Avance Gas Holding Ltd

Good afternoon, and welcome to Avance Gas Fourth Quarter Earnings Release Call. My name is Ulrik Andersen, and I'm flanked by our CFO, Peder Simonsen.

Together, we'll take you through the main highlights of the results we presented earlier today. Peder will present the financial part, whereas I will talk about the market and about our two dual fuel new buildings, which we ordered last year.

After the presentation, we as always welcome any questions. So without further ado, Peder the word is yours.

Thank you very much, Ulrik. I will move to Slide number 3.

Looking at our Q4 financial highlights, we achieved a TCE rate of 61,000 just above $51,000 per day and this compares to $42,700 in the previous quarter. The effects of IFRS 15 adjustments as we had highlighted the last quarters was smaller this quarter than previous and on the discharge-to-discharge basis, our TCE rate was, 51 -- just below $51,500 per day.

We achieved 100% commercial utilization rate and with 13 ships in out of 14 in the spot market we are very pleased with that. And that contributed to the strong rate that we have achieved.

Our one ship that we have on TCE is with Wilmar and that TCE was extended until December 21, during the quarter. Looking at our OpEx, it came in at just below 7,700 which is down from just about 8,000 per ship day in the previous quarter.

And our A&G was impacted, as it has been for the past quarters by one-offs and came in at $1,200 per ship per day up just around $200 per ship per day. For the full year, 2019 our TCE came in at $35,000 per day, and OpEx just below 8,000 per ship per day, and our A&G just above $1,000 per day.

And this is in line with what we have guided previously. I think the A&G will, we can expect to come down further as the one-offs are taken out of that number and also when we get more ships delivered as Ulrik, will come back to later.

During the quarter, as we previously have announced, we entered into two ship building contracts for two dual fuel businesses for delivery in Q4 2021 and Q1 2022 at the DSME. We have also on the back of the expansion of our scrubber program founded sensible to getting places financing of that CapEx.

So we have established a $50 million scrubber financing which equals approximately 75% of our scrubber CapEx established with the existing Banking Group and in -- within the financing that we have, under the $515 million credit facility. So this financing will not incur any other limitations or otherwise increased costs.

It will be repaid over the remaining tenure of the financing until 2024 and will otherwise have the same terms under the existing facilities. We achieved the net profit of $37 million approximately or $0.58 per share and the board announced the dividend of $0.30 per share for the quarter which represents approximately 50% net profits.

Looking at our balance sheet, we have a cash position of $86 million at the end of the quarter. We had a net of financing fees a debt position of $453 million.

And we then had a shareholders' equity of $411 million at the end of the quarter. And as you can see the cash flow from operations was strong for this quarter, reflecting the higher freight rates and also a payment of freight.

This was offset by the repayment of the $35 million tranche that we announced before our last earnings call that we had repaid in November last year. We then move to Page 4.

We had, as mentioned, 100% capacity utilization for the fourth quarter and all those days 97% was in the spot market and 3% was in -- on -- relating to TCEs. This picture is also in the full-year numbers.

But we had a 98% commercial utilization and 3% TCE, while 95% in the spot market. In terms of off-hire, we had marginal off-hire of just 1% and 99% of calendar days were available days.

This also is the case for the full-year figures. As we have been discussing in the previous quarters, we have a project of installing scrubbers and drydocking six ships, with further drydock kit, three ships in addition to that, during the remainder of the year.

We have in Q1, a -- we have three ships that will be completed three to four ships being completed during the first quarter and 70% of all this estimated drydock dates will be completed in the first quarter. We're drydocking our ships in the Malaysian shipyard which in the view of the coronavirus impacting most of our shipping and especially also shipyard capacity and efficiency.

We are happy to be not drydocking our ships in China. We are to some extent exposed to the Coronavirus in this regard as well during -- due to some of the equipment being sourced from China which is being delayed somewhat.

But we are constantly programming our fleet and making all the adjustments as possible to reduce the off-hire and reduce the waiting in connection with the drydocking program. We now expect the six ships program being completed by mid-May in Q2.

We're also considering what to do with the last two ships in the eight ship series that are due for drydocking the first special survey this first half or the first nine months of this year and we may consider scrubbers or other options for these ships. We have an estimate of 45 to 60 days now off-hire in connection with the drydocking and scrubber installments.

And, yes, I've mentioned 70% of these days will be -- are estimated to be covered by completion of Q1 whereupon the majority of these ships will be out trading in -- what we believe to be a positive spot market. Just an update on the cash break-even.

If we move to Slide 5. We have here included the cash break-even including the new financing which has brought the cash break-even slightly up to approximately 22.5%, which is in line with what we have historically on average as a normal run rate.

It excludes drydocking. But then as I said it includes the new financing.

And on the basis of that cash breakeven, which we believe is very competitive, you can move to the graph on the right hand side where we illustrate the annual free cash flow generated by the company with our 14 current ships and based on the cash break-even on the left hand side, that's different freight rate scenarios, moving $10,000 per day above the cash break-even. And this is also adjusted for the dry dock days that I've mentioned previously of the eight wind-class ships and also the Avance which is due for intermediate survey in Q4 this year.

And as you can see, there's approximately 15 million per 10,000 in free cash flow at estimated which is around the analyst average of 42,500 per day, we generate free cash flow $100 million per year. And on that note, I will give the word back to Ulrik.

All right, thank you. So a quick throwback to Q4, before we look ahead, to see what generated the result that we have delivered today.

This Q4 delivered quite unusual as the market stayed strong more or less throughout the period. Normally what happens in Q4 is that the U.S.

consumes more and exports less, it means that the demand for vessels drop and thus also the freight drops. However, this quarter, the U.S.

production was so high that the export did not drop. In fact, October set a record as demand with the highest export of LPG ever.

This was of course, one of the main drivers in keeping the market up. Other factors impacted us well.

We don't have time for all of them now. But one of them was another one of them was the attack on the Saudi oil installations.

Although they haven't at the end of Q3, the effect really only materialized in Q4 and sort of kick started, what can you say the quarter. And it was not all rosy for the owners in Q4 because as we got closer to the deadline for IMO 2020 i.e.

the 1st of January, the new bunker regulations were kicking in, and as owners gradually start to procure and burn the more expensive low sulfur fuel oil but being unable to pass on that bill to the charters, the earnings did erode to some degree over the course of the quarter. Of course, ultimately, we're still satisfied with the result.

And we must say also that the quarter developed like it did was not huge surprise to us, we have been speaking about this already back in Q3 that we thought the market would stay strong. And we believe it justified our decision to keep a large part of the fleet in the spot market.

Turning the page to Page number 8. Let's try and look a little bit ahead and see what is in-store for us.

Looking at the supply side first, we still see a modest order book. It stands at 13% of the fleet, which is unchanged since we had the last call and some vessels have been delivered and some have been ordered.

But ultimately we stand at the same place. Eight orders have been added to the order book of which two of course are Avance Gas, our own.

I will speak more about those two new buildings at the end of the presentation. The historic data for scrapping shows that the average scrapping age is 28 years, which actually signals that there, would be some scrapping this year with 11 vessels above 28 years of age.

However, given the strong outlooks that we see, we don't expect much very limited scrapping activity over the next 12 months, if any at all. Two other factors have been influencing the supply side and positively you can say in the interest of supply side in recent months, but also going forward, naturally the COVID-19, the coronavirus, which is on everybody's lips have had a -- quite an impact on the supply side, also on the demand side, which I'll talk about a bit later, but on the supply side, it has been a positive effect despite the regrettable situation.

What happens is that China has been what can you say not as efficient as we have seen previously, we have seen versus being rerouted from China to for instance, Japan. We have seen vessels being stuck in load ports for longer than usual.

And we have seen quarantines on vessels after they have discharged in China. Naturally, we have also seen delays in the scrubber installations.

Peder talked about it. But we have seen that for both our own and also for other owners who have had their vessels in drydocking and scrubber retrofitting in China.

All of these things of course, not making the fleet utilize as efficient as it could be, which create links and which is all things equal good for the rates. We continue to see IMO 2020 disruptions.

The effect is definitely wearing out; it's not as impactful as it was before the turn of the year and into the New Year. But we still see some scrambling around for bunkers.

And we still see of course the delays in the drydocks which are partly due to the COVID-19 but also due to owners installing scrubbers which takes longer. So all in all, the supplier, the supply side is looking reasonable with some disturbances at the moment, but with IMO 2020 disruption wearing out over the course of the next two to three months in our view.

If we turn the page and look at the production side, we will today look at the U.S. because it's the most important area.

The U.S. production has of course gone from strength to strength since 2013 and even before.

Before we jump into the graph, it's important to remind everyone that production is not equal to export and export capacity is also not equal to export. But of course, the higher the production in the U.S.

is the more product is available for export, and the cheaper it will also be. And last year, the production increase was 8.5 million tons, it's quite significant, it's 11%.

And for this year, the EIA forecast at growth of 7%, approximately 6 million tons. As it appears on the graph, a slight drop in production is expected for 2021.

And naturally, as I just stated, we would like to see this high U.S. production as possible.

So we are watching the developments here on -- in for 2021. What we're seeing now is that a slight drop in production, it's around 2%, it’s not a catastrophe and we think there's plenty of product available for export also for 2021.

But as I said we will be watching the space. On the capacity side, the expansive projects that continue most notably we've had enterprise wrapping up their latest expansion.

It was due to be completed by the end of last year. But as we have been able to see, we think that the expansion is really only about fully completed around now.

We still have more projects to come from [indiscernible] enterprise, potentially [indiscernible] and other suppliers. So we are pretty confident about the export capacity not being a bottleneck in the years to come.

All in all, yes, we remain confident that U.S. will continue to drive the VLGC market in the U.S.

economy. Turning the page to Page number 10.

And the demand side, then the question is, of course, is that demand for all this additional LPG, we believe the answer to that question is yes. And where we would be seeing this increased demand is primarily in the Far East Asia.

Today 80% of the global demand is in the east, mainly driven by China and India, also South Korea though and other Southeast Asian countries. Last year the import to China went up staggering 23% and India with 20% right there up.

Next year, we still expect well, maybe before I say this, I should point out that this forecast we're looking at now was done before the coronavirus. I'll talk about that in a moment.

In any case, we're still despite the coronavirus, which we think is a bump in the way is we still expect a lot from the Chinese import. As I just mentioned, the outbreak of the COVID-19 happened after the -- these figures we have here.

So of course this will have an impact. The situation is dynamic and it is too early to establish the exact impact of the virus on the Chinese import but I think we could say to conclude that in the short run fewer tons will be imported.

This is for sure. The good news is that China announced a few weeks that the previous import tariffs of 25% which was imposed on U.S.

LPG will be reduced to just 1% from March. So, what we believe is that our assessment of the situation is that once the COVID-19 is under control, we will see a bounce back in the Chinese import which will hopefully act as a catalyst and an accelerator on the freight market as well.

We have seen drops in the freight market, given the coronavirus, but so far we have avoided the huge, huge drop, we hope that to continue. So, overall what we are looking at here is that we have a modest order book and no additions coming because it takes three-years to build a vessel.

We have the good U.S. production certainly for the next 12 months or more, we have strong demand as well.

So overall, our assessment of the situation is still positive particularly for this year. And turning the page, to Page number 12.

I would like to talk about our new vessels. So as announced last year, and as Peder presented earlier, we have entered into a contract agreement with a Korean shipbuilder DSME, for two VLGC dual fuel vessels.

It means they can burn LPG, which we're transporting and they can burn compliant IMO 2020 fuel as well. So before I wrap up, I just want to spend a few minutes talking about these new business and why we consider them a milestone for Avance Gas.

So as it appears the vessels they differentiate themselves pretty much everything which is currently on water. The vessels they offer as I reiterated performance and they even reducing emissions at the same time.

What these vessels offer is a significant lower bunker consumption. If we look at the average vessel on water, we estimate around 20% less bunker consumption while steaming.

At the same time, they burn cheaper fuel, they burn LPG and this is of course, a very strong proposition, lower consumption, cheaper fuel. All advantages worth mentioning is that we avoid mixing risk of the bunkers.

What is happening after IMO 2020 is that a lot of different specs on fuel is available that all comply with the new regulations. But if you mix these, it can make the engine unstable, which is obviously not good as the engine may in worst case breakdown.

We avoid that. Also we have reduced bunkering time currently around 3% sometimes even more time on a voyage is spent on bunkering, waiting for barges, getting the bunker on board et cetera.

With this last assigned cargo intake we have, we can bunker once to perform a full round trip from the U.S. to the Far East.

It also means that while we are taking cargo for our charters, we just continue taking that cargo for few miles because the pumping capacity is much higher at the terminals and we avoid all of this risk with waiting for barges and barges of [indiscernible] at all. These vessels able to achieve higher speeds.

It means of course that if you can perform a voyage faster, you have the same revenue; you get higher earning per day. So naturally a positive thing, we have constructed and elected to construct these vessels with a larger carbon intake, these vessels are 91,000 cubic, which is quite a lot larger than the charter vessels today.

It means not only will we have LPG for the propulsion; we also have additional capacity for extra cargo which obviously we can generate revenue on which again will help us increase the daily earnings. The green profile is, of course, something that is offering us more attractive finance terms.

Today the banks are very interested in financing and green projects and bringing down the emission of that loan portfolios. This means that we can achieve a lower break-even with this vessel that we would have otherwise been able to.

Finally, the vessel is designed as a pure dual fuel vessel. It means that we can avoid big tanks, which will of course require more engine capacity and will mean that the vessel would burn more.

We can also use sharp generators it means that we generally burn LPG while we're steaming and not use the compliant fuel on our accelerators, which some other retrofit solutions will have to do. Finally, of course, we are reducing emissions and we think that's very positive.

We are delivering on our sustainability agenda with this. And as you can see, we are reducing the emissions with -- we're basically wiping up shocks and particle pollution, but also bringing down CO2 and NOX with significant percentages.

What we look at versus the requirements that we expect or the legislation we expect from IMO is by 2030, we will be looking at reducing CO2 emissions by 40%. And I think what is worth noticing here with these vessels is that already today, by the technology we know that is available, and by slow streaming and combining these two; we believe we are very, very close if we cannot already comply with the 40% reduction.

And I remind you that eight years ahead of schedule for the IMO 2020 -- IMO 2030 timeline. So, we think this is a very, very big leap and the right direction to go for us.

With that, I want to conclude today's session by just wrapping up as we see on Page 13. We believe the supply situation is looking positive.

We don't expect many orders and order book is on control. We still see strong growth.

We see further expansion of the U.S. export occupancy and increasing demand.

We do have the COVID-19 still hanging over our heads; we hope that gets resolved sooner rather than later. But we don't deem this as a showstopper for the otherwise positive story.

We do have drydockings, as Peder explained, in Q1 and they will of course have an impact. But once we are through Q1, we have a clean runway where we are able to generate hopefully a lot of cash as was also shown on the graph.

With that, I want to conclude today's session. I will hand the word back to the operator and if there are any questions, we are very happy to answer those.

Thank you very much.

Hey guys, how are you doing?

How are you? Fine.

Thank you.

Thanks, very good. Just a first question on bookings, you guys in the previous quarters has guided towards bookings and from what I can see, you haven’t guided in this quarter.

Should we just utilize year-to-date numbers as a proxy for what you've booked today?

I think it's -- as we explained it, together with the coronavirus on top of an otherwise very difficult quarter in terms of lots of ships going out to drydock and how that will impact our results is very difficult to say. We have chosen not to guide, it's more a reflection of that rather than I mean the market, the market and market has remained very strong so far this quarter adjusted for the seasonal effect.

I think, as we previously have seen, the market normally is with a time adjustment for when you take the ships until it actually comes into your books is a good proxy as we have asked before we started to guide. And once we have and I think that's probably still the best proxy, the market is still volatile and to use the year-to-date market and following the market I think is the best, the best, best you have.

Okay. And with regard to the remaining CapEx, you guys have been new builds obviously and then the scrubber retrofits, how much is remaining on both of those, and what is the timing and the cadence for the installments on the new builds?

The new builds will have only $16 million due for payments this year. And the remaining is done in 2021, and then coming into 2022 with a final installment being I mean 60% of the payment.

I think we went through this last quarter, when it comes to the CapEx on the scrubbers that falls due when the ships are being delivered, or up until the ships are being delivered and also some of this falls due after. So we have $12 million out of the $32 million paid already and $20 million is remaining as of today.

I think that concludes the Q4 presentation and thank you for joining.