BW LPG Limited (BWLP) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to BW LPG's Second Quarter 2020 Financial Results Presentation. We will begin shortly. You will be brought through the presentation by BW LPG CEO, Mr. Anders Onarheim; CFO, Elaine Ong; and EVP, Commercial, Niels Rigault. 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 unknown and -- 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 CEO, Mr. Anders Onarheim. Please go ahead sir.

Thank you. And welcome to the presentation of our results for the second quarter 2020. As you heard, I'm here joined by our CFO, Elaine Ong, and our EVP, Commercial, Niels Rigault. We appreciate your interest and we'll take questions at the end of the call. Let me start by saying that I'm very pleased with our 2Q results, particularly when we take into account the circumstances, both the COVID-19 and oil price disruptions that put our entire organization to the test, both at land and at sea. Crew changes became a huge challenge, inspections were almost impossible to conduct, and the volatility in the market made it very difficult for commercial team, in addition to added work challenge of working from home, of course. I'm therefore very proud to lead such a competent and agile team. So, if you go through the presentation, please go to this slide four, the highlights. TCE rates on our VLGC fleet averaged 39,100 per day; this was generated net profit after-tax of $62 million, earnings per share of $0.45. With our continued strong financial performance in the second quarter, we have now achieved the year-to-date return on equity of 24%. We have generated $300 million of free cash flow. We're also pleased to announce that we continue to return cash to our shareholders. The Board has declared a Q2 cash dividend of $0.15 per share amounted to $21 million. With this dividend, we have year-to-date paid $0.35, which is about 34% for the $1.03 in earnings per share that we had first half. Our dividend policy remains to target a payout ratio of 50% on an annual basis. However, since we pay on a quarterly basis, the Board has found it prudent to payout less than 50% for the first quarter. This, of course, leaves room for some upside in the last two quarters. BW LPG, we are retrofitting the world's first LPG dual-fuel engines on the BW Gemini and the BW Leo and with this clearly taking the lead and advancing technology towards zero carbon fuel propulsion. You can see the picture, the deck tanks ready for installation at the yard on the left side, so huge, huge tanks. We continue to be fully committed through our 12 dual-fuel engine conversions given the substantial environmental benefits that this gives us. DNV has confirmed that installing new technology on existing vessels generate 97% less carbon emissions than the construction of a new vessel. This means that building new vessels with LGP propulsion is hard to justify from an environmental perspective when you can actually convert and we hope that the industry will follow our lead and upgrade their fleets rather than build it. We also hope that our customers will see and take advantage of this benefit when tendering for their longer term chartering needs. Finally, we have also started to collaborate with Hafina, our affiliate company on bunker procurement. Hafina supports bunkering of over 450 ships, so they are a major player, bringing economic -- economies of scale and best-in-class bunkering logistics to our firm. As we also previously announced, we have concluded the sale and delivery of Berge Summit through a new owner for further trading. The sale has generated $9 million in liquidity and net gain of $4 million. The successful completion of that transaction I think demonstrates our asset management strategy. We'll continue to evaluate for investment and divestment and the quarters ahead. We now own and operate a fleet of 46 modern VLGCs with an average of 8.7 years. Turning to page five, let me then review the key financials of the quarter. So, in the second quarter, we positioned our fleet to capture the strong market in the first half of the quarter and protect ourselves with increased time charter coverage when the market hit bottom at the end of June. With a strong commercial and operational performance, we achieved the daily rate as mentioned of 39,100 for the VLGC segment. This allows us to continue generate strong return for shareholders with return on capital employed of 12% and return on equity on 21% for the quarter. The annualized earnings yield measured as EPS divided by our share price at quarter was 58%. Our net leverage ratio decreased from 58% in the second quarter of last year to 46% in the second quarter this year. This is the level we are very comfortable with. Once again, we have returned cash to shareholders at the same time, significantly paid down our debt to a comfortable level. Our EVP, Commercial Niels Rigault now will take you through the market review and commercial update. Niels?

Thank you, Anders. Let me start with a summary of the VLGC market and outlook. We are currently witnessing a strong V-shaped recovery in the VLGC market. At the start of Q2, we had freight rates around $50,000 per day, but it declined sharply down to $10,000 at the end of the second quarter. Now, in the middle of the third quarter, the sea freight rates have recovered to level we'll have so at the beginning of Q2. Looking forward into Q3, LPG production and export out of the U.S. are holding up well with the export at similar level to 2019. And inventory is still well above the five years average. LPG export out of the Middle East are up 17% [ph] or about 11 cargoes in August compared to the average export level from May to July. This as a result of OPEC gradually reducing their production costs. For the medium term meaning Q4 and 2021, freight rates are also supported by inefficiencies from bunkering delays, crew changes, and heavy drydock schedule. In 2021, we expect that over 20% of the fleets will be drydocked. We maintain a cautious view for 2021, but highlight that the recovery to a higher oil and gas price environments would support a more positive outlook. As you can see from slide eight, traded LPG volume fell by 9% in the second quarter, but we have seen recovery in import demand in both Asia and Europe in the third quarter. The positive news in Q2 on the demand side is that China is back and have started to import LPG from the U.S. again. Last time was in 2018. On slide nine, you will EIA short-term energy outlook released in August. They still anticipate a growth in the U.S. LPG export by 13% in 2020, but expects net exports to decline by 10% in 2021, up from their April update, which was expected an 11% decline. The forecast is based on the WTI price of $40 for 2021. On the next two slides, we want to give you a better understanding of the LPG demand drivers. Global LPG demand is about three times larger than the seaborne LPG trade. The LPG domestic production in Asia is not able to meet the rapid growth demand. Retail is the largest sector for the total LPG demand, consuming about half of all the produced LPG. A 2.1% compound annual growth that we have seen historically would equate to roughly 3 million tonnes of LPG additional demand per year, or roughly eight additional VLGCs a year. In addition to retail, LPG demand is also driven by the chemical and refinery sector. On slide 11, we saw that demand for LPG in China is driven as much by chemicals and refineries. In China alone, over seven PGAs [ph] projects are in the constructions and scheduled to come on stream from 2020 to 2023. The total propane requirement for these are estimated to be over 4 million tonnes per year. Turning to slide 12, the new building order books now stack [ph] up 11% of the current fleet with two new confirmed orders since our Q1 earnings release. 60% of the order book is LPG propulsion. However, there are no reason to order new ships to make the fleet more efficient. More than 150 existing ships can be retrofitted. From an environmental standpoint, newbuilds do not justify the CO2 savings with a CO2 payback period of over 15 years, contract retrofits of only six months. Think reuse. Turning to slide 14, Q2 was the quarter COVID-19 hit the VLGC sector. Total seaborne LPG trade decreased 9% year-on-year, mainly driven by decreased exports from the Middle East. OPEC+ started the historic production cuts in May, as such, LPG export from the Middle East dropped by 12%. Anticipating less cargoes out of the region, with additional vessels toward the U.S. and fixed only 10% of our fixture in the Middle East. U.S. export remains strong with volumes transported by VLGCs up 7% from the same period last year despite oil production reduction. The WTI oil price went negative in April disrupting VLGC trade. During this period, public services demonstrated its capabilities in supporting shipping performance by improving our commercial utilization. European import demand came to a complete halt due to lockdown measures. However, this was part offset by the increases in India and Brazil where the sudden increase in import caused delays and [Indiscernible] port as many ships were stuck for weeks. The decreasing import demand resulted in an oversupply of fleets in the market and freight rates started to drop. We reduced the fleet capacity by slow steaming and tailing the longer route to the Cape of Good Hope instead of via the Panama Canal. The collapse in VLGC freight rates at the end of June will impact our Q3 performance. For Q3, we have fixed about 80% of our fleet wide available days at an average rate of about 27,000 per day basis discharge-to-discharge. However, the current strong rate environment will most likely translate to a higher earnings in Q4 making the third quarter a weaker quarter this year. Slide 15 shows strong performance this quarter was driven by a high utilization in combination with the well-positioned fleet that allow us to capture the strong spot market in the quarter. Turning to slide 16, in the second quarter before the rates collapse, we increased our time charter coverage from 16% to 25% for 2020 from 5% to 14% for 2021. We have now covered our TCE in exposure for 2021 at the profits of $2 million. With that, I will hand back to Anders, who will share some technical highlights. Thank you.

Thank you, Niels. As mentioned, we continue to deliver a strong technical and operational performance in the quarter despite the challenges on the market due to COVID-19. Our planned drydocks and retrofittings remain largely on track and our final scrubber installation is scheduled for October this year. The retrofitting of BW Gemini and BW Leo with LPG dual-fuel engines are commenced in August. Once completed, they'll be the first vessels on water with this pioneering technology; we could pave the way for Ammonia propulsion and zero carbon emissions down the road. I previously said that these conversions make sense both from financial and environmental perspective. This is still the case. The forest spread is still attractive and we expect significant bunker savings with our retrofitted ships. Crew changes remain challenging, though we managed this well with contract overrun on declining trend. We have completed about 900 crew movements year-to-date, however, still 47 crew members are over three months delayed and 55 members are less than three months delayed for their crew change. With that, let me turn over to our CFO, Elaine Ong, who will take -- walk you through the financial position and results. Elaine?

Thanks Anders. Here on page 20 is an overview of our income statement. Our TCE income was $149 million for the quarter and $311 million for the first half of this year. This is driven mainly by the strong TCE rates and a high fleet utilization of 97%. Included in our TCE income for the quarter is a positive $17 million relating to the effects of IFRS 15 on revenue where since 1st of January 2018, spot voyages that straddle the quarter and have to be accounted for on a low to discharge basis. With rates picking up as we near the end of the third quarter, we expect IFRS 15 to have the opposite effect on our reported numbers for Q3. Vessel operating expenses came in at $7,100 per day for the quarter and $7,400 per day for the first half of the year. This is roughly in line with our expected run rate for this year. Time charter high expense relates to one vessel with a charter period of less than 12 months. EBITDA came in at $113 million for the quarter and put on $239 million for the first half of the year, representing an EBITDA margin of 77%. As previously highlighted, with effect from 1st of January 2020, we revised our vessels useful life from 30 years to 25 years. The impact is an increase in depreciation of approximately $6 million per quarter. We also recognized a $4 million impairment charge on two time charter in contracts this quarter. This is because their contracted rates were higher than forecasted earnings over the remaining lease periods. Profit after-tax this quarter was $62 million or $0.45 per share. For the first half of 2020, our profit after-tax was $143 million or $1.03 per share, yielding an annualized return on equity of 24%. The fair value changes this quarter include an approximate $2 million loss on our interest rate hedges and $3 million gain on our forward freight agreements and bunker hedges. These mark-to-market changes are deferred in equity, bringing our total comprehensive income for this quarter to just over $1 million. Turning to page 21, we provide a snapshot of our balance sheet and cash flow statement. Our vessels book values supported by broker valuations stood at $1.8 billion at the end of the quarter. Shareholders' equity was $1.2 billion or $8.39 per share. During the quarter, we generated $113 million of net cash from our operating activities and ended the quarter with $83 million of cash. Our $300 million revolving credit facility remains undrawn, giving us just under $400 million of available liquidity at quarter end. Turning to page 22, the strong cash flows generated over the last 12 months with minimal capital expenditures over the same period have allowed us to pay down debt, thereby reducing our leverage. Our net leverage ratio decreased by 12% over the last 12 months from 58% at the end of Q2 2019 to 46% at the end of this quarter. This is even after paying out $145 million in dividends for both 2019 and Q1 2020. This is made possible by a low operating cash breakeven of $20,500 per day for our own fleet and $21,600 per day when we include the time charter in vessels. Our all-in cash breakeven level for 2020 is $23,700 per day, which is the average TCE needed in 2020 to cover all our cash costs, including drydockings and the equity portion of our CapEx upgrade. Page 23 provides an overview of our liquidity and debt position. Our net debt position at the end of the quarter was $1.1 billion. Of this, only $13 million relates to our trade finance facilities for our cargo trading business and $215 million relates to lease liabilities under IFRS 16 on leases. The remaining $887 million in debt outstanding relates to our five term loans. We have no major balloon payments due in the next five years and only a small balloon payment of $47 million due in 2023 relating to our $150 million term loan. In May this year, we secured financing for the retrofitting of five dual-fuel LPG propulsion engines. The existing $400 million facility at LIBOR plus 170 bps was increased by $38 million with all other terms unchanged. That gives us a bank financing that covers over 80% of our expected CapEx on these five vessels. With this, I'd like to hand the time back to Anders to conclude our presentation.

Thank you, Elaine. Could then just turn to page 25, while summarize our earnings presentation. I'd say despite the challenges related to the COVID-19, we delivered another strong quarter both commercially and operationally and generate earnings per share $0.45 per share in the quarter and net profit after-tax of $62 million. On the back of our strong earnings and taking into account our balance sheet, liquidity, CapEx, and a cautious market outlook, the Board has declared a cash dividend for the second quarter of $0.15 per share, amounting to $21 million. Combined with $0.20 dividend paid for Q1 2020, the dividend is 34% of year-to-date net profits. And at the share price this morning, this gives an annual dividend yield of about 25%. In fact, since our listing in 2013, our dividend policy has remained unchanged with the target payout ratio 50% of annual net profit after-tax. With the dividend announced today, we have since our IPO declared 63% accumulate earnings as dividends. We are very excited and proud to have the first LPG dual-fuel vessels soon ready for operations. I believe this clearly demonstrates our ESG [ph] commitment as a company. It's not enough to have a nice glossy paper with text only in the annual report, actions speak louder than words. Finally, I would like to provide a summary of our outlook on the VLGC market. Although the rate freight rates collapsed at the end of May, the market has shown a strong recovery towards the end of July. The rate has increased to around $50,000 per day, the level last seen in early May. Freight rate recovery is supported by recovering LPG exports, firm import demand from Europe and Asia, and significant reductions in fleet supply due to slow steaming of vessels and longer voyage routes from U.S. to Asia like Cape of Good Hope. In the medium term, we see downward pressure on U.S. LPG supply following lower oil prices and a meaningful newbuild order book. This is partly offset by heavy drydock schedule with over 40% of global fleet going to yards by end 2021 and recovering in Middle East LPG production, as OPEC oil production gradually returns to pre-cut levels. Again, we are conservative, but we also think there are uncertainties out there. So, we will stick to this view and but of course, we will maneuver as good as we can through what we think will be exciting, but challenging times. So, with that, I'd like to thank you and like to open up the call for questions.

Thank you, sir. Ladies and gentlemen, we will begin our question-and-answer session. [Operator Instructions] We have the first question from the telephone line from the line of Anders Karlsen. Please ask your question.

Yes hello. Congrats on good results. This is Anders from Danske Bank. Question for you Niels, what are you seeing in the U.S. right now in terms of exports because I mean, EIA has been fairly conservative in approach towards 2021 analysis. That's part of what you're alluding to -- and you're saying that 2021 might be challenging, but can you give us some data [ph] on what is happening in the U.S. right now?

Yes, I mean EIA has been very conservative and as also as I mentioned during the presentation, the base WTI price, they using is $40. And right now, it's more like $44. And we are also surprised that how many cargoes actually came out and are coming out right now. We also see that the rich gas areas are also pumping a lot of LPG. So, things are going great and I would say that more cargoes coming out but yes, we are anticipating a reduction next year. But we'll see if the prices continue to go up, then we probably see an increase.

Okay. And then if you look to take additional cover, what levels could you -- is already demand out there and what levels can you say fix [Indiscernible]?

Yes, there are demand and right now, I would say that it's around $20,000, $28,000 per day.

Okay. Thank you.

We have the next question from the line of Lukas Daul from ABG. Please ask your question.

Thank you. Good afternoon ladies and gentlemen. I was wondering if you flip to page 18 in your slide deck, if you could help us to reconcile the capital expenditures that you are sort of putting in place in your retrofit program. Because it says that you have spent so far $31 million on it. And that's not something we are able to reconcile with your official statement. So, maybe if you could help us with that?

Elaine ready to take [ph]?

Sorry, sorry, Lukas, I didn't realize I was on mute. Thanks Lukas for your question. Basically, the $31 million is the expected expenditures for the retrofit this year which we have financed, the four ships that will be, so it hasn't been entirely spent, so to speak.

Okay, okay. So, that's something that will still sort of be paid out throughout the course of the year.

That's correct.

Okay, okay. Okay. That makes sense. And then a couple of other things. You mentioned that one of the measures you have taken to sort of offset the market. weakness was a slow steaming and I guess from some of your environmental KPIs in the appendix, we could say that but could you just ballpark sort of give us a figure of the average speed in the second quarter compared to the quarter before a year ago?

You have those numbers Niels?

No, I don't have those numbers. The only thing I would say is that in Q2, we started to slow steam towards the end of Q2 when the market started to drop. So, around mid-May, June.

Okay. Okay. And then Elaine, I mean, you've been sort of having a very good OpEx numbers so far this year, but I was wondering whether there's kind of an impact of the of the COVID-19 situation where maybe some of the stuff on the maintenance side, et cetera needs to be sort of postponed. Is that the right assumption or is this sort of level, something we should anticipate you to deliver going forward?

Lukas, I think I mentioned earlier in the script that the levels that we're seeing for the first half of 2020 will be indicative of the run rate for the rest of this year.

Okay. And then

So, I think -- that will be quite close.

Okay, fair enough. And you mentioned sort of the positive impact you've got on your TC in the second quarter, I guess it was around $17 million. And that's going to reverse in the third, is it going to fully reverse or partially or how should we think about that?

Well, I think it probably is going to partially reverse. It really depends -- I don't have the crystal ball at quarter end Q3 yet at this point in terms of where the positioning of the vessels are and what we would estimate as an accrual. But suffice to say that the $17 million that we saw at the end of the quarter -- that we reported will reverse early in Q3, and then we will pick up some form of offset. So, I would say it should partially reverse at the least. And it also depends on how far along the freight rates improve compared to where we began, which is fairly low levels at the end of Q2.

Okay. And then just finally, I mean, there have been a couple of secondhand sales in the recent months and I would say that maybe the realized prices came in higher than what people would have anticipated. So, my question is, what is that 02 [ph] and do you see sort of potential for doing more similar transactions?

I can start Niels, then you can follow-up. I think we continue to evaluate our fleet and to see at one point is the right time to start renewing more. I think we are comfortable with the value we're seeing and I think we -- so, we will evaluate, but now our focus really is on renewing the part of our fleet where we're we are retrofitting. So, -- but again, we will continue to look at this and we have many discussions internally and we have seen that there is some -- there are inquiries out there. Of course one of the big challenges has been now this -- these past several months is that even though you can agree on something, getting bulk inspectors on boards and just getting the details done, it's very difficult. Even though so -- it's -- generally sales and then completion takes much longer.

Okay. Thank you very much and have a nice day.

[Operator Instructions] There are no questions on the telephone lines at the moment.

Let's take question from the webcast. So this is from Petter Haugen from Kepler. He asks what's the actual cost of retrofitting at the OGC? And what the main cost elements are including fire?

I can start. I think the costs -- we did discuss before they are somewhere between $9 million and $10 million, that's the actual costs of retrofitting. And so that CapEx it's split pretty much equipment, it's about $6.5 million, and -- engineering about $0.2 million, DR [ph] cost is about $1.5 million, and then there's also a built in some contingency. So, -- and how many extra days? We have said that in total we expect to the retrofitting to take approximately between 50 and 60 days.

Okay, he also has a follow-up question, which is what does it take to convert from LPG to ammonia and what is the expected cost of that?

Yes, I think, of course, this is the question. We have certainly seen -- we had a firm belief that it is not going to take a big investment or big adjustment to go from the LPG propulsion to ammonia. So, but the cost is still too early. [Indiscernible] still working on this and we haven't closed dialogue with them, but it's still too early, I think to give any concrete numbers. But again, this -- I'm being told by our clever engineers that this will not be a big investment.

Okay, I think there's no further questions on the webcast.

We have a question on the telephone line, sir. Would you like to proceed?

Yes, let's go ahead and take question from the telephone line.

Thank you, sir. We have a question from the line of Eirik Haavaldsen. Please ask your question.

Yes. Hi. So, -- sorry about that. Just wanted to double check your Q3 guidance when you say 80% of them although stay at 27 that's just -- your Q3 guidance refers only to spot days, right?

It's fleet wide.

So, including time charters?

Yes.

Can you also then make -- elaborate a little bit on where you've been booking ships for the past two, three weeks?

Well, the market has really recovered as a V-shaped. In June, it was down to $8,000 to $10,000 per day. And in August, we're talking slightly above $50,000. So, -- and the market moved up in just -- from $10,000 to $40,000 plus in two weeks. So, it's --

Okay. Thank you. Thank you for that.

[Operator Instructions]

Yes, I'm sorry. So, well, it sounds like there are no more questions down here. So, if that's the case, I would just like to thank everybody for joining us for the call and have a good day.

Thank you, sir. Ladies and gentlemen, we have come to the end of today's presentation. Thank you for attending BW LPG second quarter 2020 financial results presentation. More information on BW LPG is available online at www.bwlpg.com. Good bye.