Avance Gas Holding Ltd (OTCPK: AVACF)
Q1 2016 Earnings Conference Call
April 27, 2016 09:00 AM ET
Peder Carl Gram Simonsen – Chief Financial Officer
Christian Andersen – President
Anders Weinberg – Private Investor
Good day, and welcome to the Avance Gas Holding Limited First Quarter 2016 Earnings Presentation and Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mr. Peder Simonsen. Please go ahead.
Peder Carl Gram Simonsen
Thank you. Thank you for coming to the presentation and thank you for those dialing in to the Q1 presentation for Avance Gas.
If we move to Slide 4, the TCE rate for quarter ended at $38,700, down from $61,144 in Q4 2015. We had an EPS of $0.61 versus $1.31 in Q4 and we declared a dividend or the board declared dividend of $0.30 for the quarter. Main events for the quarter included an amendment of our credit facilities whereby we converted $100 million of turnout into revolving credit, and further we amended our financial comments, where we reduced the percentage of interest-bearing debt requirements on cash and cash equivalents from 7.5% to 5%, while retaining $35 million of nominal requirements. We also repaid $25 million on our revolving credit facilities during the quarter.
If we move to Slide 5, we recorded a time charter equivalent earnings of $48.5 million for the quarter, down from $71 million, reflecting the seasonal lower freight levels and also lower fleet utilization.
This was the first quarter with the full operating fleet – operating for the full quarter, which resulted in a slightly higher operating expenses, although at the OpEx per day was more or less unchanged. The non-operating expenses also reflected the higher average debt level for the quarter at $4.9 million, up from $4.5 million. Our net profit was $21.1 million or $0.61 per share as previously commented.
Moving to Slide 6, our total assets ended at $1,081 million, down slightly due to reduction in receivables and depreciation. The receivables decreased to $43 million from $71 million, which is the combination of lower freight rates and also receipt of demurrage receivables of around $17 million during the quarter.
Our net interest bearing debt decreased by $36 million, which is due to regular debt repayments and also the $25 million repayment on the revolving credit facility. Our free cash ended up more or less unchanged, up slightly from the previous quarter, and our equity ratio ended up at 45%.
And in terms of cash flows, we see that our operating cash flow increased from the previous quarter, which is mainly a result of the reduction in receivables and we received $17 million in demurrage repayment. Net cash flow from financing and investments was negative $58 million, of which $22 million was the dividend that we paid for Q4 during the quarter. And that resulted in a net increase in cash of $1.2 million.
And I’ll then give the word to Christian, who will continue the presentation.
Good afternoon and good morning for anyone dialing in from overseas. Page 8 is just to remind you that we have all the ships delivered for some time now and we have a fleet of 14 ships sailing; eight ships delivered from Chinese yards last year, we have five South Korean built ships, and one Japanese built ship.
The order book is the big challenge in this market. This year is the highest number of newbuildings delivered into this segment ever with 44 ships. Next year, there are another 24 coming and are also some orders later, but for 2018, 2019 and 2020. As of today or by end of March, about one-third of the fleet to be delivered this year has been delivered. And the order book stands at about 29% of the existing fleet. So although there is a high number of ships to be delivered this year, we have seen the worst of the order book and it’s coming down by every month.
For the next couple of months, this month included, there will be four new ships delivered. The biggest number of ships delivered this year will be in June where we expect eight ships delivered. Most of the ships are contracted in South Korea, we don’t expect any slippage in South Korea. There are few ships under construction in China. Also the Chinese ship seems to be on time, and in this segment, unlike a lot of other segments, we don’t expect any cancellations whatsoever. So the ships on order will be delivered.
The performance first quarter, the next graph on Page 10 you can see the Avance Gas spot VLGC, spot-indexed, and our fixtures represented as dots. And for those of you who attend these presentations you will see that the number of dots are much fewer than we normally will have and what we should have with a fleet of 14 ships. You will also see that some of the dots are red and a couple of ones are blacks. The red dots are representing the Chinese fleet ships and we are doing this to illustrate that the Chinese built ships are getting market freight and there are no discounts whatsoever to the Chinese ships, they are getting the same freight as other ships, but the course, the speed performance on the Chinese built ships are slightly better than our older Korean and Japanese built ships. The performance of the Chinese ships are higher. The two dark dots represent Korean ships and Japanese ship. The reason for slightly fewer dots than normal is that this year, this quarter we have fixed large number of freight on floating rate. So we are talking about spot fixture on floating rate going forward. All in all, we have – in addition to these fixtures around 11 fixtures on floating rate. Of these 11 fixtures, two has been floating March numbers, two is floating February, five is floating March and we had also four fixtures on floating April Baltic.
These 11 floating fixtures are – five of them are loading in the Middle East, two of them are loading in Balboa, which is Pacific height of the Panama, so the LPG is loaded in US Gulf, it’s taken through the Panama Canal with Panamax of 75,000 cubic meter and it’s reloaded through VLGC on the Pacific side and sent to Far East. And the last four, floating fixtures are loading out of US Gulf.
If we look on, still on Page 10 on the right side, you can see that the rate decline has been higher this year than it has been in the last couple of years, and in particularly January came in with a high rate environment and we have 7.1 base per ship in January in average rating. Obviously, the rate decline is divided to a couple of ships, spread out on the fleet it’s quite a high number.
Looking into February and March, the waiting time has come down and we are seeing a much more normal waiting time in February and March, and we think that’s quite representative for what we expect to see throughout the year. But of course with lower fleet utilization, with higher global fleet there will be easier to get some more waiting time than we had in the last couple of years.
If we look at the LPG export on Page 11, the US Gulf is showing you the exports from Middle East, it’s going at Panama, it’s about 3 million tons per month from the export in countries in the Middle East. I’ve said a couple of times before and I can repeat it again, we do not expect any increase from the Middle East due to [indiscernible] has basically been exporting full capacity also during sanctions.
The most interesting part is of course the right hand graph on Page 11, which is US Gulf, US East Coast liftings. You can see that February and March is slightly down compared to January. We see that January export was higher than expected, however it’s not necessarily a normal export. And we see that in February and March, a number of loadings have been done on smaller tonnage. And as you may recall when we do our statistics we only do the VLGCs. So when there are liftings on 50,000 cubic meter ships and smaller ships they are not included in our graphs, so that’s why volume is coming down. There is one interesting thing on this page though and that’s, in March you can see a small pile up mark and that’s some terminal in Marcus Hook.
In March, we had the first VLGC loading ever from Marcus Hook, and this cargo was actually sent to Australia, so that’s nice. There are also further loadings in Marcus Hook in April and we have not included Marcus Hook in our fleet utilization model, so this is kind of bonus.
On Page 12, we are showing the same as on the previous. The left slide is showing number of liftings, you can see that in general there were 42 liftings, slightly low in both February and March. The interesting part on this page is the right hand graph, showing you export by this nation, and as you might recall the employment of ships going to the South America and to Europe is about 2.5 ship, 1 million ton on an annual basis. And while we are exporting from US Gulf to Asia, that four we can use the Panama Canal we need fixed ships on an annual basis to do 1 million ton. And the direct exports from US Gulf to Asia during first quarter this year is 47%. If we are including the export from – which is reloaded in Balboa, which I talked about, the export from US to Asia is more than 50%. So this is very good news and this is the main reason for our optimistic view for the future. The export from US Gulf and US East Coast to Asia is much higher than we have expected in our fleet utilization models.
To illustrate this, in Page 13 we have included an average numbers when it comes to tons on the left hand side and when it comes to number of cargos on the right hand side. So in 2014, the US exported 1 million ton per month, increased 1.4 million last year and in first quarter the average export per month from US Gulf was 1.8 million tons. Comparing this to number of cargos, you see we come from 20 cargos in 2014, we had 29 cargos average last year and the first three months this year, the average liftings in US Gulf and US East Coast is 37 cargos, 37 VLGC cargos. With fixed itself of this going to slightly more than 50% going to Asia, we see that more than – around 20 ships will be employed in long-haul trade taking it away for about three months.
So to summarize, the steady US export is why we maintain positive view for the coming months. The next terminal is US Gulf is expected to come on stream second half third quarter, some of reported that it might slip into fourth quarter. This will add another six to eight cargos per month from US Gulf. As I said, the US export to Asia is higher than expected and it’s giving us a positive employment picture and it creates the positive development from all. We have seen and I have to say that the freight rates have come much further down than we expected. We have seen motivation from the shippers of cargo to try to use whatever they can to keep a low pressure on freight rates, since they have taken so many floating rates. And it’s not only us, fixed and floating, this has been the preferred trade pricing for the early parts, the mid parts of first quarter. We’ve seen the market turn, we think it’s – we hope it’s turn for the year, the board fixed rates, which is quoted everyday has now – has a positive development in the past two weeks.
In addition, there is hardly any appetites from our customers to take floating rates. All of them want to have a fixed price freight on today’s level, today is approaching $30 per ton, and this is what our customers are trying to get and we are more – right now we are quite keen to have float in May, float in June. We also see that with all the deliveries of tonnage towards late last year and this year, there are more competition on every cargo. So the spot players of the ship owners are getting more ships delivered and each cargo get more competition, which is another reason for downward pressure on freight rates so far this year. But as I said, the first loading of the VLGC for Marcus Hook is good news and we expect Marcus Hook to continue to lower VLGCs, however we’d like to see the pattern a bit more before we include Marcus Hook in our fleet utilization models.
Panama is a big question; the first VLGC is booked to go to Panama. It’s supposed to happen in June. This is Astomos ships, Astomos is the biggest LPG in Japan and one of the biggest importer and trader as well, and they have booked a slot. Remains to be seen if this slot is going to be used to price to consulate slot in Panama is expected to be $30,000, $35,000, also it’s quite small money to process. So it might be just as an option, but we see that when – the charters are talking about employment, they always want to have the Panama auction for the – from US.
We will continue to strengthen our balance sheet. Peder explained that we have paid down a bit debt based on our revolving credit facility to have that flexibility. We think there will be opportunities coming, I think we might be able to buy ships, I think there will be consolidation. We remain very positive to consolidation. We don’t have any firm project right now or we don’t have any firm discussions going on as of today, but we are positive and I think everyone out there is aware that if they want to talk consolidation they are very welcome.
So, we think to have increased financial flexibility and to have cash at hand, it is coming handy. We believe that this is the second quarter, the board has announced 50% dividend on EPS and we believe that with this 50% dividend we are giving an attractive direct yield for investment and we also think that our shareholders are happy that we maintain strong balance sheet and give us the flexibility.
So I just want to repeat once again, that we are a bit disappointed about freight market first quarter and we are hoping that it would turn a lot sooner than it did, but we think we have seen the turning point now. We expect to have a firm freight market this summer and we are positive. I’d like also to take the opportunity to just remind you what we have done when it comes to dividend, since the IPO, we started our first dividend first quarter 2014. This is the ninth dividend in a row, this is the ninth quarter in the row we paid dividend. We paid in – we paid almost NOK60.5 in dividend since the IPO, and when it comes to dollar, we’re about $7.7 in dividend. So, we – it remains to the board to decide on the dividend each quarter, but a part of our strategy is to give good direct yield to our shareholders to lower dividends.
So with this, I invite first in Oslo for questions and then afterwards we’ll open them for questions over the phone.
Q - Unidentified Analyst
Can you give a bit more specific on weight fee base in April and maybe May, where you have some overview, February-March level or January level you think?
Peder Carl Gram Simonsen
I don’t think it’s right to say anything about what’s happening in second quarter today. May, we don’t know, April we do have a certain idea what we will have, but we’ll wait for the comments.
Peder Carl Gram Simonsen
I think overall the – let me take one step back, I was in India a month ago, and we visited the old LPG companies in India, Avance Gas imported more than 20% of the Indian LPG last year. This year, we’ve done one fixtures of India, and this was done one of the first days of January. So the Indian spot business is coming down, mainly because they have downtime charters, the Indian’s expect to increase LPG imports this year, but we do expect that the spot market import in India is coming down. So I can’t really say anything about waiting time, but I do expect the waiting time into more or less unchanged, because the waiting time congestion import, more than anything else. So when increased Indian LPG export I do expect it the waiting time to remain more or less unchanged.
Peder Carl Gram Simonsen
Well, the Indian LPG companies and the Indian authorities are telling us that they expect the Indian LPG import to increase. From the picture we’ve seen in the first three months this year, the spot activity in shipping is very low and I don’t really have a big view on if this will pick-up or not.
These floating rate structures, aren’t you making it out very vulnerable? And who’s is going to be in the Baltic to – to actually get to Baltic?
Peder Carl Gram Simonsen
That’s a very good question, and I do agree. But to do only floating rates is not good because we need [indiscernible] to have a firm opinion on such term freight bids. And again, cargo is king, our customers are kind of dictating us when they want floating it’s very difficult to insist one having fixed price and if we insist on fixed price, it’s we did that in February that level was very low. So I think the offside with floating rate in a down turn market is much greater than the downside. So that’s why we accepted having floating rates, rather than insisting on taking fixed price at low levels, but I do agree in your view.
Anymore questions from the audience? Okay operator, I think we’re ready for questions from the callers.
[Operator Instructions] And we’ll take our first question from Anders Weinberg, Private Investor. Please go ahead.
I just wondered if you can say anything about potential buybacks, I know it’s much lower time and what’s your view on that given the low time? And secondly if you can elaborate a little bit more on what’s the term on the market, you said that freight rates have turned up a little bit less after [indiscernible], do you have any visibility into next few weeks?
Peder Carl Gram Simonsen
When it comes to buyback of shares, this is obviously something we are thinking about and watching very closely. We have been discussing it in the board this year and I’m sure we will discuss it further down the road. So far the board has decided not to use the money to buy back shares and we think it’s more better for the company and we think it gives us more flexibility to keep a strong balance sheet to enable us to do business, we expect to see during this year. As I said it’s continuously mixed up and it might change any time, I don’t really know, this will be for the board to decide.
Your second question about freight rates, you know I’m very reluctant to come with any firm numbers when it comes to freight, it’s really difficult to many any models about freight rates. It’s really going to competition on each cargo, and what we see now is that the chartering activity has increased quite a lot over the past two, three weeks, and we see that the freight rates are coming off day by day, it’s more fixed. I think that our customers might be surprised to see the big number of ships disappearing into long term employment and loading in the US, and I think that we will see that one day there are very few ships competing freight cargo and then I think we will see a big jump in the freight rates. This is quite normal way of behavior in this segment and we’ve seen the same both last year and 2014. This is what we expect to see, but please Anders don’t ask me what the freight will come to and although I might give you the day the markets will really boom, I will be a bit reluctant to do it right now.
Has the industry done anything in terms of slow steaming the backhaul or similar things to adjust the capacity?
Peder Carl Gram Simonsen
I think there will always be the services speed on the balance voyage, but older activity is somewhat slower than the [indiscernible], what we are doing is what – when we are discharging a cargo we will – if we don’t have any cargo booked for the ship, we will keep the ship in the Singapore area and wait for the next cargo. This will give us a true flexibility to go to Middle East, go to West Africa or go to US Gulf or pick up the – every old cargo in Australia. So I think that’s what most people are doing, instead of going back to the Middle East, they will keep the ships at a deviation point where they are very flexible for whatever the cargo is for the next Gulf.
[Operator Instructions]. There are no questions at this time.
Peder Carl Gram Simonsen
Okay. Thank you everyone. See you in a while.
Thank you. And that will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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