BW LPG Limited

Ladies and gentlemen, welcome to BWLPG's third quarter 2020 financial results presentation. We will begin shortly. Bringing you through the presentation today will be CEO Anders Ornheim, CFO Elaine Ong, EVP Commercial Niels Riegel, and EVP Technical and Operations Pontus Berg. They will be pleased to address any questions after the presentation. Should you have any questions, please press star one 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 unknown risks, uncertainties, and other factors, many of which BWLPG is unable to predict or control that may cause BWLPG's actual results, performance, or plans to differ 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 of an offer to purchase or sell any securities. With that, I'm now pleased to turn the call over to BWLPG CEO, Anders von der Heim. Please go ahead.

Thank you. Welcome to the presentation of our results for third quarter, the period ending on 30th of September this year. As usual, I'm joined by our CFO, Elaine Ong, our EVP commercial, Neil Frigaud, and also with us today is EVP technical and operations, Pontus Berg. Thank you for taking the time, and we'll take questions at the end of the call. The good old saying that when the going gets tough, the tough gets going. I think that's been, I think, a motto, I think, for all of the whole shipping community, and certainly it's also been that for us. And I want to start by really thanking and complimenting the whole team from officers and crew and colleagues for, I think, great effort in very, very difficult times. I think also, again, it's a very tough quarter. I think the team has delivered not just a solid Q3 result, but also I think we delivered the world's first VLGC that's powered by LPG propulsion technology. Of that, we're very proud. We've had to navigate COVID-19 restrictions, oil price disruptions, and uncertainties in both workplace and daily lives. And as I said also in the last quarter, COVID-19 has made career changes almost impossible, inspections were difficult to conduct, and volatile markets kept the commercial team certainly on their toes. So again, I'm very proud to lead such a competent team. If we go to slide four, the star for this quarter is clearly BW Gemini. It's the world's first very large gas carrier to be retrofitted with the pioneering LPG propulsion technology. The Gemini is currently on a historic Trans-Pacific voyage on full LPG propulsion to the Enterprise Terminal in Houston. We really think that LPG as fuel is a promising solution for sustainable shipping. And as you know, we have committed over $100 million to retrofit 12 of our VLGCs with this new technology. And because we think it makes sense from an environmental point of view, operational point of view, and economic point of view. We're pleased to bring BW Gemini to you. in the form of an augmented reality model that you can download using a mobile device. A video is also available on YouTube and on our website. So, to page five, the highlights. Again, I think, you know, we delivered a solid quarter despite significant volatility. TCE rates on our ability fleet averaged 26,800 per day, and generating then a net profit after tax of $25 million, or earnings per share of 18 cents. So far this year, we have now achieved a year-to-date return on equity of 19% and generated $400 million of free cash flow. And I'll continue to focus on returns. Again, I see the community very often talking about net asset value. In our business, we really think focusing on return on equity, return on capital employed, is really what matters. We're also happy to announce that we continue to return cash to our shareholders. The Board has declared a Q3 cash dividend of 15 cents per share, amounting then to $21 million. With this dividend, we have year-to-date paid $0.50 per share. This represents 42% of our accumulated earnings per share so far this year. Our dividend policy remains the target, a payout ratio of 50% on an annual basis. And this, of course, leaves room for some upside in excess of 50% in the last quarter. But again, that's for the Board to decide. Turn to page six. Our rates collapsed to OPEX levels at the end of the second quarter and recovered to above 40% later. And of course, this makes a huge challenge for the commercial team. At $8,000, you really start wondering if you should secure more at 15 or even 18 or 20. So it was a tough quarter for us to make decisions. Of course, the V-SHIP recovery in the market makes Q3 the weakest quarter in this year. And we can already say that looking ahead. So our day rate, including both spot and time of charging earnings, averaged $26,800 per day in the third quarter. And again, this allows us to continue to generate returns for our shareholders with the return of capital employed of 6% and return of equity of 8% for the quarter. We have significantly also paid down our debt. Our net leverage ratio has decreased from 54% in the third quarter of 2019 to 44% this year. So again, we managed both to earn good money, take down our debt, pay dividends, and still put some on the bank. Now, Nils Riegel will take you through the market view and the commercial update. Nils.

Thank you, Anders, and good afternoon, morning, and happy Friday to all of you. Today, the LDC freight market is strong. It seems like the world is behind us with rates stabilizing at around $50,000 per day. This is supported by resilient U.S. export, recovery from the Middle East, widening arbitrage, and reduced fleet supply due to shipping inefficiencies and dry docks. We have fixed approximately 80% of our Q4 spot and time charter available days at an average rate around $36,000 per day on the discharge to discharge basis. We have upgraded our view for the medium term, and we have a more optimistic view for 2021. We still believe that the US LPG production remains sensitive to oil and gas prices, but that has proven to be more resilient in a low-price environment. In the meantime, the pace of recovery in the Middle East follows the OPEC Plus production curve. medium-term B&C trade market also continue to be supported by shipping efficiencies from port delays, bunkering delays, crew changes, and heavy dry dock schedule. We expect that over 23% of the fleet will be dry docked next year. Slide nine. In Q3, US LPG exports continue to offset polling supplies from other regions. We have seen both Q3 and year-to-date import into China to fall. However, we now see Chinese import recovering with incremental demand from the new PDH plants. The decrease in Chinese import was offset by strong import into the other regions. Year-to-date imports to both Japan and South Korea have increased significantly. India continues as the most consistent and meaningful driver of LPG demand and is now the second largest LPG importer after China, with LPG demand up 12% year-to-date. Notably, India started to import from the U.S. since last year. The duration of the voyages is more than four times compared to the voyages from the Middle East, supporting Tongma demand. Since 2011, Number of cargoes imported into India has increased from 70 to 270, an annual growth rate of 19%. BW LPG has chosen to take part in the Indian growth story and has increased our presence with more TC fixtures and additional sale of one vessel into our JV in India. Turning to slide 10 about US LPG production, you will see robust US LPG production despite lower oil and gas production compared to 2019 levels. US LPG production has been strong. According to EIA, as of the 6th of November, average daily US LPG production is 2.6% higher compared to the same period last year. This is supported by higher gas content in oil-directed productions, higher amounts of NGL, and infrastructure development, which supported more efficient gathering, processing, and transportation of NGL. As a result, we have upgraded our view towards 2021 US LPG production and export on the current oil and gas prices. At slide 11, you will see EIA short-term energy outlook released in November. EIA re-estates a growth in the US LPG export by 19% in 2020 and has revisited its forecast for 2021 export by 1 million tons from its October release. Turning to slide 12, the new build order book has increased by five vessels in Q3. It's now signed at 12% of the current fleet. I'm glad to see that over 70% of the order book is LPG propulsion. But we want to continue to stress that there is no reason to order new ships to make the fleet more efficient. More than 150 existing buildings can be retrofitted. From an environmental standpoint, new builds do not justify the CO2 savings with a CO2 payback period of over 15 years Contra a retrofit of six months. Slide 13, due to the uncertainties of technology, will develop to meet the 2030 IMO target. Market sees an upfront benefit from second-hand vessels compared to ordering new ships today. Hence, new building prices have softened while the second-hand prices have firmed up and prices are well above new building equivalents. Also, following the V-shaped recovery in the VLDC spot market, we have also witnessed a similar recovery in VLDC time charter market. Activities have picked up, and current SFA market indicates for CAL21 VLDC rates to be above $35,000 per day. Despite the volatilities and uncertainties in the market, we have maintained high commercial utilization at 97.6%. In addition, a well-positioned fleet with strong earnings from our time-sharded coverage has also protected us in the market downturn. In Q3, we had one time-sharded contract being canceled with the cancellation fee recognized for Q3. We have kicked the ship again at the 12-month CC, which will be recorded in Q4. That was it for me and our EVP technical operation, Pontus, will take you through the technical update. Thank you.

Thank you very much, Nils. Turning to page 18. As mentioned by Anders and seen on slide 6, we continue to deliver really strong technical and operational performance in the quarter, despite the unprecedented challenges from the world around us. Our planned dry docks and retrofits remain largely on track. Our final scrubber installation on BW Carina was successfully completed in October on time and budget. The retrofitting of BW Gemini is now completed. She is fully certified by DMV GL. BW Leo and Orion has completed their dry dockings and will begin their gas and sea trials shortly. Leo is supposed to start towards the end of next week already. BW Gemini is on her first-ever LPG-propelled Trans-Pacific voyage unbound to Houston for loading at Enterprise. She will there lift the largest-ever LPG cargo on a single keel, following our retrofit and modification works at Julian Shipyard in Shenzhen, whereafter she will very likely turn back to Far East. Crew changes remain challenging. We have managed it well, with contract overruns on a declining trend. We have completed around 900 crew movements year-to-date. However, still 35 crew members are over three months delayed. All in all, the technical and operational teams on board and ashore perform extremely well, all things considered. With that short update, I will turn over to our CFO, Elaine Ong, who will talk you through the financial position and results.

Thank you, Pontus. Here on page 20 is an overview of our income statement. Our TCE income was 101 million for the quarter and 413 million for year-to-date September. Included in our TCE income for the quarter is a negative 3 million impact related to the effects of IFRS 15, where spot voyages that straddle the quarter end are now accounted for on a load-to-discharge basis. Vessel operating expenses came in at $7,600 per day for the quarter, and $7,500 per day for year-to-date September. This includes additional crew costs due to the impact of COVID-19. Our operating expenses remain in line with our expected run rate for this year. EBITDA came in at $67 million for the quarter and $307 million for year-to-date September, representing a strong EBITDA margin of 66% and 74% respectively. As previously highlighted, With effect from 1st Jan 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. Profit after tax this quarter was $25 million, or $0.18 per share. For year-to-date September, our profit after tax was $167 million, or $1.21 per share, yielding an annualized return on equity of 19%. Turning to page 21, we provide a snapshot of our balance sheet and cash flow statement. Our vessels' book values, supported by broker valuations, stood at $1.8 billion at the end of the quarter. Shareholders' equity was $1.2 billion, or $8.42 per share. During the quarter, we generated $89 million of net cash from our operating activities and ended the quarter with $100 million of cash. our $300 million revolving credit facility remains undrawn, giving us $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 10% over the last 12 months, from 54% at the end of Q3 2019 to 44% at the end of this quarter. This is even after paying out $166 million in dividends for 2019 and the first half of this year. Our all-in cash break-even for 2021 is $25,300 per day, which is the average TCE needed in 2021 to cover all of our cash costs including dry dockings and the equity portion of our fleet capex upgrade. Page 23 provides an overview of our liquidity and debt position. Our net debt position at the end of the quarter was $954 million. Of this, $202 million relates to lease liabilities arising from our time chartered vessels, while all borrowings relating to our trade finance facilities were fully paid. The remaining $861 million debt outstanding relates to our five-term loans. In October this year, we will fully repaid the $150 million term loan. With this, we will have no major balloon payments due in the next five years. On this note, I would like to hand the time back to Anders to conclude our presentation.

Thank you, Elaine. So I will summarize. You can see that on page 25. So, again, despite many challenges for the quarter, it was still, I think, we delivered a solid result, 18 cents per share over $25 million. I think on the back of these strong earnings, and again, taking into account our balance sheet, liquidity capex, and updated market outlook, I think we are very happy to pay a dividend of 15 cents per share, mounting that to $21 million. And combined with the 35 cents paid for Q1 and Q2, the dividend is 42% in our year-to-date net profits. As a matter of fact, the dividend announced today, the company has since its IPO declared 63% of accumulated earnings as dividends. So that's not bad. As you gather by now, we're quite excited and proud to be the first one to have an LPG-powered vessel in operation and on our way to Houston for loading. And we remain firmly committed to the retrofitting of the other 11 vessels with this new technology. We want to take the lead, and we're showing that. So, subsequent to the quarter, at the quarter end, we have exercised our option then to purchase the bare boat charter vessel, BW Empress, in October 2020. And as Elaine said, we also fully repaid the $115 million term loan. And we'll have no major balloon payments during the next five years. Finally, I would like to provide a summary of our outlook on the VLGC market. As you've heard from Niels, we have upgraded our market outlook under current oil and gas prices. We are now cautiously optimistic for the 2021 VLGC market. This is supported by resilient U.S. LPG exports, reduction in fleet supplies due to increased efficiencies related to COVID-19, restrictions and a high dry dock schedule in 2021, as well as a recovery in the Middle East LPG exports according to the current OPEC Plus production agreement. Having said all that, the market remains extremely volatile, and recovery to a higher oil and gas price environment will certainly reiterate a more positive outlook. We've seen some positive development lately, but again, we know that this market is quite volatile, so we will just try to steer as solidly and as steadily as we can. So with that, I'd like to open up the call for questions. Thank you.

Thank you. Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, Please press star 1 on your telephone keypad and wait for your name to be announced. Or you can type your questions in the Q&A box. We have a question. We have a question from the line of Lucas Dahl. Please ask your question.

Thank you. Good afternoon, gentlemen on the line. Can you say how much you have paid for the Empress when you were buying it back?

Do you want to tell Niels or not?

I don't think I will, but it's... I mean, it's the reason why we took the purchase option. It's a very lucrative purchase option. So it's very below the market. Yes. Okay.

Okay, so maybe a little bit easier question then. Anders, when you talk about the heavy dry docking schedule for next year... Could you sort of compare how this is being affected by sort of COVID or the logistic issues around it? If you sort of say in a normal market, this would have taken X days next year because of A and B, this is going to take Y days. Could you sort of shed a bit of light of that?

I don't think I can give you X and Y dates, but I mean, it's clearly, I think, yeah, I think, you know, what we talk about internally, at least, is I think we see almost a 20% increase or slowdown, call it that. But again, you know, and it's so difficult. Of course, sometimes it's purely because, you know, it's impossible to get the birds and because of COVID. Also, of course, the market, I would say, has been in this year probably stronger than most of us in the industry expected. And I think that also has perhaps affected and made the decision easier to postpone and push back. So I don't know, Nils, if you can quantify it more than that, because I think it's difficult. There are many, many reasons for it. But clearly, we're very happy to see that we've been able to complete our dry dockings now on time and budget. So Nils, you want to add anything to that?

Maybe on the docking Pontus is the one, but we see that obviously it's a lot of inefficiency there. The winner is the one which could handle this at best. I think that we're doing our best to be actually efficient in an efficient market, if I can put it that way.

Okay, so for the vessels that you have due for a special survey next year, excluding those that are doing the dual fuel conversion, what do you sort of assume they will spend in the shipyard measured by days?

If you'll allow me, we will spend as much as we normally spend, and we will take as long time as we normally take. The only thing that is complicating things is that service engineers that we need to fly in because the competencies isn't available locally, we need to plan a lot ahead because they all need to spend the two weeks sitting in quarantine in some hotel somewhere. And that's of course a small added cost, but it's minimal and won't be visible in the numbers anywhere. So we haven't seen any delays so far this year. What we have done is we have delayed to actually go into dry dock because we have needed to plan a little bit better and get a grasp of the situation. But so far, no issues. And we are actually tomorrow docking in another ship in Dubai dry docks where we, again, expect no deviation from an ordinary budgeted time and cost.

Okay. And then one sort of unrelated question on India that you mentioned as sort of a big growth market, now also taking volumes from the U.S. I mean, what has led to that switch and how do you sort of expect it to develop going forward?

Nils, why don't you take that?

Yes. I mean, obviously, the two biggest buyers in of LPG in the Middle East is China and India. India has preliminary bought all their LPG from the Middle East, but they also see the prices in US and that it makes sense also for them to buy US products and ship it to India. As I said, we have now for the first time see actually now LPG going from US into India. which is obviously good news for us ship owners.

Okay. Thank you, and have a good weekend. Thank you. Thank you.

Once again, ladies and gentlemen. I apologize. Please go ahead, sir.

Yes, let's take some questions from the webcast. So let's start with a question from Petter Haugen. He says, good afternoon. Could you expand on why you upgrade your 2021 outlook despite the EIA expect a 10% decline in net export from the US? Is expected improvement from Middle East sufficient to counter US declines? Or do you believe EIA is too pessimistic?

I can start, but then Niels, you can continue. I think, first of all, of course, we do our own estimates. We look at what the EIA does, and we also watch very closely what happens to the infrastructure in the U.S. and everything else. And I think, you know, so we have We have, based on what we see in terms of both infrastructure, we've seen also this year that despite lower oil production, we've seen, you know, higher LPG production. And so I think it's a combination of many factors. But I think, again, but we're also saying we're not, we're going out and not saying we're super bullish, but we've upgraded our view. And I think it's based on many of these factors. And we still see also demand side, you know, quite good. We're seeing demand picking up significantly. in India has been very strong. We're seeing it in China. And so I think it's a combination of many things that have made us upgrade our view. Niels, do you want to specify some more?

I think you grabbed it up. I mean, I think for everyone, the U.S. production has been much stronger than everyone had anticipated due to the fall of oil prices. And so, I mean, we're surprised to the positive. We also think that the inefficiencies which we have experienced this year will also continue next year. As I said, 23% of the fleet will dry dock next year. So that will have an impact on supply. And as I said, if India continues to buy U.S. products, it's four times the ton mile compared to what they usually do. So, yeah, I think that's the main drivers that we are in. more optimistic for next year.

Okay, thank you. We'll go on to the next question from the webcast and from Nick Linane. He asks, how much have Asian LPG imports been increased due to lower refinery production of LPGs this year? Yeah, how much extra demand in tons or ships?

Niels, you want to try? I was thinking that was the perfect question for you, Ivar. You know the answer.

Okay. So, yeah. We have that refinery runs are down by around 20%. And around... So in... in terms of, that's about half a million tons of LPG, which is, yeah, I don't know how much.

It's difficult, but you can clearly see, and I mentioned again, India, I mean, you saw definitely that the refineries... uh due to the call we went down and they just the huge import of of lpgs which was needed because of the shortfalls from from the refineries and i think the same thing happened in brazil so um yeah okay we have one more question on the same it's uh for elaine i think what is your annual depth amortization requirement going forward

I think if we take into account the $150 million term loan that was paid off in October on a go-for basis, we are looking at just under $100 million.

Okay. Then there's another question from Maria Dingstad on the webcast here. She says, thank you for a good presentation. It says in your presentation that estimated TC coverage It's 24% for 2020. What is the average tenure on the TC contracts?

Niels? Was that the question for the TC in or the TC out? I didn't fully understand the question.

The TC out.

Okay, yeah. We had... So we have 14% for 21, and what was, I mean, the average for the next 10 years?

Yeah, so it's mostly one-year contracts, right? But there are some longer ones.

Okay, I get it. Okay, yeah. So the majority is a one-year contract. But, yes, we have some of them are over two years or 24 months. Yes, the majority is one year. Okay, the length of the contract. Okay, got it. In LPG, the norm is basically the 12-month contract. That's also where the traders, they are doing their product contracts for 12 months, and that's the reason also they do their shipping for the 12 months.

I think it's also what we choose because, I mean, sometimes even we are offered perhaps longer contracts, but at levels that we don't find that attractive. No, sure.

Okay, then I think we have one more question on the phone line.

Yes, we have a question from the line of Eric Havildensen from Patro Securities. Please ask your question.

On the Empress, do you intend to keep her unlevered at this point?

Elaine?

Hi, Erik. Hi. Good morning. Good afternoon. Yes, I think for the time being, when we probably will keep on another.

Yeah. And then on the birch into the India JV, roughly what kind of level are you, can you disclose that? Because I don't believe it's been disclosed what the price or value there is.

Eric will prefer not to be disclosing that.

Okay, and then finally then, on your time charter coverage for 2021, you haven't really, there's not a lot of change since the last report, but there's been, I mean, a lot of broker chatter and gossip as recently as this week. You're rumored to have fixed out two ships at $36,000 a day, so is there any reason why or are those reports wrong? I guess you're seeing them as well. What are you doing now on the time chart side for 2021, if you can elaborate a little bit?

Is that a question for me then? Yes, so far, I mean, if you look at it just for the Q3, our coverage is 14%. Yes, we have increased a little bit further our coverage for next year, and As has been reported a little bit in the market, the focus has been India. As I've mentioned before. Yes, sorry.

I think as you said, Nils, I think you can tell you the same. I think we really think the Indian market is very interesting. And I think we want to increase our presence in that market. And so I think that you can see that it's also one of the reasons. And of course, again, the levels are attractive in our view. And so we believe the Indian market is really going to remain in a growth market here for quite some time to come.

But is your JV essential for that business? I mean, because not that many of your, at least publicly listed, certainly competitors are as active in that business. And of course, we see the premiums that are being reported. So is this JV when you now inject another ship into it? And obviously we see, as you say, that Indian LPG demand is growing tremendously, longer distance, et cetera. Is this a market that is more difficult to tap into for others that don't have that presence?

I think that's true in many ways. I think, of course, also Indian flags make a difference with, you know, first right refusal. But I think it does help us. It does give us, I think, you know, a – an edge over some of our peers. And again, and I think you can expect us, you know, continue to focus on India as an important market for us. And whether that means, you know, we expand that India operation, but, you know, we will definitely focus on this because we think, again, this is, LPG is great for India and India is good for LPG shipping. Exactly. And we're all on the housekeeping.

Yep.

Now, just to add further to what I said, I mean, obviously with the JV, I mean, we're sitting close to our Indian clients. So it's... Yep.

And finally, one housekeeping question for Elaine. With the Empress now then back in your fleet, does that mean that the charter hire expense line on your P&L will be zero from now on?

No, we will still have one more ship on the charter expense line. Okay. without the empress. Thanks, Eric.

Okay. Thank you. Thank you, everyone.

We have another question on the line from Dennis Angelopoulos. Please ask your question.

Hey, guys. Just one follow-up on the remaining capex. It's our understanding that the payments that are made, essentially the total capex that's been made so far, that goes into prepayment accounts and doesn't flow out of the cash flow. Could you sort of, if that's true, could you elaborate on what actually the remaining cash outflow is, if it's not exactly the same as the remaining capex to be paid? Well, then...

Yeah, I could do that. On the capex to be paid, I guess if you're looking at the chart, we have $30 million that has been paid. Sorry, $40 million has been paid, $30 million of which is propulsion related for the 2020 plans. And then we have another $21 million coming due in the 2021 plans for the LPG retrofits.

Okay, but how much of that's going to be cash outflow in the net? Because that's sort of the thing I'm trying to say. Because we have CapEx 115 remaining to be paid. Is that what we should plug into our models, 115 in the cash flow?

Are you plugging into the go-forward number or are you plugging into the current number?

I'm just talking about when we model it in cash flow, right, we say how much goes essentially into cash outflow for the investment.

So if you look at page 18 of our presentation, the remaining capex to be paid in 2020 will be $21 million and $86 million in 2021. So there's a table at the bottom of page 18.

Okay, I understand that, but just because from the previous quarter that didn't match with your cash flow statement, and the explanation we got was that because it was that you were forwarding them to the prepayment account, and then it was going to... These are the numbers that will match now. Okay, perfect. Thank you very much. That was just a clarification I wanted. Sorry for that. Thank you.

Okay, we're going to do one more question from... the webcast. Is Panama Canal congestion an issue in the market for BLGCs currently? If so, how long do you typically have to wait on each side, and how long do you expect it to continue? Is it mostly COVID-related or other reasons? Pontus, maybe you answer that.

Sure. We actually don't have to wait because we are very prudent in pre-booking all our northbound slots. The delays have been, if you actually show up at the Panama Canal unbooked, it was a little bit over a week. I think we were up closing in on 10 days at the most, but it has softened a little bit after the canal has cleared some backlogs after bad weather and massive loadings and traffic afterwards. But yes, it is partly due to COVID and corona and a crunch on people in the area as well. But we do still pre-book.

Thank you. Okay, then we have no more questions on the webcast.

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.

Okay, sounds like there are no more questions. Thank you very much for listening in, and we will continue to try to deliver results throughout the year. Thank you.

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