BW LPG Ltd (BWLP) 2015 Q1 法說會逐字稿

Welcome to BW LPG's first quarter 2015 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.

They will be pleased to address any questions raised after the presentation.

(Operator Instructions).

We will begin the presentation now.

Welcome, everyone, to the presentation of BW LPG's results for the first quarter of 2015, the financial period ending the 31st of March.

As always, we appreciate your interest in our results and encourage you to raise any queries at the end of the call.

The first quarter of 2015 has been the strongest market ever experienced in VLGC transportation for that part of the year. The softness we typically experience in the first quarter of each year is driven by maintenance related production shutdowns in the Mexico, and also by inventory buildup in Asia in anticipation of those shutdowns.

These days, however, we see a less seasonal market and we have more constant LPG export supply in particular, out of the US, and a more constant demand driven in particular, by industrial demand.

For the market leading fleet, high utilization and the strong relationships with the industry's leading customers, BW LPG has once again delivered marked year-on-year improvements in profitability.

On slide 4, we addressed the highlights of Q1 2015 which includes continued solid profitability and operating cash flows. We will talk to that in more detail later.

The second half dividend of $1.15 per share, that is an annualized dividend yield of 25% on yesterday's closing share price. The dividend would payout the 100% of NPAT for the period, which is above the policy of 50% of NPAT, and paying above the policy is driven by the high operating cash flows and the solid balance sheet position that we have.

The freight size is growing to 45 owned or operated vessels by the end of 2016, after adding the recently well-priced acquisition of four additional VLGC new builds which will be delivered at DMSE in Korea.

Our new building progress is on time, it is on budget, and it is meeting expectations on quality. Our utilization is close to 100% which is driven by sound technical management, experienced operators, well planned chartering and vessel positioning, and the quality of the assets themselves.

We have maintained a strong balance sheet with low cost of finance and solid remaining debt capacity. We also benefit from an enviable quality of customer base, which includes relationships which have continued for many years.

Slide 5 provides the financial highlights of Q1 2015. Our time charter equivalent earnings were $131m, which is up 30% from Q1 2014. This growth is driven mainly by the exceptional market rates we see in the continuing tight shipping market and is achieved despite a high proportionate takeup of liftings under our fixed rate contract of affreightment.

EBITDA was $80.4m which is 56% higher than Q1 2014. And then profit was $57.3m which is 86% higher than Q1 2014.

The results of the above is continued positive value delivered to shareholders. Our rolling 12-month earnings per share is just over $2 which is around NOK15 at today's rate. That equates to an annualized earning yield of almost 26% on the quarter end share price. Annualized return on equity is almost 25% and that is despite leverage still being below 36%. That leverage will increase with the new builds, towards our target of 50% to 60% and as that happens, as you can imagine, the return on equity will increase proportionate to return on capital employed.

We are very pleased with these results, in particular, the continued high rates of return to equity holders. We have consistently delivered shareholder value beyond the levels which we have anticipated at the time we listed, through a combination of sustained market strength, high asset utilization, improvements in contract terms and a rigorous focus on value efficiency and spending.

Subsequent events to the quarter are addressed on slide 6.

We acquired four new building contracts with BSME for delivering Q3 and Q4 2016, the estimated fully delivered costs are $72.5m per vessel. These contracts became available due to the default situation and it is the combination of the long-standing and high quality industry relationships, and our immediate financial capacity and strong balance sheet which have allowed us to secure the opportunities ahead of competition.

For those investors who have heard us talk about managing the fee and return on capital employed, just as intently as we managed the year, this is an example of what we mean.

Long-term value generation is driven very much by acquiring assets at good value on top of benefiting periodically from exceptional market conditions. We have recently secured long-term time chartered rates of $52,000 a day, these vessels will be paid back unlevered in just under 5 years.

The BW Leo is delivered successfully on the 27th of April this year, as with our other new build delivery so far, she came in on time, on budget and meeting our high expectations on quality.

The excellence of the freight team we have in place is apparent. We thank both Hyundai and the freighter division team for their continued high performance. On the 29th of April, we announced the exercise of the purchase option to acquire the VLGC Berge Summit. It was delivered to us on the 11th of May. The purchase option was priced at $8m which isn't far above our assessed scrap value of Berge Summit, despite that you have some continuing news of trade potential.

In my opinion, that translates into a good buy.

In late 2014, we saw equity valuations of LPG shipping stock slide as a result of oil prices retreating apparently and seemingly due to concerns on the potential for cheap oil in the longer term.

Slide 7 provides some data on what has happened in reality. At the time we saw share prices dropping, we highlighted the continuing investments in midstream US infrastructure and a continuing demand side growth which to us, suggested that the degree of concern was disproportionate to the expected impact of lower oil prices.

In the meantime, the market has continued to move from strength to strength with an incremental investments in pipeline, in fractioning, and in export terminal capacity. The temporary shift from ethane to propane cracking in the US hardly impacted export volumes and VLGC utilization remain close to 100%.

The positive trends continue, with weekly production continuing to surge upwards and weekly exports at long-term highs with continuing growth. This is the backdrop against which we have seen such stellar Q1 results. We continue to benefit from an exceptional charter rate environment in Q2, and we see good reason to anticipate market strengths continuing through the remainder of 2015. For reference the prices of the rates that we are seeing today are at the very high end of what we have ever seen in the $100 per metric ton plus level.

Slide 8 is more of the same. Export growth outlook continues its steep upwards trajectory. Export terminal investments continue to be added and committed to, and that export terminal investment continues to deliver capacity on and ahead of schedule. Growing export capacity combined with delivery on or ahead of time, translate into a tighter market and an effective rate environment.

All the exports we have seen have been at the high end of our early expectations. We have always anticipated healthy growth and export potential.

What is particularly interesting is the robust development in demand for LPG which translates into demand for shipping tonnage.

China, India and Indonesia were surging ahead with strong double digit import growth, Korea and Japan is showing strong moderate growth and Caribbean and South East Asia are increasingly interesting sources of future growth. The new build order book hasn't moved much in the past quarter which is good news. Most ship-owners recognize the importance of waiting for increased export volumes to consume the increasing VLGC capacity before we add more to the new build order book.

We still anticipate somehow the supply of VLGC capacity in 2016 which is when the bulk of the new builds will really hit the water.

We expect this to result in a softening of rates towards long-term averages, while export volumes catch up with that shipping overcapacity. Our fleet size continues to grow with the four new builds that we have added to be delivered with four new builds already delivered in fact from HHI, two options exercised to acquire vessels on [salvaging] and then we've got the acquisition of four additional new builds which will come from DSME at excellent value. The outlook is for a fleet size of 45 by the end of 2016, which maintains our market leading position by fleet size amongst long-haul LPG transports.

With that, let me hand over to our CFO, Vijay Kamath who can walk you through the financial positioning results as well as the excellent financing we have in place.

Thanks, Nick. Q1 2015 continues a strong performance and delivery on accretive projects. An investor who has paid NOK47 at IPO was last night, pre-devidend holding on to a share valued at NOK69.70, a capital gain of almost 50%, and our received dividends of NOK5.6 during 2014.

The total shareholder return is close to 60% in 18 months, they have also benefited from a buyback of 2.5% of outstanding shares and average NOK47.74, currently held as treasury stock. On top of this, they are due of further dividend from $1.15 per share, approximately NOK8.6 on or about the 29th of May. We are very pleased with the value delivered with the value delivered to our investors, our TCE income for the quarter was $131m compared to $100m in Q1 2014. This increase is attributable to the overall fleet growth and increased TCE per day.

Charter higher expenses for the quarter decreased marginally to the redelivery of the G.Symphony last year. The effect of the purchase options exercised on the Vermillion First and the Berge Summit and the redelivery of the Gas Capricorn, will only be visible in the next quarter of leased transactions took place late in Q1.

Operating expenses were slightly higher at $26.5m, commensurate with the increase in fleet size. We achieved an EBITDA of $80.4m in the quarter, which is 50% higher than the $51.5m achieved in Q1 2014.

Finance expenses are higher at $4.3m. In all, net profit for the quarter is $57m compared with $30.7m in the comparative quarter last year.

We achieved a VLGC TCE of $41,300 per day for the quarter compared with $32,600 per day for Q1 2014. LGC TCE has improved significantly to $30,900 per day for the quarter compared to 20,400 per day for Q1 2014. So far,Q2 2015 have continued to show positive development in the spot market. We have updated our expected utilization across contract types for the quarter on March 16 and I hope this provides more insight on our likely performance during the quarter.

Our commercial utilization remains strong and continuing to provide positive momentum for EBITDA. The balance sheet is strong with a leverage of 36% having grown to $1.8b with a delivery of three vessels during the quarter, and also the stage payments made on the new build program with HHI.

We have started drawdowns on our market-leading ECA facility for the delivery of our new build fleet. Net operating cash flows were healthy and the quarter had $62m compared to $68m in Q1 2014. These cash flows have been applied toward vessel acquisitions and loan repayments. Net cash available 31st of March, was $49.1m. Our net debt position as of 21st of March is $576m, available cash and undrawn facilities was $239m. Our balance sheet provides a platform for growth as demonstrated through our recent acquisition of the four new buildings from DSME.

Let me now hand you back to Nick.

Thanks very much, Vijay.

Great. Thanks, Vijay.

If you turn to slide 16, I will summarize the presentation after which we will open for questions. So first, you can see that the LPG market has continued to grow substantially even in a low oil price environment. The growth continues and this month's charter rates are at the high end of what we have seen throughout the history of the VLGC market. About $108 yesterday.

And that is the Baltic, of course, the Atlantic is much better than that. The continued growth in NGL production in the midstream investment along with healthy projections for demand growth suggest that we continue in the positive end of the range of our expectations through 2015 and into the beginning of 2015 which is very good news for our business.

Q1 2015 has been the strongest chartering environment we have ever experienced in VLGC in the first quarter of the year. Through high quality technical management and operations, we have delivered high utilization to take best advantage of the premium market.

And as a result, we see exceptional operating cash flows. The AGM approved yesterday a second half dividend for 2015 at 100% of impact which translates into $1.15 per share for the half year on an annualized dividend yield of 25% on yesterday's closing share price.

We are able to pay out dividends at 100% impact and retain a relatively low leverage. We continue to grow the fleet by adding and delivering new builds on time, on budget, and good quality by exercising purchase options and a long-term chartered in, and by acquiring new build orders and pricing well below recent transaction prices to the second hand asset.

We have substantial debt capacity and have consistently delivered financing at the very low end of market pricing. These financing arrangements were underpinned by a strong financial relationships, a solid balance sheet and blue chip contract portfolio.

2014 was an excellent full year of BW LPG, with high operating cash flows enabling strong dividend yields. 2015 is shaping up so far to be another high profitability year. While the size of the new build fleet creates some degree of concern as to the rate environment in 2016, we have been careful to invest with sound long-term pricing and maintain a fixed income portfolio that makes out platform particularly resilient to temporary market weakness if we do say that.

We anticipate entering 2016 still the leading provider of maritime LPU transport services to the world's leading oil majors and trading houses, and with a good proportion of that capacity already contracted at rates which deliver solid returns on capital employed.

This concludes our results update for the first quarter of 2015. We greatly appreciate your interest in and attention to our market updates and I would like to open the lines to questions now.

We will begin our Q&A session now. (Operator Instructions).

Our first question comes from the line of Petter Haugen of DNB. Your line is open, please go ahead.

Hello, guys. This is Petter. I have -- the first question on your slide number 8, this time around, you have now two port costs and if I'm not mistaken, the change from the previous quarter's investment is the higher one.

But to the best of my recollection here, you haven't changed your production forecast for the US NGL or US LPG side, could you just explain to us why you now see this upside and also the combination of the same production forecast with higher exports forecast?

Yes, thanks a lot for that, Petter. And actually the two levels that you see there are projections coming from us, these are basically external forecasts, and it's a range of forecasts so this is the high and the low end of the various external market data that we look at. So you can see the sources there at the bottom of the slide. And in terms of the production numbers, we are not changing them at the moment even though we see, you know, short term production growth continuing in the US, we are a little bit careful that some of this is driven by shift to more efficient plays and so we are not sure the beginning of a particularly long term trend in 2015. And so the forecast that we are showing now at the moment are based on a consolidation of producer forecasts that we have delivered a few months ago.

And what we have done is just overlay the export forecast range on top of that.

Okay, thank you.

And if I could just add one follow up questions to that, because during the call, if I not remember incorrectly, you said that you would expect the rates to come down to the long-term average sometime during 2016 on the back of increasing fleet growth. Could you just explain how you think the long-term average is sort of at the bottom and why not it didn't stop before or sort of below that long-term average.

Yes, Petter. So the historic long-term average rate in VLGCs is around $28,000 to $30,000 a day. What we see now is a rate -- a long-tem rate which would deliver something like a 7.5% rate of return on a $76m new build which is a long-term average new build price is around $32,000 a day and we think that is a reasonable point to look at for a long-term price going forward.

And when we look at that type of price level, we really look at asset utilization in the market as the driver for prices arriving at different levels. And so as we see asset utilization across the global fleet drop towards 80% and we anticipate then the day rates dropping towards the $30,000 a day level. And the last time we provided an update, we were probably a little more bearish on 2016 than we are today. We still believe that it is normal in any market but you don't achieve super normal profits in perpetuity. So we think that the concept that this market operates for several years of extremely high rates is a little overly optimistic. Having said that, I think that good discipline on new building to make sure that we end up with a fleet which is quite balanced in terms of the market and so there is reason to believe that in 2016, utilization doesn't drop too low and probably not below that 80% level and that means that something in the low 30s feels like a fairly comfortable outcome for the period in 2016 where we are seeing the majority of those vessels hit the water.

Beyond that, because we see production continuing to grow and exports continuing to grow, we think rates will pickup again somewhat.

Having said that, we have not enough positive signals on production and in particular, export growth and by far, in particular, demand, first to feel comfortable that it is time to add new builds to the already particularly large fleet which is being delivered.

So you know, in summary, we think that utilization drives where we end up on rate outcomes and we think that utilization is looking slightly more positive in 2016 than we felt three months ago.

Very helpful, thank you very much, Nick. That is all for me.

Sure.

Your next question comes from the line of Eirik Haavaldsen from Pareto Securities.

Your line is open, please go ahead.

Yes, hi, You have increased your TCE coverage by approximately [one less year] for both 2016 and 2017 after an impact rate of about 50,000, so basically saying that the much talked about [reverse] charter has been a reality. Can you comment on whether there is anything special about that charter? I know you have been a bit reluctant but I heard that you know, the intention might be to use that import turnover. Are there more of those kind of opportunities because it is pretty high level.

Well, we don't talk about specific contract opportunities, and changes in our contract portfolio that you are looking at all right not necessarily related to the particular market opportunity that you are talking about. I mean there have been other good opportunities out there. We definitely see more new logistics emerging, I mean ultimately you got so much incremental LPG which is flowing at the global export market.

There has to be new logistics developed to make this work very well. And so we do think we are going to see incremental storage opportunities and we think we will see new channels emerge which will consume some of the new fleet which is coming but I can't speak specifically about individual contracts that aren't public.

Okay, on a more general basis then, would you expect sort of your next contract for 2016 or 2017 to be more towards 50 or more towards 30 based on what you see today?

You know, it's quite hard to predict, I think what we see today, absolutely, would suggest that there is still room to conclude TCEs, that there is some right -- trend, it wouldn't be unusual to conclude something closer towards 50 than we see today. In reality, they are not seeing a whole lot of liquidity in these kind of mid-term contracts. I think in the short term, clearly the value of the one year TCE today is at the very high end of what it has been historically and that is driven by a general view that the outlook for the rest of 2015 is very strong.

I think when you look at the time charters which are two and three years out, there are those in the market who would really like to see what the impact of the delivery of the new build fleet is before they lock in rates which are too high.

On the other hand, you got a lot of oil majors and traders out there who are making significant commitments in terms of delivered volume and they need to make sure they cover some of their books and so I think, that at the moment is keeping those two and three year TCE opportunities at a pretty favorable level.

Okay, and just more financial, first of all, Vijay, on the revolving credit facility and is that something you can just draw on whenever you like in a way or is that more --

Yes, Eirik, it is typically when we need the capital that we can draw on the revolver when we need it for operating expenses.

All right. Thank you.

Your next question comes from the line of Michael Webber from Wells Fargo, your line is open, please go ahead.

Good morning, guys. How are you?

Good morning.

First, to put my question and then [ask a question] for the -- Vijay, around the new builds that you guys ordered earlier in the quarter, can you talk to the level of financing you guys are looking at those and forgive me if there is something that doesn't that we have missed. But in terms of where that falls off [to your existing gearing ratios] and I'm assuming that a significant financing available although you already [looked at kind of went in that] in terms of the overall leverage?

Michael, we are -- so go ahead, Nick.

Okay, so I didn't hear the question entirely clearly but basically, we don't have any financing against those incremental four new builds that we have acquired from DSME yet if that is what you mean.

We think they are very financeable, and actually, I can tell you at the moment, we get a lot of proactive interest from perspective lenders immediately when we execute a transaction like that. And that is the value of having the strength of the balance sheet in the conservative financial position and strong fixed income portfolio we have.

So I think there is reason to believe that we would be able to finance those incremental vessels at prices which are similar to or better than the most recent financing Vijay put together.

Maybe, Vijay, you can give some additional color on that.

Yes, I mean our target generally is to leverage the balance sheet up to a maximum of about 50% third party 60% and given where we are right now, there is enough room to add that capacity. That doesn't mean that we will finance these vessels at 100%.

Okay, yes, good. That is kind of where I was getting at and so, you probably know where -- your ratios are now the but still sticking with the overall band of 50 to 60?

Yes and there is (inaudible) more of a kind of a conceptual question and it might be a bit too early to comment on it but there is -- earlier this week, I believe last week at the [PLR] kind of a (inaudible) around the MLP space specifically on what works and what doesn't and ethylene transportation pipeline was included in that in terms of potentially having an issue kind of tapping into that lower cost of capital. And if you are going to flow that through to what it could mean for the export complex, you can make the case that it would be good for exporters of potentially, propane, butane, and ethane relative to the more (inaudible) petrochemicals.

I am just curious as to whether or not that is something that is kind of permeated the thought process yet within some of the [bidders] that you guys talked to or whether that is something that you might (inaudible) as to have declined to really have an impact on the margin.

I think there are actually a lot of things which are impacting the outlook for ethane at the moment, you know, our view in house is that ethane is actually particularly interesting right now, it is a point in time where we are seeing at the early months of this year, the highest ever rejection rates of ethane and it should be a great time actually for those who have the potential to benefit just start to lock in some agreements to (inaudible) and the problem is if you want to present to a board in your organization now that you got a project to use ethane as either a feed stock or potential power source or, a power supplement, you have to deal with the fact that we have gone through a relatively -- or particularly low oil price recently and that has somewhat distorted the economic short term on delivering ethane.

And so you got that in terms of the NLP ability if you like, of these structures, I think it depends whether you are doing them standalone or whether you kind of integrate them with other natural gas liquid structures, I think there is a lot of reason why it should make great sense because once you lock in these logistics, by their nature, by the amount of capital you have to deploy on infrastructure, they need to be long-term contract. If you talk to the terminals, we have been working on ethane export and I mean, we will be interested in locking in third contracts with off-takers which are typically ten years plus.

So there should be some value to do that. I think a lot of the noise around ethane at the moment is just driven by the impact for lower oil price environment, the amount of rejection we sold to propane being cracked in the US instead of ethane and my expectation is that will improve over time.

Yes, and I guess what I am getting at is not the viability of ethane export and MLP, and so -- methylene transportation within the US are getting more expensive off the capital basis because those pipelines just don't work within the fee structures anymore and so (inaudible) the margin and the benefit for exporting less refined product if you can (inaudible) a view on that, I guess, maybe next quarter when we have had a bit more time to adjust, I think this time just came out, again, like four or five days ago. But thank you for the color. I appreciate it.

Yes, that is okay but just let me make one more comment on that and I think that you know, at the moment it is very hard to do anything on ethane pipelines because the -- guess we haven't seen the development of the ethane export markets to the potential that we would have expected several months ago. I mean we certainly hope that we would see by December 2014 significantly more export commitment on the ethane that we have and we are aware from speaking with potential off-takers that the change in oil price had a major impact there.

So you know, getting these structures underway is a whole lot easier when you can see continued and rapid growth, you know, in export of fhe product as well.

So I do think it is worth waiting another quarter and you know, see the color come in and I think we should see something over the next quarter that at least signals our renewed interest in ethane because it is -- you know, a very cheap resource which has a lot of potential application particularly in Asia.

Great. Thanks a lot. I appreciate it.

Great. Thanks, Michael.

Your next question comes from the line of Lukas Daul from ABG. Your line is open.

Please go ahead.

Thank you. Nick, I was just wondering when I look at your achieved day rates in the quarter, the voyage charter and the COA spot, they show quite an opposite trend to what has happened in Q4 and it is quite a bit of a discount.

Can you just elaborate a little bit more on what is the reason behind that?

Yes, sure. I mean there are a few things which drive this but in particular, you know, the COA spot is lower due to longer balanced packages on voyages undertaken on the COA spot. Which are most of the time, followed by longer laden voyages under different contract types.

So in this instance, we got longer laden voyages which related to the fixed COAs, and so what that does is it creates volatility in achievements between diff periods which will actually even out over time. So it is very hard for anyone to predict that in their projections and because it is not visible and there is really a timing difference in terms of when you see these longer ballast passengers and when they hit, you know, whether they complete during single quarter or overlap a quarter or so one.

And so unfortunately, this is some of the variability you will see all the time in results just driven by when and where and what distance we are experiencing out ballast voyages.

All right. Thank you.

Sure.

Thank you. There are no other questions. I would now like to hand over the

Conference back to today's presenters. Please continue.

Excellent. Thank you, everyone for your attention and for the ongoing support of BW LPG.

We are very glad to be able to continue to meet your support with solid financial performance and strong dividend yields. Vijay and I will be in Singapore next week and we are going to prioritize taking calls with investors and analysts following on from this presentation.

If you would like to be included in that call schedule, please notify our investor relations department using the email link which is on our website or email link which is in our website or email directly to Vijay and myself. It is helpful but not essential, if you let us know the nature of your queries in advance and then we can respond with the most current information.

We have come to the end of today's presentation. Thank you for attending BW LPG's first quarter 2015 financial report presentation. More information on BW LPG is available online at www.bwlpg.com

Good bye.