BW LPG Limited

Ladies and gentlemen, welcome to BWLPG Second Quarter 2020 Financial Results Presentation. We will begin shortly. You will be brought to the presentation by BWLPG CEO Anders Unnohain, CFO Elaine Ong, and ETV Commercial Niels Riegel. They will be pleased to address any questions after the presentation. Should you have any questions, please press star 1 on your telephone keypad or type your questions into the chat box on the website. You will receive further instructions as required. Certain statements in this conference call may constitute forward-looking statements based upon management's current expectations and include unknown and known and unknown risks, uncertainty, and other factors many of which BWLPG is unable to predict or control that may cause BWLPG's actual results, performance, or plans to defer materially from any future results, performance, or plans expressed or implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation often offer to purchase or sell any securities. With that, I'm now pleased to turn the call over to DWLPG CEO, Mr. Anders Omaheim. Please go ahead, sir.

Thank you. Welcome to the presentation of our results for the second quarter of 2020. As you heard, I'm here joined by our CFO, Elaine Ong, and our EVP commercial, Nis Regal. We appreciate your interest, and we'll take questions at the end of the call. Let me start by saying that I'm very pleased with our 2Q results, particularly when we take into account the circumstances. Both the COVID-19 and oil price disruptions, they put our entire organization to the test, both at land and at sea. Crew changes became a huge challenge. Inspections were almost impossible to conduct. and the volatility in the market made it very difficult for the commercial team. In addition to Agile Work Challenge, they're working from home, of course. I'm therefore very proud to lead such a competent and agile team. So, if you go through the presentation, please go to the slide four, the highlights. The TCE rates on our VLGT fleet averaged 39,100 per day. This was generated in net profit after tax of 62 million for an earnings per share of 45 cents. With our continued strong financial performance in the second quarter, we have now achieved a year-to-date return on equity of 24 percent, and we have generated $300 million of free cash flow. We are also pleased to announce that we continue to return cash to our shareholders. The Board has declared a Q2 cash dividend of 15 cents per share, amounting to $21 million. And with this dividend, we have year-to-date paid 35 cents, which is about 34 percent of the $1 $1.03 in earnings per share that we first had. Our dividend policy remains to target a payout ratio of 50% on an annual basis. However, since we pay on a quarterly basis, the Board has found it prudent to pay out less than 50% for the first quarters. This, of course, leaves room for some upside in the last two quarters. We are retrofitting the world's first LPG dual-fuel engines on the BW Gemini and the BW Leo, and with this clearly taking the lead and advancing technology towards zero-carbon fuel propulsion. You can see the picture of the deck tanks ready for installation at the yard on the left side. They're huge tanks. We continue to be fully committed to our 12 dual-fuel engine conversions, given the substantial environmental benefits that this gives us. DMV has confirmed that installing new technology on existing vessels generates 97% less carbon emissions than the construction of a new vessel. This means that building new vessels with LPG propulsion is hard to justify from an environmental perspective when you can actually convert. And we hope that the industry will follow our lead and upgrade the fleet rather than build new. We also hope that our customers will see and take advantage of this benefit when tendering for their longer-term charging needs. Finally, we have also started to collaborate with Hafnia, our affiliate company, on bunker procurement. Hafnia supports bunkering over 450 ships, so they're a major player, bringing economies of scale and best-in-class bunkering logistics to our firm. As we also previously announced, we have concluded the sale and delivery of Berger Summit to our new owner for further trading. The sale has generated US$9 million in liquidity and a net gain of $4 million. The successful completion of that transaction, I think, demonstrates our asset management strategy. We will continue to evaluate for investment and divestment in the quarters ahead. We now own and operate a fleet of 46 modern VWCs with an average age of 8.7 years. Turning to page five, let me then review the key financials of the quarter. So in the second quarter, we positioned our fleet to capture the strong market in the first half of the quarter. and protect ourselves with increased time target coverage in the marketed bottom at the end of June. With a strong commercial and operating performance, we achieved a daily rate, as mentioned, of 39,100 for the VLDC segment. This allows us to continue generating strong returns for our shareholders with return on capital employed of 12% and return of equity on 21% for the quarter. The annualized earnings yield measured as EPS divided by our share price at quarter was 58%. Our net leverage ratio decreased from 58% in the second quarter of last year to 46% at the end of the second quarter this year. This is a level we are very comfortable with. Once again, we have returned cash to shareholders. At the same time, significantly paid down our debt to a comfortable level. REVP Commercial, Niels Vergaard, now we'll take you through the market review and commercial update. Niels.

Thank you, Anders. Let me start with a summary of the VLTC market outlook. We are currently witnessing a strong V-shaped recovery in the VLTC market. At the start of Q2, we had a freight rate around $50,000 per day, but it declined sharply down to $10,000 at the end of the second quarter. Now, in the middle of the third quarter, will receive freight rates have recovered to level we last saw at the beginning of Q2. Looking forward into Q3, LPG production and export out of the US are holding up well with the export at similar level to 2019 and inventories still well above the five years average. LPG export out of the Middle East are up 17% or about 11 cargoes in August compared to the average export level from May to July. This as a result of OPEC gradually reducing their production cuts. For the medium term, meaning Q4 and 21, freight rates are also supported by inefficiencies from bunkering delays, crew changes, and heavy dry dock schedule. In 21, we expect that over 20% of the fleet will be dry docked. We maintain a cautious view for 21. but highlight that a recovery to a higher oil and gas price environment would support a more positive outlook. As you can see from slide 8, traded LPG volume fell by 9% in the second quarter, but we have seen recovery in import demand in both Asia and Europe in the third quarter. The positive news in Q2 on the demand side is that China is back and has started to import LPG from the U.S. again. Last time was in 2018. At slide 9, you will see EAEIA short-term energy outlook released in August. They still anticipate a growth in US LPG export by 13% in 2020, but expect next export to decline by 10% in 2021, up from their April update, which was expected an 11% decline. The forecast is based on the WTI price of $40 for 21. On the next two slides, we want to give you a better understanding of the LPG demand drivers. Global LPG demand is about three times larger than the seaborne LPG trade. The LPG domestic production in Asia is not able to meet the rapid growth demand. is the largest sector for the total LPG demand, consuming about half of all the produced LPG. 2.1 compound annual growth that we have seen historically would equate to roughly 3 million tons of LPG additional demand per year, or roughly eight additional VLTCs a year. In addition to retail, LPG demand is also driven by the chemical and refinery sector. On slide 11, we show that demand for LPG in China is driven as much by chemicals and refineries. In China alone, over seven PDH projects are under construction and scheduled to come on-stream from 2020 to 2023. The total propane requirements for these are estimated to be over 4 million tons per year. Turning to slide 12, the new building order book now stands at 11% of the current fleet, with two new confirmed orders since our Q1 earnings release. 60% of the order book is LPG propulsion. However, there are no reasons to order new ships to make the fleet more efficient. More than 150 existing ships can be retrofitted. From an environmental standpoint, New builds do not justify the CO2 savings, with a CO2 payback period of over 15 years, contrary to a retrofit of only six months. Think reuse. Turning to slide 14. Q2 was the quarter COVID-19 hit the WGC sector. Total sea-borne LPG trade decreased 9% year-on-year, mainly driven by decreased exports from the Middle East. OPEC Plus started the historic production cuts in May. As such, LPG export from the Middle East dropped by 12%. Anticipating less cargoes out of the region, we positioned our vessels toward the U.S. and fixed only 10% of our fixture in the Middle East. U.S. export remains strong, with volumes transported by VLDCs up 7% from the same period last year, despite oil production reduction. The WTI oil price went negative in April, disrupting WTC trade. During this period, product services demonstrated its capabilities in supporting shipping performance by improving our commercial utilization. European import demand came to a complete halt due to the lockdown measures. However, this was offset by the increases in India and Brazil, where the sudden increase in import caused delays and discharge ports and many ships were stuck for weeks. The decreasing import demand resulted in an oversupply of fleets in the market and freight rates started to drop. We reduced the fleet capacity by slow steaming and sailing the longer route to the Cape of Good Hope instead of via the Panama Canal. The collapse in VLC freight rates at the end of June will impact our Q3 performance. For Q3, we have fixed about 80% of our fleet-wide available days at an average rate of about $27,000 per day, basis discharge to discharge. However, the current strong rate environment will most likely translate to higher earnings in Q4, making the third quarter our weekly quarter this year. Slide 15 shows that our strong performance this quarter was driven by a high utilization in combination with a well-positioned fleet that allowed us to capture the strong spot market in the quarter. Turning to slide 16, in the second quarter, before the rates collapsed, we increased our time-sharded coverage from 16 to 25% for 20 and from 5 to 14% for 21. We have now covered our TUC-IN exposure for 2021 at a profit of $2 million. With that, I will hand back to Anders, who will share some technical highlights.

Thank you. Thank you, Niels. As mentioned, we continue to deliver a strong technical and operational performance in the quarter, despite the challenges from the market due to COVID-19. Our planned dry docks and retrofittings remain largely on track, and our final scrubber installation is scheduled for October this year. The retrofitting of BW Gemini and BW Leo with LPG dual fuel engines are commenced in August. Once completed, they will be the first vessels on water with this pioneering technology, which could pave the way for ammonia propulsion and zero carbon emissions down the road. I've previously said that these conversions make sense both from a financial and environmental perspective. This is still the case. The forward spread is still attractive, and we expect significant bunker savings with our retrofitted ships. Crew changes remain challenging, but we managed this well with contract overruns on the declining trend. We have completed about 900 crew movements year-to-date. However, still 47 crew members are over three months delayed, and 55 members are less than three months delayed for their crew change. With that, let me turn it over to our CFO, Elaine Ong, who will walk you through the financial position and results. Elaine?

Thanks, Anders. Here on page 20 is an overview of our income statement. Our TCE income was $149 million for the quarter and $311 million for the first half of this year. This is driven mainly by the strong TCE rates and a high fleet utilization of 97%. Included in our TCE income for the quarter is a positive $17 million relating to the effects of IFRS 15 on revenue, where since 1 January 2018, spot voyages that straddle the quarter end have to be accounted for on a load-to-discharge basis. With rates picking up as we near the end of the third quarter, we expect IFRS 15 to have the opposite effect on our reported numbers for Q3. Vessel operating expenses came in at $7,100 per day for the quarter and $7,400 per day for the first half of the year. This is roughly in line with our expected run rate for this year. Time charter hire expense relates to one vessel with a charter period of less than 12 months. EBITDA came in at $113 million for the quarter and $239 million for the first half of the year, representing an EBITDA margin of 77%. As previously highlighted, with effect from 1st of January 2020, We revised our vessel's useful life from 30 years to 25 years. The impact is an increase in depreciation of approximately $6 million per quarter. We also recognized a $4 million impairment charge on two time-chartered-in contracts this quarter. This is because their contracted rates were higher than forecasted earnings over the remaining lease periods. Profit after tax this quarter was $62 million, or $0.45 per share. For the first half of 2020, our profit after tax was $143 million, or $1.03 per share, yielding an annualized return on equity of 24%. The fair value changes this quarter include an approximate $2 million loss on our interest rate hedges and $3 million gain on our Ford Freight agreements and bunker hedges. These mark-to-market changes are deferred in equity, bringing our total comprehensive income for this quarter to just over $1 million. Turning to page 21, we provide a snapshot of our balance sheet and cash flow statement. A vessel's book values, supported by broker valuations, stood at $1.8 billion at the end of the quarter. Shareholders' equity was $1.2 billion, or $8.39 per share. During the quarter, we generated $113 million of net cash from our operating activities and ended the quarter with $83 million of cash our $300 million revolving credit facility remains undrawn, giving us just under $400 million of available liquidity at quarter end. Turning to page 22, the strong cash flows generated over the last 12 months with minimal capital expenditures over the same period have allowed us to pay down debt, thereby reducing our leverage. Our net leverage ratio decreased by 12% over the last 12 months. from 58% at the end of Q2 2019 to 46% at the end of this quarter. This is even after paying out $145 million in dividends for both 2019 and Q1 2020. This is made possible by our low operating cash breakeven of $20,500 per day for our own fleet and $21,600 per day when we include the time charter in vessels. Our all-in cash break-even level for 2020 is $23,700 per day, which is the average TCE needed in 2020 to cover all our cash costs, including dry dockings and the equity portion of our CapEx upgrade. Page 23 provides an overview of our liquidity and debt position. Our net debt position at the end of the quarter was $1.1 billion. Of this, Only $13 million relates to our trade finance facilities for our cargo trading business, and $215 million relates to lease liabilities under IFRS 16 on leases. The remaining $887 million in debt outstanding relates to our five-term loans. We have no major balloon payments due in the next five years. and only a small balloon payment of $47 million due in 2023 relating to our $150 million term loan. In May this year, we secured financing for the retrofitting of five dual-fuel LPG propulsion engines. The existing $400 million facility at LIBOR plus 170 BIPs was increased by $38 million with all other terms unchanged. That gives us a bank financing that covers over 80% of our expected capex on these five vessels. With this, I would like to hand the time back to Anders to conclude our presentation.

Thank you, Elaine. We then just turn to page 25. I'll summarize Senator Arring's presentation. As stated, despite the challenges related to the COVID-19, we delivered another strong quarter, both commercially and operationally, and generated earnings per share of $0.45 per share in the quarter and net profit after tax of $62 million. On the back of our strong earnings and taking into account our balance sheet, liquidity, CapEx, and a cautious market outlook, the Board has declared a cash dividend for the second quarter of $0.15 per share, amounting to $21 million. Combined with 20 cents divided dividend paid for Q1 2020, the dividend is 34 percent of year-to-date net profits. And at the share price this morning, this gives an annual dividend yield of about 25 percent. In fact, since our listing in 2013, our dividend policy has remained unchanged with a target payout ratio of 50 percent of annual net profit after tax. With the dividend announced today, we have, since our IPO, declared 63 percent of accumulated earnings as dividends. We are very excited and proud to have the first LPG dual-fuel vessel soon ready for operations. I believe this clearly demonstrates our EFT commitment as a company. It's not enough to have a nice glossy paper with text only in the annual report. Action speaks louder than words. Finally, I would like to provide a summary of our outlook on the BLGC market. Although the freight rates rate collapsed at the end of May, the market has shown a strong recovery towards the end of July. The rate has increased to around $50,000 per day, a level last seen in early May. Freight rate recovery is supported by recovering LPD exports, firm import demand from Europe and Asia, and significant reductions in fleet supply due to slow steaming of vessels and longer voyage routes from the U.S. to Asia by Cape of Good Hope. In the medium term, we see downward pressure on U.S. LPD supply, falling lower oil prices, and a meaningful new build order book. This is partly offset by heavy dry dog schedule with over 40% of global fleet going to yards by end 2021. And recovery in Middle East LPG production as opiate oil production gradually returns to pre-cut levels. Again, you know, we are conservative, but we also think there are, you know, there are uncertainties out there. So we will stick to this view. But of course, we will maneuver as good as we can through, you know, what we think will be exciting but challenging times. So with that, I'd like to thank you and I'd like to open up the call for questions.

Thank you, sir. Ladies and gentlemen, we will begin our question and answer session. Should you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. We have the first question from the telephone line, from the line of Amish Carlson. Please ask your question.

Yes, hello. Congrats on my good result. This is Amish from . It's probably a question for you, Nils. What are you seeing in the U.S. right now in terms of exports? Because I'm in EIA. has been fairly conservative in her approach towards 2021. And I assume that's part of what you're alluding to there, and you're saying that 2021 might be challenging. But could you give us some insight on what is happening in the U.S. right now?

Yes, I mean, EI has been very conservative, and also, as I mentioned during the presentation, the base WTI price they're using is 40, and right now it's more like 44. And we are also surprised at how many cargoes actually came out and are coming out right now. We also see that the... The rich gas areas are also pumping a lot of LPG. So things are going great, and I would say that more cargo is coming out. But, yes, we are anticipating a reduction next year. But we'll see. If the oil price continues to go up, then we'll probably see an increase.

Okay. And then if you look to take additional cover, what levels could you, you know, is there any demand out there and what levels can you say fix a year time charter at the present time?

Yes, there are demand and right now I would say that it's around $20,000, $28,000 per day.

Okay, thank you.

We have the next question from the line of Lucas Dio from ABG. Please answer your question.

Thank you. Good afternoon, ladies and gentlemen. I was wondering if you flip to page 18 in your slide deck, if you could help us reconcile the capital expenditures that you were sort of putting in place in your retrofit program. Because it says that you have spent so far $31 million on it, and that's not something we are able to reconcile with your cash flow statement. So maybe if you could help us with that.

Elaine, will you take that?

Sorry, Lucas. I didn't realize I was on mute. Thanks, Lucas, for your question. $31 million is the expected expenditures for the retrofit this year, which we have financed, the four ships that will be. So it hasn't been entirely spent, so to speak.

Okay, okay. So that's something that will still sort of be paid out throughout the course of the year?

That's correct.

Okay, okay. Okay, that makes sense. And then a couple of other things. You mentioned that one of the measures you have taken to sort of offset the market weakness was slow steaming. And I guess from some of your environmental KPIs in the appendix, we could see that. But could you just ballpark, sort of give us a figure of the average speed in the second quarter compared to the quarter before a year ago?

You have those numbers, Niels?

No, I don't have those numbers. The only thing I would say is that in Q2, we started to slow steam towards the end of Q2 when the market started to drop. So around mid-May, June. Okay.

Okay. Okay. And then Elena, I mean, you've been sort of having a very good OPEX numbers so far this year, but I was wondering whether there is kind of an impact of the COVID situation where maybe some of the stuff on the maintenance sides, et cetera, needs to be sort of postponed. Is that a right assumption or is this sort of level something we should anticipate you to deliver going forward?

Lucas, I think I mentioned earlier in the script that the levels that we're seeing for the first half of 2020 will be indicative of the run rate for the rest of this year.

Okay, okay.

So I think if you use that as a guide, that will be quite close.

Okay, fair enough. And you mentioned sort of the positive impact you've got on your TC in the second quarter. I guess it was around 17 million. and that's going to reverse in the third? Is this going to fully reverse or partially, or how should we think about that?

Well, I think it probably is going to partially reverse. It really depends. I don't have the crystal ball at quarter-end Q3 yet at this point in terms of where the positioning of the vessels are and what we would estimate as an accrual. But it's suffice to say that the $17 million that we saw at the end of the quarter that we reported will reverse early in Q3, and then we will pick up some form of an offset. So I would say it should partially reverse at the least. And it also depends on how far along the freight rates improve compared to where we began, which is fairly low levels at the end of Q2.

Okay. Okay, and then just finally, I mean, there have been a couple of second-hand sales in the recent months, and I would say that maybe the realized prices came in higher than what people would have anticipated. So my question is, what is that O2, and do you see sort of potential for doing more similar transactions? Yeah.

I can start Nielsen, you can follow up. I think we continue to evaluate our fleet and to see at what point is the right time to start renewing more. I think we are comfortable with the values we've seen and I think we will evaluate, but now our focus really is on renewing the part of our fleet where we are retrofitting. But again, we will continue to look at this, and we have many discussions internally, and we have seen that there are inquiries out there. Of course, one of the big challenges that's been now these past several months is that even though you can agree on something, getting both inspectors on boards and just getting the details done is very difficult. So generally, sales and completion takes much longer.

Okay, thank you very much and have a nice day.

Once again, ladies and gentlemen, if you wish to ask a question on the telephone lines, please press star 1 on your telephone keypad and wait for your name to be announced. There are no questions on the telephone lines at the moment.

Let's take a question from the webcast. So this is from Peter Haugen from Kepler. He asks, what's the actual cost of retrofitting at the LGC, and what the main cost elements are, including off-fire?

Well, I can start. I mean, I think, you know, I think the cost, you know, we've discussed before, they are somewhere between $9 and $10 million. You know, that's the actual cost of retrofitting. And so that CapEx, it's split pretty much equipment. It's about $6.5 million. GN Engineering, about, you know, 0.2. The yard cost is about 1.5. And then there's also built in some contingency. So... And how many extra days? We have said that in total we expect the retrofitting to take approximately between 50 and 60 days.

Okay. It also has a follow-up question, which is, what does it take to convert from LPG to ammonia, and what is the expected cost of that?

I think, of course, this is the question. We... we have certainly seen that we have we had a firm belief that it is not going to take a big investment or a big adjustment you know to go from the lpg propulsion to to ammonia so so but the cost is still too early you know man are still working on this and we're having close dialogue with them but it's it's it's still it's still too early i think you know give any any any concrete numbers but again uh this I'm being told by our clever engineers that this will not be a big investment.

Okay. I think there's no further questions on the webcast.

We have a question on the telephone line, sir. Would you like to proceed?

Yes, let's go ahead and take a question from the telephone line.

Thank you. So we have a question from the line of Eric Havildensen. Please ask your question.

Yes, hi. So sorry about that. Just wanted to double check your Q3 guidance. When you say 80% of those days at 27, that's just your Q3 guidance refers only to spot days, right?

It's fleet-wide.

So, including time chargers?

Yes.

Can you also then elaborate a little bit on where you've been booking ships for the past two, three weeks?

Well, the market has really recovered at the V-shape. I mean, in In June, it was down to $8,000 to $10,000 per day. And in August, we're talking slightly above $50,000. And the market moved up from $10,000 to $40,000-plus in two weeks.

Thank you for that.

Once again, ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Once again, ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. Once again, ladies and gentlemen, if you wish... Yes, I'm sorry.

It sounds like... There are no more questions shown here, so if that's the case, then I'd just like to thank everybody for joining us for the call, and have a good day.

Thank you, sir. Ladies and gentlemen, we have come to the end of today's presentation. Thank you for attending BWLPG's second quarter 2020 financial results presentation. More information on BWLPG is available online at www.bwlpg.com. Goodbye.