Earnings Call: Q2 2021

Aug 26, 2021

Welcome to BW LPG's Second Quarter 2021 Financial Results Presentation. Bringing you through the presentation today are CEO, Anders Onerheim CFO, Elaine Ong EVP Commercial, Niels Rygou and EVP Technical and Operations, Pauntersburg. We are pleased to answer questions at the end of the presentation. Should you have any, please type them into the chat box in your Zoom panel. You may also use the raise hand option. Before we begin, we wish to highlight the legal disclaimers shown in the current slide. This presentation held on Zoom is also recorded. I now turn the call over to BW LPG's CEO, Anders Onerheim. Thank you, Lisa. Welcome to our Q2 results presentation for the period ended 30th June this year. As Lisa said, as usual, I'm joined by my CFO, Elaine Ong EVB Commercial, Niels Rygault and EVB Technical and Operations, Pampersburg. It now has been over one and a half years since COVID-nineteen was declared a global pandemic. Our way of life has certainly been impacted and how we do business must adapt to this new reality. Our operations and crew changes continue to be challenged by travel restrictions as countries manage subsequent COVID outbreaks and new strains with varying degrees of success. We would like to thank port authorities and health facilities around the world to set aside resources to vaccinate our crew. Without our crew, our ships cannot sail. If our ships cannot sail, we cannot deliver cleaner energy to the world. The Q2 this year was challenging. VLGC freight rates fell below OpEx for several months before staging a modest recovery. We try to navigate the market with the returns focused mindset, selling 2 of our older vessels to generate attractive returns, secured our 1st ESG related loan facility and made good continued progress on our LPG retrofitting program. It's been nearly a year since we begun this program with BW Gemini, the world's 1st very large gas carrier to be powered by pioneering LPG dual fuel propulsion technology. We are now more than halfway through this program, which is our Keystone project for decarbonization. We now have 8 vessels, soon 9 on water serving customers with the sector's lowest emissions profile and with 7 more vessels to go, 6 more that is. My thanks to our site team, officers and crew we're working tirelessly to ensure the project progresses on time, on budget and with zero harm. These vessels emit significantly less greenhouse gases compared to similar vessels running on compliant fuel. Once all 15 VLGCs are retrofitted, we will have saved 1,000,000 tons of CO2 emissions. Showcasing an innovative approach to increasing operational efficiency, our VLGC, the BW Balder, was the first to receive LPG bunker via SGS, with LPG carrier Epic St. Martin from our sister company. Our retrofitted vessels refuel as they load saving turnaround time and increasing operational efficiency. The infrastructure for distribution and bunkering is already largely available to serve potential marine market demand. There are many LPG storage facilities that can be used for LPG bunkering and over 700 small sized LPG carriers that can be used for ship to ship for STS Bunkering. And at PW LPG, we are convinced that LPG is part of the solution as we work towards the 0 carbon future. It's an important step in that direction. As a world leader in LPG shipping, we can facilitate global decarbonization as we all work together to combat climate change. Turn to Slide 5. During the Q1, reported TCE rates for our VLGC fleet averaged $25,500 per calendar day. Commercially, we achieved $27,500 per available day with a high commercial utilization of 96%. This performance contributed to net profit after tax of $23,000,000 where an earnings per share was $0.16 Adjusted for accounting gains, however, the net profit came in at $3,000,000 and for the Q2, we will distribute a dividend of $0.10 per share amounting to a total of $40,000,000 paid out to our shareholders. Support for us to continue to pay our shareholders as long as our operations are running well. Looking at highlights for the quarter, I would like to commend our selling crew as well as our Onshore teams, who completed approximately 30 inspections and safely embarked and disembarked more than 500 crew with no delays to port operations. We also concluded the sale and delivery of BW Empress in This year, DIS generated $40,000,000 in liquidity and resulted in a $10,000,000 net gain. Now the gain of $10,000,000 materialized after we increased our share in our Indian subsidiary from 50% to 88%. In your market is increasingly important to us. After the end of the second quarter, we have sold and delivered BW Confidence, BW BOSS and BW Energy. These 3 transactions add $81,000,000 to our liquidity and resulted in net gain of $9,000,000 In addition to the above, we also exercised our purchase option for the Eurocosmos, which is now renamed BW and Eglata. And finally, we secured a $45,000,000 loan to finance the retrofitting of 6 dual fuel LPG propulsion engines. As normal, Nils will talk more about the market, but we expect rates remain above cash breakeven for the rest of the year. This year is driven by continued growth in U. S. Exports as well as recovering volumes out of the Middle is looking into next year and 2023, we continue to be constructive, But to reiterate that sustained export growth for U. S. LPG and no further newbuilds are key to bring about a balanced market. To Slide 6. The soft spot market during the Q2 pushed our annualized return on equity up to 7% our annualized return on capital employed under 6%. Nevertheless, our operational and free cash flows remain healthy at $68,000,000 $41,000,000 respectively for the quarter. This gives us great flexibility and enables us to continue to return cash to our shareholders. Our net leverage ratio continues down from 42% at the end of the first quarter to now 40% at the end of the second quarter. Is the lowest level in 5 years. Next up is Niels, who will take you through the market review and commercial update. Niels? Thank you, Anders, and good morning and afternoon to all of you. So let's turn to Slide 8. We have fixed 83% of our Q3 available fleet days at an average rate of $32,000 per day basis discharge to discharge. We expect the rates to be firm for the remaining of 2021, but with high volatility due to voyage inefficiencies. In the medium term, we continue to be optimistic for 2022. However, the high number of recent New Berlin orders have increased the uncertainty for 2023. But the tightening of IMO regulation will lead to increased recycling of the aging VLGC fleets and the recovery in production from the Middle East will partly offset the newbuilding deliveries. Let's turn to Slide 9. During the Q2, U. S. LPG export increased by 22% And with high domestic demand from extremely cold winter earlier this year has led to low inventories, which again leads U. S. LPG prices to continue at record high levels. Despite the high U. S. LPG prices, the strong U. S. Export illustrates the strength of the LPG import demand as more and more countries are building out the infrastructure to use LPG as the primary source. For the main import regions, South Korea was the only one to show a notable decline due to less retail demand and higher local refinery production. Let's turn to Slide 10. On Slide 10, you see EIA short term energy outlook released in August. EIA forecast that US LPG export will remain high in 2021 2022, albeit production growth slowed to 3.5% from over 10% in 2019. On the positive side, the oil price has been higher than forecasted, incentivizing U. S. Oil producer to increase production. Also OPEC has gradually started to increase oil production. Therefore, if the entire 5,800,000 barrels per day production adjustment is phased out, we expect a meaningful recovery in Middle East LPG export over the next years. Turning to Slide 11 and talk a little bit about the VLGC fleet profile. So the focus on this slide is the increase in the orders for VLGC. The last quarterly update, we expected 30 vessels for 2023 and none for 20 24. Today, another 14 vessels have been added to the order book, 9 ships in 2023 and 5 in 20 24. This shows that our industry has grown the LTC market in the future. All recent orders are with LPG Propulsion. We take comfort in the industry following us and embracing the LPG propulsion technology. BW LPG has no new orders, but will have the largest fleets of our ship of Paulson vessel ready by 2022. We sold 4 ships, which generated total free cash flow of 121,000,000 and exercise the purchase option of 1 of our long term TCE. As a result, today, we control a fleet of 42 VLGCs and 8 of them are targeted. Turning to Slide 13. On our commercial performance, we achieved a commercial result of $27,500 per day with $96 commercial utilization. The result was impacted by positioning costs related to 7 ships due for drydock and 2 ships delivered for sale. Overall, we had 11% planned off hire days, driven by upgrading our vessel with Elpazebo Paulsson and smart chip technology. For Q3, we expect off hire days to be at 6%. Slide 14, talk about the TransAlta portfolio. As mentioned, we increased our ownership in the Indian joint venture from 50% to 88%. Our time charter out revenues from 2022 increased from $39,000,000 to $52,000,000 with the average TCL rates increasing from $32,900 to $33,800 per day. With expectation of a healthy shipping market for 2022, we increased our TCN coverage with 3 VLGCs at an average cost of $25 per day, bringing down our average TCN costs. That's it for me and Pompous Feike will take you through the technical updates. Turning to Slide 15. In Q2, it was business as usual on the technical and operational front, in spite of increasing challenges from COVID-nineteen, as earlier mentioned. We continue to be a reliable partner for our customers and commercial colleagues as we managed our LGIP retrofitting program as well as baseline priorities with market leading OpEx and safety performance. We remain focused on the safe and disciplined in conversion of our vessels with LPG propulsion technology. As earlier mentioned by Anders, we are now more than halfway through our program with 8 vessels in the water and 1 at yard and 1 at gas dry. BW Brage is scheduled to be completed in the next few days and thus we will have 9 VLGCs serving our customers. As with all pioneering technology, we expect that this ambitious retrofitting project to have its share of tipping issues. It turns out, nearly a year in, the main challenges we face are from the logistics of moving people and materials. Our sincere thanks to committed colleagues and partners for taking these challenges in their stride and keeping to time lines and budgets. We continue to demonstrate the industry is ready for LPG to be a mainstream marine fuel. Ship to ship bunkering in international waters We have confirmed LPG fuel contracts with suppliers in the U. S. To ensure uninterrupted supply for our retrofitted vessels. In Q2, we lifted 5 LPG fuel stands in Houston and Netherland. Our crew continues to handle our cargo operations flawlessly. In the first half of the year, we had nearly 600 port calls, which means that our team manages an average of 3 port calls per day. In Q2, we managed about 30 mandatory inspections with 0 screening rejections from our customers and the oil majors. These inspections were conducted either at safe ports or done remotely. We credit the excellent result to our crew and marine colleagues who have worked hard to maintain our vessels to industry leading standards despite the worry and challenges from COVID-nineteen. Planned special and intermediate survey dockings were also carried out on time and on budget. To protect the safety of our crew on board, colleagues from the office undergo 2 to 3 weeks of quarantine and vessels follow strict coordinating rules while at yard. Lastly, some words on the impact of COVID-nineteen on crude changes. Our thanks to the crewing team who currently holds one of the most complicated jobs juggling ever changing regional and international travel restrictions and finding connecting flights to get our crew safely home to their families. In Q2, over 500 crew joined or left our vessels safely with only minor impact to port operations. We remain vigilant, quarantining and testing crew before they leave their home country and before they board a vessel. Every port call is also analyzed for local restrictions and quarantine requirements, so that we are prepared and are in full compliance at all times. Let me now turn over to our CFO, Elaine Ong, who will discuss our financial position and results. Thanks, Paunters, and good day, everybody. Here on Page 16 is an overview of our income statement. Our TCE income was $94,000,000 for the quarter, as Niels mentioned earlier, we had a higher than usual planned off hire this quarter with 4 of our vessels at the yard undergoing LPG propulsion profits. In addition, our TCE income also includes a negative $5,000,000 impact related to the effects of IFRS 15. Vessel operating expenses came in at $8,100 per day. This includes incremental manning costs incurred due to the pandemic. EBITDA came in at $55,000,000 for the quarter, representing a continued high EBITDA margin of 58%. We sold the BW Empress during the quarter, realizing a net gain of $9,900,000 The vessel was delivered to its new owner for further trading in April. We increased our equity share in our Indian joint venture from 50% to 88% during the quarter. Our equity investment is now accounted for as a subsidiary and the remeasurement of our existing equity interest was a gain of $9,800,000 This gain was derived from an uplift in asset values relating to the vessels in the joint venture prior to the transaction. Further details can be found in Notes 15 and 16 in our financial report. Our net profit after tax for this quarter was 23,000,000 were $0.16 per share, yielding a return on equity of 7%. Page 17 provides a snapshot of our balance sheet and cash flow statement. Our vessels' book values, supported by broker valuations, stood at $1,800,000,000 at the end of the quarter. This is after the reclassification of BW Confidence, BW BOSS and BW Energy as assets held for sale. We concluded the sale and delivery of these 3 vessels after the quarter end. These transactions will be reflected in our Q3 report. Shareholders' equity was CAD 1,300,000,000 or CAD 9.17 per share. As mentioned earlier, we have increased our ownership in our Indian joint venture from 50% to 88%. Hence, the financial results of our Indian business have been consolidated from April this year. The impact on our balance sheet are as follows: approximately $200,000,000 increase in vessel values, dollars 100,000,000 increase in cash and $180,000,000 reduction in loan receivable from the joint venture, giving us a $120,000,000 increase in total assets and a $100,000,000 increase in total liabilities. Looking at our cash position, we continue to generate positive cash flows from our operating activities. Including the positive cash flows from divesting our older vessels, we ended the quarter with $134,000,000 of cash. We also have $256,000,000 of undrawn revolving credit facility, which gives us $390,000,000 of available liquidity at quarter end. At the end of June, our net leverage ratio is at its lowest levels in 5 years at 40%. Our available liquidity at $390,000,000 is at the highest level to date. Our operating cash breakeven is at $21,300 per day. Our net debt position at the end of the quarter was RMB 872,000,000. Gross debt was $1,000,000,000 of which $175,000,000 relates to lease liabilities arising from our time charter in vessels. This leaves us with approximately RMB830,000,000 in debt outstanding, which relates to our 5 term loans, including our new $198,000,000 facility for our Indian subsidiary, which was concluded in May. This new facility was partially drawn during the quarter with the remaining $92,000,000 reserved for future growth. In August, we have also secured a $45,000,000 transition revolving credit facility to finance the retrofitting of 6 VLGCs with dual fuel LPG Propulsion Engines at a margin of LIBOR plus 1.7%. This is an upsize of our existing $290,000,000 term loan facility whose terms remain unchanged and as our 1st transition financing done in tandem with our journey towards net zero carbon emissions. We have 4 remaining LPG Propulsion retrofits still to be financed for which discussions are already well underway. 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. We will begin our Q and A session now. Should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. Should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question Again, should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. One last time, should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. All right, we have come to the end of today's presentation. Thank you for attending BW LPG's Q2 2021 financial results presentation. More information on BW LPG will be available online at www.bwlpg.com. Have a good day and a good night.