Dorian LPG Ltd

NYSE:LPG

Earnings Call Transcript 2020-Q2

[Operator]

Greetings and welcome to the Dorian LPG’s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website, which is www.dorianlpg.com.

I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young, please go ahead.

[Ted Young, Chief Financial Officer]

Thank you, Stacy. Good morning, everyone. And thank you all for joining us for our second quarter 2020 results conference call. On the call today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; and John Lycouris, Chief Executive Officer of Dorian LPG USA.

As reminder, this conference call webcast and a replay of this call will be available through November 7, 2019. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe, or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions.

Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today.

Additionally, let me refer you to our unaudited results for the period ended September 30, 2019 that were filed this morning on Form10-Q. In addition, please refer to our previous filings on Form 10-K and Form 10-Q where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements.

With that, I'll turn over the call to John Hadjipateras.

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Thank you, Ted. Welcome to our second quarter 2020 earnings call. I am in Singapore, where I attended the Global Maritime Forum and where much of the discussion concerned climate change. Although the long-term goal of the industry is zero-carbon emission, in the meantime, LPG provides a significantly better alternative to fuels currently being consumed.

John and Ted are in Connecticut and after I give you a brief report, Ted will follow with a discussion of our quarterly numbers and John of the market and our fleet status. We will complete the call with questions.

On this date last year the Baltic rate was $41 a ton and a year before that it was $30.Today, the Baltic is above $70, The market appears to have reached a degree of stability, having created above $50 a ton since April of this year. And just this quarter, the Baltic struck a highest level since 2015 and $81 a couple of weeks ago. This quarter's profitable results reflect the health of the current freight market. Our fleet is well positioned to capitalize on the potential price differential between low-sulfur and high-sulfur fuel oil. Two of our ships recently came out of drydock bringing our scrubber-equipped fleet to four ships on the water trading. We believe that is a -- that there are about 20 in all scrubber-fitted VLGCs currently. In addition, we expect to have four more VLCCs enter the drydock -- five more before the end of this year and three in -- during next year. At the completion of our program, we will have traded 12 out of our 20 ships scrubber-fitted.

The trade environment and cost control have contributed to strong cash flows enabling us to fund the scrubber installation and strong buybacks from cash flow. Today we have repurchased $6.7 million of stock in accordance with our previously announced $50 million buyback authorization. This program underscores our Board's commitment to thoughtful capital allocation. Our optimistic view of the market continues to be supported by market fundamentals with a contained order book and prospects for increased demolitions.

And with this, I will hand you over to Ted.

[Ted Young, Chief Financial Officer]

Thanks, John. My comments today will focus on our unaudited second quarter results and our capital planning for the remainder of the year. For the discussion of our second quarter results, you may also find it useful to refer to the Investor Highlights slide posted this morning on our website.

Beginning with our chartering results, we achieved total utilization of 92.9% for the quarter with a daily TCE that is TCE revenue over operating days as defined in our filings of $47,623, yielding a utilization adjusted TCE which is TCE revenue per available day again as defined in our filings of about $44,241.

Spot TCE, which reflects our Helios Pool results per operating data the quarter, were $51,613 per day with utilization of 91.5%. I'd also point out that our spot results are net of the administrative costs of the pool. And as a result, our actual TCE is higher than this level. Daily OpEx for the quarter was $8,594 or $8,403 per day excluding amounts expensed for dry-dockings. Those amounts compare to last quarter's $8,052. Increased insurance premiums in some lines played a role in the cost increase which we will seek to offset by efficiencies and other cost categories.

Total G&A for the quarter was $5.9 million and cash G&A i.e. G&A excluding non-cash compensation expense was about $5 million. G&A for the quarter also reflects bonus payments to our executive team of about $1.1 million. Excluding those payments, cash G&A of $3.9 million was down some $600,000 versus the prior quarter and $200,000 versus the same quarter last year, excluding the professional legal fees related to BW LPG's unsolicited proposal.

As we discussed last quarter, our G&A including non-cash compensation expense should decline. For non-cash comp expense we expect to see a decrease because the original awards granted in 2014 invested in 2017, '18 and '19 have now been fully amortized. These awards hit our P&L by roughly $700,000 a quarter, and thus we expect non-cash comp expense to be lower by this amount.

Our reported adjusted EBITDA for the quarter was $67.3 million, which was a significant increase from the prior quarter’s $38.4 million and substantially stronger than the $19.6 million reported during the same quarter last year. That $19.6 million does exclude the costs related to DW LPG's unsolicited takeover proposal.

The strong rate environment and lower G&A accounted for most of the improvement. We look at cash interest expense on debt as the sum of the line items of interest expense, excluding deferred financing fees and other loan expenses and realized gain/loss on derivatives. On that basis, total cash interest expense for the quarter was $7.6 million which is down about $100,000 from the prior quarter, largely due to continued debt pay down. We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost, fixed hedge and a small floating piece of 4.3%.

For the quarter, we had cash outlays of roughly $3.6 million for dry-dockings or $1,719 per fleet day. Fleet day is calendar days plus time charter-in days. Both of latter two terms used are defined further in our filings. We also managed to repurchase $6.2 million of stock during the quarter and an additional $500,000 since the end of the quarter.

Our free cash flow to equity, which I remind you is a non-GAAP term, before outlays for stock buybacks and dry-dockings was $25.3 million or roughly $12,000 per calendar day for the three months ended September 30, 2019. Clearly, our cash flow and liquidity remains strong. Since quarter end through to October 29, our restricted and unrestricted cash is up about $13 million to somewhat over $96 million.

Although we hold an 80% plus economic interest in the Helios Pool, we do not consolidate its balance sheet accounts, which has the effect of understating our cash and working capital. Thus, we believe it is useful to provide some additional insight in order to give a more complete picture. As of Tuesday October 29th, the pool had roughly $35 million of cash on hand. And as a reminder, the pool has no debt whatsoever. In light of the strong rate environment, we've taken advantage with disruption at one of the shipyards to postpone installation of three scrubbers until the first calendar quarter of 2020.

While we remain very constructive on the rate outlook, historically, we've seen a bit of a rate pullback in the winter months and thus felt that a slight delay reduced our opportunity costs from the installation. Based on this revised plan, we now expect to have total cash outlays of roughly $25 million or about $6,000 per day for the remainder of the fiscal year for the 10 dry-dockings including scrubber installation and ballast water management systems. Since we do get extended payment terms from a number of our vendors, some additional amounts in respect to these dry-docking throughout will not be payable until our fiscal year 2021.

On completion of the program, 12 of the 23 vessels in our fleet will be able to profit from the expected fuel price differential between low-sulfur fuel oil and high-sulfur fuel oil following the implementation of IMO 2020. For the remainder of the fiscal year, we therefore anticipate cash cost per day of $29,000, which is the sum of the $23,000 a day to which we have historically guided, plus the 6,000 just mentioned.

With a solid market backdrop and a strong balance sheet, we maintain our constructive view on our business and expect to continue to be able to generate solid cash on cash returns for our shareholders.

With that, I'll pass it over to John Lycouris.

[John Lycouris, Chief Executive Officer, LPG USA]

Thank you, Ted. Seaborne LPG has grown 15% year-to-date over 2018, while U.S. export volumes in recent months have for the first time taken the global supply lead over the Middle East exports. According to Waterborne HIS, U.S. LPG exports to-date are 34 million tons, while all the Middle East liftings are at 32.3 million tons. This might be a direct result of the attacks last month in Saudi Arabia reducing lifting volumes of September and October.

The U.S. LPG supply has grown by 4.8 million tons year-over-year. The rest of the world supply growth has kept pace, growing 4.4 million tons year-over-year and recovering to roughly 2016 levels. Australian, Southeast Asia and European volumes have experienced the largest growth, which we believe are favorable for ton-mile demand.

During the third quarter, we saw 187 VLGC liftings out of the U.S., about six monthly cargos on average more than last year and are likely attributable to Energy Transfer's Marcus Hook Terminal increased capacity during the year to about 15 VLGC liftings per month. We expect increased number of liftings in this quarter and next year on account of expanding U.S. export and fractionation capacity by Enterprise, Targa and Nederland terminals, which would increase the total monthly VLGC lifting from all terminals to about 100 vessels.

U.S. propane inventories are still at high end of their five year range, hitting 100 million barrels last week, 22% higher than last year same time. Wider LPG pricing spread between the U.S. and the Far East has drove demand last quarter. In China, two BDH units started up operations; Donguan Grand Resource and Technology 600,000 metric tons per annum, PDH plant conducted trial production; and the Hengli Petrochemical in Dalian started a single-train dehydrogenation unit. SP Chemicals put into operation the steam cracker, which utilizes both propane and ethane as feedstock. Demand also increased in South Korea, as Hanwha Total and LG Chemical both restarted production of their steam crackers after maintenance which were expanded to increase their propane feedstock capabilities.

The order book overall remains stable, representing 13% of the current fleet and with implementation of IMO 2020 we remain hopeful that the cost of compliance may drive less efficient ships to demolition.

The scrubber adoption rate in all marine sectors continues to be strong and for the VLGC fleet, we expect more than 40 vessels to have scrubbers installed by the end of first quarter 2020. We currently expect our scrubber installation will be completed by the end of the third quarter 2020 which will mean that 12 out of our 22 ships will be scrubber equipped.

As Ted mentioned, we have decided to opportunistically push back installations, allowing our vessels to continue trading and take advantage of strong market rates and vessel demand. Given our fleet of installed and scrubber retrofit installations, we expect that our fleet will be commercially flexible and compliant within any regulatory or sovereign restrictions.

Thank you very much. I'll pass it over to John Hadjipateras.

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Thank you, Ted. Thank you, John. Stacy, do we have any questions?

[Operator]

[Operator Instructions]. Our first question comes from Omar Nokta with Clarkson.

[Omar Nokta, Clarkson]

Hi, John, John and Ted. That was a very good overview you gave on the market, fundamentally, for this year and the outlook, especially with the VLGC liftings being about 100 or so each month. When you think about where things are right now, obviously VLGCs are very strong, earning $60,000 a day or so, we're supposed to be approaching or we're supposed to be feeling some of the winter seasonality that tends to be at least a weaker market, at least for the next several months, so clearly that's not happening. Is there something that's different this year relative to last year, the year before, that's causing the strength to persist as we get into the winter?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Yes, Omar, I think that there are many -- that the market -- the seasonality aspect of the market is being distorted for a while anyway and there's less of it. And each year we go on to see that the seasonality not sort of playing out as we expect. It could be because of the new supply that we're getting. It could be because of the new terminals that are being established in the Far East. But I myself don't kind of count on seasonality. I look through it. And I think we should be looking at the average for the year more as if we wanted to make a prediction than when we're going to spiking or falling. I just don't think the market will follow those usual patterns anymore.

[Omar Nokta, Clarkson]

Okay. That makes sense that there's probably more cyclical themes that play that are driving these seasonality issues maybe a bit towards the wayside? Just based on how strong the market has been, really, as you said, since effectively April, what's the inquiry looking like for longer term deals from charterers?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

It’s beginning. It’s beginning again. There is -- after a long period, of course of a down market there is reluctance on the part of charterers. And except that in the spike earlier this year, the -- when the market spiked during this year, it also started a little bit the year before. But when it spiked, there was a little bit of a rush for people to cover. And if you could see that the main incentive was to avoid that being exposed to the spot rates. So the period was maybe a year’s period in audit. At the moment, I think you're getting to a maturing a little bit. And people that are looking further ahead and we see inquiries for two and three years. And of course we also at the same time have been seeing inquiries for projects for longer period time charter. So it's coming -- it’s coming, I think period. But we haven't seen anything at the moment which is for us actionable, but we're watching it very closely.

[Omar Nokta, Clarkson]

Okay, got it. And just maybe -- just some color then on the -- potentially on the -- there you mentioned the project deals. Would those be -- the ones you're seeing, are those for existing ships or ones that would be against a newbuild order?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

We try not to say that word, okay? Yes, look I think both.

[Omar Nokta, Clarkson]

Okay. And maybe just one final one from me and maybe just taking a step back and thinking of Dorian, obviously now pure play deals VLGC company, 22 ships owned, obviously cash machine at the moment, what are your thoughts on the fleet from here as you think about the next phase in Dorian's life span? There you had an aggressive investment five years ago in building up the fleet. But when you think about the next time you're ready for growth, do you want to continue on with VLCCs or do you look elsewhere within the LPG chain?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

That a very good question. No, we look -- the further it gets from the VLGC, the more opportunistic we would be. But in terms of investing in VLGC, as long as we feel some confidence in the prospects of the -- over the long-term and we would be ready to do that. But I think we'd be very cautious, not so much because of we fear the market but we fear that a start of a newbuilding program could create a very unwelcome sort of…

[Operator]

Our next question comes from Nicolay Dyvik with DNB.

[Nicolay Dyvik, DNB]

Just a quick question on the Enterprise Terminal, what do you hear in terms of volume ramp up and U.S. inventories are high, investors needing for scrubber retrofits and the China LPG demand is finally strong after weak H1 of 2018 and PDH ramp up that you talked about. So you’re now having higher terminal volumes. I just wanted to see if you have any insight on how that is shaping up this ramp up?

[John Lycouris, Chief Executive Officer, LPG USA]

Can I take that then John H? Nicolay, the Enterprise has tested already the 175,000 barrel expansion and they are operational already. We've seen that this month and we expect another expansion from Enterprise for 260,000 barrels in the third quarter of 2020. So we really expect that with their 85% utilization, they will be able to push a lot of cargos and liftings forward.

[Nicolay Dyvik, DNB]

So is your sense that the 175,000 ramp-up is already now fully operational or yet to come?

[John Lycouris, Chief Executive Officer, LPG USA]

We've seen in the last two weeks, a very high utilization of the terminal. We assume it is and we have also heard that they have tested it and it is operational from their call a week ago.

[Nicolay Dyvik, DNB]

How should we think about -- you bought back some stock this quarter, how should we think about cash dividends versus buyback in our modeling for 2020?

[Ted Young, Chief Financial Officer]

Look -- John, you on?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Yes. I'm back on. I mean unless Omar, when I was talking about the things I don't want to talk about.

[Ted Young, Chief Financial Officer]

Did you catch -- Nicolay, if you want to pick up, your timing is impeccable. Nicolay asked about dividends versus stock buybacks if you'd like to take that one. How they should think about that as a model out the coming 12 months?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

We can't give you a guidance on that, because I think we look at it from time-to-time, and our Board is looking at the most efficient way of returning to our shareholders. So at the moment, we can say that the buyback program is there, but we don't want to exclude the possibility of dividends or any other way of returning value which would be also debt reduction.

[Operator]

[Operator Instructions]. Our next question comes from Greg Wasikowski with Webber Research. Please go ahead.

[Greg Wasikowski, Wells Fargo]

So I'll bring up the scrubbers. So I just want to get the numbers right. The original schedule is to have all 12 done prior to January 1st, right? But now we're expecting nine to be done by January 1st and three of those to slip past, right?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Correct.

[Greg Wasikowski, Wells Fargo]

Okay. Maybe what is causing those delays? Is it too many orders at the yards or is it more the installations are just taking a little bit longer than expected?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

It's not the installation. Where our ships have gone into the yards, they've come out in good time, and within expected both in terms of the cost and the time, we've not been far from our estimates, so -- and we don't expect to be very far. But the three ships were delayed, were stemmed in China, and they weren't the only ones in China, but there were three in a particular Chinese shipyard, which had problems. And so, we have been examining alternatives. But we frankly have not been -- we’ve been a little bit relaxed to put it bluntly about looking for alternatives because in the meantime we’re taking advantage of the higher earnings. So, I expect that early next year we will be proceeding. And by no means are we in postponement of any significance. It’s just that in reaction to something that just came up unexpectedly. We kind of opportunistically took advantage of it to continue to do some voyages before we put the ships in the shipyard.

[Greg Wasikowski, Wells Fargo]

Was it specific like operationally to the yard specifically or is it a broader issue?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

No, it's specific to the yard. That yard actually was closed down by the local authority because of a dispute between its owner and the local authority. I mean John, of course, is more aware of the details. But yes, as we said -- I mean you've seen that in general, I think you may have heard also from the other markets that there are delays and instances particularly in China where they're overbooked. This might not be have as much impact now that people are taking VLGCs out of the lineup and keeping them trading too. So, I expect that it's not going to be an issue for us or other people to complete the scrubber programs that even if there's a little bit of a delay.

[Greg Wasikowski, Wells Fargo]

Okay, that makes sense. And then the remaining five for this quarter, are they -- I'm assuming they are not in China? And then just from a modeling perspective, can you remind us how long we should expect those ships to be off higher for Q4?

[Ted Young, Chief Financial Officer]

We’ve given guidance previously that it's -- 25 to 30 days could slip a little bit, it could slip a little bit either way, sometimes little faster, sometimes a little slower.

[Greg Wasikowski, Wells Fargo]

And then just switching gears real quick. I always enjoy hearing about your developments as to LPG as a marine fuel. Now you guys have something going with MAN and Hyundai if memory serves. Do you any updates there? And then like, when do you think is we can start to talk about LPG engine retrofits becoming more realistic?

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Yes. John Lycouris, you're ready to take that. You've been following it closely.

[John Lycouris, Chief Executive Officer, LPG USA]

Thank you, John. Yes, Greg, we are continuing those discussions and we have progressed our engineering studies with all the parties concerned. And we will be trying to put the whole project together as an economic proposition for the Board to consider some time in the -- towards later in the year.

[Operator]

Thank you. I will now turn the floor over to John Hadjipateras for closing comments.

[John Hadjipateras, Chairman, Chief Executive Officer and President]

Thank you Stacy and thank you all. And I wish you all a Happy Halloween. Good day and good night from me and good morning to all of you.

[Operator]

This concludes today teleconference. Thank you for your participation.