BW LPG Ltd (BWLP) 2015 Q2 法說會逐字稿

Welcome to BW LPG's second quarter 2015 financial report presentation.

We will begin shortly.

You will be brought through the presentation by Martin Ackerman, CEO; Andrew Hoare, CCO; and Elaine Ong, CFO of BW LPG.

They will be pleased to address any questions right after the presentation. (Operator instructions). You will receive further instructions as required.

We will begin the presentation now.

Thank you. Welcome everyone to the presentation of BW LPG's results for the second quarter of 2015, the financial period ending 30th of June. We appreciate your interest in our results and encourage you to raise any queries at the end of the call.

My name is Martin Ackerman, and I'm joined by our CFO, Elaine Ong, and our CCO, Andrew Hoare. I'm the new CEO of BW LPG. And I'm delighted to take you through this presentation.

I have been in commercial LPG for the past two decades. And up until this summer, I was the CEO of Evergas for the past seven years.

The second quarter of 2015 was another extraordinary quarter, building on the momentum from Q1 and extending into the beginning of the third quarter.

Continued U.S. LPG export growth and sustained import demand growth in China and India were the main contributors of strength in the VLGC market in the past quarter.

BW LPG has the largest VLGC fleet in the world with built in growth via our order book of eight new builds and purchase options on chartered and vessels. We are thus very well positioned to capitalized on the favorable conditions of the market.

Now please turn to slide 4. Here we address the highlights of second quarter 2015 and subsequent events.

We maintained solid profitability and generated strong operating cash flows; a fleet that is growing to 45 owned and operated vessels by the end of 2016; one VLGC delivered in second quarter, and two to be delivered in third quarter on time and on budget.

We acquired four attractively priced new building contracts at DSME for delivery in second half 2016 with estimated fully delivered cost of $290 million.

On 28th April, we announced the exercise of the purchase option to acquire the VLGC Berge Summit, and she was delivered to us on the 11th of May.

Switching focus now to subsequent events following the end of the quarter.

On dividend, a first half dividend of $0.78 per share to be paid in third quarter, an annualized dividend yield of 23% on yesterday's closing share price.

The dividend represents a payout of 75% of net profit after tax for the period, and our third consecutive extraordinary distribution.

Dorian, after careful deliberation, we elected not to exercise the option to acquire 6 million shares of Dorian LPG.

Now please turn to slide 5. We provide financial highlights for the second quarter of 2015.

Time charter equivalent earnings were $155 million, an increase of 10% relative to second quarter of 2014. This growth was driven by continued exceptional market rates as well as a growing fleet.

EBITDA was $106 million, 15% higher year-on-year.

Our net profit was $81 million, a 12% increase year-on-year.

BW LPG continues to deliver value to shareholders. This is illustrated by a rolling 12-months earnings per share of $2.15, around 18 [nocs] at today's rates, which equated to an annualized earnings yield of 25% on the quarter end share price.

Annualized return on equity of 27%, despite leverage of only 44%.

We are very pleased with consecutive year-on-year growth and earnings as well as in achieving the highest margins of EBITDA and profit since the listing of our Company in November 2013.

At this stage, I'd like to hand things over to our CCO, Andrew Hoare, to give you an overview of the LPG market.

Thanks, Martin. Turning to slide 6, we see that U.S. LPG production continues to grow despite the recent fall in oil prices to near six-year lows. However, U.S. LPG exports remained at elevated levels and continue to grow at a faster rate relative to production, with a rising proportion of those exports heading east.

From January to July of this year, approximately 5 million tons have moved west to east, driving a high single digit growth in [tam oil] demand.

Despite low LPG prices and significant U.S. export growth, inventories in the U.S. continue to build and are up 22% on the year. Export terminal capacity expansion plans remain on track. The 2016 terminal expansion is set to surpass the unprecedented growth we witnessed in 2015 with the next big ramp up expected in January of next year.

Much of this volume is committed to buyers on term contracts. We expect that new terminal capacity coming on line to operate at healthy utilization rates.

Turning to U.S. production and export forecast on slide 7.

Consensus U.S. LPG production growth forecasts continue to hover around the 7% mark, while there is generally greater variability surrounding expectations around U.S. exports with growth estimates ranging between 22% and 43%. Although high, the export forecast is supported by strong global LPG demands have led to correspondingly lower LPG prices, enhancing the attractiveness of LPG as a feedstock for the petrochemical industry, as well as supporting retail demand, particularly in China where imports of LPG for non-PDH use alone has grown in excess of 30% year-to-date.

Turning to the LPG Fleet Profile on slide 8.

The fleet of VLGC on the water and currently stands at 180, with 17 VLGCs having been delivered year-to-date and a further 19 expected in the remainder of the year.

Our fleet continues to grow with eight new builds delivering from [Shindai] and DMSE over the next 18 months, bringing us to a fleet size of 45 vessels by the end of 2016, maintaining our market leading position.

At 42% of the fleet, the VLGC order book remains formidable. However, the build out of the fleet will coincide with the continued LPG supply growth from the U.S., as well as a possibility of additional volumes from the anticipated liftings of sanctions in Iran.

On the demand side, strong import demand growth from China and India, as well as stable import volumes into Japan, Korea and Southeast Asia are expected to support fleet growth.

With that, let me turn over to our CFO, Elaine Ong, who'll walk you through the financial position and results.

Thanks, Andrew. Looking at our income statement on slide 9, our TCE income for the quarter was $155 million, compared to $141 million in the same quarter last year. This is increase is attributable to the overall fleet growth and increased TCE per day.

Charter hire expenses for the quarter decreased due to the exercise of options and redelivery of vessels.

Operating expenses increased to $31 million, consistent with the increase in fleet size.

We generated EBITDA of $106 million in the quarter, which is 15% higher than the $92 million achieved in the same quarter last year.

Finance expenses are higher at $4 million due to the drawdown of debt from the revolving credit and ECA facilities.

Net profit for the quarter is $81 million, compared to $72 million in the comparable quarter last year.

On slide 10, you can see that across the fleet of 33 VLGCs, we achieved TCE rates of $46,600 per day for the second quarter, compared with $45,200 per day for the same quarter last year.

On our LGC fleet, the TCE rates improved significantly to $34,900 per day, compared with $30,800 per day for the same quarter last year.

Slide 11 provides a snapshot of our balance sheet and cash flow position. We have a strong balance sheet with a leverage ratio of 44%, and assets that have growth to approximately $2 billion with the delivery of two vessels during the quarter as well as progress payments made on our new building program.

Operating cash flows almost doubled in the quarter to $101 million, compared to $56 million in the same period last year.

Net cash at the end of the quarter was $69 million.

Slide 12 shows our net debt position at the end of the quarter at $762 million. Available cash in undrawn facilities were $89 million.

Our balance sheet provides a solid platform for growth, and we are evaluating a number of attractive financing options for our five remaining uncommitted new builds.

With that, I would like to hand it back to Martin to conclude our presentation.

Thank you, Elaine.

If you please turn to slide 13, I will summarize the presentation, after which, we will open for questions.

The LPG export market has continued to grow substantially, even in a low oil price environment, led by U.S. volumes. Import demands continue to grow, driven in particularly by China and India.

The order book of 42% remains at elevated levels.

The second quarter 2015 has seen a continuation of the exceptional charter market conditions experienced in the first quarter.

The Company invested $290 million in four attractively priced new build lease sale contracts during the quarter.

Going forward, we have obligations for substantial new build CAPEX over the next 18 months, while also preserving cap of the growth investments.

We maintain considerable debt capacity with current leverage of only 44%.

The Board has approved the first half 2015 dividend of 70% net profit after tax, translating into $0.78 per share for the half year, or an annualized dividend yield of 23% on yesterday's closing share price.

Our decision not to exercise the option to acquire the 6 million shares of Dorian LPG was based on the challenging price fundamentals of the opportunity and lack of offsetting new term cash flow generation.

This concludes our results update for the second quarter of 2015. We appreciate your interest in and attention to our market updates.

And I'd like to open the line for questions now. Thank you very much.

We will begin our Q&A session now.

(Operator instructions).

[Bjorn Christianward] from Danske Bank. Your line is open.

Thank you. Good day.

With regards to the dividend, could you elaborate a little bit on the 75% payout ratio? And why going for that instead of 50% and 100%? And how we should interpret this going forward?

Thank you for that question. The payout ratio above our stated policy of 50% of the net profits after tax reflects the strong cash flow that we had this quarter. As well as lack of [barter] accretive growth opportunities experienced.

I would say that we're pleased that this payout marks the [third] consecutive time we'll distribute extraordinary profits to shareholders. And I'd like to emphasize that this is extraordinary with our stated policy being 50%.

That being said, our current dividend yield is still firmly in the mid-20s range, while we have invested during the quarter $290 million of growth capital in the new buildings mentioned earlier in the presentation.

OK. And then also on the Dorian LPG stake, I don't know if you can comment on this. But the group, what were they thinking when it comes to acquiring this stake? And also if you could touch upon why didn't they end up buying the stake that ended up in this final [energy]? Was it a price issue? And what is the plan going forward? And [then have] this potential buy from BW LPG, is that now out of the question or could it reappear in the future?

It's difficult for me to speculate what the reasons were for the group, so that we have to ask the group about. But I would say that we represented with an opportunity which we very carefully considered. And given the current environment, the near term fundamentals of these investments were simply challenging given the stock prices today. On that basis we decided to say no.

That being said, we'll continue to be patient and prudent with our capital. And we will, of course monitor any future opportunities going forward.

OK. And then the [OM] on your COAs. I guess there have been some potential restructuring there. Could you comment on how we should look at the optionality that now lies with your customers in the long term talking into 2016, 2017? Have you managed to restructure that optionality that you have in your contract renewals?

Thank you for that question. We did some reclassification this quarter to provide you with a little more transparency. So the classification has been made between COA-Spot and COA-Fixed in the appendix in our presentation. And we're now factoring in the COA-Spot optionality being taken [up].

So I would recommend that you use that as a guidance using this presentation.

To your question on how our portfolio is now, I would say I'm, myself, nearly four weeks into the job, so it's a little bit early to comment on what we're going to do going forward. But, of course, I'll sit down with the management team and go through our portfolio. And together we will look at the strategies going forward in that context.

OK. Thank you. And then lastly here on the demand side you have some [peeps] yesterday pretty optimistic about the order book being absorbed based on the recent development. How is BW LPG's view with regards to the order book? Are you more positive now than you were three months ago? Or how is your in-house view developed?

I don't think it has changed remarkably from the last quarter. We still see a substantial growth in the supply side. And the U.S. LPG production and export forecast I believe speaks for itself on slide 7 of our presentation. Whether it's going to absorb the order book - it has so far with the number of new builds mentioned by Andrew. And even today we saw the market firming a little bit. So we're still quite optimistic.

I think right on the demand side. I think the highlights of this year, of course, have been the 30% increase in retail demand in China and also the coming online of the [PDH] plants, which, actually, I think it surpassed expectations out of China for the course of this year. And you saw 6 million tons for the first half of the year. That's expected to keep on track for the balance of this year.

And these are plants that cannot [switch]. So it's LPG only.

OK. Yes. Sounds like you're bullish. Thank you very much. That's it for me.

Thank you very much.

Donald Morgan, Wells Fargo.

Good morning, gentlemen. And congrats on a strong quarter.

My first question is two parts on asset values. Firstly, are you seeing stronger earnings in Q2 and now, to-date in Q3, put any upward pressure on prices for on the water assets? And then, secondly, on the new build side of the equation, can you comment on where you think the market is for current VLGC orders in relation to the [72.7] you paid for the VLGCs from DSME?

Thank you, Donald, for that question. I would say the global market right now, if you look at how asset values are on the global shipping outlook, they are still quite a few challengings in the global shipping community. And we don't see any immediate strengthening of asset values.

That being said, we certainly also haven't seen any weakening. And our values compared to our book values is giving us a lot of flexibility looking at our balance sheet.

When we look at new building orders, the prices are still quite firm out there. And we remain very confident in the decision we took to buy the four DSME options. And we haven't seen anything as compelling as that since then. And we don't expect to in the near term either.

OK. Thank you for that. Just a follow-up on the market. Can you talk a bit to the timing of some of the U.S. Gulf export projects for the coming online over the next six to 12 months? And as given recent rate strength, you're seeing any sort of material change among your charters in the way they're viewing the market? And if time charter rates are pushing higher for the one to two, three-year period?

Thank you. I'll leave that one with Andrew.

On the building of U.S. production and exports, I think there is one major project starting with expansion with one of the major exporters - a large exporter now - which will be in Q1 of 2016. And then towards the end of the year, we have a new project in Freeport which will be coming online. So that will bring combined, on an annualized basis, probably about another 8 million tons to the export market.

And one thing is we always say with the U.S. plants, they always deliver on time. And I think we expect both those expansion and the new product to also deliver on time as well.

In terms of how they are preparing for this expansion, not directly related to the time and charter market. In general, the TC market has been quite firm for the course of this year because I think people were seeking to cover the imminent positions of the Q2, Q3 market over this year.

We are seeing the time charter market perhaps easing a little bit moving forward. So we're seeing some of the charters retreating as they naturally would in a time when the stock market is easing. But we still see potential time charter opportunities moving out going forward.

Thank you [for that comment]. Just one last one. Finally, can you give a bit of guidance to where you think TCs have been in Q3 to date and a proportion of - have days [unbooked]? Are you expecting a stronger quarter relative to Q2, or is it still a bit early for you to tell on that one?

I think probably [notionally] we would pitch the one-year TC rates today, delivery into Q3 of about between, say, $60,000, $65,000 per day. That certainly is off compared to some of the previous numbers around about $75,000 per day.

Longer term rates are probably hovering around the $40,000, $45,000 per day level.

All right. Well, appreciate the color that you've given.

Erik Haroldson, Pareto Securities.

Hi. Thank you. Martin, you said one reason for not declaring the Dorian option obviously that share price. But you also said that the lack of near term cash flow was one reason. Which one is it? Which one is the most important for you in this case? I mean, I understand the share price. But let's say the Dorian share price has been at $15, what would you have done then?

Thanks, Erik. That's a good question. But I'm not really going to speculate on what we would have done if the share price had been something else. We took the decision on the basis what the market was this time around. And it was something we discussed closely in management and within the Board. And the result you've seen today with our press release this morning.

What the future is I'm not going to speculate about today.

OK. But are you looking at - do you have a decide to grow at the moment. I mean, you have a very strong balance sheet. You pay a healthy dividend - or a very healthy dividend I would say. And have a lot of cash. Is it going to continue to be a dividend or do you see other opportunities out there that might be yielding a better cash flow [inaudible]?

Well, I'm glad that you're happy with the dividend. And we also definitely think that this is a strong signal to send to the market, even within a quarter where we invested $290 million in new ships.

We do have a very strong balance sheet. And we do have a lot of optionality in growing going forward. And we will consider any opportunity that comes our way.

We are naturally interested in growing our business. But the mantra here for us is to create long term shareholder return. And, as you are aware, the Company is within industrial shipping so we have the long term view on this.

But I think the dividend is definitely also making it very attractive for our short term shareholders.

OK. And maybe one for Elaine. On the your equity it is [inaudible] ratios, is 50% still the minimum level for you? And then is also $50 million the minimum cash holding you want to maintain? Is that a fair assumption?

That's correct.

Thank you.

Thank you very much, Erik.

Erik Stavseth from Artic Securities.

Hi, guys. A couple of your peers - actually, all of your peers have reported numbers now. And, again, you Spot number, Spot rate appears to be a little bit on the low side. Can you address how come the implied rate is still in the range of 59,000 Spot whereas the others are reporting closer to 90,000 for the quarter?

I don't think we want to communicate any more than we are doing in the appendix. We don't want to comment any further on this.

I think we are achieving very healthy Spot rates. The market, as you are aware, it's difficult to compare our company with the peer groups. We run a fleet, nearly 40 ships. And the total global Spot market is less than 20%.

OK. My next question then relates to the COAs, which Bjorn touched upon. It seems like for the second half of 2015 you have increased substantially the number of COA days compared to the Spot base that were indicated in Q1, even though, of course, one quarter has passed.

But can you comment on what happened there? It seems that you reduced Spot [inaudible]. So a comment there would be appreciated.

Previously, we haven't reported anything in these boxes in the Appendix. And we try to make it a little bit more clear to you by reclassifying the days in these boxes. So it's only a matter of reclassification from our side between what we have as COA-Spot and COA-Fixed.

We have a fairly massive contract portfolio. And we realize that it's difficult for you guys to have full transparency. This was an attempt to make it a little bit more clear. I hope it's helping.

My point is actually that you have more than 4,500 available base in Q1, which was [seems] a big Spot. And then you had roughly 2,200 base COA-fixed in Q1. And now you have 2,900 base COA-fixed. And a quarter has passed. So it seems that the fixed has [inaudible].

Maybe I'm stupid, but it seems to me that you've covered a lot more, that you've actually taken down the available Spot base which will then impact your net earnings negatively.

For now we provide the guidance we put in this, the chart we put in the Appendix. And I think for the time being, that's probably as much guidance as we can give. But I think there's been a fundamental shift in strategy there just being the way that we've reclassified some of the COA activity that we have within those two brackets.

All right. Then my last question relates to the rumor that Conoco/Phillips/P66 is out to be looking to build at least four or more VLGCs for their project in the Gulf Coast. Do you have any comments as to whether you're involved in that project? Or if you see this as a threat to additional new builds being added to the market?

I'm sure you appreciate we can't comment on specific projects which [leak] to the market or otherwise. So I think we have no comment on that one.

OK. Last question, then. Mexican LPG imports are expected to increase. Do you see that as a positive or a negative for the LPG shipping market out of the U.S. Gulf?

All demand growth is positive. Mexico and the Caribs are an obvious source of demand for LPG. But I still think as we see in the course of this year roughly 50% of the U.S. volumes are moving longer haul to the eastern markets. That's where we see the real true demand, particularly in China.

So all demand is healthy. But the longer demand is really what is going to impact our market. And that remains very strong.

OK. Thanks.

Thank you, Erik.

(Operator instructions).

[Lucas Dow] of ABG Sundal Collier.

Hello, Mr. Lucas Dow, your line is open. Please go ahead with your question.

Hello. Can you hear me?

Hello.

Yes. Hi. Sorry guys.

I have a question on the fixed income exposure that has obviously increased throughout the year compared to the guidance you had given six or nine months ago. But is it fair to say that that is a result of the strong market where people have been calling or using the optionality which they have in the COA agreements?

I think in part, yes. That is correct. With the longer haul movements there has been an increased draw on some of the fixed rate structures that we have.

OK. And then your coverage for 2016 hasn't moved that much. How should we interpret this? Should we interpret it that maybe you are keeping a little bit more flexibility with regards to the Spot exposure? Or that you are maybe getting better optionality on the terms of the new COAs?

We can say yes to both of those. Yes.

Do you have a range where you would like to be over the course of 2016? Or is there some - could you describe the dynamics of how you would like to play it?

No. I have to pull the card again to say that I've been here only four weeks. And we will have the usual strategy process over the coming months. And I really look forward to sitting down with my management group and the Board and formulate the strategy for our next couple of years.

So that is as close as you're going to get me to answer that one today.

All right. Sure. And then just on the COA-Spot, if you look at the numbers that you disclosed in the Q1 report and the numbers you are releasing today, you have added six days in the COA-Spot, and your average rate increased from $38,000 to $48,000 a day, which doesn't really add up.

I think we reclassified the way we reported our Spot COAs in Q2. So I think this is guidance. I think you can use Q2 as a refresher going forwards rather than the Q1 former guidance. So I think stick to the Q2 numbers that we're showing here. And that's the best reflection of the status now.

[Lucas Dow]: All right. Thank you.

Thank you, [Lucas].

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

Thank you all very much for your insightful questions and for your attention today and for the ongoing support of BW LPG.

We are very glad to continue delivering solid financial performance and very strong dividend yields.

Elaine, Andrew and myself will be on the road visiting investors starting from next week, Monday. If you'd like to be included in that schedule, please notify our investor relations department via the email link on the website or call any one of us.

And it's helpful but not essential if you let us know the nature of any queries in advance so we can respond with the most current market information. Or, potentially, if you just want to meet us.

That's it. Thank you very much.

We have come to the end of today's presentation. Thank you for attending BW LPG's second quarter 2015 financial report presentation.

More information on BW LPG is available online at www.BWLPG.com.

Goodbye.