DHT Holdings Inc (DHT) 2015 Q2 法說會逐字稿

Thank you. Before we get started with today's call, I would like to make the following remarks. This conference call is also being broadcast on our website at dhtankers.com, and a replay of this conference call will be available on the website. In addition, a Form 6-K evidencing this news release will be filed with the SEC.

As a reminder, this conference call contains forward-looking statements that are governed by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which include statements regarding DHT's prospects; the outlook for tanker markets in general; expectations regarding daily charter hire rates and thus utilization; forecast of world economic activity, oil prices and oil trading patterns; expectations regarding seasonal fluctuations in tanker demand; anticipated levels of newbuilding and scrapping, and projected drydocks schedules involve risks and uncertainties that are more fully described in our filings made with the SEC. Actual results may differ materially from the expectations reflected in these forward-looking statements.

I am today joined by Svein Moxnes Harfjeld and Trygve Munthe, Co-CEO of DHT Holdings. Svein?

Thank you, Eirik, and good morning to all. The EBITDA for the quarter came in at $49.5 million and net income for the quarter was $22.2 million, equal to $0.24 per basic share. Our VLCC operating in the spot market achieved time charter equivalents earnings of $52,300 per day in the second quarter. As of today, we have booked 56% of our spot VLCC base for the third quarter of time charter equivalent earnings of $81,000 per day.

We will pay a dividend of $0.15 per common share for the quarter payable on August 20 for shareholders of record as of August the 12th. The cash dividend represents 63% of net income. The cash dividend follows our new dividend and capital allocation policy announced on July 22. Including the dividend for the second quarter, we will then have paid cash dividends for 22 consecutive quarters.

Further and in line with our new dividend and the capital allocation policy, we made debt prepayments of $20 million during the quarter. As of June 30, our cash balance was $137.1 million for which $65.8 million is earmarked for the remaining predelivery installments for our newbuildings, all due during the fourth quarter of this year. As of quarter-end, we had mortgage bank debt of $508 million and a convertible bond of $150 million. This represents 46% of total assets.

As earlier reported, we have secured $290 million in bank debt for our newbuildings, which will be drawn on delivery of the vessels. The remaining predelivery installments of $65.8 million will be funded by cash at-hand. This means that [on a] pro forma, fully-delivered basis, interest-bearing debt equals 57% of total assets. Our new capital allocation policy reflects our view of where we are in the cycle with an increasing amount of capital being returned to shareholders as quarterly cash dividends, in combination with the delevering and already strong balance sheets.

And I'll pass on to Trygve.

Thank you, Svein. Operationally, we are pleased with the performance during the quarter. Our commercial team delivered handsome results for the quarter, being in line with what we stated on the first-quarter earnings call. Additionally, we have booked more than half of our third-quarter spot days at what we consider very strong levels. However, once everything is said and done, we do expect spot VLCC earnings for the full third-quarter to come in somewhat lower than the $81,000 per day we have secured so far.

Our technical management team continues to deliver high-quality ship management services at competitive costs with the relevant new fleets. Regarding period chartering, we had previously advised the extension of the time charter for one of our VLCCs for one year at $

$46,000 per day. With that, we currently have six of our 14 sailing VLCCs on period charters. For additional term business to make sense, we would like to see extended periods being available at worthwhile numbers.

We have a strong customer base with whom we have term business today. We will certainly continue to service them well, and hopefully increase mutually rewarding business with them in due course.

And when it comes to growth, we reiterate that for DHT to grow further, any such growth must be clearly value-enhancing to DHT shareholders. We do, however, have a fully funded growth program embedded in the Company with six VLCC newbuildings scheduled to be delivered over the next 15 months. Once delivered, these newbuildings will increase our VLCC fleet by 43%.

These will be very efficient ships with premium revenue-generation ability, and will contribute greatly to the Company's earnings power and dividend capacity. The first ship will deliver in November, and then every two months or so thereafter. Under the current spot rate scenario of about $65,000 per day, we estimate that each of the ships will add some $5.1 million of EBITDA per quarter.

Under the same rate assumptions, these six newbuildings should, combined, add about $0.24 of quarterly earnings per basic share. On a fully diluted basis, it would be about $0.20.

With that, we would like to turn it over -- or open it up for Q&A.

(Operator Instructions) Jon Chappell, Evercore ISI.

Trygve, you went over a couple of big strategy things from a 30,000 foot view. Just to dig a little deeper, when we think about uses of cash, obviously the dividend policy now is set in stone, which I think is very helpful. Also, you talk about deleveraging the balance sheet. Let's start with about post the delivery of the ships -- Svein talked about 57%. Is there a target capital structure -- debt to cap ratio you'd like to be at before you stopped deleveraging and look at maybe other uses of cash?

Yes, I'd say that's a good question, Jon. And we would like to see the leverage to come south of 50%.

Okay. And then when we think about what you do with the fleet kind of in the meantime -- you're right, you already have the inherent growth. Clearly, assets are quite accretive at the current levels. Could we see DHT do something more asset-light like chartering vessels, while you are still in the process of delevering down to that target level?

Well, we will note the chartering investments. And simply because we have a focus on operating with robust cash breakeven levels, and chartering in these time charter variables is essentially some sort of 100% financing, and will distort our efforts in that regard. So our focus all along has been to acquire ships, owning them 100% and applying moderate leverage.

Okay. That's clear. And then finally just the chartering strategy -- you mentioned the new charter for the Samco, $46,000. That's obviously a very strong return on that ship. But you also mentioned the duration.

So just wondering, as some of these heritage Samco ships come off of charter, if you can get similar levels to that other -- to this recent contract, is that something that you would consider? I mean, it seems there's some broker reports that levels are even higher than that today. Or is it more important for you now to kind of extend the duration and look to two to three-year charters?

I think if we were to increase the number of ships that we have on charter, we would like to see periods somewhat longer. But for the six ships that are currently on time charters, of course we would be willing to look at shorter extensions with existing clients, if that made any sense.

It does. Actually that's very clear and somewhat new. So the six that are on today, you would look for something [one] 12 months or less at great returns. But if you were to kind of shift your total operating strategy more towards period with the other eight vessels, then you would want greater than one-year duration?

Correct.

Makes perfect sense. All right, that's all I have. Thanks, Trygve. Thanks, Svein.

Thank you.

Spiro Dounis, UBS Securities.

Nice job this quarter. It sounds like 3Q is off to a pretty good start as well. I just want to talk about maybe potential vessels sales you talked about in the past, and certainly vessel values have gone up over the last few months. Just wondering where your current position is now? And maybe more broadly speaking, if you'd be more likely sellers rather than buyers in this market? Or do you believe there's still some value to be found in some of these VLCCs?

You've seen as of late, especially in the older spectrum, that asset values has built up, but we don't think that these prices yet really reflect the cash generation potential of these ships; hence the focus is on how to operate these ships and then generate as much cash flow as possible, and again, in support of our ambition to return meaningful monies to our shareholders. But at some point, we will consider to potentially divest some of the other assets, but we think it's too early.

Got it. That makes sense. And then just as it relates to floating storage, contango spread right now is still probably a little too tight for VLCC storage. But just wondering if you've heard rumblings if they've started up again, just in light of Iranian crude maybe pushing crude prices down and steepening that contango curve? And maybe in that context if you could also offer your thoughts on how you are viewing the return of the Iranian VLCC fleet?

I think on general increase to store oil we've heard very little and had very few incoming calls requesting our ships for floating storage. As to what will happen with our Iranian fleet and how that will all play out, it remains to be seen. It's nothing that will happen -- be immediately happening. But from what we gather, approximately one-third of their fleet is engaged in storing oil. And we also gather that most of that is condensate; whereas the balance of their fleet is engaged in delivering oil that they are selling predominantly to China.

Got it. Appreciate the color. Thanks a lot, guys.

Thank you.

Ben Nolan, Stifel.

Nice quarter, guys. My question has to do -- sort of going back to Jon's question about how you are thinking of the proceeds of cash. And I think it's good that you delineated the exact ratio for how the dividend goes and how much additional cash you'll use to pay back debt; that's extremely helpful. But when thinking about the debt, how do you sort of decide what gets paid back? And specifically, would you consider maybe buying back any of the convertible instruments?

You know, on the -- on what we did in the second quarter, it was pretty easy. This was a small loan that it was coming to final maturity in March, so it's the first one coming off. And it was easy to pick that one. It was also one of the loans with the higher margin over LIBOR.

So I think you should expect us to apply a similar approach going forward. As far as convertible bond, as far as we know, there hasn't been a whole lot of trading in it, and that we haven't had a good opportunity to assess potential buyback of that instrument.

Okay. That makes sense. That's not a huge facility, so illiquidity is perfectly natural there. But along those same lines, maybe this is just sort of for my own bookkeeping purposes, how do I come to the fully diluted EPS number? Obviously the higher share count, and then you're probably adding back some interest, but how do you get to that $0.22? Could you just maybe quickly walk me through the math?

Yes, you'd take our regular net income, you add back about $2.8 million, which is the interest expense for the convertible, and then divide by the share count there, 111 million-something.

Okay -- $2.8 million --?

[7965] -- I think you will see that in the income statements.

So it's the $2.8 million you need to add back, which is the full -- all the interest on the convertible, which is not just the cash but also other elements.

Okay. That's extremely helpful. And those two are my only questions. Thanks. And again, nice quarter, guys.

Thank you.

Omar Nokta, Clarksons Platou.

I just had a couple of questions. Just the first one was just going back to the guidance on 3Q. Do you have a percentage of days that was booked at that 81,000 number?

Yes, so, 66%. So, just over half of the third quarter has been booked at $81,000 per day.

Okay. Thank you. And just also wanted to touch on the dividends and your comments earlier about looking to get down to that below 50% leverage before thinking of boosting it. Currently, by our numbers at least, you look to be well within that ratio, and within the next couple of quarters, will be below that. Are you suggesting maybe that they add that 60% that you are looking to pay out could be boosted before year-end?

I think it's important -- the percentages we refer to is tied to book values, so we haven't really adjusted for broker assessments. So, we can only repeat that we'd like to see interest-bearing debt compared to total book assets, is what we'd like to see below 50%.

Okay. That's good for me. Thank you.

Thank you.

Mark Suarez, Euro Pacific Capital.

Thanks for taking my questions. I think my questions regarding the dividend policy has all been answered. I just want to maybe touch on the macro environment for one second. As you look at the VLCC pricing environment, I believe that you did a good job in describing it last quarter.

How will you describe the capacity up there in the Far East? Do you feel there's enough capacity out there to maybe continue to slow down some of the asset value growth that you will presumably expect, given the pricing -- the strong pricing environment out there, especially the more -- the modern times, the five-year-old kind of a segment there? What is your sense?

I think typically what happens when you have a strong trade market is that, first, it will be the older -- or assets in the older end of the spectrum that will appreciate in value. And then once that takes place, people will then look at younger ships as they would initially look somewhat discounted.

I think what you see now is that the 15-year-olds are up close to double the value that they were a year and a half ago or so. We know that our discussions in the market for more modern types of assets and we would expect that these post transactions close, that those asset prices will be higher than what was locked down, so to speak.

So there is an interest now -- again an interest from people to invest into the earnings environment. And this seems to also be more single asset type of transactions, so not necessarily big M&A for corporate -- public corporations making big splashes.

Got you. And on the new book conversions, have you seen a significant deceleration since the beginning of the year? We are beginning to see some evidence here that that is actually, in fact, decelerating as capacity goes down. Is that kind of what you are seeing in terms of dry bulk into tanker conversions?

I think as we argued before, that, yes, there would be some of this, but it would not really amount to a significant factor for the tanker space. A lot of the dry bulk ships that they want to get out are built at yards that cannot really build large tankers. And some of them have come so far along that it's too late to convert. So we, quite frankly, thought it was a bit hyped, that whole argument, a few months back.

It's really been more in the product tanker space where you have smaller ships and the yards typically can build, say, Capesizes but will also build MRO oil tankers.

Got you. Okay. And I guess the last question here on the income statement, if you go and you take a look at your daily vessel operating expense, I think it came below what was generally expected. What sort of run ratio should we think about going forward here for the second half of the year?

There will always be some fluctuations in the OpEx level, but we regard the second quarter as a very good quarter. So we are very pleased with those results and was certainly in the sharper end of the spectrum. So -- but you need to look at this over time. So I think actually both first and second were coming in very good, and so -- beating expectations. All ships have been operating perfectly fine, and nothing unforeseen.

Okay. Great. Thanks for the time as always, guys.

Thank you.

Erik Stavseth, Arctic Securities.

I want to touch upon sort of the macro perspectives here. I mean, we've seen the VLCC market being counter-seasonally strong now for the good part of the summer. Are you still of the opinion or are you still of -- do you have a view on whether we still have a sort of a seasonal uptick in Q4, and that should sort of be added to the strength we are seeing now?

I guess the strong spot market we've seen really to date this year is a reflection of a favorable environment for the owners, whereby there's very little new supply coming to the market. There's been a nominal growth in oil demand, and there's been a substantial increase in the transportation required to transport these barrels.

So, all in all, that's really just played out and have knocked out totally any hope that the barriers would have on any seasonality in the summer. For the remainder of the year, there's very few ships to be delivered. And there seem to be for us many highly motivated oil producers, so that will -- we'll expect to see a good flow of oil in the coming 6 to 12 months. We think there's a very good chance with that, and with the tanker market really benefiting.

Okay, so makes sense. In terms of -- I mean, you see strong demand and then you see that the oil producers who are motivated to increase production or key production high, what's your sort of biggest concern in terms of how demand -- I mean, I agree with you on supply, and we see the supply is relatively marginal for the rest of the year. But on the demand side, I mean, what's the biggest concern you would have on the demand side for the remaining part of this year, and call it, the first half of 2016?

I think it's fair to say that China, of course, has become a very big part or component in the demand picture. So what will happen there is just something that we will need to watch very closely. That being said, the economy in China is shifting from infrastructure investment into becoming more of a consuming economy. And thereby, that should benefit the oil consumption.

They are building a meaningful new number of refineries. And also on top of that, they are building their strategic petroleum reserves. So all that combined bodes well for a continuing strong tanker market. But again, of course, China is something to watch very carefully.

So you are not concerned about the global refining margins narrowing, which would lead to a softer demand globally? I mean, we've seen EIA -- or IEA report that the first half of the year would probably be the strongest in demand terms, and that we will have demand growth with still lower demand. Are you afraid that the weaker refining margins can see demand abate?

We are not too sure. It's -- it would be speed bumps here and there, but we don't think it's going to derail the recovery we are in the midst of.

Okay. Thanks.

Charles Rupinski, Seaport Global.

Thank you for your time. I just had a couple of questions. First, I apologize for this because I had some problems with the conference call, so I think I missed it. But could you just repeat if you had mentioned what you booked in the spot market so far this quarter?

Yes, so we have booked -- for the third quarter, we have -- to date -- booked 56% of our spot VLCC days at time charter equivalent earnings of $81,000 per day.

Thank you very much. That was very helpful. Appreciate it. And just the other question is more of a macro question. I think you've been very good with the color on the industry, but have you noticed anything changed over the quarter in terms of vessel speeds, whether it's your vessel or vessels speeds overall, in terms of laden versus unladen ton miles? Is it stabilized? Or is it creeping up? Or do you have any comments on that, please?

I think, year-to-date, we've seen from the various reports that the average speed increase is about 1 knot. And it's certainly not [put a] dent in the spot market. So this we could certainly take; it's not really an issue, so.

Okay, great. Well, thank you for your time.

[Jeff Berhanson, Serberth].

Congratulations on a good quarter, gentlemen. We take note that you've changed the phasing of the CapEx. It used to be less in 2015 and more in 2016. It seems you have -- you've paid more around [30] versus [21] in 2015. Is there any particular reason for that?

I'm not sure we understood your question. Could you repeat that for us, please?

You've changed the phasing of your CapEx, and so you paid more in 2015 than 2016. Is there a reason for that?

These are marginal numbers, but some of the issues related to this is that we had an opportunity to ensure that all our newbuilds will comprise of Tier 2, and thereby relaying the keys of the ships earlier to avoid applying a Tier 3 on the ships. So that was then also adjusting the milestones, if you, like on the shipyard.

And the key laying is the milestone for the fourth and last predelivery installment. So that means that [key will deliver] all six ships before year-end and they will all be Tier 2.

So a prudent move. Thank you very much. The other question goes in the direction of time charter commitment. A couple of quarters back or last year, you said that you would start looking at committing to longer-term charters at acceptable -- when they were at acceptable levels, and obviously very difficult to commit to an actual dollar number.

I guess for context, longer periods are available. And if we compare rates to the time when you set acceptable levels, everyone would probably assume that that is acceptable today, it seems like the curve has changed, and it seems like the environment is different. But would you venture out in putting any number on a three-year deal, if you were to do one?

We would not provide any number on that. I think as Trygve stated on the call, we had a very strong customer base where we have term business. And I think everyone should assume that we are actively engaged in business development with these customers. And these are typical also users of term tonnage. So it's certainly our ambition to see if we can expand that activity with this customer base, and potential for new customers.

Do you see -- or maybe just as a follow-up to that -- do you see an increased inquiry on the customer base for the longer-term business now? Or has it just been sort of --?

Yes.

Thank you very much. And congrats again, guys.

Thank you.

(Operator Instructions) We'll now move to our final question in the queue at the moment. That's from Alex Hersham of Cerberus. Please go ahead.

Thanks for taking the time for Cerberus I/II here. Two questions on my end. Would you mind just elaborating a little bit on your leverage policy? You talked about below 50% of book value. I just wanted to understand the full prices around book value versus either current values or midcycle values?

Sure. As you well know, we have had a keen focus on cash breakeven levels. Of course, in the current rate environment, it's not the biggest concern for anyone, but we do think it's important to have one eye sort of down the road, and make sure that DHT at all times has a very competitive cash breakeven level.

So that's why we'd like it to be south of 50%, and 50% of acquisition costs, and then with normal depreciation factoring in, rather than allowing for levering up as values increase. Because, of course, it will only elevate to cash breakeven numbers.

So, is another way -- just for me to think about it -- is that not really about 50% of book value but really more a function of just trying to get your cash flow breakevens to really low levels, and it just happens to work out at less than 50% of book value? Like, are you actually actively thinking about it as a percentage of book value? Or are you more thinking about it as a cash flow breakeven?

I think it's more the latter. And as you also know that we've been focusing very much on the repayment profiles on the various bank loans, which, also, of course, has a significant impact on new cash breakeven numbers. So we are attacking this from all possible angles, really.

Okay, cool. Thanks for that. Second question is, would you mind just elaborating a little bit -- I don't know if I missed on the call -- on the working capital outflow that you saw in the quarter?

Working capital outflow? Accounts Receivable are off somewhat -- there's nothing unnatural in it. There's nothing sort of overdue invoices or anything of that nature. So it's nothing to be alarmed about.

And then when you operate these big ships in the spot market for when you change accounting periods for exactly which day they pay and the freight gets paid, and when we pay for bunkers, that could coincide with the quarter change. So it will be somewhat volatile, but it's all business as usual, we gather, so.

Okay. But the $15 million or so of sort of working capital that's been an outflow year-to-date, should we expect that to sort of transition to being an inflow and reverse of the back half of the year? I mean, I know when you have new ships coming online, and the working capital needs to go into those new ships, but this doesn't seem -- this sort of $15 million doesn't really seem to be related to those new ships.

No, but it's -- of course, with a rising rate environment, your receivables are going to go up as well. So, in a higher market, you will have higher receivables. But I think what you're seeing in the first half is perhaps a bit of a coincidence as well that we ended in the second quarter where the numbers we did for working capital.

Thanks a lot.

Thank you.

Thank you. As there are no further questions in the telephone queue, I would like to hand back to the speakers today for any additional or closing remarks. Thank you.

Just remains to say thank you very much to all for attending the DHT call and staying in tune to what we are about. So, thank you, all, and have a good day.