BW LPG Ltd (BWLP) 2014 Q4 法說會逐字稿

Hello and welcome to the BW LPG's Fourth Quarter 2014 Financial Report Presentation. We will begin shortly. You will be brought through the presentation by Nicholas Gleeson, CEO, and Vijay Kamath, CFO of BW LPG.

We're happy to take any questions after the presentation. (Operator Instructions) We will begin the presentation now.

Welcome, everyone, to the presentation of BW LPG's results for the fourth quarter of 2014, which is the financial period ending 31st of December. Apologies for the slightly delayed start, but we had a lot of people trying to join the call and we wanted to make sure everyone had the opportunity. As always, we very much appreciate your interest in our results and encourage your queries at the end.

The second slide includes important information on the preparation and use of these results. This slide will be available on our website. The third slide contains the itemized agenda for today's presentation and is mainly provided as a quick access reference to view the various sections within the presentation.

So let's move to slide 4. Q4 2014 poses the strongest annual financial performance ever achieved in the 35-plus-year history of BW's transportation of LPG. On the back of this, the board has decided to recommend to the AGM a dividend payout of 100% of impact for the second half 2014. This would indicate a yield of not far below 30% for the whole of 2014 basis the 31 December share price and foreign exchange rate.

We continue to operate the most substantial fleet of large and very large gas carriers on a listed platform which continues to grow with the addition of newbuilds: One was delivered in November; three more due by the end of April. And in fact, we've just completed the ship-naming for these three earlier this week in Korea. These next three deliveries are well on schedule, also on cost and meeting technical expectations.

We've delivered 98% utilization in Q4, which is driven by the strength of technical management operations and commercial relationships. We continue to be the LPG transport provider of choice to oil majors and to leading trading houses.

The leverage ratio of 33% at year end indicates that we're financially stable and well positioned to meet existing capital commitments as well as nearly emerging investment opportunities. Our newbuild program has been supported with an export credit-backed financing at LIBOR plus 170 basis points.

We're very proud of our achievements in Q4 2014, which include TCE earnings of almost $140 million, EBITDA of $88 million, and net profit of $65 million which translates to an annual profit of $256 million, double that of 2013.

Given continued significant cash generation, the board will recommend a 100% NPAT payout for the second half of 2014, which translates to an annualized dividend yield of over 27% basis the 31 December share price.

On slide 6, we review subsequent events, which include the $400 million financing, which Vijay will elaborate on separately, and the board recommendation for 100% NPAR payout of dividend to be presented to the AGM on the 19th of May this year.

On slide 7 to 9, a look at the market. The LPG export market, and in particular, long-haul exports using VLGCs, continues to develop strongly, which is reflected in the historically high January and February spot rate environment that we've seen so far this year continuing today.

Slide 7 illustrates the growth and supply of natural gas liquids from the U.S. As you can see, the degree of growth has been substantial with the U.S. becoming the world's single largest exporting nation in 2014. And importantly, the growth trend continues.

Slide 8 shows that export outlook remains very positive and continues to support these expectations of a tight shipping market through 2015 with continuing investments in export terminal capacity to meet anticipated LPG supply. So importantly, we also see midstream continuing to invest in this growing market.

Slide 9 highlights that demand remains robust supporting export growth and driven in particular by volumes to the Far East which, of course, we like because it means larger ton miles, longer distances.

On slide 10, you'll see that BW LPG's fleet expansion continues, which I've already addressed. But importantly, it's on target, on time, cost and technical specification.

Slide 11 shows that the fleet order book has moved very little since we presented the Q3 2014 results which is good news, allowing the export market growth the opportunity to catch up with the additional tonnage which is coming in late 2015 and 2016. You should note that this slide does not include the growth that we can potentially achieve through exercising purchase options on the expiry of charter-in. At this stage, it seems likely that the economics of those purchase options would be positive in most cases so you would expect to see us exercise those.

Let me hand over now to Vijay to go through the financial results.

Thanks, Nick. Indeed, this has been an absolutely exceptional year. Before I start on the numbers, I'd like to note the increase and consistency across the analyst community. It certainly feels that there is better alignment and understanding of our business model reflected in the relative accuracy of most projections.

Our TCE income for the quarter was up $138.7 million compared to $101.7 million in Q4 2013. This increase was driven by fleet growth and higher average rates across contract types.

Operating expenses are similar to Q4 2014 as against that for Q4 2013; after adjusting for delivery cost related to the Maersk fleet acquisition in Q4 2013. EBITDA of $87.9 million in the quarter is 92% higher than the $45.8 million achieved in Q4 2013. No impairment drive-back has been carried out in Q4 2014 as market values continued improving.

In Q4 2013, we rolled back $9 million. Higher interest costs in 2014 are due to external financing since IPO date. Net profit for the quarter is $65 million compared with $35.9 million of Q4 2013. This aggregates across the quarters to an annual profit after tax of $256 million, more than double that achieved in 2013.

EBITDA continues to trend very positively with average achieve rates of $44,000 per day in 2014 and high utilization throughout the year. The balance sheet is strong with a leverage ratio of 33%.

I'm particularly proud of the financing we have arranged from KEXIM, DNB and SEB of up to $400 million for financing seven newbuildings of the company. The terms highlight the strength of our lender relationships and our finance ability, as well as fortifies the company for future growth.

When we look at the cost of our debt, it is a very important indicator as to the quality of our business with the combination of over 35 years of successful continued operations through market cycles. But frankly, most of the best counterparties in the industry has chartered us, a portfolio with secured income in both stronger and softer markets, and the fleet maintained to hike safety and quality standards over so many years. It is clear to see why the lenders in the market differentiate so substantially on pricing amongst borrowers.

Operating cash flow in the quarter was $87 million compared to $46 million in Q4 2013. Investment cash flows are predominantly installment payments in new business. Net cash at the level as of December 31, 2014 was $70.2 million. Net debt at December 31, 2014 was approximately $460 million. Available cash in undrawn facilities were $195 million.

The balance sheet remains strong with low leverage. Combination of strong cash flows and low leverage set the backdrop for the dividend payout at 100% of impact.

With this, I'll hand you back to Nick to conclude the presentation.

Thanks, Vijay. Thanks very much. Since late last year, we've seen a rapid decrease in oil prices, and this has led to a degree of concern as to the impact on expert potential for LPG. In fact, if you review producer estimates for capital investment and production, we see an interesting trend which underpins our continued firm belief in export markets and therefore in shipping.

The rig count forecast is reducing. However, the production forecast is increasing. Terminal and pipeline investments for NGLs continue. This is because, A, there's a significant excess of NGLs in the U.S. available for export to a growing global demand market; and, B, because rig productivity is increasing so that production growth is able to be maintained with fewer rigs. We also see a recent shift towards high grading which is moving toward higher profitability and lower cost [fields] which indicates a shift towards higher NGL producing plays.

Taking to consideration also the countries which have higher marginal cost of production of oil are producing, on average, far lower NGLs than the U.S. type oil and shale gas. And that indicates that as these fields stop producing and the oil comes from the U.S., we're going to see more NGLs produced. Therefore lower oil prices have not been as impactful on NGL production as some have anticipated and the outlook remains solid.

We continue to feel that the NGL demand side of the picture remains a critical watch point to ensure that export growth continues. And the good news is that the demand side has demonstrated continued strong appetite for LPG on both retail and industrial consumption with new markets developing and existing markets continuing to grow at higher edge.

Supply, demand, and infrastructure build-out specific to LPG continues to grow on all fronts. So on all levels of the equation, we see the market continuing to perform at or above the levels on which we've based our modeling so far. We feel very confident about the picture for 2015 and beyond.

A simple data point to demonstrate the continued strength of exports and shipping. Q1 2015 has so far been the historic strongest chartering market for this time of the year. And we're still operating at above $100 a metric ton, and we're still in the traditionally soft season for the market. The outlook for the traditionally tight shipping availability and strong rates in April and beyond would suggest another exceptional market in 2015.

As a result, our strategic intent remains firm. We plan to maximize utilization for profit optimization throughout the cycle. We've continued market leadership in larger assets and through high quality service delivery to blue chip charterers. The strength of our balance sheet is demonstrated by the pricing available to us on major financings. If you look at the financing that Vijay's team has been able to achieve with KEXIM out of Korea, this is really an exceptional rate and it just demonstrates how much confidence there is in our business model.

Our carefully balanced contract portfolio balancing fixed income with spot to benefit from immediate market strength without creating excessive exposure to interim down cycles, creates platform stability suitable to a long term cyclical market. This is a platform, which is suitable for growth in market dips as well as cash delivery in peaks to benefit long-term from the anticipated continued growth in NGL exports.

We're extremely happy with the profits we've delivered in 2014. And then our Board is recommending to share these profits with our investors delivering substantial yield on this occasion due to these exceptional results. We're working hard to replicate this in 2015.

This concludes our results update for the fourth quarter of 2014. I'd like to open the line now to questions.

We will begin our Q&A section now. (Operator Instructions) We will take questions from the conference call first.

Our first question comes from the line of Nicolay Dyvik from DNB. Your line is open. Please go ahead.

Good morning. It's Nicolay from DNB speaking. Could you comment, Nick, a bit on slide number 8 on the difference between the terminal capacity expansion and your projections for U.S. LPG exports which seems, at least from what I can see on the slide, relatively flat '15 over '14?

Yes. Thanks very much, Nicolay. I think it's a good point. You see a lot of different views in the market. And basically what we see is -- as the extra or the additional export terminal capacity is coming online, we make an assumption that it won't be fully utilized.

The main difference in the way we look at the market versus others is that we feel that demand is likely to the limiting factor. And at certain points, the growth and export capacity is so high that we feel that will take demand market some period of time to catch up.

Now in fact, what we're actually seeing is that demand has been quite quick to catch up with the availability of propane with relatively inexpensive propane. So there's certainly some upside in that model. But that's really the difference you see between the two chances that we're assuming that export terminal capacity isn't running at 100%. Immediately it comes online once we get to mid-2015 and beyond into 2016. We assume that it takes a little bit of time for demand to catch up.

Of course, if you look at the proportion of committed exports from terminals in the U.S., there's reason to believe that export terminal capacity is certainly 75%, 80% at the minimum and continues to push upwards. But we're working more of that minimalist view rather than assuming full utilization 100% at the time.

Right. And one more question. Very useful with the tables you provide on the capacity and coverage. And from what I calculate, if you look COA fixed [and term shorter is] now about 52% coverage for 2015, and how do you expect that? Is that the level you are comfortable with or should it -- is it like higher one quarter from now? And also some comments on 2016. And finally, if you could explain a bit on your spot performance this quarter which seems somewhat on the low side of this compared to our expectations.

Yes, for sure. So, on the first question, I think 50% coverage that you're seeing me, I'm calculating correctly, is about the right level for us. By the time you move anywhere beyond this level of fixed coverage going forward, it becomes too difficult to managed the COA portfolio. But bear in mind that we have additional vessels coming in to the fleet. So we will have gradually have a higher proportion of exposure to the spot market over time. But still I think this level that you're looking at now feels about right and should remain relatively flat going forward unless we really see exceptional rates in the [time] China market.

In terms of what has happened in the fourth quarter on voyage charter rates, we're definitely not performing at the same level as the rest of the market there. But there are some factors including the [back over wedges] that we had in the beginning of the quarter, where obviously, the revenue is slower to start in Q4. And we didn't see rates coming off during Q4. So the rates that we locked in later in the quarter delivered less in terms of profitability.

On the other hand, that results in a strongest start in the first quarter of 2015. So normally you just see a little bit of timing difference there during the two quarters. But indeed that calculation is correct if you're looking at the Voyage Charter rates at Q4 2014 looking somewhat soft.

There's reason then to believe that it will improve in the first quarter then?

Yes, absolutely.

And one final question. What's the appetite in the industry now for newbuild from sale and purchase perspective? Is it easy like the liquidity? Is it easy to sell a newbuild now at that cost? Or are there any buyers out there? Or how do you comment that?

We're certainly not looking for buyers around newbuilds at the moment. We think we have the right size of program. We still think there's a lot of newbuilds coming into the market through 2016. So we're not actively looking to add to the newbuild fleet right now.

If we went out to the market to sell a prompt delivery newbuild I think there'd be very strong appetite because, in general, I think the expectations for rates during 2015 continue to be pretty strong. So you pay back an exceptional proportion of the investment cost of the asset relatively quickly.

I think by the time you get into 2016 expectations, that rates might be somewhat softer than they are today because of the level of tonnage being delivered, but not dramatically and certainly not below levels which would be likely to be profitable. So there's probably still some appetite out there for trading in newbuilds, but not much of liquidity on the sale side.

Okay. Thank you. That's all for me. Looking forward to the (multiple speakers) --

Sure. Thanks, Nicolay.

Our next question come from the line of [Herman Hildan] from Clarkson Research. Your line is open. Please go ahead.

Hi guys. Good afternoon.

Good afternoon.

Good afternoon. So, at the second dividend payment, we paid out 100% of net profit. And obviously in the presentation you point to a very strong cash flow during the quarter. I was just wondering if you could share some thoughts surrounding how we should think about this in 2015 in different scenarios. I mean the rates that we're seeing in the market now definitely look very strong. Should we expect BW to pay higher than what, call it, the long-term dividend strategy of 50% net profit is during periods of time when the market is outperforming. Could you give a comment on that? Obviously, I understand this is not solely in your hands, but at least you can maybe share some reflection about how you think about it.

Sure. Thanks for the question. I think the dividend policy very much remains 50% of impact subject to financing availability and commitments to capital expenditure. We want to be very careful that we don't dress ourselves up as a yield play which is not what we are. This is a cyclical market. And for a business like this in a cyclical market, when you're delivering very strong cash, and when you're not making significant investments using that cash, it makes sense to return it to shareholders.

Now, that might sound disappointing, why aren't we making significant investments, and the answer is we certainly have the intention. We've got the newbuild program coming, we've got other areas that we certainly are interested in investing in, but we also have relatively low leverage at the moment. So, we feel like with exceptional cash flows in 2014, it made sense to make a very strong payout.

If I was modeling 2015, I would probably start with 50% of impact as a base case looking at the fact that we have a number of newbuilds delivery and looking at the fact that, you know, there are other investments that we need to make to maintain our leadership position eventually. So, we're definitely not targeting to turn ourselves into a 100% impact payout company. It's in relation to the exceptional cash flows that we've had during 2014.

There's a chance for a higher payout ratio in 2015 because so far, the cash flow looks strong. But we need to see how the market performs and what sort of investment opportunities we find during the year.

And also kind of, if you look at the cash flows in hindsight, I mean say that first half of the year is good then say that second-half 2015 is good and then you come into 2016 where obviously there's a quite a few vessel delivery. Would you make that consideration based on how the second half of year was or how the market is based on where you're sitting right here now?

We definitely look forward as well as back. So when we make the decision on dividend policy, which is done of course at the board level, the types of numbers that we produce for their consideration include forward estimates on rates and normally taking a fairly conservative view on that as well as backward looking.

And just on -- you've been buying back some shares as well where you indicated in the market some sort of minimum or maximum level for the buyback if you were continue this post dividend payments that you announced today. How much will you adjust that maximum acquisition price of your stocks relative to the dividend payment?

Yes, it's a good question. And I should have highlight here that in Oslo, the environment here is that when you make a share buyback there's certain information that you're required by the exchange to publish at the time you make your buyback. You don't have to publish a cap, but you do have to publish the number of shares and the total number of dollars that you would invest at a maximum which gives an implied cap.

That means if you have for example a board approval to implement a shared buyback at various levels, you end up signaling a very strange ceiling price if you don't go in and very deliberately announce a ceiling. So that ceiling is not for us, the value beyond which it's not interesting to implement a share buyback. It's simply a function of the reporting requirements on the Oslo Bors.

In terms of buying back shares, how we look at it is, typically we would make any other sort of investment value accretive investment first before buying back shares until it becomes such an exceptional return in our view that spending the money that way makes good sense. And this is why we made the buyback at the end of last year. We think that buyback could have been interesting at higher prices, but we were able to implement it below NOK50 so we did that.

We achieved about 2.5% buyback. We think that's already a significant position to hold in ourselves. So, would we do another buyback now, I think we've got the dividend payout, we've got the newbuild fleet coming, we'd like to make sure that we've got significant cash available in case we come across positive investment opportunities during this year. So, we're not actively looking down the path of an additional share buyback now, but it's not beyond the realms of possibility

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Eirik Haavaldsen from Pareto Securities. Your line is open, please go ahead.

Hi, guys. On slide 9, you have a demand projection. Just wanted to ask, how much of the China increase there is from the basis of PDH consumption?

So PDH is going to be, we think, somewhere between 4 million to 6 million tons in that first 8.2 million 2013 to 2017, eventually increasing to around 10 million tons. And so, the reason the proportions might look a little bit off there is we think eventually a lot of the residential consumption in China will be domestically satisfied because it's a different grade of LPG.

Okay. I mean you're having relatively good first-hand knowledge of where the volumes are flowing today/ Are you sensing any shift lately? There's been a lot of reports of increasing -- as volumes going east quite recently actually, are you also seeing that development because obviously that's important for the ...?

Yes, we definitely are. You see two stories recently. One is that there's more shifting towards Europe, and one is that there's more shifting towards China. I think part of the reason that you see those two sides of the story is because there's actually more leaving the U.S. now on the back of Sunoco and the Tiger expansion and so on.

But we definitely see a gradual increasing trend in volumes towards China. And we also see an increasing level of committed future volumes towards China which is great news. It just means on average longer haul transportation at the time.

And also on the India side, a lot of issues with logistics and congestion there. Do you think that will change at some point? Or is that likely to be kind of bullish factor for you this year as well or at least the way it started this year?

Yes, it's a bullish factor. It's not something that we should rely on definitely. But I think globally, there are reasons to expect congestion in other areas as well, over time. A lot of markets are developing very quickly and are going to be exporting or importing volumes beyond what they've been doing so far. And that usually creates congestion. And congestion is usually a positive for the shipping industry.

Do you think inefficiencies are really increasing in the market this year just because the market is growing too quickly in a way?

Yes, exactly right. The market is growing very quickly in certain markets. Like India's grown at 33% again last year. It's been averaging about 35% for the past few years. It's incredible growth to absorb, and it's not unusual that you would see a degree of inefficiency there.

U.S. exports are growing very quickly. And through the same channels, you're going to start to see other products also moving out of the U.S., which will probably create some degree of congestion there as well. So, overall, I think there's reasons to believe that various markets could experience interim congestion. But as that's happening, you'll see those same markets working very hard to become more efficient. So I wouldn't count on it adding value long-term. It's just a short-term bonus for us.

Again and one final, if I may, I hear from quite good sources now that terminal guys in the U.S. are actually reducing their fees because obviously, their clients and your clients are bleeding. Is that sort of something you can confirm that you see happening right now? I mean obviously good for the kind of trade flows.

I think there's a lot of talk about it, and I think there's a lot of pressure from various parties towards the terminals to see the reduction. It would make sense where you see the potential for cancellation of cargos. It's much more positive for the market as a whole if the cargo still moves and the terminal takes some of the pain at interim.

Where that's coming from at the moment, frankly, is that you have the arbitrage relatively closed. And the product is still committed to move and the demand is still there. So there's always going to be some flex in profitability in the value chain. And at the moment, some of that flex is probably coming from terminals; longer term, that might remain the case. Some of that flex will also be pushed towards shipping particularly as more ships come into the market. And that's why I think it is reasonable to expect in 2016 that we don't see the same strength of rates that we've seen in 2014 and may well see this year.

So gradually, across the value chain, they'll be a degree of squeeze. The good news is that it makes propane more affordable globally and the outlook for propane more affordable, so volumes can continue to grow.

Very good. Thank you.

Sure.

Our next question comes from the line of Nicolay Dyvik from DNB Your line is open. Please go ahead.

Hi, it's Nicolay again. You continue to talk about investment opportunities. Can you be a bit more specific?

Yes, I mean we would like long-term to maintain our proportionate relevance to the market. The global fleet is growing by 50%, and ultimately, we would like to achieve some degree of growth. Historically, out of 35-plus years, we've only invested when we think that the investment price is good long-term value. Market values at the moment are somewhat on the high side compared to the average cost of a vessel in our fleet. So we're probably not at a level at the moment where we're investing second-hand. We think there's enough newbuilds out there at the moment.

So, long-term, we're looking for the right priced acquisitions to add to our fleet base. But we're not going to do that very urgently. We'll be patient about it. We also look from time to time at other asset sizes which make good sense in terms of long-haul global logistics. We've been an important player in the past in MGCs, and that's something that could be interesting to us going forward even smaller sizes.

And we're also still interested in very large ethane carriers. But I think if you look at where the oil price is now, it looks a little more difficult in the short term to deliver satisfying economics on long-haul ethane transportation. So we see some of those investment opportunities probably deferred but still making sense in the longer term.

And of course, we've also been interested in and bidding on storage projects. And we have a particularly strong history in delivering storage projects, and it could be the case that acquiring older assets to apply to storage projects becomes interesting other times as well.

Thank you.

We will now take the questions from the webcast. Thank you.

The first question via the webcast is from [Kim] from [Copa]. His question, how would the current geopolitical development, in particular the Russian intervention in Ukraine, project on the activities of BW LPG?

Thanks very much for the question. The shipping activities that we see related to the Ukraine was smaller vessel sizes, the ones that we're working with. So that's the direct impact. The indirect impact in terms of VLGC shipments into Europe, there's some increase in activity there definitely. It's less the market that we've been actively involved in. So we don't see any very specific direct long-term benefit from that for our sales at the moment.

Thank you. There are no other questions. I would now like to hand the conference back to today's presenters. Please continue.

Excellent. Thank you very much, everyone, for your attention. This concludes our results update for the fourth quarter of 2014. We always appreciate the attention and the support that we receive from our investors. We hope that the growth in top line and profitability, along with the dividend payout, are very satisfying to our investors.

In the coming days, I'll meet investors across Europe and the U.S. to afford the opportunity to review our results in detail. If you'd like to be included in that schedule, please notify our Investor Relations department using the email link on our website. And we look forward also to issuing our annual report which should come out in the middle of April.

We have come to the end of today's presentation. Thank you for attending BW LPG's fourth quarter 2014 financial report presentation. More information on BW LPG is available online at www.bwlpg.com. Goodbye.