BW LPG Ltd (BWLP) 2023 Q1 法說會逐字稿

Welcome to BW LPG's First Quarter 2023 Financial Results Presentation. Bringing you through the presentation today are CEO, Anders Onarheim; Deputy CEO and Head of Strategy, Kristian Sorensen; CFO, Elaine Ong; and EVP Commercial, Niels Rigault. We are pleased to answer questions at the end of the presentation. (Operator Instructions) Before we begin, we wish to highlight the legal disclaimers shown in the current slide. This presentation held on Zoom is also recorded.

I'll now turn the call over to BW LPG's CEO, Anders Onarheim.

Thank you, Lisa. Welcome all to our Q1 presentation for the financial period ended 31st of March 2023. As always, I'm joined today by Kristian, Elaine and Niels. The year started off very strongly. On the shipping side, with an expanded fleet through our pool vessels, we have positioned ourselves to benefit from the strong market and capture value for our shareholders. Our Product Services division also delivered a solid first quarter -- full quarter as an expanded team.

With this, let me move on to the highlights for the quarter. Please turn to Slide 4. Like many of our quarters, Q1 of '23 was also an eventful one. Our shipping business delivered the highest historical daily TCE on record with $60,900 per available day with commercial utilization of 97%. This is despite taking some cover earlier this year at lower levels as Q1 is often challenging. This year certainly has been different. The payoff of investing in our 15 dual fuel propulsion vessels is now becoming more and more visible. In addition to the environmental benefits using LPG as fuel, it also makes commercial sense as burning LPG is cheaper than burning compliant fuel.

We are now experiencing great interest in our retrofitted ships from our customers. The sale of BW Thor in March generated additional liquidity of $54 million and a net book gain of $17 million. Q1 was also the first full quarter after the combination of BW Product Services and Vilma LPG Trading. Product Services delivered a net result after tax of $3 million and traded about 1 million tons of physical LPG during the quarter.

In sum, the above activities contributed to our strong liquidity position of $532 million and net leverage ratio down to just below 21%. And with this liquidity position, we're able to return more dividends to shareholders. And for Q1, we announced the dividend of $0.95 per share, equal an annualized dividend yield of 43%. If this continues, that's a less than 2.5-year payback. This is, of course, not a promise for the future. The Board has also resolved to initiate a new share buy program -- buyback program for the purchase of up to $50 million. We will conduct this get through an open market purchase or as a tender offer. Details on execution will be provided when the new share buyback program is launched.

Switching to our market outlook, we're still positive, but we expect volatility to remain. The current oil price is conducive to continued strong export growth from the U.S. and steady growth from the Middle East. We also see the margins for Chinese PDH plants have been improving, which is important for LPG demand. Further, we expect fleet inefficiencies to continue to lend support to rates. 36 VLGCs are due to dry dock from June to the end of 2023 and waiting times at the Panama Canal are likely to increase as the world's merchant fleet expands in the coming years. Recently announced capacity expansion for U.S. LPG export terminals also enable more LPG to be shipped in the years ahead, clearly positive for our market.

And finally, before I hand over to Niels, after the end of Q1, we sold and delivered BW Odin and BW Austria. These 2 sales generated additional liquidity of approximately $113 million, and they result in a combined net book gain of approximately $26 million.

Those were the highlights. Niels is going to take you through the market and shipping performance segments. Niels?

Thank you, Anders, and greetings to all of you.

So let's turn to Slide 6 in the presentation. The VLGC freight market had a very strong performance in the first quarter of '23. The average spot TCE for the first quarter was set at $70,000 per day. Historically, the second strongest market performance for the first quarter and is significantly higher than previous years, surpassing expectations.

Initial fears of a market downturn due to poor Chinese PDH margin, global economy outlook, new vessels delivery were proven wrong. Will discontinue going forward? While we can't say for certain. We think there are good reasons to be optimistic, and I would like to highlight 6 of them.

One, strong U.S. export growth, record high inventories and expected decline in domestic consumption indicate robust U.S. export potential. Two, sustained Asian demand. Asian LPG demand remained strong, exemplified by increased run rates on Chinese PDH plants, driven by improved operating margin. Three, market inefficiencies. Various inefficiencies within the LPG trade, including congestions at the Panama Canal, port delays, weather condition, and geopolitically and regulatory factors continued. Four, observation on newbuilding fleets. Although 28 VLCCs are still scheduled for delivery in 2023, the impact of this supply growth is expected to be partly mitigated by the dry docking of 36 VLGC throughout the year. Increased newbuilding prices. Rising prices of newbuilding vessels contribute to high time charter freight rates.

And finally, sixth, market dynamic shifts. Notably, a significant shift has occurred in the LPG shipping where traders and oil majors have transformed into ship owners, resulting in a market increasingly oriented towards long shipping, reducing incentives to drive down rates.

If we take a slightly longer view of the VLGC market, we see a significant slowdown in fleet growth in 2024. With just 40 newbuildings expected to be delivered. Furthermore, considering the substantial LPG export expansions in both the U.S. and the Middle East, coupled with shipyards being fully booked until the second half of 2026. This scenario presents a promising opportunity in the LPG shipping sector.

Now let's move to Slide 11 to discuss our performance. Our TCE performance for Q1 2023 achieved a new record since our company listing in 2013. However, we did not expect the market to be so volatile and strong. At the start of this year, spot rates developed very much in line with seasonal trends, and conventional data implied that this would continue.

As a result, we took cover in the TCE and the paper market to protect the downside, which lowered our performance compared to the overall spot market.

Our remaining TCE coverage for 2023 is 31%, with an average rate of 38,900 per day. And our TCE book for 2023 is covered with a $29 million profits.

For '24, we currently only have 4% coverage. But we see strong demand from the market to fix 2 to 3 year's time charter at historically strong rates. Our LPG retrofits are popular due to the fuel efficiencies and could obtain 13% to 15% unlevered returns for those TCE contracts.

For the second quarter, we have booked 90% of our available fleet days at an average rate of $50,000 per day. The lower fixed Q2 number compared to Q1 is due to the market dip we saw in March and April.

The current spot market is on average, $80,000 per day. So we expect to finalize the remaining days of Q2 at a strong note.

The FFA market for Middle East, Japan indicates TCE at mid to high $50,000 per day for the remainder of the year.

That was it. Kristian, over to you.

Thank you, Niels. Before we move to the product services part, we believe it's worthwhile to also say a few words about our strategy, which remains steadfast by building a robust return focused company by active researching for attractively priced investments in shipping as well as LPG trading and onshore infrastructure projects.

On the technology side, BW LPG pioneered into the dual fuel LPG propulsion technology through our retrofit program. A technology, which today represents a fuel saving of approximately $6,000 per day. We're strong believers in the LPG dual fuel technology as well as closely monitoring the developments on the ammonia side.

Accordingly, we will continue to look for opportunities to create shareholder value through attractive asset trade transactions as well as using our time charter portfolio and derivatives to adjust our market exposure.

Looking at our India business. It's been instrumental in our efforts to participate in the upside potential of the Indian LPG markets. And with regard, our presence in India, as [Abib] said, of strategic importance we expect to build further upon.

If you flip to the product services update on the next slide, you will see that we report a net profit after tax, in line with our April trading update of $3.1 million. After depreciation of $17 million for the 5 time charter vessels. You can expect Product Services to continue its conservative short-term approach to the market while we prepare for an activity ramp up in the medium term.

Some of you have asked us about the synergies between shipping and trading. And as guidance for first quarter, our Product Services division takes about 20% of our available ships for that specific quarter with a total physical volume of about 1 million tons traded.

And with that, over to you, Elaine.

Thanks, Kristian, and a very good day to all of you. On a consolidated basis, we reported a total of $225 million in gross profit for Q1. This was largely driven by the strong TCE earnings from our shipping segment on the back of the sudden reopening of China with low inventories.

EBITDA came in at $176 million, which represents an EBITDA margin of 78%. We recorded $17 million of gains from the disposal of the BW Thor during the quarter. This brings us to a full year net profit after tax of $131 million, $3 million of which came from our Product Services segment.

Our net leverage ratio came in at 21%, just above our 20% guidance for a payout of 100% of NPAT. Nevertheless, our Board has still decided to declare a Q1 dividend of 95% per share, equating to a payout ratio of 100% of NPAT.

At the end of March, we had $329 million of cash and $2.6 billion in total assets of which $1.7 billion relates to the carrying value of our vessels. Compared to the latest secondhand broker valuations, we have a healthy headroom of $380 million in excess of our book values.

Our positive free cash flow of $171 million this quarter was derived mainly from our strong operating cash flows and a net positive investing cash flow of $50 million, mainly from the sale of BW Thor.

The positive cash flows were used to repay our term debt to return value to our shareholders, both in dividends paid and our continued share buyback. Our return on equity and capital employed for Q1 were 33% and 24%, respectively. We ended the quarter with a total equity of $1.6 billion, which translates to an NAV per share of $11.38 and NOK 119 per share.

Next, we move on to the financial performance of our 2 operating business segments. Starting with our Shipping business per day statistics. Our VLGC fleet generated $200 million in TCE income or $58,700 per calendar day for the quarter, which is a historical record high. Daily OpEx came in at $8,600 per day, largely due to higher maintenance and repair expenses.

Our shipping segment ended the quarter with a profit after tax of $128 million. For 2023, we expect our operating cash breakeven for our total fleet, including our chartered-in vessels to be at $23,100 per day.

Shifting focus to our expanded Product Services business. In Q1, we traded approximately 1 million metric tons of physical LPG, generating $25 million in gross profit. Depreciation relating to the amortization of 5 right-of-use assets was $18 million, resulting in a $7 million EBIT for this quarter. Other expenses comprised of the interest component of the ROU liabilities, G&A expenses and estimated taxes approximates $4 million for the quarter.

Net of depreciation and other expenses, our Product Services business reported a profit after tax of $3 million this quarter. Our trading portfolio reflected an average daily value at risk of about $5 million for Q1 based on the standard 95% confidence level.

Our committed capital in this business remains unchanged at $100 million, which includes $50 million in a revolving working capital facility used mainly to finance margin calls on our paper hedges.

Slide 15 provides a summary of our liquidity position. On a consolidated basis, we ended the quarter with over $0.5 billion in liquidity, made up of $209 million in cash, net of $38 million held in broker margin accounts and $241 million in undrawn revolving credit facilities.

Ship Finance debt at the end of March is at $413 million after all our scheduled repayments of existing term loans. Our revolving credit facilities remain undrawn.

On trade finance, we have expanded our facilities to $580 million with support from multiple banks across Europe and Asia, and we are on track to further expand our lending group and upsize our lines to $800 million.

At the end of March, only $278 million or 48% of our current $580 million in lines have been used. $71 million related to advances drawn, and $207 million in letter of credit issuances.

On this note, let me open the floor for questions. Back to you, Lisa.

Thank you, Elaine. We will begin our Q&A session now. (Operator Instructions)

We have one question from Eirik Haavaldsen.

I was a little bit curious about Niels' remark on the 2-, 3-year time charter opportunities. You said 30% to 50% unlevered return on those? Did I understand that correctly?

Niels, do you want to answer that?

Yes, that was correct.

What is level? And then are you referring to the vessel, I mean, just the vessel value or the kind of dual retrofit cost value?

No, the vessel value with the retrofits.

Okay. So you have ample opportunity to do 2- to 3-year time charters that give you 30% to 50% level return at present?

Eirik, no, I think there was -- it's 13% to 15%. Yes, we would love that 30% to 50%, but I'm afraid, 13% to 15% is what we have to settle for. We still like that.

That's still very good. But what's it going to take you to exercise on a few of those opportunities? And how has the development there been for the past 3 to 6 months in terms of liquidity and freight rate direction because it's only going higher. It's following the spot market, it's not -- that's the best way we're seeing.

Yes, I think that's right. I think it has been increasing. And I think also, we're also seeing more requests for these 3-year opportunities.

But Niels, why don't you expand the role.

No, that's true. I mean, we can clearly see that -- I think the market is a little bit surprised how well all the newbuilding deliveries have been absorbed into the market. And we clearly see that the demand for time charter coverage are increasing and players are out there, happy to fix the 2 to 3 year's time charters.

And maybe we should add also, I mean, I think we are quite pleased to observe that our retrofits are actually getting premium rates over newbuilds at the moment, which I think is actually -- it's -- I think it's a testament to the fact that we have now been, we're operating 16 ships with LGIPs, and we're gaining great experience, and I think our customers are appreciating that.

Yes, clearly. And just one question on your cash position, which obviously is rich. What this -- if we should -- what's the fair assumption in terms of reasonable cash position to hold? I mean cash management is suddenly becoming a big topping in commodity shipping. It hasn't really been like that or that hasn't been the case for a long time. But I mean what's your plan with all the cash?

Yes. Well, I mean we have decided -- we have announced also that we will -- the Board has started a new share repurchase program. And of course, we will continue to evaluate opportunities, investment opportunities versus returning cash to shareholders. So that's a constant discussion we're having with the Board.

And, it is a strong position. And with our current leverage also, over time, I would expect our cash position to be slightly lower. But for now, we still think we see good opportunities. Kristian mentioned, our position in India providing us with interesting opportunities there. But as you saw, we're quite slow in making investment decisions. We want to make sure the returns work harder for us.

And finally, on your dividend, you include your sales gain in your dividend. Not all your peers or not all companies do that but we should continue to expect you're doing so, I assume.

Yes, you can expect that.

(Operator Instructions)

We have Petter Haugen.

I have a few questions. Well, we can start with the Panama Canal situation. It seems as if it's -- well, you mentioned that it's still tight and there is still waiting time. But could you elaborate a little bit more on the recent development there? And perhaps also in terms of the longer-term outlook here. Have you seen anything which could lead you to believe that the sort of structural under capacity could be alleviated?

Niels, do you want to answer that?

Yes. No, we certainly continue to see that the Panama Canal is -- first of all, very volatile when it comes to waiting days. And normally, we would state that Q1 will slow down a little bit traffic using the Panama Canal, but we do see that it jumps from a couple of days to some the 15 days waiting.

So we do see that even though people are talking about the economy slowdown and maybe less containerships using the Panama Canal, we still see that trade are still on and the Panama Canal just expand even further. So we see more ships coming, but the constant is the Panama Canal.

Another thing which we also see, which is due to -- which is a little bit of concern is that we see the weather -- no, not the weather, the water level in the Panama Canal is very on the low side, which means that the capacity for the Panama Canal will probably decrease further.

So the data we have today, it looks like the delays and the inefficiency with the Panama Canal now will continue.

So would that also then make it sort of natural to conclude that incremental growth out of the U.S. Gulf would need to be going below cap of -- you know. Now it sort of...

Sorry.

Okay. So on the margin here, we'll model for 15,000 nautical miles to Southeast Asia instead of the 10,000 canal, which is I suppose -- to you, guys.

We're not going to let you have your own model, but it's -- but we hear you.

On the newbuilding side, well, as mentioned by [IDEXX] you do have a lot of cash and building newbuildings. That's one way to lower that cash position. What would it take for you to do so, to go to the arts and all the new ships now? And if you did, what would be the cost and delivery time for the first one?

I think what it would take for us to order new ships will be that we see either a drop in newbuilding prices or new technology that can -- we can justify making the 25-year investment. We believe that at the moment, there is still enough uncertainty. And even though within the LPG segment, you can argue that we've sort of found at least a good intermediate solution with LGIPs, we still think the risk reward is not attractive enough at these levels to invest in new buildings.

But again, new technology, new fuels, new designs And as Kristian mentioned, we're starting ammonia very closely. If we see opportunities that will give us good returns, we will look at that. But at the moment, we are very pleased with just having a low cash breakeven when we see a lot of the newbuilds require much higher rates to provide appropriate returns.

I don't know, Niels, Kristian, do you want to add anything to that?

No. Only that's ordering new buildings today. The deliveries, in fact, today, it's second half '26. And that could quickly changed up to '27. I mean if the dry bulk and tanker market start to -- ordering.

So we're pushing all 10 now on new milling prices.

Yes.

That was interesting. So 110 from the Clarksons view. I'm looking at, they quote 103. So, but...

Yes. That's less than, the...

Yes. But the oil cost is still higher. And I think -- so -- but of course, coming down to -- going down to 90, we might start looking at it.

Okay. Then we'll watch out for 90. I'm making notes here.

Okay. The final question for me on the world map, Product Services, you mentioned that, Kristian, that in the sort of in the immediate outlook, you aim to increase that activity. Could you sort of specify that and perhaps number of tons you expect to trade sort of going forward into '24?

Well, it's hard to be too specific on the exact volume, but as previously guided last year, we traded about 5 million tons in total. First quarter was about 1 million. It's also about what opportunities we see out there. But of course, we have an ambition to grow the business, but the risk reward is obviously a part of this. So we are -- but the ambition is to grow the business from last year's volume, but exactly how and when we will do it, that we need to come back to you on that.

Let's say that was to use the financing now being increased from -- well, from the back of my head, some $500 million to $800 million, an increase of some 40%. Is that sort of the range of what you think about? Or is it more like 4% growth?

No. I mean it's definitely more than 4% growth. So it's -- if it's 4%, that remains to be seen. But again, we have growth ambitions, but we will like -- with most of the other activities that we engage ourselves with, we want to build this step by step.

And in terms of profitability going forward, the $3 million of net profit this quarter, is that representative going forward as sort of -- if we were to model this on a quarterly basis?

I think it's -- it's Anders. I think it's -- we're going to be careful to say what's normal. We've only operated for a full first quarter. And so I think over time, we will be -- we'll give more guidance on that. But we certainly -- as we said before, we have -- we certainly have ambitions to earn at least the same return on equity here as we have on the shipping business.

But it is also -- we view this in the total context. And as Niels and Bob mentioned, this is giving us also a great benefit on the shipping side.

And we also see that when looking at all types of investments, Product Services can play an important role also in that. But I think we're going to be careful to go out and already now say what you can expect.

(Operator Instructions)

We have one question from the Zoom chat box. Over to you, Glenn.

Lisa. We have one question from Anders Karlsen. Can you say anything about the purchase price for the BW Messina?

Yes, we can say. We paid low to mid-60 for the Messina. So it shows again the value of having options. If you want to put that in a context of newbuild equivalent, we're talking about low 80s. So [Petter], at those levels, we'll probably be slightly more aggressive in general.

Okay. Thank you. There are no further questions from the chat.

(Operator Instructions)

Okay. Then I would just like to thank everybody for listening in, and we will get back to work here. We want to deliver another good quarter, next quarter. So we need to get busy again. Thank you so much.

We have come to the end of today's presentation. Thank you for attending BW LPG's First Quarter 2023 Financial Results Presentation. More information on BW LPG and BW Product Services are available at www.bwlpg.com and www.wwproductservices.com, respectively.

Have a good day, and a good night.