BW LPG Limited (BWLP) Q2 2018 Earnings Report, Transcript and Summary

Welcome to BW LPG’s Second Quarter 2018 Financial Results Presentation. You will be brought through the presentation by BW LPG’s CEO, Martin Ackermann; and CFO, Elaine Ong. They will be pleased to address any questions after the presentation. [Operator Instructions]. Certain statements in this conference call may constitute forward-looking statements based upon management’s current expectations and include known and unknown risks, uncertainties, and other factors, many of which BW LPG is unable to predict or control, that may cause BW LPG’s actual results, performance or plans to differ materially from any future results, performance or plans expressed or implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities. With that, I am now pleased to turn the call over to BW LPG’s CEO, Martin Ackermann. Please go ahead sir.

Thank you very much Anna. Welcome to the presentation of BW LPG's results for the second quarter of 2018, the financial period ending 30th of June. I am as always joined by our CFO, Elaine Ong. We appreciate your interest and we will take questions at the end of the call. Before we get into the discussion of the company's financials and operational results, I want to briefly address where we stand regarding our proposed combination will Dorian LPG. On July 9th we increased our all stock proposal, the revised proposal represent the value of 8.73 per share of Dorian LPG common stock. Based on our closing share price on 29th August yesterday, [indiscernible] 34.37. The Dorian LPG Board has not yet formally responded to this increased proposal we submitted more than eight weeks ago. We continue to believe that the proposed combination of BW LPG and Dorian LPG is a unique opportunity to maximize value for all shareholders and would deliver compelling benefits to the stakeholders of both companies. Together the company -- the combined company would have a larger fleet with better geographical coverage, improved utilization, scheduling, and positioning. It would also have a significantly strengthened credit profile which would provide greater financial flexibility to invest for the future and realize substantial financial and operational synergies. We believe the power of this combination would directly benefit customers as we advance our vision as a premier shipping company. There is strong support from Dorian LPG shareholders for the proposed combination and we look forward to a response from the Dorian LPG and them showing a willingness to constructively engage with us in the weeks ahead to discuss the merits of the combination. As such we announced our intent to nominate three independent highly qualified candidates to stand for election to the Dorian LPG Board each of whom is committed to objectively evaluating all of Dorian LPGs strategic options and value creation opportunities. And we have filed a preliminary proxy statement with the SEC given our intention to solicit proxies to elect directors at Dorian LPGs 2018 Annual General Meeting. The purpose of today's call is to discuss our quarterly earnings. As such we will not be able to comment any further on the proposed combination with Dorian LPG. With that let me turn to the topic at hand our second quarter performance. The spot market bottomed out at 19.9 per metric ton in mid April and ending the quarter at 34.4 per metric ton. The U.S. Gulf exports were lower year-on-year in April but normalized in May and June. Increased exports from the Middle East has meant that export levels are back to pre-Pickard [ph] levels. BW LPG's overall VLGC Fleet performance has been better than the Baltic Index by 29% for the first half of 2018. This has been mainly due to a capture of long haul cargos from the West in the second half of the quarter and then improved these markets. Improved arbitrage economics and ton mile generation from the U.S. Gulf, exports have improved the economics for the third quarter with the expectation that the worst is behind us. Third quarter to-date the Baltic is now just below 40 metric -- $40 per metric ton and now more than 80% of our spot days are covered for the quarter. If you now turn to slide 4, we review the highlights of the second quarter. We generated net revenue of $61 million based on daily rates of $14,800 for the VLGC segment. The VLGC contract coverage of 15% and total contract coverage of 19% for the quarter. EBITDA came in at $8 million for the quarter netting a loss of $27 million or $0.20 per share. BW Denise was sold and BW Havis was recycled generating additional liquidity of $13 million and a book gain of $2 million. On 29th May BW LPG has proposed to combine with Dorian LPG. Subsequently on 9th of July we increased the exchange ratio from 2.05 to 2.12 and announced our intention to nominate Directors to stand for elections at Dorian's forthcoming Annual General Meeting. On 30 August, 2018 BW LPG entered into contracts to retrofit dual-fuel LPG propulsion engines on four VLGC's including future options. With the world's first LPG fueled engines, BW LPG continues its emphasis on reducing global emissions and promoting a fuel efficient alternative for the shipping industry. I will now turn to slide 5 for an overview of our commercial performance. In the second quarter TCE rates on our VLGC Fleet averaged $14,800 per day including offhire and $15,000 per day excluding offhire. Our VLGC spot earnings came in at $14,600 per day excluding waiting time compared to the Baltic spot index rate of $9,200 per day for the quarter. Fleet availability remains solid at 99% with a commercial utilization at 88% reflecting a 12% waiting time for the available fleet. We strive to make it as clear as possible to you by reporting earnings per day on both calendar day and available days. Available days are simply calendar days less offhire days where the vessels are technically not available. If we were to report our earnings on operating days which excludes offhire and waiting time under the definition of one of our peers, our earnings would increase to $17,000 per operating day. This is however an incomplete measure of performance and peer comparisons as more waiting days translate into higher earnings per day. Let's turn to slide 6, on this slide we want to share with you our VLGC Fleet since 2016 showing how BW LPG consistently has been outperforming the Baltic market index fuel cycle. Our TCR rate based on full calendar days that is including even the days when the vessel's aren't technical offhire which is the strictest measure one can use, outperformed the Baltic market index by 20% in 2016, 38% in 2017, and for the first half of 2018 we are 29% ahead of the market index. This clearly underpins our strong commercial performance. Moving to slide 7, being the best in class relies on more than just strong commercial performance. Our balanced portfolio of what we would like to call new and young vessels shows how we can deliver the lowest cost base in the industry. The chart to the left shows the breakdown of our costs on a professional day basis using the last twelve months financials. This is divided into two vessels categories. Our young vessels are delivered before 2014 and our new vessels are delivered after 2014. The point I would like to make here is that our young vessels have a lower total cost following mainly lower interest costs and lower depreciation that more than outweighs the slight OPEX disadvantage. This makes the overall return profile of these vessels very attractive especially in an improving market. Our own VLGC Fleet has an average age of only 6.9 years. We continue pushing to remain the industry cost leader to having the lowest OPEX per vessel by being the largest VLGC operator in our industry, the lowest G&A cost per vessels which is significantly lower than our peers and the lowest financing cost in our industry backed by a very strong credit profile that allows us to continuously invest in our fleet including green technology OPEX. Now moving to slide 8, we're very pleased to announce that we have signed contracts for the retrofitting of four VLGCs with LPG propeller dual-fuel engines for future options. BW LPG would be the global pioneer in operating next generation hi-tech green ships. With LPG propulsion we will reduce sulfur oxide emissions by up to 97% allowing for full compliance with all current and future sulfur emission requirements. Above and beyond compliance we're proud to move the maritime industry a step towards a cleaner future. We will be the world's first to install LPG propelled dual-fuel engines hence improving our output efficiencies by approximately 11% as compared to compliant fuels. This means that we can capture significant improvements in total fuel voyage, economics, and in addition to saving from reduced fuel consumption and reduced fueling time we buffered from price sensitivity to post 2020 fuel price scenarios offering high lifetime saving prospects. The conversion to LPG propeller dual-fuel engines is a lifecycle operate and a long-term commitment. We expect that the first retrofitting will take place in conjunction with the scheduled dry dockings starting very early 2020. On slide 9 we see the global fleet of VLGC stands at 261 vessels as of 31 July, 2018 after growing by six vessels in first half of the year. The current order book to fleet ratio stands at 14% with three vessels set for delivery in 2018, 22 delivering in 2019, and 12 delivering in 2020. Our VLGC market share is 16% including LPG [ph] and new buildings, our total owned fleet -- old and operated fleet comprises 51 vessels. On slide 10 we provide an overview of seaborne LPG trade in the second quarter of 2018. Global seaborne LPG trade grew by 4% year-on-year in the second quarter mainly due to higher imports into Asia, mainly India, South Korea, and Southeast Asia despite a fall in Chinese and Japanese imports. India had the largest growth in imports up to 35% year-over-year driven by government initiatives that aims to promote the use of LPG while Chinese imports partially impacted by trade tariffs sentiments declined 14% year-over-year. On the export side North American seaborne LPG grew year-over-year by 14% to 8 million tons driven by stronger regional trade as well as an increase in volume to Europe and Southeast Asia. Middle Eastern seaborne LPG exports also grew by 9% to 10.3 million tons primarily driven by stronger Iranian, Qatari, and UAE exports. Now turning to slide 11, here we provide an updated snapshot of EIA's outlook for LPG balances in the U.S. For the second quarter of 2018 U.S. net exports grew year-over-year by 15.5% or approximately 1 million tons to 7.6 million tons driven by stronger U.S. LPG production growth of 9% year-over-year to 21 million tons while inventory levels have also recovered to their five year average. In July 2018 EIA has revised its forecast for the U.S. LPG production upwards to 78 million tons and net exports to 31 million tons implying a production growth of 11.3% and net export growth of 14.4%. By 2019 U.S. LPG production is expected to further [Technical Difficulty] by 0.7% resulting in U.S. net export growth of 16.6% to 36 million tons. With that let me turn over to our CFO, Elaine Ong who will walk you through the financial position and our results.

Thanks Martin. Starting with our income statement on slide 12, our net revenue for the quarter was $61 million compared to $91 million in the same quarter last year. This is mostly due to lower spot rates and smaller fleet size. Charter high expenses for the quarter decreased mainly due to lower hire rates for our charter in vessels. We generated EBITDA of $8 million in the quarter compared to $40 million in the same quarter last year. We reported a net loss of $27 million or $0.20 per share in the quarter. Turning to slide 13, we provide a snapshot of our balance sheet and cash flow position. We continue to maintain our leverage ratio at 55% and we ended the quarter with cash and cash equivalents of $40 million. On slide 14 you'll see our net debt positions at $1.2 billion at the end of the quarter. Total liquidity consisting of available cash and undrawn facilities was $255 million. We currently have five debt facilities and $800 million facility with $316 million outstanding and $215 million of undrawn credit. A $400 million ECA facility with $335 million outstanding. A $221 million ECA facility with $187 million outstanding, a third ECA financing at $290 million with $254 million outstanding. And finally a $150 million term loan with $145 million outstanding. With that I would like to hand it back to Martin to conclude our presentation.

Thank you Elaine. So if you please turn to slide 15 I will summarize our earnings presentation. We netted a loss per share of $0.20 in the quarter on net revenues of $61 million. BW Denise was sold and BW Havis was recycled. Together these generate additional liquidity of $30 million and a book gain of $2 million. We propose to combine with Dorian LPG in an all stock transaction and an exchange ratio of 2.05 and later to 2.12. On 19th of July we filed a preliminary proxy statement with the SEC relating to our proposal to nominate three independent directors at Dorian LPG's Annual General Meeting. On 30 August, 2018 BW LPG has entered into contracts to retrofit dual-fuel LPG propulsion engines on four VLGC's including future options. With the world's first LPG fuel engines BW LPG continues its emphasis on reducing global emissions and promoting a fuel efficient alternative for the shipping industry. Looking ahead we expect total contract coverage of 15% for the remainder of the year. While there has been a recent uptick in freight rates, our short-term outlook remains cautious as we enter the second half of the year due to the last fleets supply growth, unfavorable geographical LPG price spreads, and high VLGC utilization of the Panama Canal and global geopolitical tensions. As winter approaches we expect further rebuilding of U.S. LPG inventories and we maintain our view that sustained U.S. LPG production growth and no further fleet supply growth is the key to reopening global price spreads and a rebound in freight levels. Looking forward the following factors should help rebalance the VLGC market including continued U.S. export growth, new wave of PDH facilities, and expansion of existing plants in Asia as well as a healthy growth in Asian retail demand. With that we would like to open up the call for questions.

Thank you Martin. [Operator Instructions]. Our first question comes from Peder from Fearnley Securities. Your line is now open. Please go ahead.

Hi guys, just two quick questions for me. First of all on the contract book, obviously there hasn’t been much happening on that scene for the past year but with rates now above cash breakeven levels do you have any indications or are there more interest out there now and can you potentially give some indications at what levels you would be interested in concluding business at?

Hi Peder, good to hear from you and thanks for calling in. Yes, you're absolutely right that there has been an increase in freight levels and as you said yourself current spot rates are above breakeven or at least our breakeven. And I think that's however where the spot market is right now. I think there's still a bit of a bid ask spreads between what we want and what the charters are willing to pay. But we are seeing that narrowing and has been stumped period charters entered here over the last six months but those rates have been I would say in the high teens. And we probably feel we need a little bit more for that to become interesting given our outlook.

Okay, thanks and just on the order book and looking at the order book next year there's a bit more vessels coming in and there's quite a bit of trade or controlled tonnage, do you think that will affect the market differently than if those vessels are owned by just the traditional owner operators?

Well, I mean for sure there's trader controlled tonnage but the fleet is also much larger than it was in the past. So, of course sometimes we see that trader relets are diving in a little bit more aggressively than traditional owner operators. But it has to be an open and live market so we're not very nervous about that.

Okay, thanks, that's all for me.

Thank you Peder.

[Operator Instructions]. The next question comes from Anders from Danske Bank. Your line is now open. Please go ahead.

Hi, this is Anders. Quick question on CAPEX on the Amgen [ph] modification or on the retrofit second, can you elaborate a bit more on your pre delivery schedule for chartering ships and did it deliver one this quarter, is that correct?

Hi Anders, good to hear from you and thanks for calling in. I think we like to hold the cards a little bit towards our chest in terms of the CAPEX commitments but I think I have previously been out saying numbers in the range of $79 million for the complete retrofit of the engine and of course that involves everything from the engine upgrade it sells, from the gas supply systems to tanks, etc.

Okay, on the redelivery of the ships, are you planning to redeliver chartering ships?

Well I think we're not disclosing in detail when our ships trail off, but on page 19 you can see exactly what ships are -- when they come on and off up until 2021. So there you can see the details of entries and exits on the fleet.

Okay.

So the two ships that left the fleet was Denise and Havis during the quarter and then Berge Ningbo is coming here in the third quarter.

Alright, thank you.

Thank you. Your next question comes from Lukas from ABG, your line is now open. Please go ahead.

Thank you. Good afternoon Martin and Elaine. Martin you seem still a bit cautious on the near-term market outlook even though we have seen their rates popping up. Can you see -- can you talk about little bit what you see in the market right now and what do you think we are going to have a seasonally weaker Q4 which used to be the case until two years ago or how are things shaping up?

I think it is difficult to be much more specific than I just was in the call. But I mean we are -- I would say we are more positive than we have been and as I also said we think the worst is behind us and that's probably as close I will come in terms of guiding.

And looking into 2019 then, and the delivery schedule that we are facing there, you say the worst is behind us, that means you seem to be a bit more optimistic on that being absorbed without hitting the earnings the same way it did this year, is that how we should interpret it or…?

Yeah, I mean the order book is still out there and we are still -- we're coming through a quarter with depressed levels so it's difficult to be super optimistic. I mean we're definitely seeing the -- we're seeing supply demand balancing out when we look ahead at least to more normalized levels and that gives us some fair amount of optimism when looking ahead. But, we don't want to be too forward leaning on this year. There is still -- we certainly don't need any additional supply growth and we mentioned also a number of factors which creates some concern out there with of course the demand picture especially in Asia is very promising looking ahead.

Okay, and given the demolitions that we have seen so far this year, have you sort of have any -- do you have any updated thoughts on that, has the pool of potential demolition combinations may be increased a little bit going forward, what do you think?

I don't think we have changed our view very much on that. We hope that stable orders will be prudent and disciplined. And we definitely as I've also said I think the 2020 regulations are factors that people -- that will make ship owners think twice before conducting life extension surveys for older ships. So of course if you're faced with the ballast [ph] water treatment system upgrade and potentially increase fuel costs post 2020 maybe that's the time to say goodbye to your older ships.

Alright, thank you.

Thank you very much.

Thank you. Your next question -- sorry, we have to have one more question on the audio sir, it is from Lars [ph] who is from Arctic Securities. Please go ahead. Lars, your line is now open. Please go ahead. If you can hear me, your line is now open, please ask your question. As we're not hearing any response I believe we have a question on the web. Please go ahead sir.

Okay, there's a question from Maurice Lee [ph] and he's asking what is the cost of retrofitting LPG propulsion per vessel. I think Martin answered that earlier. He also asked what is the LPG consumption per day on a latent VLGC at normal speed?

Thanks for that question and your interest Maurice. I think we can give you some detailed assumptions for remodeling afterwards but as we said mentioning there is 11% more efficiency in an LPG burning engine than compared to a normal fuel. So I think that would be the number I would use in the model. And then you need to put in whatever you expect the price spread or the prices will be on LPG propane versus combined fuel. So I think that covers that question. Is there any more online.

There's no more questions on the webcast.

Okay, any more questions on the audio cast.

There are no more questions in queue sir.

Alright, well thank you everybody for dialing in and your attention to our quarterly release.