BW LPG Limited

results presentation. Bringing you through the presentation today are CEO Anders Unaheim, Deputy CEO and Head of Strategy Christian Sorensen, CFO Elaine Ong, EVP Commercial Nils Rigaud and EVP Technical and Operations Pontus Berg. 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 being recorded. And I'll turn the call over to our CEO, Anders Unaheim. Thank you, Glenn.

Reflecting the true international nature of shipping, and as at BWLPG, we speak to you from three locations today. Kiristel and myself from Oslo, Elaine and Pontus from Singapore, and Niels from New Delhi, India. Our Indian subsidiary, BWLPG India, is welcoming our stakeholders at LPG Week, an event organized by the Royal LPG Association. Since we cannot bring everyone on board a vessel, we are harnessed down in India with the technology to bring a vessel to you. So if you're in India, come by to see a virtual reality model of the BWC, an Indian-flagged VLGC managed by our partner, Synergy Group. It has been a busy quarter for the team at BDL-PLG. Our acquisition of Vilma Oil's LPG trading operation that was announced last quarter has been approved by the Spanish regulatory authority. We have had solid financial results, and we are also well prepared for the upcoming environmental regulations. Geopolitical and economic uncertainties continue to cloud the outlook of the markets. We're working hard to contribute to energy security by delivering LPG safely and sustainably around the world. With increasing demand for natural gas, we're also seeing a growing awareness of the possibilities for LPG in many ways. In many ways, we're surfing this wave of increased production of oil and gas. More on this later. Some key highlights and figures for the quarter. Our average day rate was $38,200 for available days during the quarter, with a very good 98% commercial utilization. This compares very favorably to our colleagues in the industry, and I think it really underlights the importance of having a critical mass in the fleet. We have ample liquidity of $365 million and a net leverage ratio of 25%. 93% of our floating interest debt is hedged at an average rate of 2.1% before margin for the next half decade. We also sold and delivered one BLGC, the BW Prince, in October, generating $44 million in liquidity with a book gain of $2 million. I think this further confirms that our asset values are real. And last but certainly not least, we received, as I said, the approval from the Spanish authorities for the acquisition of Wilma's LPG trading operation. We are very excited to be welcoming our new colleagues, and I'm happy to see that the team is working hard to complete the transaction by the end of this year. Kirsten will give you more details here later. We continue with our 75% payout policy for dividends, and we return 25 cents per share for the third quarter. This brings our total dividend payments up to $102 million so far in 2022. For our market outlook, we continue to have a positive view of 2023. Niels will elaborate on this, but just to give you a quick primer. We expect strong export growth from both the U.S. and Middle East, a couple of stable retail demand, and recovery in demand from the Far East petrochemical industry. We also expect the implementation of the new regulations, the EEXI and the CII, to reduce the effective supply of the VLGC fleet. And a certain shipping efficiency will certainly continue into next year. So that's the highlights and outlook. But before we go to the next slide, Kristian will now share some additional details on the VLMLPD trading transaction and what we can look forward to in the future.

Great. Thanks, Anders. Yes, as you mentioned, as a subsequent event since the end of Q3, we are pleased to announce that we recently received the Spanish authorities approval for acquisition of Wilma's LPG trading activities. We expect to close this transaction by the end of the year, and following the closing, we will increase our trading activities under the name BWLPG Product Services, with presence in Singapore, Madrid, as well as Oslo. In addition, we plan for up to five of Vilma's VLGCs to enter the BWLPG pool over the coming months, which will have a consolidating effect on the freight market. BWLPG product services will report on their own trading book and will operate on market terms like any other player in the market. And we expect to start reporting on the contribution to BWLPG's EBITDA at the next earnings release. When you ramp up the product services activities, we will add another layer to BWLPG's commercial portfolio, which we are confident will increase our optionality and ability to adjust our exposure in the growing LPG markets. And as mentioned many times before, thanks to its versatility, green profile, and competitive pricing, LPG is increasingly regarded as an alternative to more costly energy sources, and we look forward to participating in this growing market with an even larger footprint than before. Back to you, Anders.

Thank you, Gideon. We're currently experiencing a very strong LPG shipping market. And as is often the case, there are multiple elements contributing to this happening. Strong demand for natural gas in Europe has certainly contributed to the high gas prices, and consequently, higher exports out of the US also for LPG. The very large increase in LNG exports out of the US have also contributed to the longer waiting times for Panama Canal transits. Today, we're seeing in excess of 20 days. And even if there are more US-originated voyages going to Europe instead of Asia, and thus the negative ton-mile impact of this is offset by increased Middle East exports. For the very near term, we continue to enjoy a highly favorable spot rate environment. with the vessel shortage of cargoes coming out of the Middle East Gulf and other shipping inefficiencies. So spot rates could see continued support for a good period going forward. At the same time, I think it's healthy to remind ourselves that rates well above $100,000 per day, they tend not to last forever. And we expect continued volatility also in this market, even though the underlying fundamentals could look quite good. With that being said, I'll hand the floor to Nils. We'll talk more about the outlook and our commercial performance. Nils?

Thank you, Anders. And good evening from India. Please turn to slide seven. So we continue to have a positive view towards 2023, even with the high new building deliveries. The main reasons are, as Anders mentioned, the expectation for solid growth in both U.S. and the Middle East exports. We also see a recovery in Chinese LPG demand supported by new PDH plants coming on stream with expected recovering margins. And we should not forget about fleet inefficiencies such as the Panama Canal. Regulations such as EEXI will have an impact on the speed of the building sea fleets and Pontus will talk more about the effects. The VLC market will also face a heavy dry docking schedule next year. 67 VLC to be dry docked, which is about the double compared to this year. Let's look closer on the third quarter and turn to slide eight. For the third quarter, U.S. exports were steady compared to last year. Middle East, on the other hand, grew by a substantial 23% compared to the same quarter last year. This growth was led by Saudi Arabia, Iran, and Emirates. The majority of this export found a home in Asia, mainly China and India. China actually increased their imports despite continued lockdown measures in place. While Indian imports were down during the quarter, we expect the full year to show growth due to the strong activity in October and November. European imports from the US continue to grow up by 143% in Q3 compared to last year. Let's dive a little bit into what 23 will look like from a supply and demand perspective. Slide nine shows the expected export growth from the main LPG hubs. More than 10% growth in the US and more than 5% growth out of the Middle East. On slide 10, And on the graph to the left, we have illustrated how we expect the new building sea delivery next year to be absorbed by both demand growth and market inefficiencies. We expect increased export will absorb approximately 45% of the new vessel capacity. In addition, we also expect Panama Canal delays to continue. And with the introduction of new regulation, it could potentially absorb new building fleet supply by about 30%. As a result, We expect a firm freight market for next year. But since inefficiencies plays a large part of it, we will continue to expect a very volatile market going forward. However, with our critical mass in the spot market, we are ready to face this challenge. For my last slide before handing over to Pontus, please turn to slide 12. Anders has already touched on the rate figure, so I only add that we have booked 80% of our Q4 available days at an average rate of $50,000 per day. And that we have covered 17% for 23 at 34 100 time charter days. And with that, I would like to hand over the floor over to Pontus.

Thank you. Thank you very much, Nils, and good evening to all of you from Singapore. So the team continues to keep our focus on best-in-class operations as we put the final touches to ensure full compliance with upcoming environmental regulations. To date, we have conducted close to 600 port calls and Panama Canal transits, and the team continues to target just-in-time arrivals to save bunkers, reduce emissions, and serve our customers' interests best possible. Year-to-date, we have consumed 22,340 tons of LPG fuel, saving over $6 million in fuel costs versus compliant fuel. We have also reduced our CO2 emissions by over 12,000 tons. Combining high-tech ships with smart operations, we are in a strong position to meet the new green regulations coming into force next year. Turning to the next slide. The key message we wish to leave you with is that come 1st January 2023, it remains business more or less as usual for BW LPG. All our vessels will be able to fulfill their commercial obligations. With available data, we can however see that 50% of the current world BLGC fleet will need to slow down in various degrees as a direct result of the EXI regulations coming into force. EEXI, or Energy Efficiency Existing Ship Index, determines the efficiency of the design of current vessels on the water. If the efficiency of the vessel does not meet the required baseline, mitigation methods such as engine power reduction, i.e. slowdown, or using less carbon-intense fuel, such as LPG, will be needed. CII, or carbon intensity indicator, is an operational grade indication on how efficiently a ship conducts her voyages. Every year from 2023, a vessel would be rated from A to E, where E or D rating for three consecutive years impose the need for a plan to be approved by class on how to achieve C rating or better. The easiest and cheapest way, cheap C-class or better if you are EOD, is to reduce the engine power and thus slow down your vessel. Else one would be looking at various retrofits such as sales, MIVIs ducts, CO2 efficient fuel conversions, again, such as LPG, for example. It do remain to be seen how these new regulations will impact the overall business in the months to come. However, our fleet remains operable, and all vessels will be able to fulfill their commercial obligations. And in particular, our 15 LGIP vessels will maintain maximum service speed for the foreseeable future. On this note, over to you, Elaine.

Thanks, Pontus, and a very good day to all of you. I'll walk you through the key financial highlights from our third quarter. Starting with our per-day statistics, at $37,200 per calendar day during the quarter. Daily vessel OPEX came in above budget at $7,900 per day, largely due to higher manning expenses, escalating cost of lubricants with a higher price, and inflationary pressures on the cost of stores and spares. For 2022, our operating cash break-even for our total fleet, including our chartered-in vessels, is at $22,800 per day. EBITDA for the quarter was $93 million, which represents an EBITDA margin of 71%. And we ended the quarter with a net profit of $46 million. This translates into an earnings per share of $0.32. With our net leverage ratio at 25% this quarter, our board has declared an interim dividend of $0.25 per share, equating to a payout ratio of 77% of NPAT. At 30th September, we had $133 million of cash, $2.2 billion in total assets, of which $1.6 billion relates to the carrying value of our vessels. Our positive free cash flow of $58 million this quarter was derived mainly from our strong operating cash flows, as there were minimum capex since our LGIP retrofit program was already completed in the previous quarter. Our return on equity and capital employed this quarter were 10% and 13% respectively. We ended the quarter with a total equity of $1.5 billion, which translates to an NAV per share of $10.50. Here on slide 16 is an update on our financing structure and debt repayment profile. During the quarter, we drew down on our 198 million Indian debt facility for the BW Loyalty. She was the last of eight vessels going into our Indian subsidiary. Our standing bank debt was at 442 million at the end of September. Our gross debt currently stands at 609 million. This includes 64 million in advances drawn on our trade finance facilities and 106 million in lease liabilities from our time-chartered in-vessels. with a cash balance of $122 million, net of $11 million held in broker margin accounts, and $243 million undrawn revolving credit facilities. We ended the quarter with $365 million of available liquidity and a net debt of $487 million. In today's rising interest rate environment, our interest rate hedges have sheltered us from the recent rate hikes, as over 90% of our long-term debt is now hedged at a fixed rate of 2.1% before margin for the next five years. On this note, let me open the floor for questions. Back to you, Glenn.

Thank you, Elaine. We will begin our Q&A session now. Should you have questions, please type them into the Zoom chat box. You can also click the raise hand button to ask your question verbally. Please note that participants have been automatically muted, so please press unmute before speaking. We'll pause for a second to gather any questions. Again, should you have any questions, please type them into the Zoom chat box or use the raise hand button.

So, I've never experienced that we've been that crystal clear before. I guess everybody thought it was a good quarter. So, no difficult questions. Of course, we like if you want to challenge us. But, you know, if we're not going to hold you. Oh, actually, someone is going to ask a question here. So, now I'm glad I kept this going.

Okay. Should I just shout out? This is Petter Haugen from ABG calling. Yes, come on, Petter. The slide showing the observation of the 45 vessels delivered next year. Could you give some more color to what you put into that in particularly Panama Canal sort of outflow of three of those 45 vessels? What is the assumptions here and And I guess the final question is that there is still an oversupply, I can see. It's sort of six vessels too many in the audiobook. And what would be the consequence of that is sort of the latter part of the question.

Nils, do you want to have a crack at that?

Yes. I mean, the sound was not super good from India, but you talked about the Panama Canal for next year and our expectations.

Yes, and how those three vessels, which is taken out of the new building order book. So I suppose that's an increase from current levels in terms of additional waiting time.

Yeah, no, no, it's correct. I mean, obviously, there are some assumptions we need to take from here. But we see now clearly that the Panama Canal is getting more and more congested. And right now, obviously, it's Christmas season. So now it's really the waiting time is booming. And you can clearly see that also that on the auctions the Panama Canal have opened up for ships to pass it has exploded. So some people have paid up to $2 million just to pass the Panama Canal. And we expect, obviously, the market to normalize when we get to the normal, well, the season. But we also expect increased traffic to the Panama Canal, like the LNG from the US.

Was that answering your question? Thank you. So it's still an increase from the levels we've seen in 2022. Yeah, correct. But the sort of the final pass here, you leave some, I don't know, it's six ships, is it? Which is sort of growth, which is not observed. So right now, as far as I can tell, and perhaps you can enlighten me on that as well, the one year TC market is at some $36,000 per day. And And current spot rates are at $130,000 per day. So will those sort of surplus six ships mean that the 2023 rates will be sort of considerably lower than what we've seen as the year to date average?

I mean, it will definitely come down from the record levels we have today. But if you look at the forward market, let's say the FFA market, you could actually look in your Cal 23 at around low $40,000 per day. And if you add on the benefit of, for instance, burning LPG, which has a delta of about 6,000, you suddenly come up with LPG propulsionships doing in the mid to high $40,000 per day. And that's what the market expects. So, yes, it's down by the... from the $100,000 we currently see now. And it will be volatile, as I said, but at least the market anticipates that the market will be around the $40,000 next year.

Okay, thank you. I'm sorry.

Petter, of course, we've seen various estimates on how these inefficiencies and the regulations will affect the market. I think you know, we are normally fairly conservative in our approach. And so, and obviously we, as Neil says, we expected it to be volatile and everything, but there's no question that our view of the new bill book is much more balanced than it has been in the past. And as Neil says, I think the market is indicating to us that we will also, and we are able to use paper market to lock in, you know, still rates above, well above 40,000. So I think it's it's and of course, we will we will we will always try to try to manage whatever whatever market we see ahead. But but but again, this is this is our I think our conservative numbers and we could, of course, see more effects both in the Panama Canal and even regulations.

Thank you so much. Then the final question from my side, then. If you were to sort of see the offers of the low $40,000 also in the TC markets, are you there to increase your coverage for 2023 at those levels? Or are you now so comfortable that you would rather stay spot for the full sort of 80% plus of the fleet which you have open today?

I think we'll take, and Nils, you can answer more. I think we'll take a balanced approach to that. I think if we, we are open, we're open to do, you know, some three-year charters. If we see, you know, tractor rates, you know, up between 35 and 40, I think we would. Yes. But again, it's, you know, and simply because we expect the volatility to be large, we think it's good if we can get with the right counterparty, if we can get some good TCs, we will always consider that. But, and of course, you know, in India, we have, you know, traditionally been, you know, 35 and just below. But of course, that's also with, you know, with our thirstiest and oldest ships. And even there, that market is starting to look more optimistic.

Thank you very much.

Thank you, Petter. Our next question comes from the line of Erik Hovaldsen. Erik, please go ahead.

Hi, thank you. So just to try to understand a little bit around your cash flow priorities, because obviously this is the fourth truly fantastic year for you and your net debt levels have come down to very low levels, as you show. You've sold a lot of all the vessels. are you at all starting to look at buying in your vessels do do your t-scene portfolio have purchase options attached to them for example or should we kind of expect you to continue pursuing you know vertical integration or or other types of acquisitions like the wilma wilma daily did

I think there's a yes and yes. We will look for opportunities if we see assets that fits into our portfolio. We will not order new ships at $95 million. We think that's not a good business proposition. As we said, if we see opportunities, if we see maybe some with the new regulations coming next year, there might be opportunities for us to acquire vessels at... at a fair price, and we could even retrofit if we get the right assets. So we are open to look for growth, but again, it has to be right for us. But we are also, I can say, we're nearing a point where we think having a critical mass in terms of being in the spot market as we are, we're not going to sell a whole lot of more ships. That I can also say. And of course, we are, you know, with the Vilma, we're getting, you know, more ships into the pool. And so it has also given us, you know, given us more, again, you know, increased sort of flexibility in the marketplace. So that's important. And of course, it is being with a strong balance sheet. You know, we always have discussions also with the board, you know, what's the right capital allocation model going forward. And that's something we will continue to do. As I said, again, we know this market is quite volatile and we think having a strong balance sheet in a volatile market is always good. But we will continue to discuss that. And when it comes to the final question about looking for more opportunities in the value chain, yes, we will continue to do that. We think the Wilhelm LPG acquisition gives us another interesting leg to stand on, both an increase to earnings power, as Christian said, also it can give us... also more of a hedge in a tough market. But it will also give us an opportunity to look for other types of business that will complement the trading operation. So we will definitely continue also to look for ways to just take a larger share of the whole market.

Okay, but then as a follow-up, because obviously you have a great track record of value creation since your IPO. So when you say looking at other types of businesses and products I mean you it will always be related to LPG first to be clear you're not going to look at other yeah okay so it's other niches other geographical regions stuff like that logistics investments okay thank you and then finally just curious TC out so your coverage for next year that's physical TC out right that's not that's not what you've done in the paper market

It's mostly physical, but there's also maybe some paper on that, but it's mostly physical.

Okay. Thank you very much.

Thank you very much, Erik. Our next question comes from the line of Dr. Marcus Alasa, who writes on the chat, what business volume slash profit levels is expected from the Spanish acquisition? Thank you.

Thanks for the question. I think it's a bit early to guide on profit levels expected, but with regards to the business volume, Just to give a little bit of insight, today our current setup with W Product Services is trading about 1 million tons. And with the acquisition of Wilma's LPG trading activities, we will have a substantial increase in volumes and it's going to be more than doubling. But it's hard to, at this point, be kind of too specific, but it's going to be a substantial increase. increase in the trading volume compared to what we have today. So I hope to be more specific at the next earnings release. As mentioned, we plan for reporting on BWLPD product services contribution to EBITDA by the next quarter.

We are very excited about the prospects here. We also see that culturally it's a good fit with the Wilma team, and they're quite experienced. So our expectations are high, but we will do this in the right tempo.

Our next question is also from the chat, from the line of Joon-Nicolai Skålund. He's asking regarding the Chinese petrochemical demand outlook. Could you elaborate some on your expectations on the growth in Chinese PDH capacity? Thanks.

Niels, do you want to take that?

Sure. Yes, there are a number of PDHs being built. Some of them have some delays this year, which we will see the effect next year. But in terms of number or increased demand, it's about 5 million tons of propane. And also, when we talk to the Chinese PDH plant owner, they also expect recovery of their margins. So, yes. So, we currently expect an increase of about 5 million tons for next year.

Thank you, Nils. And we have another question now from the line of Anders Carlsen, also in chat. And he's asking, how will you be treating the five Wilma vessels as children or will they be part of the trading P&L? Christel?

Yeah, the vessels will end up in the BLGC pool against the COA voyages back. That's probably the most specific explanation I can give.

Okay, thank you, Christian. We have no further questions on the chat. If there are anyone who would like to ask a question, this is your final chance.

Okay, then we thank you very much for your attention and we look forward to your continued support. Thank you.

Thank you very much. We've now come to the end of today's presentation. Thank you for attending and have a good night.