Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, ladies and gentlemen. And thank you for standing by. Welcome to today's Avance Gas Holding Presentation of Fourth Quarter 2019 Earnings. [Operator Instructions] I must also advise you this meeting is being recorded today on the 27th of February, 2020. And it is my pleasure to introduce Mr. Ulrik Andersen, Company's CEO; alongside Mr. Peder Simonsen, CFO. Please go ahead, gentlemen.

[Ulrik Uhrenfeldt Andersen, Chief Executive Officer]

Yes. Good afternoon, and welcome to Avance Gas Fourth Quarter Earnings Release Call. My name is Ulrik Andersen, and I'm flanked by our CFO, Peder Simonsen. Together, we'll take you through the main highlights of the results we presented earlier today. Peder will present the financial part, whereas I will talk about the market and about our 2 dual fuel new buildings, which we ordered last year. After the presentation, we, as always, welcome any questions. So without further ado, Peder, the word is yours.

[Peder Carl Gram Simonsen, Chief Financial Officer]

Thank you very much, Ulrik. I'll move to Slide #3. Looking at our Q4 financial highlights, we achieved a TCE rate of $51,000 -- just above $51,000 per day, and this compares to $42,700 in the previous quarter. The effect of IFRS 15 adjustments, as we have highlighted the last quarters, was smaller this quarter than previous. And on the discharge-to-discharge basis, our TCE rate was 51 -- just below $51,500 per day. We achieved 100% commercial utilization rate. And with 13 ships in out of 14 in the spot market, we are very pleased with that. And that contributed to the strong rate that we have achieved.Our one ship that we have on TCE is with Wilmar and that TCE was extended until December '21 during the quarter. Looking at our OpEx, it came in at just below $7,700, which is down from just above $8,000 per ship day in the previous quarter. And our A&G was impacted as it has been for the past quarters by one-offs and came in at $1,200 per ship per day, up just around $200 per ship per day. For the full year 2019, our TCE came in at $35,000 per day, and our OpEx just below $8,000 per ship per day and our A&G just above $1,000 per day. And this is in line with what we have guided previously. I think the A&G will -- we can expect to come down further as the one-offs are taken out of that number. And also when we get more ships delivered, as Ulrik will come back to you later on. During the quarter, we -- as we previously have announced, we entered into 2 ship building contracts for 2 dual fuel businesses for delivery in Q4 '21 and Q1 '22 at the DSME. We have also on the back of the expansion of our scrubber program found it sensible to get in place a financing of that CapEx. So we have established a $15 million scrubber financing, which -- it was approximately 75% of our scrubber CapEx, established with the existing banking group and in -- within the financing that we have, the -- under the $515 million credit facility. So this financing will not incur any other limitations or otherwise increased costs. It will be repaid over the remaining tenure of the financing, i.e., until 2024, and we'll otherwise have the same terms as under the existing facility. We achieved a net profit of $37 million approximately, or $0.58 per share. And the Board announced a dividend of $0.30 per share for the quarter, which represents approximately 50% of net profit. Looking at our balance sheet, we had a cash position of $86 million at the end of the quarter. We had a net of financing fees, debt position of $453 million. And we then have a shareholders' equity of $411 million at the end of the quarter. And as you can see, the cash flow from operations and -- was strong for this quarter, reflecting the higher freight rates and also payment of freight. This was offset by the repayment of the $35 million tranche that we announced before our last earnings call, that we had repaid in November last year. We then move to Page 4. We had, as mentioned, 100% commercial utilization for the fourth quarter. And of those days, 97% was in the spot market and 3% was in -- on -- relating to TCs. This picture is also in the full year numbers, but we had a 98% commercial utilization and 3% TC, while 95% in the spot market. In terms of off-hire, we had marginal off-hire of just 1%, and 99% of calendar days were available days. And this also is the case for the full year figures. As we have been discussing in the previous quarters, we have a project of installing scrubbers and drydocking, 6 ships. And with further drydock, 3 ships in addition to this -- that during the remainder of the year. We have -- In Q1, we have 3 ships that will be completed, 3 to 4 ships being completed during the first quarter, and 70% of all this estimated drydock days will be completed in the first quarter. We are drydocking our ships in the Malaysian shipyard, which, in the view of the coronavirus, impacting most of shipping and especially also shipyard capacity and efficiency. We are happy to be not drydocking our ships in China. We are, to some extent, exposed to the coronavirus in this regard as well during -- due to some of the equipment being sourced from China, which is being delayed somewhat. But we are constantly programming our fleet and making all adjustments possible to reduce the off-hire and reduce the waiting in connection with the drydocking program. And we now expect the 6 ships program being completed by mid-May in Q2. We are also considering what to do with the last 2 ships in the 8 ship series that are due for drydocking and the first special survey this first half or the first 9 months of this year. And we may consider scrubbers or other options for these ships. We have an estimate of 45 to 50 days now off-hire in connection with the drydocking and scrubber installments. And yes, as mentioned, 70% of these days will be -- are estimated to be covered by completion of Q1, whereupon the majority of these ships will be out trading in the -- what we believe to be a positive spot market. Just to update on the cash breakeven. If we move to Slide 5, we have here included the cash breakeven, including the new financing, which has brought the cash breakeven slightly up to approximately 22.5%, which is in line with what we have had historically, on average, as a normal run rate. It excludes drydocking, but then as I said, includes the new financing. And on the basis of that cash breakeven, which we believe is very competitive, you can move to the graph on the right-hand side, where we illustrate the annual free cash flow generated by the company, with our 14 current ships. And based on the cash breakeven, on the left-hand side, that's different freight rate scenarios, moving $10,000 per day above the cash breakeven. And this is also adjusted for the drydock days that I have mentioned previously, of the 8 wind-class ships and also the Avance, which is due for intermediate survey in Q4 this year. And as you can see, there's approximately $50 million per $10,000 in free cash flow, and at the estimated -- which is around the analyst average of $42,500 per day. We generate free cash flow of $100 million per year. And on that note, I'll give the word back to Ulrik.

[Ulrik Uhrenfeldt Andersen, Chief Executive Officer]

All right. Thank you. So a quick throw back to Q4 before we look ahead to see what generated the results that we have delivered today. This Q4 delivered quite unusual, as the market stayed strong, more or less throughout the period. Normally, what happens in Q4 is that the U.S. consumes more and exports less. It means that the demand for vessels dropped, and thus also the freight drops. However, this quarter, the U.S. production was so high that the export did not drop. In fact, October set a record as demand with the highest export of LPG ever. This was, of course, one of the main drivers in keeping the market up. Other factors impacted as well. We don't have time for all of them now, but one of them was -- another one of them was the attack on the Saudi oil installations. Although they happened at the end of Q3, the effect really only materialized in Q4 and sort of kick started, what can you say, the quarter. It was not all rosy for the owners in Q4 because as we got closer to the deadline for IMO 2020, i.e., the first of January, the new bunker regulations were kicking in. And as owners gradually start to procure and burn the more expensive low sulfur fuel line but being unable to pass on that build to the charters, the earnings did erode to some degree over the course of the quarter. Of course, ultimately, we are still satisfied with the result. And we must say, also, that the quarters develop, like it did, was not a huge surprise to us. We have been speaking about this already back in Q3 that we thought the market would stay strong, and we believe it justified our decision to keep a large part of the fleet in the spot market. Turning the page to Page #8. Let's try and look a little bit ahead and see what is in store for us. Looking at the supply side first, we still see a modest order book. It stands at 13% of the fleet, which is unchanged since we had the last call, some vessels have been delivered, and some have been ordered, but ultimately, we stand at the same place. Eight orders have been added to the order book, of which 2, of course, are Avance Gas, our own. I will speak more about those 2 new buildings at the end of the presentation. The historic data for scrapping shows that the average scrapping age is 28 years, which actually signals that there would be some scrapping this year with 11 vessels above 28 years of age. However, given the strong outlooks that we see, we don't expect much, very limited scrapping activity over the next 12 months, if any at all. Two other factors have been influencing the supply side. And positively, you can say, influenced the supply side in recent months, but also going forward, naturally the COVID-19, the coronavirus, which is on everybody's lips, have had a -- quite an impact on the supply side. Also on the demand side, which I'll talk about a bit later. But on the supply side, it has been a positive effect despite the regrettable situation. What happens is that China has been -- what can you say not as efficient as we have seen previously. We have seen vessels being rerouted from China to, for instance, Japan. We have seen vessels being stuck in load ports for longer than usual, and we have seen quarantines on vessels, after they have discharged in China. Naturally, we have also seen delays in the scrubber installations. Peder talked about it, but we have seen that for both our own and also for other owners who have had their vessels in drydocking and scrubber retrofitting in China. All of these things, of course, not making the fleet utilized as efficient as it could be, which creates length and which is -- all of things equal, good for the rates. We continue to see IMO 2020 disruptions. The effect is definitely wearing out. It's not as impactful as it was before the turn of the year and into the new year, but we still see some scrambling around for bunkers. And we still see, of course, the delays in the drydocks, which are partly due to the COVID-19, but also due to owners installing scrubbers, which takes longer. So all in all, the supply side is looking reasonable with some disturbances at the moment. But with IMO 2020, disruption wearing out over the course of the next 2 to 3 months in our view. If we turn the page and look at the production side, we will, today, look at the U.S. because it's the most important area. The U.S. production has, of course, gone from strength to strength since 2013 and even before that. Before we jump into the graph, it's important to remind everyone that production is not equal to export and export capacity is also not equal to export. But of course, the higher the production in the U.S. is, the more product is available for export and the cheaper it will also be. Last year, the production increased with 8.5 million tons. It's quite significant, it's 11%. And for this year, the EIA forecast growth of 7%, approximately 6 million tons. As it appears on the graph, a slight drop in production is expected for 2021. And naturally, as I just stated, we would like to see as high U.S. production as possible. So we are watching the developments here on -- in for 2021. What we see now is that a slight drop in production, it's around 2%, it's not a catastrophe. And we think there's plenty of product available for export also for 2021. But as I said, we will be watching this space. On the capacity side, the expansion projects, they continue. Most notably, we have had enterprise, wrapping up their latest expansion. It was due to be completed by the end of last year, but as we have been able to see, we think that the expansion is really only about fully completed around now. We still have more projects to come from Targa, Enterprise, potentially, Marcus Hook and other suppliers. So we are pretty confident about the export capacity, not being a bottleneck in the years to come. All in all, yes, we remain confident that the U.S. will continue to drive the VLGC market in the years to come. Turning the page to Page #10. And the demand side, then the question is, of course, is there demand for all this additional LPG? We believe the answer to that question is, yes. And where we would be seeing this increased demand is primarily in the Far East, Asia. Today, 80% of the global demand is in the East, mainly driven by China and India, also South Korea though and other Southeast Asian countries. Last year, the import of China went up, staggering 23% and India with 20% right thereafter. Next year, we still expect -- well, maybe before I say this, I should point out that this forecast, we are looking at now, was done before the coronavirus. I will talk about that in a moment. In any case, we still, despite the coronavirus, which we think is a bump on the way, is -- we still expect a lot from the Chinese import. As I've just mentioned, the outbreak of the COVID- 19 happened after the -- these figures we have here. So of course, this will have an impact. The situation is dynamic, and it is too early to establish the exact impact of the virus on the Chinese import. But I think we can safely conclude that in the short run, fewer tons will be imported. This is for sure. The good news is that China announced a few weeks back that the previous import tariff of 25%, which was imposed on U.S. LPG, will be reduced to just 1% for March. So what we believe is that -- our assessment of the situation is that once the COVID-19 is under control, we will see a bounce back in the Chinese import, which will hopefully act as a catalyst and an accelerator on the freight market as well. We have seen drops in the freight market, given the coronavirus, but so far, we have avoided a huge drop. We hope that to continue. So overall, what we are looking at here is that we have a modest order book and no additions coming because it takes 2 years to build a vessel. We have a good U.S. production, certainly for the next 12 months or more. We have strong demand as well. So overall, our assessment of the situation is still positive, particularly for this year. Turning the page to Page #12. I would like to talk about our new vessels. So as announced last year, and as Peder presented earlier, we have entered into a contract agreement with a Korean shipbuilder, DSME, for 2 VLGC dual fuel vessels. It means they can burn LPG, which we're transporting, and they can burn compliant IMO 2020 fuel as well. So before I wrap up, I just want to spend a few minutes talking about these new business and why we consider them a milestone for Avance Gas. So as it appears, the vessels, they differentiate themselves from pretty much everything, which is currently on water. The vessels they offer, as I said, unrivaled performance and they even reducing emissions at the same time. What these vessels offer is a significant lower bunker consumption if we look at the average vessel on water, we estimate around 20% less bunker consumption while steaming.At the same time, they burn cheaper fuel, they burn LPG. And this is, of course, a very strong proposition, lower consumption, cheaper fuel. All advantages worth mentioning is that we avoid mixing risk of the bunkers. What is happening after IMO 2020 is that a lot of different specs on fuel is available that all comply with the new regulations. But if you mix these, it can make the engine unstable, which is obviously not good as the engine may, in worst case, break down. We avoid that. Also, we have reduced bunker in China. Currently around 3%, sometimes even more, time on a voyage is spent on bunkering, waiting for barges, getting the bunker onboard, et cetera. With this Large design in cargo intake we have, we can bunker once to perform a full round-trip from the U.S. to the Far East. It also means that while we are taking cargo for our charters, we just continue taking that cargo for a few miles because the pumping capacity is much higher at the terminals. And we avoid all of this risk with waiting for barges and barges of [indiscernible] et cetera.These vessels are also able to achieve higher speeds. It means, of course, that if you can perform a voyage faster, you have the same revenue, you get higher earning per day. So naturally, a positive thing. We have constructed and elected to construct these vessels with a larger cargo intake. These vessels are 91,000 cubic, which is quite a lot larger than the standard vessels today. It means not only will we have LPG for the propulsion, we also have additional capacity for extra cargo, which, obviously, we can generate revenue on, which, again, will help us increase the daily earnings. The green profile is, of course, something that is offering us more attractive finance terms. Today, the banks are very interested in financing in green projects and bringing down the emission of the loan portfolios. This means that we can achieve a lower breakeven with this vessel that we would have otherwise been able to. Finally, the vessel is designed as a pure dual fuel vessel. It means that we can avoid deck tanks, which will, of course, require more engine capacity and will mean that the vessel will burn more. We can also use shaft generators. It means that we can generally burn LPG while we are steaming and not use it -- use the compliant fuel on our accelerators, which some other retrofit solutions will have to do. Finally, of course, we are reducing emissions, and we think that's very positive. We are delivering on our sustainability agenda with this. And as you can see, we are reducing the emissions with -- we're basically wiping up shocks and particle pollution, but also bringing down CO2 and NOX with significant percentages. What we look at versus the requirements that we expect or the legislation we expect from IMO, is by 2030, we will be looking at reducing CO2 emissions by 40%. And I think what is worth noticing here with these vessels is that already today, by the technology we know that is available and by slow steaming, and combining these two, we believe we are very, very close, if we cannot already comply with the 40% reduction, and remind you that 8 years ahead of schedule for the IMO 2020 -- IMO 2030 time line. So we think this is a very, very big leap and the right direction to go for us. With that, I want to conclude today's session by just wrapping up. As we see on Page 13, we believe the supply situation is looking positive. We don't expect many orders and order book is under control. We still see strong growth. We see further expansion of the U.S. export capacity and increasing demand. We do have the COVID-19 still hanging over our heads. We hope that gets resolved sooner rather than later, but we don't deem this as a showstopper for the otherwise positive story. We do have drydockings, as Peder explained, in Q1, and they will, of course, have an impact. But once we are through Q1, we have a clean runway where we are able to generate, hopefully, a lot of cash that was also shown on the graph. With that, I want to conclude today's session. I will hand the word back to the operator. And if there are any questions, we are very happy to answer those. Thank you very much.

[Operator]

[Operator Instructions] And we do have a request from the line of Dennis Anghelopoulos of ABG.

[Dennis Anghelopoulos, Research Analyst]

Just first question on bookings. You guys, in the previous quarters, have guided towards bookings and from what I can see, you haven't guided in this quarter. Should we just utilize year-to-date numbers as a proxy for what you booked today?

[Peder Carl Gram Simonsen, Chief Financial Officer]

I think it's -- as we explained, it's -- together with the coronavirus on top of an otherwise very difficult quarter in terms of a lot of ships going out to drydock and how that will impact our results, is very difficult to say. We have chosen not to guide. It's more a reflection of that rather than -- I mean, there is a market -- it's the market and the market has remained very strong so far this quarter, adjusted for the seasonal effect. I think, as we previously seen, this -- the market normally is with a time adjustment for when you fix the ships until it actually comes into your books. It's a good proxy as we have asked before we started to guide. And once we have -- and I think that's probably still the best proxy. The market is still volatile. And to use the year-to-date market and following the market, I think, is the best you have.

[Dennis Anghelopoulos, Research Analyst]

Okay. And with regard to the remaining CapEx, you guys have been -- new builds, obviously, and then the scrubber retrofits. How much is remaining on both of those? And what's the timing and the cadence for the installments on the new builds?

[Peder Carl Gram Simonsen, Chief Financial Officer]

The new builds will have only $16 million due for payment this year. And the remaining is then in '21 and then coming into '22 with the final installment being, I mean, 60% of the payment. I think we went through this last quarter. When it comes to the CapEx on the scrubber, that falls due when the ships are being delivered or up until the ships are being delivered and also some of this falls due after. So we have $12 million out of the $32 million paid already, and $20 million is remaining as of today.

[Operator]

[Operator Instructions] And we currently have no further questions. Please continue.

[Ulrik Uhrenfeldt Andersen, Chief Executive Officer]

I think that concludes the Q4 presentation, and thank you for joining.

[Operator]

That concludes the presentation today. Thank you for participating. You may disconnect.