnage and above market asset utilization standards. During 2016, Bahri Oil transported 881 million barrels equating to 2.5 million barrels per day, through 440 VLCC voyages worldwide. In comparison, during 2015, Bahri Oil carried out 402 VLCC voyages worldwide; this 9% increase is a result of Bahri Oil’s fleet deployment diversification strategy. Furthermore, the number of voyages on the AG/East route more than doubled from 18 in 2015 to 41 in 2016. This increase resulted in a 10-percentage point increase from 13% (2015) to 23% (2016), for all of Bahri’s East and West voyages performed from the Arabian Gulf over the past year. In addition, Bahri Oil’s penetration of the West African market increased, from 3 VLCC voyages in 2015 to 13 during 2016. To further enhance its market presence, Bahri Oil penetrated the Uruguay market, performing its first Uruguay/China voyage during 2016, a route which will potentially expand in the near future. These initiatives resulted in Bahri achieving a distinctly higher fleet utilization, measured by the time the vessel is laden, which resulted in being one of the best performers in the VLCC market. On the other hand, the Arabian Gulf to Okinawa route registered a slight drop in the number of voyages, going down from 6 in 2015 to 4 in 2016. There was also an 18% drop in the number of voyages on the Sidi Kerir, Rotterdam route, going down from 38 in 2015 to 31 in 2016. Although the Arabian Gulf Ain Sukhna route registered a 38% drop, it was offset by the 23% increase in VLCC voyages on the Yanbu to Ain Sukhna route. As a testimony to its superior services and capabilities and as part of Bahri Oil’s long-term commitment to improving its operational performance, an agreement was

the deployment of its ambitious, innovation-based ‘Big Data’. Central to this strategy is the alignment of the people, corporate structure and culture that will be combined with Bahri’s maritime operational prowess. In turn, this led Bahri to achieve its 2016 above market performance and has set the stage for Bahri’s future transformation.

Bahri’s deliberative approach to driving and changing the dynamics and expectation management of the shipping industry, resulted in its above market operational and financial performance. To achieve this, Bahri developed a comprehensive strategy map, with the aim of defining its business intent and approach, which will lead to the transformation of its business purpose, through

Bahri Oil

Performance and Achievements of Strategic Business Units during 2016

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri Annual Report

2016 Business Units Performance & Achievements

Breakdown of Total VLCC Voyages by Route during 2016 compared to 2015

West African markets, in addition to it Asian clients, such as PetroChina, UNIPEC, Reliance, Essar and Petrobras. Concurrently, Bahri Oil also broadened its customer base, by adding new customers during 2016, which included CPC, HMEL, Total and HOB. This customer base expansion will further strengthen Bahri Oil’s position and sustain its position as the VLCC operator with the highest fleet utilization rate in the market, thus, allowing it to continue to outperform its competitors.

reached with S-Oil to increase its monthly volumes carried for S-Oil from 2 - 3 cargoes per month, to 4 - 5 cargoes per month. This is in addition to securing more volumes, thus ensuring employment for two additional VLCCs with guaranteed revenues, which, in turn, improves the diversification of Bahri’s trade routes. Furthermore, this is equivalent to the full employment of 5 – 7 VLCCs annually. Furthermore, Bahri Oil continued to strengthen its business relationship with its existing customers from the Caribbean and

Type of Operation

2015

2016

No. of Voyages % of Total

Arabian Gulf – USA

123

31%

132

30%

Arabian Gulf – Ain Sukhna

15%

Arabian Gulf – Yanbu

15%

Arabian Gulf – Onsan (S-Oil)

Arabian Gulf – Okinawa

Arabian Gulf – Rotterdam

2015 – 2016 Comparative Breakdown of Bahri’s VLCC voyages

Yanbu – Ain Sukhna

14%

16%

Type of Operation

2015

2016

Sidi Kerir – Rotterdam

No. of VLCC’s No. of Voyages No. of VLCC’s No. of Voyages

Caribbean/WAF – Asia/Far East

17%

13%

VLCC’s operating on the COA and spot market

247

296

Total Voyages

402

440

VLCC’s operating on time charter agreements

VLCC’s voyage chartered from market

155

144

for Bahri Oil, as the number of VLCC voyages went up from 55 to 72 voyages, a 23% increase, between 2015 to 2016. Underpinning Bahri Oil’s 2016 performance is its adoption and implementation of an “NPS” system, where a dedicated third-party team approaches Bahr’s customers and solicits their feedback independently. All areas of concern or potential business collaboration is addressed, through an internally rigorous process, where customer satisfaction is closely monitored, evaluated and addressed. In addition, Bahri Oil was issued with a full-term ISO 9001:2008 Management Certifications following its DNV/GL compliance audit. Moreover, preparations are underway for upgrade to the new ISO 9001:2015 standard for 2017. Moreover, the safety, quality and reliability of the services provided to Bahri Oil customers have been monitored, with no major incidents or issues noted and no complaints received.

Furthermore, converting the oil glut, which was responsible for the loss of market impetus, into an opportunity, Bahri Oil agreed with Saudi ARAMCO to potentially increase the volume of oil deliveries to its clients in the East. In return for a 2.5% discount on the additional deliveries to the East, if the total volume exceeds the 2015 levels. While this supports route diversification drive, it is also in line with Bahri’s strategic goal of being Saudi ARAMCO’s shipping partner. On the other hand, the Arabian Gulf to Yanbu route registered an increase of 67 VLCC voyages in 2016, in comparison to 2015, when only 38 voyages took place.While theArabian Gulf to Onsan route registered a more than three-fold increase in the total number of voyages between 2015 to 2016. The Arabian Gulf to Rotterdam, which did not register any voyages in 2015, saw Bahri haul 10 million barrels through 5 VLCC voyages during 2016. In addition, Yanbu, Ain Sukhna was another high-performance route,

Total Voyages

402

440

* Ramlah (floating storage)

overall breakdown reflects Bahri’s strong performance, despite the market’s loss of impetus during the second half of 2016. The aggregate number of VLCC voyages went up from 402 in 2015 to 440 in 2016.

Overall, the above table, which provides a breakdown of Bahri’s total VLCC voyages by route shows a healthy upward trend with the majority of its routes and a slight decrease with other routes for 2016, in comparison to 2015. However, the

Bahri Oil 2015 & 2016 VLCC Voyages Comparison

500 450 400 350 300 250 200 150 100 50 0

440

402

132

123

Araian Gulf USA

Araian Gulf Ain Sukhna

Araian Gulf Yanbu

Araian Gulf Onsan (S-Oil)

Araian Gulf Okinawa

Araian Gulf Rotterdam

Yanbu Ain Sukhna

Sidi Kerir Rotterdam

Caribbean/WAF Asia/Far East

Total Voyages

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri Annual Report

2016 Business Units Performance & Achievements

Although the market correction was stronger than anyone anticipated, Bahri Chemicals is continuing its drive to explore and sign more strategic partnerships to provide increased tonnage and cargo opportunities coverage. The expansion of Bahri’s global commercial footprint, through a robust fleet diversification program, thus broadening its product offering, remains a strategic priority. In addition, Bahri’s capital investments, is continuing, to ensure a first class and cost efficient service to its clients.

On the other hand, the launch and implementation of ‘BigData’ program will have far-reaching results, and will allow Bahri Chemicals to gain a market lead over the competition. The market’s recovery in the short to medium term will depend on its ability to absorb all new deliveries. With new ship orders significantly reduced in the chemical sector, there is reason for optimism in the next twelve to eighteen months.

improve the fleet’s trading efficiency and asset utilization, thus gaining a strong foot-hold in strategic sectors and segments. In comparison to 2015, this year’s overall operational and business results were impacted by a global volume and freight rate decline across all major markets. However, in comparison to the competition Bahri’s results were far better. This segment of the industry suffered an average drop in earnings of about 20%, whereas, Bahri Chemicals performance for 2016 was only lower by 11% in comparison to 2015. However, due to its long- term strategy of fleet employment diversification, Bahri absorbed the market correction better than its industry peers. In response to the markets’ downturn, Bahri implemented cost savings initiatives that included the implemention of a major dry docking program to improve its vessels operational efficiency, in addition to fleet-wide fuel saving initiative, which will contribute to minimizing long- term operating costs. This increased its vessels operational efficiency and broadened its access to alternative cargoes. Moreover, Bahri Chemicals built strategic long-termpartnerships with producers and traders in the Far East, South East Asia, Europe and North America. This expansion will provide stability through the cyclical downturns and has helped it to diversify into strategic sectors, such as, clean petroleum products and vegetable oil. This helped Bahri to improve its vessels business efficiency and better asset utilization. All of whichwill contribute to stronger positioning capture a greater slice of global commercial opportunities.

Bahri Chemical’s operations involves the shipping and logistics handling of liquid bulk chemicals, clean petroleum products and vegetable oils. From the middle of 2016, Bahri Chemicals’ business was affected by the increasing crude oil price, which directly impacted costs and led to increased bunker prices. Moreover, the slowdown of the Chinese economy, negatively contributed to Bahri’s operations, however, signs of stabilization towards the end of the year, helped Bahri avoid a hard landing. Moreover, a significant increase in tonnage supply, coupled with severely reduced freight rate volatility and related product movement, adversely impacted all markets during 2016. The clean petroleum and vegetable oil segments, known for their reactive supply and demand dynamics, were most affected by the downturn. As one of the world’s largest owner and operator of MR IMO2 chemical tankers, Bahri Chemicals’ increased scale allowed for geographical diversification and improved efficiency. Historically, Bahri had a relatively limited geographical scope with a focus on medium range tankers. However, with more ships joining its fleet, its global footprint is expected to expand. Going forward Bahri will diversify into other types and sizes of ships servicing its customers’ needs. On the other hand, Bahri Chemicals entered new global trade routes and partnerships, which included the Far East, South East Asia, continental Europe and North America. This allowed it to diversify its operations into strategic segments, such as clean petroleum products and vegetable oils. This in turn, helped

Bahri Chemicals

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri Annual Report

2016 Business Units Performance & Achievements

A market consolidation and an increasing number of mergers amongst international players might create a monopoly. However, some of potential players that will emerge will vie based on price, while Bahri will seize the strategic initiative and create value. As the sole national flag carrier, Bahri Logistics is also playing a major role in national development not just as a marine transporter and logistics provider but also an employer of choice for Saudi national talent.

volume of commodities along Bahri’s trade routes, Bahri Logistics smart operations, process management and focused marketing efforts, helped the company to increase its market share on the North America trade route from 29% in 2015 to 42% in 2016. Moreover, Bahri also became a total logistics solutions provider, both in Saudi Arabia and internationally after ramping up its Total Logistics capability to serve the growing needs of its key Saudi clients. Moreover, the ability to provide efficient 3 PL services will also contribute significantly to Bahri’s emerging reputation as a global total logistics solutions provider.

On the national and regional fronts, Bahri Logistics will play an increasingly active role in the kingdom’s Total Logistics capacity initiative, which is inspired by Vision 2030 and aims to capitalize on Saudi Arabia’s strategic location, which can be converted into a logistics bridge. Once realized, it will open more GCC opportunities, whereby Bahri can participate in the region’s infrastructure and development projects. The Saudi total logistics market size is estimated at more than SAR 108 billion and it will provide Bahri Logistics with greater growth opportunities in the region and across the world. In comparison to 2015, 2016 saw Bahri’s concerted efforts reach fruition with the introduction of regular liner service to major European ports with a strong involvement in Total Logistics. This new addition generated incremental revenues of SAR 70.64 million. Bahri has also taken steps to expand its presence in South America with the launch of new ports call at Vera Cruz, Mexico, which is expected to generate revenues in excess of SAR 20 million per annum. Logistics introduced SMART Operations, to improve efficiency and increase cost control. In addition to securing MOU’s with international shipping lines for trans-shipment operations. The combined initiatives generated cost savings in excess of SAR 8.3 million and network utilization gains of 5% during 2016. Although the prevailing global financial situation, which severely impacted trade flows and the Operationally, Bahri

Like other Bahri business units, Bahri Logistics was affected by the challenges of 2016. The containerized and break bulk sectors in general cargo of the major shipping companies were in distress, reporting negative growth from Q1 onwards. However, given Bahri’s unique profile as a true multi-purpose carrier, Bahri Logistics absorbed the full impact of prevailing negative market trends. Bahri’s reputation as a market leader in regional logistics, customer and operational services, contributed to its ability to withstand the challenges of 2016, while the competition felt the full weight of the economic downturn. Bahri’s participation as transportation champions in Saudi Arabia’s infrastructure development projects, helped to keep revenue streams on an even keel. Moreover, Bahri’s strategic geographic location, astride themajor eastern andwestern trade routes, coupled with its ability to effectively deploy its unique state- of-the-art vessels, allowed Bahri to provide its customers with total logistics solutions. In 2016, Bahri Logistics, became the only service provider with profile and ability to provide services to all major industries through its strong network of international offices and agents. Moreover, Bahri is increasing its presence on all continents, through the introduction of the Total Logistics Services, which will allow it to create more synergy within Bahri and to maximize Bahri Logistics ability to expand its market share. This will also help it mitigate the negative effects of the economy’s cyclical downturn that in turn affects global trade.

Bahri Logistics

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri Annual Report

2016 Business Units Performance & Achievements

Bahri outperformed the global benchmark on oil major inspections (SIRE) by 17%, in addition to the fact it has been trending downwards year over year. Furthermore, its major incidents were reduced by 57% (2016 vs. 2015) and there was no vessel rejection by any of Bahri’s customers. Moreover, Bahri received a score of ‘zero detentions’ from Port State Control (PSC), which is an internationally agreed inspection regime of foreign ships calling at national ports for 2016. This means none of Bahri’s ships were detained because of compliance failure, with any of the internationally agreed standards. On the other hand, PSC (Tokyo and Paris MOU) market detention percentage, during 2016, ranged from four to five. In addition, Bahri Ship Management carried out eighty-five safety inspections and internal audits in 2016, along with successfully migrating to ISO 9001 and 14001 to 2015 standards. To further emphasize its commitment to safety, Bahri Ship Management carried out two major emergency preparedness drills with Saudi ARAMCO, O’Brien’s and United States Coast Guard (USCG). This led to Bahri Ship Management to achieve a Tanker Management Self-Assessment (TMSA) level four (highest level) in emergency preparedness. Among Bahri ship management’s notable 2016 achievements was Bahri Oil being issued with a full- term ISO 9001:2008 management

Ship is responsible for technically and operationally managing Bahri and its subsidiary’s vessel’s safety, quality, and reliability is one of the pillars that underpins Bahri’s leading market position. The overall focus is on understanding customer requirements and its overarching commitment to ensure that all the vessels are operated safely, and efficiently and with a minimum risk to the environment. To achieve this mission, Bahri implements initiatives that set challenging safety and quality Key Performance Indicators, KPI’s, that meticulously monitors performance, toexceedor set industry standards thereby integrating innovation and technology. Through rigorous and continuous compliance audits, checks, preparatory drills and certification reviews, Bahri achieved an unparalleled position that set the benchmark for the market. outperformed industry benchmarks, which recognized Bahri as a top quartile operator for major customers such as; Saudi ARAMCO, BP, Shell, ExxonMobil and Total. Bahri also adheres to and implements a ‘continuous improvement’ doctrine. It focuses on the monitoring of the ships speed, fuel consumption, hull fouling, using intelligent monitoring systems and high performance cargo tank and hull coatings; all of which improves the vessels performance and leads to incremental operational efficiencies. management, which During 2016, Bahri’s safety and quality practice constantly

the overall business growth in terms of revenue, market share, in addition to improving customer profile acquisition. The regional presence was expanded in the United Arab Emirates and in Egypt and new joint ventures are in progress, such as establishing long-term commitments with reputed cargo charterers and importers which is expected to result in further business growth. As the national maritime carrier for Saudi Arabia, Bahri is also recognized as the leading and exclusive dry cargo carrier in Middle East. Going forward, Bahri Dry Bulk’s regional short, medium and long-term operational plans include focusing and consolidating its market presence. Moreover, Bahri Dry Bulk will continue to leverage its internal assets, which includes modern, state of the art, fuel efficient fleet, diversified business lines and regional strengths, to make a mark on global map. On the other hand, Bahri’s sustained operational efforts in balancing [TC in/out] fleet deployment voyages were marked by strict cost control measures, compliance with maritime and environmental regulations and vessel safety. The risk mitigation initiatives included benchmarking, position control, introducing best- in-class hedging future tools, all of which will be instrumental in helping capitalize on the sector’s expected consolidation and growth as market circumstances improve. The overall outlook for Bahri Dry Bulk is positive, despite the existing political uncertainty and market volatility. At the opportune moment, Bahri Dry Bulk will consider fleet expansion, through organic and inorganic growth channels and expanding its regional and global presence.

Globally, the Dry Bulk sector is driven by the demand of iron ore, coal and grains, while the local and regional markets are driven by grain and fertilizer exports. Moreover, the transportation of these commodities is affected by political and geographic instability, the fundamentals of supply response and cargo demand. In turn, these factors affect bulk cargo growth rate, shipping market volatility which in turn would influence the trade efficiencies and market balance. On the other hand, the vessel’s operating costs, particularly, fuel oil (bunker) cost, in addition to the above factors impact fleet availability and utilization, which has a direct bearing on earnings and risks. This improved business performance and growth took place despite the volatility of the global shipping market, in addition to the penetration of numerous small time operators, demand and supply imbalance as evidenced from the WTO’s announcement, which highlighted the slowdown of global economic growth on trade movement. During the 2010 – 2015, the average annual dry bulk trade registered around 5% of growth, while during the 2015 – 2020 period, it is not expected to reach the 3% mark. The year 2016 witnessed significant increase in operations, both in nature and mix of the dry bulk volumes and cargo. Regionally, Bahri’s cargo liftings exceeded 5.3 million metric tons, in comparison to 1.3 million metric tons during 2015, registering an increase of 307% in cargo liftings. In addition, there was 90% increase in the customer profile registration. Among many strategic initiatives that Bahri Dry Bulk put in place, was the introduction of the “Operator Model”, which has positively contributed to

Bahri Ship Management

Bahri Dry Bulk

Bahri Annual Report

2016 Business Units Performance & Achievements

ship running cost optimization, with strategic procurement, proactive maintenance, crew cost optimization, dry-dock efficiencies, port agencies contracts, supplier discounts. These translated into cost savings of SAR 125 million during 2016. On the other hand, in 2016, the number of Bahri managed vessels increased by 9; 4 VLCC’s and 5 MR tankers, and there was a reduction of 1 storage tanker, bringing the total number of vessels under technical management to 78 vessels. The table below shows the individual fleet’s percentage cost reduction in 2016 compared with 2015 due to the cost-effective measures applied, resulting into more efficient and cost effective operations.

certification, following its DNV/ GL compliance audit. In addition, preparations were started for the upgrade to the new ISO 9001:2015 standard, which will be fully completed in 2017. Moreover, Bahri’s Net Promoter Score (NPS), which determines customer loyalty, based on a ten-point scale, increased to 9.1 in 2016 compared to 8.5 in 2015. Any number above 9 means that the customer is very likely to recommend company services and there is a direct correlation to revenue for every one-point increase in the NPS score. Bahri’s rigorous safety and quality testing ensures reliability, which translates into increased efficiency and decreased running costs. Furthermore, there was improved

Fleet

% Reduction

VLCC

-13%

Product carriers

-31%

Dry Bulk vessels

-8%

ROCON

-8%

Chemical Tankers

-8%

Bahri Support Services

Bahri Data

34 35 35

Financial Planning & Enhancing Performance

38 39 40 42 43 43 44 44 45 41

Bahri Finance Key Functions

Financing and Investment

Risk Management

Prepare Reports and Publish Period Financial Statements Prepare Annual Estimated Budgets Monitoring Business Units Performance and Controlling Revenue and Expenses

Bahri’s HR Transformation

Bahri Corporate Marketing & Communications

Bahri Social Responsibility

Bahri Information Technology

Bahri Internal Audit

Analyzing the Company’s Financial Performance

37 38

Bahri Quality Management

Internal Control and Monitoring

Investor Relations

Bahri Annual Report

Bahri Support Services

Bahri Annual Report

Bahri Support Services

Bahri Finance, plays a significant role in overseeing the company’s overall financial, investment operations, planning, analysis, oversight and transactional tasks. Among its key transactional tasks is its preparation of Bahri’s annual budget, achieving the targets set for all business units and departments and updating such targets regularly. Moreover, it also develops various types of financial

reports and analysis, which help the executive management to take the appropriate decisions in a timely manner. In addition to disclosing the company’s operations through regular annual and quarterly financial reports developed in accordance with the accepted accounting standards in Saudi Arabia issued by the Saudi Organization for Certified Public Accountants (SOCPA).

Despite the shipping industry’s response to change, which ranges from sluggish to inertia, a fundamental shift is taking place in the form of ‘Big Data’, which is transforming the sector. Big Data is capable of making fundamental changes to the shipping industry. Through the analysis, effective utilization and eventual deployment of Big Data Models, shipping companies will be able to gain a decisive comparative advantage. Thus, Big Data applications will serve as the differentiators, aiding shipping companies to optimize their fleet’s operations. Bahri Data, whose main priority is to turn on Bahri’s performance DNA, is also positioning itself as a market differentiator that will deploy innovative solutions and applications by collaborating with ecosystem partners. Bahri Data is making pioneering changes to the maritime industry that is based on value creation, and intellectual property generation that will spur innovation. As the Bahri jewel, Bahri Data is in a unique position, given that there are a few maritime companies who have established a dedicated data unit that is attempting to deploy Big Data and advanced analytics in support of a maritime positioning strategy which gives it the opportunity to lead the industry. Bahri Data has been at the forefront of transformation focusing its energies towards its mission; to discover science-driven insights

and unearth knowledge hidden in massive data sets to support smarter decision-making. A culmination of that effort is Bahri achieving operational efficiencies, deepening its customer engagement, ensuring a sustainable shareholder value and creating a transformative impact on the maritime industry. Bahri Data has a combined 350 years of deep domain knowledge and data science expertise, through its establishment of a collaborative engagement of a teamof commercial, technical ship management and data scientist to implement Bahri’s transformation. This effort, resulted in the strengthening of Bahri’s current commercial contracts and enhanced its scale. Moreover, it also resulted in increased value creation, through optimized chartering and voyage management, customer service and operational efficiency. These efficiencies added a cushion in the market downturn in 2016. Moreover, Bahri Data’s prowess was recognized through its awarding of two prestigious accolades from Lloyds, in The Big Data Intelligence and The Innovation Award. As a result, and in less than 2 years, Bahri Data executives became leading and sought after industry experts; commenting on the expected fundamental changes that will take place in the maritime sector, through the deployment, application and utilization of ‘Big Data’. This translated into Bahri’s media share of voice surpassing its competitors.

Bahri Data

Bahri Finance

1. Develop reports and publish regular financial statements 2. Prepare annual estimated budgets 3. Monitoring business units performance and maintaining fiscal discipline 4. Analyzing the company’s financial performance 5. Internal control and audit oversight 6. Financial planning & enhancing performance

Key Functions

Bahri Annual Report

Bahri Support Services

Bahri Annual Report

Bahri Support Services

analyzed and addressed, through the monitoring of the business unit’s operations, which will help Bahri achieve it’s business objectives and exploiting potential opportunities as they arise.

BahriFinancemonitorsthecompany’s fiscal and monetary performance and compares it to initial projections to ensure that the company can generate the targeted revenue and maintain expenditure discipline. Moreover, significant deviations are

in Saudi Arabia and utilizes the best international practices. In addition, it ensures accuracy and transparency of the information, enabling users of the financial statements to understand the Company’s performance and its evaluation.

Finance Division develops the policies, mechanisms and controls necessary at the different levels of the Company and various business units, inside and outside the Kingdom, to record all financial transactions under the accepted accounting standards

Monitoring Business Units Performance and Controlling Revenue and Expenses

Prepare Reports and Publish Period Financial Statements

prepared in conjunctionwith business unit, thereafter they are reviewed by the senior management and submitted to the Board of Directors for approval. Moreover, the budgets are updated on a quarterly basis, to take into account changing market conditions, given that initial financial data is based on performance and market projections, which can change based on circumstances.

financial ratios and soundness of the financial position of the Company or performance for each period. Findings of the financial analysis are considered and recommendations are made to the senior management to take appropriate decisions.

Bahri Finance is responsible for the regular preparation of company’s yearly budgets, in coordination with all business units and departments. The preparation is preceded by a thorough analysis of the economic and commercial conditions based on the best available information, with the aim of increasing shareholder value, profit maximization, whilst applying strict expenditure control strategies. The draft budgets are

At different intervals throughout the year, the Company’s financial performance is analyzed from different perspectives, including performance analysis and comparison with previous periods or existing budgets; or analysis of

Prepare Annual Estimated Budgets

Analyzing the Company’s Financial Performance

Bahri Annual Report

Bahri Support Services

Bahri Annual Report

Bahri Support Services

Moreover, Bahri focuses on low-risk secure investments. In this respect, it invests part of its cash surplus in short-term Murabaha agreements. The Company is also committed to adhere to Sharia compliant financing policies. Moreover, approximately 99% of the Bahri’s financing facilities are Sharia compliant. As such, Bahri finances its vessel expansion, through self-financing (approximately 20% of the total value) and it seeks 80% from external sources.

Bahri Treasury is responsible for cash management and provision of funding for different company projects. Managed daily, the surplus funds are invested in short-term Murabaha agreements depending on the Bahri’s financial needs and obligations. Moreover, Bahri Treasury is also responsible for processing outstanding company payments after being reviewed and audited. The department is also responsible for company’s banking relations and as a link between financial institutions and other commercial entities.

the company’s financial transactions and ensure the development of accurate reports.

Bahri Finance combines the deployment of the latest in information technology systems and international best practice to oversee

Financing and Investment

Internal Control and Monitoring

growth opportunities, based on prevailing economic and commercial conditions, as well as the company’s capacitytoexploitsuchopportunities. Thus, enhancing shareholder value, Bahri’s commercial and financial health.

Bahri Finance has a mid to long- term growth and investment horizon. To achieve this aim, Bahri Finance carries out focused financial, market, operational, industry and sector [specific] analysis, to properly plan for investment opportunities. Whether in new vessels or other

Financial Planning & Enhancing Performance

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