BW LPG Ltd

OSE:BWLPG

Earnings Call Transcript 2021-Q1

[Lisa Lim, Head of Corporate Communications]

Welcome to BW LPG's First Quarter Financial Results 2021 Presentation. Bringing you through the presentation today are CEO, Anders Onarheim; CFO, Elaine Ong; EVP, Commercial, Niels Rigault; and EVP, Technical & Operations, Pontus Berg. 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. I now turn the call over to BW LPG CEO, Anders Onarheim.

[Anders Onarheim, Chief Executive Officer]

Thank you, Lisa, and welcome to our first quarter results presentation. As you heard, I'm joined here by Elaine, Niels and Pontus and they will also go through some of their own sections. Before we begin, I would like to just speak on behalf of all the BW LPG employees to express our deep concern for the COVID-19 situation globally and especially in India. Crude changes have been extremely challenging due to global travel restrictions and other problems. We continue to support our seafarers with initiatives to protect their safety, support their mental health and offer financial assessments where needed. Their lives are not easy at the moment, and they deserve a big thank you. The first quarter of 2021 was eventful on several fronts. VLGC freight rates experienced a record drop from more than $100,000 per day to OpEx levels within 1 month. That's volatility for you. While navigating through the extreme volatilities and challenging market conditions, we have expanded our presence in India and secured financing at attractive terms there. And we've also kept our LPG retrofitting program on track. If we go to Slide 4, our program to retrofit '15 VLGCs with LPG propulsion technology continues. It's on budget and with 0 safety incidents. This translates to a commitment of over $130 million, it's the sector's largest investment towards decarbonization. And we are proud to lead the way and to act on our promise to decarbonize and transition towards cleaner fuels for a cleaner environment. To date, we have 4 vessels on water with LPG propulsion and 4 additional ships are being retrofitted at the Yiu Lian dockyard right now as we speak. Once all of our '15 VLGCs are retrofitted, we will have saved 1 million tonnes in CO2 emissions. That's a significant contribution compared to the current VLGC order book that will add 4.4 million tonnes of CO2 emissions. So retrofitting makes both environmental and economic sense. Retrofitting has an environmental payback of 6 months versus 15 years per newbuilding. Retrofitting costs $8 million to $9 million, while it costs 10x more or $80 million to order a newbuild with the same technology. So at the price of 1 newbuild, we get almost 10 still modern and well-equipped ships. This is also aligned with our asset management strategy to maximize the value of our current assets on water while considering the best way forward in our journey towards a zero carbon future. If you look at the whole maritime industry, there's enormous potential in retrofitting. More than half of the current VLGC fleet and more than 7,500 merchant vessels in the world can be retrofitted with LPG propulsion. And we are therefore eager to share our experience, expertise and technology to further grow LPG as a clean marine fuel alternative. If we turn quickly to Page 5. During the first quarter, reported TCE rates for VLGC fleet averaged $43,300 per calendar day. Commercially, we achieved $44,400 per available day with a high commercial utilization, 97%. This performance translates into a net profit after tax of $71 million and an earnings per share of $0.51. And for the first quarter, we will distribute a dividend of $0.18 per share, amounting to a total of $25 million paid out to our shareholders. We have concluded the sale and delivery of BW Empress, which generated $40 million in liquidity and a net gain of $10 million for us. We're also happy to announce that we've increased our ownership in BW LPG India from 50% to 85%. Over the past, the Indian government has expanded LPG access to hundreds of millions of people. And this access to LPG, a cleaner fuel, is making a huge difference to the quality of life there, especially when indoor air pollution is a major health concern. India is also an exciting market for us, and the growth and potential we see in India is significant. We are therefore very happy to invest further in this market. Subject to foreign documentation, BW LPG India has secured a $198 million 5-year term loan from a syndicate of 7 banks and an all-in cost of LIBOR plus 1.98%. We think that's very competitive. Niels will talk more about the market later, but we remain positive for the remainder of the year. This is supported by recovery in U.S. LPG exports after cold winter and supply-side elements such as dry dockings and Panama Canal transit delays. Overall, demand for LPG continues to be strong, especially supported by retail usage and growing petrochemical demand. And looking into next year and 2023, we're still optimistic about the market, but newbuild orders could likely put downward pressure on freight rates, especially for 2023, and particularly, if we continue at the same pace as we've seen now. If we turn to Slide 6, we continue our track record to deliver strong returns with 22% annual return on equity and a 14% annualized return on capital employed. We will continue to focus on strengthening and deleveraging our balance sheet. The strong cash flow from operations, we can both return cash to our shareholders while also paying down debt. Our net leverage ratio continues to trend down from 44% (sic) [ 49% ] at year-end of 2020 to 42% at the end of Q1 this year. That's the lowest levels in 5 years. With that, I'll leave -- hand it over to our EVP, Commercial, Niels Rigault, who will take you through a market review and a commercial update. Niels?

[Niels Rigault, Executive Vice President of Commercial]

Thank you, Anders. So let's turn to Slide 8. Good afternoon, and good morning to all of you. So towards the second half of January, extreme cold weather in the U.S. narrowed the LPG price arbitrage between the U.S. and the Far East from over $200 per metric ton to below $100. Falling LPG export from both the U.S. and the Middle East have led to one of the quickest and most pronounced corrections in the VLGC freight in history. Today, VLGC freight market has recovered from the bottom. It seems like the worst is behind us with rates stabilizing about $40,000 per day. We keep our positive market outlook for the second half of '21. This is supported by the recovery in LPG export on both the U.S. and the Middle East, reduced fleet supply due to the dry docks and the shipping inefficiencies. In Q2, we have fixed approximately 80% of our available days at an average at an average rate around $28,000 per day on a discharge-to-discharge basis. During the quarter, we have witnessed a flurry of newbuilding orders. The order book now stands at 20% with heavy delivery in '23. We maintain our positive view for the medium-term VLGC freight market at current order books. But more newbuilding order would certainly put downward pressure on freight rates, especially in '23. Turning to Slide 9 and talk about seaborne LPG trade overview. In the first quarter, LPG import into China has recovered and has increased by 18% year-over-year. This is supportive by a recovering retail demand and ramping up productions from the newly commissioned PDH plants. Retail demand into India continued to grow. India LPG import have increased by 15% year-over-year, the highest quarterly import in history. As mentioned by Anders, we are proud to take part of the Indian growth story, and we see enormous potential in the country. We are now the #1 operator of Indian flag LPG vessels and are exploring areas of further growth in India, both within LPG vessels and within LPG infrastructures. Let's turn to Slide 10. In Slide 10, you will see the EIA short-term energy outlook released in May. EIA estimates the U.S. LPG export to remain high -- at high level both in '21 and '22, which is obviously good news. Turn to Slide 11, and talk a little bit about the fleet profile. So as we have mentioned, 23 newbuild orders have been placed since February. The newbuild order book now stands at 20% of the current fleet of 308 ships, with heavy delivery scheduled for '23. From an environmental perspective, the 62 newbuilding orders add 4.4 million tonnes of CO2 emissions, most of which could have been saved by retrofitting the existing fleet. Our '15 vessels retrofitting program saved 1 million tonnes of emissions versus the newbuilding alternative with the same technology. From an economic perspective, the longer-term LPG export growth is looking to normalize meaning the newbuilding ordering activity needs to slow down to keep the freight market balanced. The majority of the newbuilding orders are backed by TCE contracts to the traders in the high $20,000 per day. Furthermore, it is still uncertain how technology will develop to meet the IMO 2030 targets. And the vessels ordered today is still based on existing design and technology, which could very well be already old in a few years' time. Newbuilding prices have increased and Korean newbuildings with LPG propulsion now costs more than $80 million with 2024 delivery. In the VLGC second-hand markets, we are seeing an increased interest, especially for vessels 15 years and older, at prices above newbuilding equivalent. Let's turn to Slide 13 and talk about our commensal performance. We have achieved strong commercial results at $44,400 per day with a 97% commercial utilization. This translates into high operational cash flow of $156 million, allowing us to return cash to shareholders and reducing our cash breakeven by paying down our debt and making us more competitive. Due to the fall in LPG price arbitrage, our trading operation recorded a net loss of $2.4 million. Our goal for Product Services is to better serve our customer and achieve a high utilization of our fleet. Its success has been reflected in our high commercial utilization even during the weak market. Turn to Slide 14, we talk about the time charter portfolio. As we have increased our ownership in BW India from 50% to 85%, the time charter contracts in BW LPG India will be added back to our time charter portfolio from Q2 onwards. Our '21 time charter-out coverage stands at 34% with an average income of $33,700 per day; our time charter-in coverage stands at 14% and at an average cost of $26,300 per day, resulting in a positive net positions of $107 million for '21. We are comfortable at the coverage level for now, and we will continue to evaluate the opportunities for '22 at the right levels. We do see inquiries for 1- or 2-year time charter contracts at around $38,000 per day, which is in line with the current FFA market. That's it for me. And our EVP, Technical & Operations, Pontus.

[Pontus Berg]

Thank you very much, Niels. Turning to Page 15 for some technical highlights. We continue our strong technical and operational performance of previous quarters with market-leading OpEx and safety success despite the, again, increasing global challenges from COVID-19. I'll begin with an update of our LPG propulsion retrofitting program -- progress, sorry. The progress remains on track, and we now have 4 vessels in service and we have 4 vessels at the yard simultaneously. BW Gemini, the world's first LGIP, has sailed continuously for over 6 months and counting without a need to stop for bunkers. This saves voyage time and increases our commercial availability just as planned. In what will be another world's first, we will conduct a ship-to-ship LPG bunkering between BW Balder and BW -- Epic St. Martin in just a couple of days' time. With these STS, we will demonstrate that the industry has infrastructure and the technical know-how for LPG to be our mainstream marine fuel. As we have said on many occasions, shipping is ready for LPG as [indiscernible]. Currently, we are enjoying savings of approximately $4,000 to $5,000 a day by running on LPG versus very low sulfur fuel oil, another compelling reason to use LPG as fuel. Next, to safety. Zero harm is a nonnegotiable expectation from all crew and colleagues and a BW initiative we have been working hard on for years to ensure the best-in-class safety for our group, cargo and the environment. I'm pleased to share that our joint efforts are paying dividends. For nearly 2 years, we have not had any serious injuries in our managed fleet. This means that our crew get to go home safely to their loved ones, and we deliver energy to the world's markets safely and reliably. We have seen limited impacts on operating from COVID-19. However, crew changes remain a difficult challenge, and it has the full focus of our crew and teams and everybody. We have actually managed about 600 crew movements during the first quarter. We continue to provide emotional and financial support to our crew and their families. A little bit on operations. Our crew continues to handle our cargo operations flawlessly. In Q1, we saw over 310 port calls and canal transits. Active voyage management and close follow-up on the ship's performance through Alpha ORI SMARTShip have enabled us to save approximately $300,000 in fuel cost just in the first quarter. Our strategic alliance with BW Epic Kosan for coal and storage and LPG fueling reduces the potential delays, cost and dependencies on terminal schedules for vessel undergoing retrofitting. This translate into a saving of approximately $200,000 per vessel. Finally, a few words on the OpEx. We continued to maintain consistent market-leading OpEx for our fleet. We see this as an important priority, business practice despite the unprecedented global challenges to the operations. We do expect our projected fleet CapEx to peak this year and taper off in '22 with the completion of our LPG propulsion retrofitting program. And with that, let me turn over to our CFO, Elaine Ong, who will walk you through the financial position and results.

[Elaine Ong, Chief Financial Officer]

Thanks, Pontus. Here on Page 16 is an overview of our income statement. Our TCE income was $150 million for the quarter. This also includes a positive $18 million impact related to the effects of IFRS 15. Vessel operating expenses came in at $7,800 per day. This includes incremental manning costs incurred due to the pandemic. We have recorded gains of $2.8 million in the quarter relating to our investment in the shares of Avance Gas. EBITDA came in at $113 million for the quarter, representing a continued high EBITDA margin of 75%. We sold the BW Elm during the quarter, realizing a net gain of $1.6 million. The vessel was delivered to our Indian joint venture in February for continued trading. Our net profit after tax for this quarter was $71 million or $0.51 per share, yielding a return on equity of 22%. Page 17 provides a snapshot of our balance sheet and cash flow statement. Our vessels' book values supported by broker valuations stood at $1.7 billion at the end of the quarter after the delivery of BW Elm and the reclassification of BW Empress into asset held for sale. We delivered BW Empress to her new owner in April and this will be reflected in our Q2 report. Shareholders' equity was $1.3 billion or $9.04 per share. As mentioned earlier, we have increased our ownership in our Indian joint venture from 50% to 85%. Our investment in India will now be accounted for as a subsidiary, and its results will be consolidated from next quarter. Had this transaction happened with effect from 31st of March, the impact on our balance sheet would have been as follows: approximately $200 million increase in vessel values relating to the 5 joint venture vessels, $80 million increase in cash, $180 million reduction in loan receivable from the joint venture, leaving us with $100 million increase in total assets and an $80 million increase in total liabilities. Looking at our cash position, we continued to generate positive cash flows from our operating activities and ended the quarter with $70 million of cash. We have $260 million of undrawn revolving credit facility, which gives us $330 million of available liquidity at quarter end. Our free cash flow has allowed us to invest in our LPG retrofit program, return cash to our shareholders and pay down our debt. At the end of March, our net leverage ratio has come down to its lowest level in 5 years at 42% with the highest available liquidity to date of $330 million. Our all-in cash breakeven for 2021 is $28,000 per day, which is the average TCE needed in 2021 to cover all our cash costs, including capital spend. The higher all-in cash breakeven in 2021 is mainly due to our investment in LPG propulsion retrofits. Our operating cash breakeven is at $22,300 per day. Our net debt position at the end of the quarter was $930 million. Gross debt was $1 billion, of which $176 million relates to lease liabilities arising from our time charter in vessels while $24 million relates to borrowings from our trade finance facilities. This leaves us with approximately $800 million in debt outstanding, which relates to our remaining 4 term loans and revolving credit facility. In April, the outstanding revolving credit facility of $40 million was fully paid, and we will have no major balloon payments due in the next 5 years. On this note, I would like to open up the call for questions.

[Lisa Lim, Head of Corporate Communications]

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

[Lisa Lim, Head of Corporate Communications]

We have one question.

[Anders Redigh Karlsen, Analyst]

Can you hear me? This is Anders from Danske Bank.

[Lisa Lim, Head of Corporate Communications]

Yes. Please go ahead.

[Anders Redigh Karlsen, Analyst]

It's probably a question for Niels. But could you elaborate a little bit about the earnings effect that you see on the LPG propelled vessels in terms of excess earnings compared to the other ships, please?

[Niels Rigault, Executive Vice President of Commercial]

Yes, I mean, well, the question was for me, you said? I think what was mentioned, first of all, it's obviously the price arbitrage between compliant fuel and LPG prices, which today -- in today's market is around $4,000. So that's per-day savings. And another big effect that we talked about, the BW Gemini, which was the first ship, she's now been saving for 6 months and she hasn't -- we don't haven't had any downtime for her to bunker. So you save also a lot of -- on the bunker operations also. Was that the answer you wanted to hear or...

[Anders Redigh Karlsen, Analyst]

Yes. But there is probably a small effect from higher lifting capacity as well, isn't it?

[Niels Rigault, Executive Vice President of Commercial]

Yes. Of course. I mean, those ships could -- the 84,000 cubic, which is the 5 or today's VLGC could carry about 46 -- 200,000 tons, and ours could do 49,300 tons. But I mean for a round voyage, Houston-Chiba, with a couple of discharge, we use about 3,000 tons.

[Anders Redigh Karlsen, Analyst]

Added flexibility, of course.

[Niels Rigault, Executive Vice President of Commercial]

Yes.

[Unknown Executive]

We have 1 more question here from the web. This is from Eirik Haavaldsen at Pareto. Can you elaborate a little bit more on your India JV? What are the plans there? The debt facility of $198 million is sizable versus the 5 ships currently there.

[Anders Onarheim, Chief Executive Officer]

Yes. I'll start, and Elaine, you can follow. Obviously, it's up to $198 million of facility. And we find India a very interesting market. And we will -- if we think there are good opportunities for us to expand our presence, whether there's more ships or even looking at infrastructure, we will consider that. I don't know if Elaine, if you want to elaborate a little bit more on the facility itself.

[Elaine Ong, Chief Financial Officer]

Sure. Thanks, Anders. Basically, as we've mentioned there, the facilities were up to $198 million. So it doesn't mean that on day 1, we will be drawing on the full facility. It will be drawn on different tranches as we continue to look for opportunities to grow and expand in the JV.

[Unknown Executive]

Okay. There's a follow-up from Eirik from Pareto here. Given the success you've had so far with the retrofits are all for pre-2014 vessels or -- no, I mean, or all vessels build -- or newer than 2014? What about the vessels from pre 2014? Will these also be candidates for retrofits?

[Anders Onarheim, Chief Executive Officer]

I'll give a quick answer, and Pontus, I'll let you follow through. I mean, obviously, this is a question both in terms of what's technically feasible, but it's also in terms of what's the expected lifetime of a ship. And I think, of course, if we see increasing spreads in the fuels between conventional fuel and LPG, obviously, it could make sense. But I think it's for now, we're very happy with the '15 ships that we have in the program. But Pontus, do you want to elaborate on that?

[Pontus Berg]

Yes. I mean, it is technically possible to convert the pre '14 ships as well. It is unfortunately going to take a little bit more time and money to do so because these ships are not all -- not all of them have electronically controlled engines. So first, you have to convert them up to a certain standard and then for that to be able to convert into LPG engines. And that, together with the effective life span of a ship, probably gives the answer of no right now.

[Unknown Executive]

Good. Thank you for that. Yes. So about half of the current VLGC LPG fleet can be retrofitted with the technology available today. So then we move over to another question from the web here from Lukas Daul. Why have the cargo ton miles been decreasing in recent quarters?

[Anders Onarheim, Chief Executive Officer]

Niels?

[Niels Rigault, Executive Vice President of Commercial]

[indiscernible]

[Unknown Executive]

So it's referring here to the fleet environmental data slide in the appendix. So this means why is voyage length been decreasing.

[Niels Rigault, Executive Vice President of Commercial]

That's a good question. I mean we do lift most of our cargoes out of the U.S. and I don't have that sign in front of me. But if you look at in 2020 and especially in Q2, we lifted a lot with Product Services. So here, it's referring to this -- the cargo on my slide, you can put it up there. It's on the fleet environmental data showing that the cargo ton miles have gone from 21 million to 18 million. Yes. I mean it's a bit trade. So we lifted most of our cargoes out of the U.S., obviously. Then in Q4 and all that, we still have the lockdown in Europe, but a lot went into India. Some went to South America. That's basically it. I mean it's just a trading, it's supply/demand. But for us, most of our lifting is from the U.S. But I think that's also the reason is that the ships went into India and then it was South America.

[Unknown Executive]

Okay. Thank you, Niels. Then we have one more question here from [ Ula Stolberg ]. It is, why is the dividend less than 50% of net profits?

[Anders Onarheim, Chief Executive Officer]

Well, as you know, we have an annual policy of 50%. And this is, as we've seen, it's a volatile market and we think it's better to be conservative at the start of the year. And then as we've shown in the past, if everything permits, we will do a catch-up later. So I think it's simply being fairly conservative in a market that we've seen to be quite volatile. So -- but for quarterly -- so then quarterly, we're not committed to paying 50% every quarter. So it's -- but on an annual basis, that's our policy.

[Unknown Executive]

Okay. So then we will take a live question here from Lukas Daul now from ABG.

[Lukas Daul, Analyst]

Guys, I was just wondering on your outlook for '22 and '23, I mean, you remain optimistic barring any further orders. But when you sort of show the volumes, you expect them to be flat or flattish from the U.S. and the fleet is going to grow by 20%. So I was sort of wondering how all that adds up. Are you sort of assuming that the fleet inefficiencies are here to stay? Or what is sort of behind that line of thought?

[Anders Onarheim, Chief Executive Officer]

I will start, but Niels or Pontus, feel free to fill in. I mean I think we -- I think you're right. We believe that inefficiencies, they will continue for quite some time. And we think also dry docks have been pushed back. And so I think -- and we feel also still the underlying fundamental demand is going to be there. But obviously, it's -- and of course, if we do see both the diesel market, but also with new regulations coming in, we might -- and we've traditionally been very conservative on the scrapping side, but I think we might start seeing some tough decisions having to be made with some of the other part of the fleet coming towards 2023. So I think a combination of those things makes us feel fairly comfortable. Niels, do you want to add to that?

[Niels Rigault, Executive Vice President of Commercial]

No, I think -- I mean, you said it. I think the main thing in '22 is Panama that, until now, we could have prebooked the Panama slots. Now from next year, it is not possible. And we always see one of the reasons why the market went at $100,000 per day in December or early -- or first half of January, that was the inefficiency from the Panama Canal where you almost have the 2 weeks waiting to do a round voyage from Houston to the Far East due to the Panama waiting. For '23, it's, as you mentioned, Anders, the environmental regulation and especially EEXI kicking in. So those are the 2 main factors that we are quite positive going forward on the freight rates. So mainly due to inefficiencies.

[Anders Onarheim, Chief Executive Officer]

That's -- the one with the dry docks.

[Niels Rigault, Executive Vice President of Commercial]

Yes. And the dry docks.

[Lukas Daul, Analyst]

Okay. And then just to double check the guidance. On the days that you provide in the appendix, going forward, does it already include the Indian vessels that you will start consolidating from the second quarter?

[Niels Rigault, Executive Vice President of Commercial]

Short answer, yes.

[Unknown Executive]

Okay. Thank you, Lukas. Then we have another question from the web here, and this is from Nick Linnane. And he asks what sorts of LPG infrastructure asset would you consider investing into -- in India? How sizable might these investment be in terms of dollars.

[Anders Onarheim, Chief Executive Officer]

Obviously, we will -- once we make a decision on that, we'll communicate around it. But -- so for now, I think we're -- we are really spending time analyzing, looking at various situations. We're not going to jump in and make any huge investments at this stage. But we still think the India market is very interesting also long term. And if we can both help our wholesale shipping operations to be even more substantial and get better volumes and at the same time also contribute to the growth of LPG in India, we think that's a good proposition. So we are looking at several opportunities, but nothing concrete that we can communicate around at this stage.

[Unknown Executive]

Okay. He has 1 more question here as a follow-up. Can you please explain the $18 million revenue benefit in Q1 from IFRS? Is a portion of this benefit likely to reverse in Q2? Or is it a one-off benefit that will not reverse unless the accounting treatment changes back?

[Anders Onarheim, Chief Executive Officer]

Maybe, Elaine, you will take that one?

[Elaine Ong, Chief Financial Officer]

I'll do that. Basically, this is a quarter-on-quarter impact. So we would expect a portion of this $18 million revenue benefit to reverse in Q2. Again, it really depends on the direction that the rates take at the end of each quarter, so it is a differential between the opening at the end of -- at the beginning of the quarter and the end of the quarter. And so if the rates continue to basically move upwards, we will expect a reversal of this benefit.

[Unknown Executive]

Okay. Thank you, Elaine. I think that was clear. Then we have 1 more question from the web here. This is from [ Markus Trigesson ]. He says, how much can you expect depreciation and interest expense to increase in Q2 2021 due to the consolidation?

[Elaine Ong, Chief Financial Officer]

I think you can see Q2 depreciation to be approximately $7-ish million to $8 million. And interest, I think you can estimate it to be roughly between $1 million to $2 million. It really depends on the amount that will be drawn down over the course of the quarter.

[Unknown Executive]

Okay. Yes, Lisa?

[Lisa Lim, Head of Corporate Communications]

Yes. [Operator Instructions] We have come to the end of today's presentation. Thank you for attending BW LPG's First Quarter 2021 Financial Results Presentation. More information on BW LPG is available online at www.bwlpg.com. Have a good day, and a good night.