BW LPG Ltd (BWLP) 2016 Q2 法說會逐字稿

Welcome to the BW LPG second-quarter 2016 financial results presentation. We will begin shortly. You will be brought through the presentation by Martin Ackermann, CEO, and Elaine Ong, CFO of BW LPG. They will be pleased to address any question raised after the presentation. (Operator Instructions). We will begin the presentation now.

Thank you very much. Welcome, everyone, to the presentation of BW LPG's results for the second quarter of 2016, the financial period ending June 30. I am joined here by our CFO, Elaine Ong. We appreciate your interest in our results and we encourage your queries at the end of the call.

The second quarter of 2016 did not exhibit the usual seasonal upturn in rates associated with this period of the year and averaged just north of $20,000 per day.

VLGC freight rates have come under significant pressure since fourth quarter, owing to the delivery of 34 new builds year to date, as well as US-Asia propane price spreads that have compressed from more that $200 per tonne at the start of the year to approximately $40 per tonne currently. The combination of these factors has resulted in the lowest VLGC spot rates since 2009.

Turning to slide 4, we review the highlights of second quarter 2016. With the continued softness in the market, daily rates were $28,100 for the VLGC segment and $19,800 for our LGCs.

Following a 20% drop in broker valuations of LPG vessels since the beginning of this year, we have determined that it is prudent to recognise impairment charges of $56 million on our vessels, as well as $21 million on our 19.7% stake in Aurora LPG, totalling $77 million overall. Due to this, we report a $56 million loss on our results. Excluding the impairments, we generated a profit of $21 million in the second quarter.

The Board has declared an interim cash dividend of $0.09 per share for first half of 2016, equating to a pay-out ratio of 50% of net profit after tax, adjusted for the $21 million impairment charge on our 19.7% stake in Aurora LPG.

In the event of a recovery in Aurora's share price, accounting rules will prevent us from writing back impairment charges on available-for-sale financial securities. And, as such, our investors would be unable to benefit from a potential upwards revaluation of our stake. For this reason, we have thus added back the Aurora impairment to first half 2016 NPAT, resulting in the declaration of an interim dividend of $0.09 per share or $12.3 million.

On the financing front, we extended the maturity of our $100 million unsecured revolving credit facility with OCBC, set to expire in October, by a further two years, and Elaine will elaborate further on this one later.

Lastly on the newbuilding program, there are no changes to the delivery schedule last communicated and the program is still on budget.

Turning now to slide 5. We provide financial highlights for the second quarter of 2016. Net revenue was $99 million. EBITDA was $52 million. And profit before impairment was $21 million and a loss of $56 million after impairment. Earnings per share before the impairment for second quarter was $0.15. This was achieved on a leverage ratio of 47%.

I'll now turn to slide 6 for an overview of the global VLGC and BW's LPG fleet. Here we see the global fleet of VLGCs on the water currently stands at 235 vessels, with 45 VLGCs on order. 14 VLGC newbuilds were delivered in second quarter, while fleet growth totalled 34% on a trailing 12-month basis. It is safe to say that the delivery cycle peaked in the second quarter.

Our current fleet of 36 owned and operated VLGCs account for 15% of the total VLGC fleet. We still expect to receive deliveries of three owned DSME newbuilds in the fourth quarter and the commencement of the time charter in of BW Messina in first quarter of 2017.

With 19% of the fleet on order still, rates will continue to be pressed downwards as more vessels will hit the water. However, the impact of the additional vessels on water is expected to be lower relative to the first half of 2016.

On slide 7 we provide an overview of seaborne LPG trade in second quarter of 2016. Seaborne LPG trade continued to grow by 5.5% year on year in the second quarter of 2016, led by a 22% increase in Chinese LPG imports and a 16% increase in Indian import volumes.

Southeast Asian demand was flat as Indonesian and Singaporean import growth was offset by lower Thai and Vietnamese imports.

US seaborne LPG export volumes rose by 33% to approximately 6.5 million tonnes in the second quarter of 2016 and accounted for roughly 30% of global LPG trade.

Middle Eastern LPG export volumes grew by 9% year on year to just shy of 10 million tonnes, led by growth in Emirati and Saudi volumes.

On slide 8 we provide an overview of seaborne LPG trade first half of 2016. The US and Middle East have been driving export growth by roughly 5 million metric tons relative to first half of 2015, offset slightly by lower exports out of Latin America and the Med. China, Korea and India have seen the strongest import growth, led by increases in PDH feedstock and the retail demand.

We now turn to slide 9. Here we see a snapshot of EIA's outlook for LPG balances in the US. In its August 2016 short-term energy outlook, the EIA has revised its forecast for 2016 US LPG production growth strongly upwards to 4.8%, while keeping domestic consumption unchanged at negative 1.3% and increasing net export expectations this year to 25.7 million tonnes.

Since our Q1 earnings release, the trend of the EIA revisions to their 2017 forecast has been positive for VLGC freight. Specifically, the EIA expects an additional 1.2 million tonnes of LPG production while calling for 200,000 tonnes of lower domestic consumption. This has led to an expectation of 1 million tonnes of incremental LPG exports in 2017, which should create -- which should generate demand for an additional three to four VLGCs, depending on where the volumes are placed.

Now turning to slide 10. TCE rates on our VLGC fleet averaged $28,660 per day in second quarter, with contract cover of 49%. Our LGC fleet generated TCE rates of $21,920 per day for the quarter.

Focusing on our VLGC chartering performance, we recorded 523 total CoA days or 17% of VLGC revenue days. Our CoA TCE rate of $40,080 was in line with our guidance release last quarter. Our first-half 2016 CoA performance of $42,140 per day is in line with the probable minimum full-year 2016 guidance we released in our Q4 earnings.

Timecharter days came in at 1,016 days or 32% of the LGC revenue days, with a blended timecharter rate of $34,930 per day. This is lower than previous guidance as we entered into timecharters throughout the quarter at rates that are lower than those of our legacy TCE contracts.

Our spot fleet generated $21,010 per day and accounted for 51% of VLGC revenue days.

Switching focus to our LGC fleet, we recorded 323 timecharter days, or 79% of the LGC revenue days. Spot accounted for 21% of LGC revenue days, with an average rate of $19,820 per day.

I'd like to point out that all of our clients are performing within contractual limits for both timecharters and CoAs. Their performance affirms our strategy to contract our ships out only to blue chip charters. And, in fact, we entered into a new CoA with a blue chip client in this quarter.

We have revised our CoA guidance lower in the last three quarters, in line with the deteriorating conditions in the spot market. The lower spot market negatively impacts the floating rate component of one of our CoAs, while also incentivising charters to minimise liftings and instead procure tonnage from the spot market.

In the context of a spot market that is now hovering at OpEx-plus levels, in third quarter our new probable minimum CoA guidance for both 2016 and 2017 now reflects absolute minimum levels. We are hoping for the best but planning for the worst.

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

Thanks, Martin. Looking at our income statement on slide 11, our net revenue for the quarter was $99 million compared to $154 million in the same quarter last year. Charter hire expenses for the quarter decreased as we operated one less chartered-in vessel.

Operating expenses increased to $31 million, consistent with the four-ship increase in our own fleet since Q2 2015. We generated EBITDA of $52 million in the quarter compared to $106 million achieved in the same quarter last year.

Finance expenses were higher by $2 million due to the drawdown from the ECA facility to finance the delivery of two newbuilds.

We recorded a net loss for the quarter of $56 million due to the recognition of $77 million of impairments. $56 million of this amount was due to the impairment charges on vessels and only those vessels whose carrying amount was greater than the recoverable amount. We also recognised a $21 million impairment charge related to our 19.7% investment in Aurora LPG.

Excluding these impairments, we generated a profit of $21 million in the quarter.

Slide 12 provides a snapshot of our balance sheet and cash flow position. We continue to maintain a strong balance sheet, with a leverage ratio of 47% and an asset base of $2.1 billion. Cash and cash equivalents at the end of the quarter was $56 million.

On slide 13 you will see our net debt position at $894 million at the end of the quarter. Available cash and undrawn facilities were $306 million. Since quarter end, our liquidity position has increased to $240 million as of today.

At the end of June we have four debt facilities with the following outstanding at quarter end. The first is the $800 million facility, with $422 million outstanding. The second one is the $400 ECA facility, with $378 million outstanding. Then we have the $221 million ECA facility with $50 million outstanding.

Lastly, we have the $100 million unsecured revolving credit facility which was fully drawn at quarter end. We have now extended the maturity of this facility by a further two years to October 2018, at an all-in cost of LIBOR plus 160. This renewal is part of our ongoing efforts to continually bolster our liquidity position and demonstrates our ability to raise debt capital in adverse market conditions.

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

Thanks, Elaine. So if you'll please turn to slide 14, I will summarise the presentation, after which we will open the line for questions.

We generated earnings per share before impairment of $0.15 in the second quarter of 2016, based on a profit before impairment of $21 million. Given current market conditions, we decided to recognise impairment charges amounting to $77 million.

The Board has declared an interim cash dividend of $0.09 per share for the first half of 2016. We extended the maturity of our one-year unsecured facility with OCBC by two years to October 2018. We expect total contract coverage of between 38% and 50% in 2016, depending on our CoA offtake.

Freight rates currently stand at their lowest level since 2009 as US propane prices have outperformed Asian LPG prices by 50% in 2016 and the [VLGC] fleet has grown by 34% since second quarter of 2015.

The resumption of exports from the Soyo terminal in Angola and the start-up of the P66 export terminal later this year, plus the expansion of the Marcus Hook terminal in mid 2017 should generate incremental VLGC demand in the near to medium term.

However, this will be offset by the VLGC fleet growth of 30 vessels over the same period, while we are also entering the seasonal strong period for US LPG prices in the second half of the year. As such, rates can remain low for the foreseeable future, until another bout of strong US export growth, coupled with slower fleet growth help rebalance the VLGC market.

We will continue to focus on strengthening our platform by cutting costs, seeking contract coverage with strong counterparties, and ensuring that we have enough liquidity to not only manage but capitalise on the downturn.

This concludes our results update for the second quarter of 2016. We appreciate your interest in our market updates, as always. And I'd like to open the lines for questions now. Thank you very much.

(Operator Instructions). Peder Jarlsby, Fearnley Securities.

Morning, guys. Just a quick question on your CoAs. Given where the rates currently are, can we assume this downward revision of your CoA guidance is the absolute minimum we'll see, both in terms of rates and days?

The short answer to that is yes. Thanks for that question, Peder. The market is very weak and not far above OpEx levels. And given these weak conditions and the fact that all our CoAs are in the money, we took the view that charterers will do everything they can do to minimise their exposure under these CoAs. So what you're seeing now and what we have revised is our probable minimum guidance has been downward adjusted to absolute minimum levels. So that is correct, yes.

Okay. Perfect. Just another quick one. So just curious to see how talks are going with customers in terms of renewing your CoAs and TCEs. Obviously the TCE market is close to being non-existent, at least for longer-term contracts. So can you just talk briefly about how you see the potential for renewing those contracts going forward and how talks are going?

Obviously I can't go into specific details on commercial discussions with our charters, but I think it's fair to say, as I also mentioned on the call, that we are happy with our strategy of working with blue chip counterparties. And we will continue to maintain a balanced charter portfolio for the continuation of 2017 and onwards. And this strategy is unchanged.

The fixed income exposure will increase. We were able to secure timecharter and CoA rates that exceed our internal spot rate estimates. As in the case of the CoA, we recently entered into a new one that of course creates value to the Company.

So in short, I would say we will continue to work with charterers. And generally we feel that we're being positively received. And I think with the long legacy we have and the strong relations that we're building on here with most of our client base, most of these contracts will be extended, of course at prevailing market conditions at the time of extension.

Okay. Perfect. Thank you.

Eirik Haavaldsen, Pareto Securities.

Yes. Hi, guys. Just a follow-up on that former question. Is there -- on your CoAs right now, when you have this minimum guidance for days as well, is there any reason not to assume that, with the current market and the market you also expect now in the foreseeable future, that this will only be the minimum number of days given by the [listers]?

Thanks, Eirik. I feel that it's close to the same question as Peder was asking. So just to make it very, very clear here, all of our clients are performing within the contractual limits for both timecharters and CoAs. And we're very happy with the strategy of working with all these blue chip charters in the context of some of the recent problems that you've seen with cancellations in the US Gulf.

The market has been in a worst-case scenario since first quarter. And so we have adjusted the CoA guidance to also reflect the worst-case state of the world. So yes, we are at absolute minimum levels. And also, as I alluded to in our presentation, our first-half 2016 CoA performance of $42,000 per day is in line with the probable minimum full-year 2016 guidance we released in the Q4 earnings.

Okay. So also in terms of number of days, so it's not only on the rates side, I understand that, but you have --

No, I would even say specifically on the days we have adjusted it.

Okay. Okay. And secondly, in this market where all analysts, all we do is calculating minimum cash covenants and looking at the cash holdings of your peers, and you were able to extend the revolver, an unsecured revolver at LIBOR plus 160 basis points. So in some ways you're on a different planet here. How should we expect you to move along now in the next 18 months? Are you going to sit still and wait and see what happens or are you going to be aggressive or is there anything you can give some colour on there for us?

Yes. I think we're very happy with the extension of the facility we have here. And of course we understand that not everyone is able to do the same. So that's, of course, appreciated.

We're faced with three choices in terms of capital allocation and also our M&A, buyback, or doing nothing at all. And these all correspond to different market views, ranging from most to least bullish. And obviously we can't disclose the future strategic direction or investment plans of the Company, but we continue, as always, to evaluate all options on how best to deploy our capital, but only of course as [accretive] levels to our shareholders.

Okay. Thanks, Martin.

Did I answer your question?

Yes, sure. Thanks.

Thank you. Thanks, Eirik.

Lukas Daul, ABG.

Thank you. Good morning, guys. A question on your dividend. You are -- can you elaborate a little bit? You're excluding one impairment and you're including the other impairment when calculating your base for the dividend. Can you say what's behind that move?

Yes. Good morning, Lukas, and thank you for that question. Just to be clear, our policy remains at 50% of NPAT. And although negatively impacted by the impairment in the first half, we remain committed to our policy, just to make that very clear.

And you're correct that we added back the impairment charge on our Aurora stake simply because accounting rules would prevent us from writing back impairment charges in the event of an Aurora share price recovery. That is of course different with our vessel impairment. So this is why we're making the distinction between the two. And as such, of course, our investors will be unable to benefit from this in terms of receiving a dividend on any potential write-back. So this is how we looked at it.

Okay. And when impairing your fleet, can you say what kind of a value did you use, for instance, for a re-sale?

I think I'd rather not give you specific numbers on this, but I think you can discuss rough modelling details with us offline.

All right. Thank you.

Thank you very much, Lukas.

Thank you. There are no more questions in the queue at this time. I'd like to hand the call back to Mr. Martin Ackermann for any closing remarks.

All right. Well thank you very much, everyone, for listening in. And we are appreciative of you following our results presentation. So thank you very much and we will speak on the next quarter.

Thank you. We have come to the end of today's presentation. Thank you for attending BW LPG's second-quarter 2016 financial report presentation. More information on BW LPG is available online at www.bwlpg.com. Goodbye.