Martin Ackermann - Chief Executive Officer Elaine Ong - Chief Financial Officer

Welcome to BW LPG’s Third Quarter 2019 Financial Results Presentation. We will begin shortly. You will be brought to the presentation by BW LPG’s CEO, Martin Ackermann and CFO Elaine Ong. They will be pleased to address any questions after the presentation. [Operator Instructions] Certain statements in the conference call may constitute forward-looking statements based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which BW LPGs unable to predict or control that may cause BW LPG's actual results, performance or plans to differ materially from any further 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 solicitation of others purchase or sale or securities. With that, I’m now pleased to turn the call over to BW LPG’s CEO, Martin Ackermann. Thank you. Please go ahead, sir.

Thank you. Welcome to the presentation off BW LPG's results for the third quarter of 2019, the financial period ending on 30 September. I'm joined here by our CFO, Elaine Ong as always and we appreciate your interest and will take questions at the end of this call. I would like to direct your attention to the highlights on page four. In the third quarter BW LPG has achieved the highest ever quarterly net profit of $117 million, underpinned by outstanding commercial performance and a strong VLGC freight market. Because of the commercial decision to keep 87% of our fleet exposed to the strong spot market, we were able to capture the rebound in the freight market and in the third quarter alone we offset the total losses we incurred in 2017 and 2018. TCE rates on our VLGC fleet averaged at $48,100 per day, supported by overall strong U.S. LPG exports and high geographical LPG price spreads. The first half of 2019, an interim dividend of $0.10 per share or $14 million was paid to the shareholders in September 2019. I would also like to highlight the following important subsequent events: On the back of a strong quarter a positive market outlook and strong balance sheet, the board has amended a dividend policy from semi-annual to quarterly dividend payout. The target pay-out ratio of 50% of our net profit after tax remains unchanged. With our strong performance in the third quarter, we are proud to return cash again to our shareholders, displaying our core focus on capital discipline. The Board has declared an interim cash dividend of $0.33 per share for third quarter of 2019, amounting to $45.7 million. This brings our year-to-date 2019 cash dividend to $0.43 per share, in line with our policy of 50% of impact.…

Thanks Martin. Starting with the financial highlights on slide 14. Year-to-date we have accumulated net profits of $120 million, following the strong recovery in the VLGC market since the beginning of Q2 this year. We generated $117 million of profits in this quarter alone, making Q3, 2019 our most profitable quarter ever. Our EBITDA was consistently positive through the cycle, in spite of the very challenging market in the last two years. Our year-to-date EBITDA was at $245 million, representing a strong margin of 69%. Of this $245 million, only $24 million is attributed to the net impact of the adoption of the new IFRS 16 on leases since the beginning of this year. We have also consciously started to deleverage our balance sheet with the excess cash generated from the strong market, decreasing our leverage ratio from 59% at the end of the first quarter this year to 55% at the end of Q3. With the $14 million in dividends paid this quarter, we have paid accumulated dividends of $500 million since our IPO in 2013. Including the dividend announced today, we will have paid out $4.04 per share. This represents over 74% of our accumulated net profits per share of $5.45 since our IPO in 2013. Turning to page 15, we provide an overview of our income statement. Our TCE income for the quarter was $185 million, driven mainly by the strong spot rates and heightened utilization of over 98%. EBITDA came at $149 million, representing a margin of over 80%. Following the new IFRS accounting standards, our charter-in contracts with more than 12 months duration have been capitalized on our balance sheet, while our charter-in contracts to expire within the next 12 months will continue to be reported as charter-high expenses. As such, our charter-high expense for…

Thank you, Elaine. So if you all please turn to slide 18, I will provide a summary of our outlook on the VLGC market. In line with our forecasted VLGC freight market starts to recover at the end of the first quarter and the positive momentum has continued into the third quarter. This is supported by U.S. LPG production and terminal growth. We expect the delayed expansion of enterprise export terminal to ease the tightness in the U.S. Gulf Coast, export terminal capacity, support high U.S. exports and VLGC fleet utilization in the near term. The growth in the LPG exporters is well supported by strong demand for imports, mostly driven by the petrochemical sector in Northeast Asia, as well as the retail sector from emerging markets across Asia such as India and Indonesia. As such we expect the ton-miles demand in VLGC’s will increase, giving a positive freight outlook for the remainder of 2019 and 2020. However increased demand will in-part be offset by a high level of new building deliveries. In conclusion, we expect the coming IMO 2020 regulation to have a positive impact on VLGC rates, mainly as a significant number of VLGCs are expected to be docked for scrubber retrofits. This further supports our positive freight outlook for the remainder of 2019 and 2020. In the longer term, we maintain our view that sustained U.S. LPG production growth and no further new build orders remain a key to a balanced VLGC market. With that, I'd like to open up the call to questions.

Thank you. [Operator Instructions] We have the first question from the line of Peder Jarlsby from Fearnleys Securities. Please go ahead.

Hi, Elaine and Martin, congrats on the very good results. Just quickly on the dividends, now you pay roughly 40% of EPS. Going forward, given where you are on the balance sheet and that you have no maturities until 2023, should we still assume that 50% and no PAT is kind of the standard and then you have the option to kind of move higher if the balance sheet and market outlook allows for it?

Hi Peder, Elaine here. Our current dividend policy of 50% and PAT still holds, and at this point we will aim to comply with our policy, but the board always has discretion to amend that, should you know the market conditions change. So I would suggest that you use 50% and PAT as a guide.

Okay, perfect! And on the charter-in’s you had – in the 2Q presentation you had three charter-in vessels expiring and then could you provide some information on these? Have these declared options or maybe hasn't caught on those and also when they actually expire?

I don't think we would like to go into details around, especially when all this expires and when we have contracts up for renewal, but some of the details that you saw last quarter might have been booked on the balance sheet. As I mentioned we entered into some sale lease backs and part of that has been recognized on the P&L as immediate profits, that's the closest I can get into the charter book. Otherwise, you can look at the back of our presentation, where you can see exactly how many days we have of charter-in and out.

Okay, perfect, that’s fine; and then just one final one. So looking at the market now, it seems like charters are booking quite far in advance. Is it possible of you guys to give kind of a ballpark number in terms of how much you covered for the fourth quarter? I understand you can’t say rates, but just in terms of percentage of days that you have covered so far.

Yeah we have covered more than 80% of our book now for the fourth quarter and you know the Baltic has been a little choppy over the last two months, although at very high levels. So I think as a guidance note, you know keep it at more or less the same results line that we've been delivering this quarter.

Okay, perfect, that's great. Thanks and congrats again.

Thank you, Peder.

Thanks so much for calling in Peder.

Thank you. We have the next question from the line of Lars Ostereng from Arctic Securities. Please go ahead.

Hello guys! I saw that in the report you mentioned a delay on the enterprise terminal, back to us at least, then you to me, and so I was wondering if you could maybe provide a bit of color on that and also how you now expect the enterprises capacity to develop throughout 2020.

Thanks for calling in. Yeah, it's correct that the expansion of the enterprise terminal has been delayed. Officially they have said that it's technically ready, but exports have not started. So what exactly that means is slightly up in the air. I can tell you that the current name plate loading capacity for the terminal is about 660,000 barrels per day, which is just shy of 20 million tons per year or in VLGC’s, approximately 37 VLGC cargos of capacity each month. And they were initially scheduled to complete late September 2019, adding another 5 million tons or 5.3 million tons a year or say 10 VLGC’s a month and that expansion has been delayed somewhat. We are not fully sure when it will be ready, but we believe it's probably imminent. The expansion will allow the terminal also to load butane and propane simultaneously, which will improve the docking times at the terminal even further.

Right. Thanks a lot and congrats on a great quarter.

Thank you very much and thanks for calling in.

Thank you. We have the next question from the line of Dennis from ABG. Please go ahead.

Hi Elaine, hi Martin. My first question is around the new propulsion systems and scrubbers. What's your outstanding CapEx on those? Do you have any?

I don't think we have – thanks for calling in. Sorry for the silence here. We were giving each other looks here on who was supposed to answer that question. I don't think we want to be that specific. I don't think we have revealed exactly those numbers. We have guided that the installation of the LPG propulsion is including deck tanks, the retrofit of the engines, fuel supply systems, deck strengthening, etcetera, dock times, everything is north of $8 million per vessel and I can say that we’re – if anything, we are delighted to see that the product market and the price spreads have developed favorably in our direction. Meaning that, in addition to all the environmental benefit that we have been such strong proponents for, we can also now see that the financial benefits are very favorable, which means that it bodes well for potential retrofits of further VLGC CapEx.

So with that in mind, are you considering expanding the LPG propulsion program by any chance or do you think you're going to wait until you install them first?

Well, I mean we have been quite vocal about how many ships we have that are capable of retrofitting and we of course keep optionality with our suppliers in these things as you should expect. So I think you can expect that we are evaluating all our options at this point and that's probably as far as I’ll go on that point at this moment in time.

Okay, and one last question here related to the IMO 2020 having an effect on vessels going out for scrubber retrofitting. But also the IMO 2020 will probably have an increase in the fuel prices. I'm just thinking – want to hear your thoughts about if that's going to have any down side on the U. S. export economics, you know given the added costs it’s going to have.

Well, everything being equal, of course it tends to get a little bit more expensive for ships. It will get more expensive for ships to move relatively from the U.S. Gulf to Asia as opposed to Middle East to Asia and I guess that's what you are implying. But when we look at the economics on the LPG prices, U.S. compared to the Middle East, there still seems to be room to absorb that in the prices and we're not really concerned about that, so yeah.

Okay, and just since you mentioned the pro pay – the prices in the Middle East, you also mentioned the drone strikes in your presentation and the report. You think that's had any kind of effect on the prices in the Middle East or do you think that's been completely unaffected by it, just because it might be driving the spread as well.

Yeah, I think – I mean we saw for sure that it had a strong impact on Saudi Arabian volumes and I did mention that they came down by 24%. Part of that is a drone strike and part of that is continued OPEC+ production costs, so yeah, I think part of the increases we have seen in appliances can be attributed to the challenges that has been seen in that region during the quarter.

Okay, those are the questions I had. Thank you very much for your time.

Thank you. Thanks for calling in.

Thank you. We have the next question from the line of Eirik Haavaldsen from Pareto. Please go ahead.

Yeah, I just – your sort of coverage is very different from BW six or seven years ago. There are no index linked CoA days or anything like that in your portfolio for 2020, right, that is not mentioned.

No, we don't – well, I would say we only – first of all, thanks for calling in Eirik and thanks for showing interest. We’re disclosing only in our portfolio at the back of the presentation, our fixed rate coverage. So if we have anything that which is index linked, we are not talking about it and I prefer to keep that under wraps. But you should expect of course any contracts we have to move – and if we don't mention them, to move exactly in line with the spot market or better.

Alright, so nothing that would sort of prevent your trading ability or anything of this sort. And secondly, the one I said because … [Cross Talk] yeah.

No, I can just elaborate on that. Of course we talked about it in the past that we especially with the evolution of the global VLGC markets with such a large proportion of cargos now coming from the U.S. and historically movements being well mostly Middle East and of course some small parts of Europe and quite a lot from West Africa, and now you have U.S. playing a vital role; you have Australian volumes and so forth, and of course you should expect that we would not lock ourselves into a position that would negatively affect our ability to enjoy the strong freight market.

That’s good to hear. And also then on the time charter activity, isn’t it at all tempting to look in a little bit at these levels?

Of course, of course it's tempting to knock in a little bit, but of course we have been disciplined now for a long time and of course we have our own rate levels that are acceptable to us; not just the rate levels, but also the duration of the charters and of course we look at that every day. So you should expect us to be prudent and over time take up some coverage. We were of course not expecting to be at 5% coverage when we enter the next down cycle, which inadvertently will come at some point.

Okay and thirdly, then on to maybe Elaine. You’re paying down now roughly $100 million of debt every quarter in terms of net debt at least. What are you going to do with all the money? Because, I mean you – there is no point in getting your debt level down to sort of 20% with your type of funding. So I mean dividends of course, but anything else where we should look out for?

Well, I think at this point you know this has been you know kind of the first quarter where we've enjoyed significant profits. So I think our decisions on how we are going to allocate this excess cash will really depend on how, you know how things pan out in the next couple of quarters, which is looking quite positive. We have demonstrated you know returning value to the shareholders through our dividend policy and paying down debt right now remains our priority, because our leverage is still at you know mid 55% and that’s probably you know a bit too high and if we can bring that down to further strengthen our balance sheet, further priority, I think that would be still our preference. Beyond that, I think we would look at opportunities opportunistically as they come available.

In short the four Ds, capital discipline, equates into deleveraging, dividends, and good deals.

That’s perfect, Martin. Thank you.

Thank you. [Operator Instructions]. We will now take questions from the webcast.

Yes hello. The first question from the webcast is from Axel Styrman from Nordea. And he asks, how many via this CSU [ph] estimates are currently out of the market, related to scrubber installations. And the second question is, why did Japan increase LPG imports at the level they reported in Q3? So in our presentation on slide eight, we showed that Japans LPG imports grew from 2.6 million in Q3 2018 to 3.4 million in Q3, 2019.

Thank you for calling in Axel. We estimate about 20% of vessels will be installed with scrubbers, which is a 20%, 50 ships in total, and we have about 20 of them already fitted. So we should expect the remaining 30 vessels to disappear from the market for, well a slightly extended period of time to have those scrubbers fitted. And I would think that most ship owners would try to do that in conjunction with already planned, visits at yards, at least that’s how we are thinking about it, because of course if you look at the time value of taking those ships out in the current market, you may think twice about this in your evaluation of whether it makes sense or not to install these exhaust gas systems. When we talk about Japan, what we've been seeing, if there's no particular reason apart from the fact that they bought a lot of LPG over the summer, so as far as we have been able to see, the inventories have been very full year-on-year in Q3 and they did sell a lot of stocks during the second quarter, so they are replenishing that as well. So that’s what we can read into the numbers that we've been seeing.

Okay operator, then there's no further questions from the webcast, but I think there's one more question on the call.

Yes, we have the next question from the line of Chrissie [Inaudible]. Please go ahead.

Thanks for taking my question. As much as you’ve realized around 90% of the Baltic Index, do you expect now that the Index has kind of stabilized around a range you'll be able to realize the higher percentage, hopefully next summer?

I prefer – first of all, thanks for calling in and asking questions. I prefer not to give concrete guidance of where I think the Baltic Index is going. I can say that we're – we mentioned a lot of positive things that will impact the – that we expect to impact the Baltic over the next five quarters. But of course we are also hearing Q1, which is traditionally a lower rate period in the market. So there may be some effects of that on the rates. But of course currently, we are fixing quite long as was also discussed now. So fixtures that we’re doing at current levels are for most have been going well into the first quarter. So we are positive as we've been saying, but that's as close as I can get you on Baltic guidance. In terms of our performance, relative to the Baltic, I mean as we said we came in close to 90% on the three months trailing Baltic. If you look at the current Baltic, it's actually a much closer, and you should probably expect something around there. I think as I mentioned it's – when the market is going up and down during the course of these periods, you will see operators trailing behind the market movements.

Okay, thank you. Let me clarify my question. My understanding is that in arising markets, you kind of lack capturing the Baltic Index, but I would expect that in the last few months at least, quarter-to-date Index has stabilized and its – it’s a bit choppy as you mentioned, but it’s not rising to the extent that was in Q3. Does that mean that you will be able to perform closer to the Index in an Index where it’s not rising or not?

Well, if the market is – let's just assume theoretically that the market remains flat. Then it will be easier for us to beat the Index, because then we will be, as we always do, try to fix with a strong hand, and we will read as much as we can into a more or less stable market position. Of course what happens, particularly when the market's rise quickly over a short period of time, our ships will have locked in whatever rate is at the beginning of that period, and we won’t be able to take the full up-side of an increasing market. Then you would think that we should capture much more value on a downward market, but what actually happens is that many buyers pull back from the market immediately, which strengthens the downward trend in the market and increases the waiting time for the players in the market. So, I think the best rule of thumb here is to expect that when there steep movements in either direction, you should expect operators to be trading behind the Baltic Index. And another important point I raised today during our call is that only approximately 30% of the total market fixtures are represented by the Baltic Index. So the Baltic market Index is set only of fixtures being done between AG and Japan. So any other fixtures from West Africa, from U.S., from Scandinavia, etcetera, does not impact the Baltic. Even if they are of course calculated on the Baltic equivalence and maybe above the Baltic, they will not impact the Baltic either up or down.

Great! Thank you much. That was quite useful. Again, congrats!

No problem. If you have more questions on that, I’ll be happy to take it offline with our research team, just write to our IR department and we can discuss this off-line. Do we have any more calls?

Thank you, we will get back to webcast again.

Yes, hello. One more question from the webcast. This is from [inaudible]. He asks looking into the shipyard that are able to build VLGCs, what is the average backlog they have? In other words, if one would look to order a new VLGC, how long will it take?

Thank you for calling in. It takes approximately 24 months to build a VLGC and that of course depends on the yards. The two Japanese that are capable of building will probably be longer than that. As far as we can see the one Chinese yard that is building this is also getting quite filled up and then you have the two main Korean yards and there we will see approximately similar ordering rates. They have been – they should be expected to be filling up with L&G orders due to the big tender out of the Middle East. I do apologize for the background noise here. We are in a meeting, conference room in a hotel, but apparently we have a [inaudible] gathering next to us. So if you hear some noise, it's not Elaine and myself.

Okay, there's no further questions on the webcast. So I’ll hand it over to the operator to close the call.

Thank you. We have come to the end of today's presentation. Thank you for attending BW LPG’s, third quarter 2019 financial results presentation. More information on BW LPG is available online at www.bwlpg.com. Good bye. Thank you.

Thank you.