Dorian LPG Ltd (LPG) 2016 Q3 法說會逐字稿

Greetings and welcome to the Dorian LPG third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young, please go ahead.

Thank you, operator. Good morning, thank you all for joining us for our third-quarter 2016 results conference call.

With me today are John Hadjipateras, Chairman and CEO of Dorian LPG Ltd., and John Lycouris, Chief Executive Officer of Dorian LPG USA. As a reminder this conference call, webcast and replay of this call will be available through February 5, 2016.

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 are estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our third-quarter 2016 results filed with this morning with the SEC on 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 will turn over the call to John Hadjipateras.

Good morning and thank you for joining us for our third-quarter 2016 financial results. I will provide a brief update on our operating performance in Q3 before handing the call to Ted to review our financials. Ted will then pass the call to John Lycouris who will update you on our new building program and to discuss the broader market.

In our third fiscal quarter we've taken delivery of seven ships: the Clermont, Cheyenne, Cratis, Commander, Chaparral, Copernicus and Challenger. At the beginning of the last calendar year, we owned five VLGCs. At the midyear mark and at the end of June we owned nine VLGCs.

Our fleet now comprises 21 owned VLGCs of which 18 have been built in 2014 and 2015, making Dorian the leading owner of eco-VLGCs in the world. We are partners in the Helios LPG pool where the fleet currently comprises 21 smart VLGCs including one on a one-year time charter. 17 are owned by the Company and four are our owned by Phoenix Tankers, the subsidiary of Mitsui OSK. Outside the pool we have four VLGCs on time charters of more than two-year duration.

Our chartering strategy continues to be opportunistic in the strategic employment of our vessels through both the spot and period markets. We have historically been biased towards time charters but we also recognize the importance of taking advantage of a strong market to capture the best possible risk-adjusted return on our assets.

For the quarter ended December 31, 2015, our spot VLGC utilization was 93% and our overall VLGC utilization rate was 95%. As a reminder, we calculate fleet utilization as defined in our filings by dividing our total operating days in a period by the total available days in that period.

Finally, in accordance with our previously authorized share repurchase program the Company repurchased approximately $6 million worth of LPG shares or 481,231 shares at an average price of $12.10 in the third quarter. The Company now has $89.9 million remaining on its authorization. We remain committed to returning cash to our investors and our Board continues to consider our dividend policy as our cash position builds.

We continue to review our financial position and will determine the most appropriate capital allocation strategy that would best serve our shareholders and the Company's strategic flexibility. That includes the weighing of the relative benefits of share repurchase, dividends or accumulating capital for strategic purposes.

You should expect us to be opportunistic with our share buyback and to weigh this and other options for delivering value to our shareholders. We certainly see an interesting arbitrage between the value of our vessels and the price of our stock in the market.

Let me now hand over the call to Ted who will discuss the financial results for the quarter.

Thank you, John. The quarter's results reflected a strong freight market, high vessel utilization, the entry of seven newbuildings into service and good management of our costs.

Before I move on to discuss the results for the year and the quarter I would like to remind you that our business should be viewed from a long-term perspective. As a reminder, we are affected by the seasonality of the market and it is important to understand how this seasonality may affect our quarterly financial results. The LPG shipping market is typically stronger in the spring and summer in preparation for increased consumption of propane and butane for heating during the northern hemisphere winter.

For the quarter ended December 31, 2015, we reported total revenues of $93.3 million, representing charter hire and voyage freight revenue earned for our VLGCs and our one pressurized vessel. As we initially described last quarter, we report results for the Helios LPG pool which commenced operation on April 1, 2015 as part of our total revenues. We report our share of the Helios results as net pool revenues in our income statement which represents our percentage participation in the pool revenues less pool voyage expenses and pool general and administrative expenses.

Our share of net pool revenues for the quarter was $66 million. Time charter equipment revenues per day across all our VLGCs including those in the Helios pool amounted to roughly $58,000 while our spot VLGCs including those in the pool earned over $65,000 per day for the quarter. Our voyage expenses for the quarter were approximately $4.3 million and mainly related to bunker costs of $3 million.

While bunker prices continue to remain low in the current oil price environment we are also benefiting from the speed and performance characteristics of our eco-ships which are performing ahead of our expectations. Our vessel operating expenses for the entire fleet were approximately $14.3 million or $8,180 per vessel per calendar day which is calculated by dividing the vessel operating expenses by calendar days for the relevant time period that our fleet was owned.

Focusing on our VLGC-only vessel operating expenses we operated these ships at an average cost of $8,324 per day which included our investment in training officers for future deliveries of approximately $557,000 for the quarter. We expect these training costs to ramp down significantly going forward as we have substantially completed this process though we continue to recruit and train officers and crew in order to ensure regular home leave for our seafarers.

Adjusting for that investment in training, the daily OpEx for our VLGCs amounted to approximately $7,980 a day which is a very good result. Depreciation and amortization was approximately $13.5 million for the quarter ended December 31 and it relates mainly to depreciation expense for our operating vessels.

General and administrative expenses for the three months ended December 31, 2015 were $7.5 million and were comprised of $2.5 million of salaries and benefits, $1.4 million of costs related to non-capitalizable items incurred prior to delivery of vessels that deliver during the quarter, principally pre-positioning crews several weeks in advance of the delivery of the vessel, $1.3 million of stock-based compensation, $800,000 of professional fees and $1.5 million of other G&A expenses. I would note that our professional fees were somewhat elevated this quarter because of the increased level of corporate and capital markets activity.

Excluding the non-cash comp expense we incurred approximately $6.2 million of cash G&A expense for the quarter. Our year to date, that is for the nine months, our G&A excluding non-cash comp expense was $17 million. We have previously disclosed that nearly $3 million of that amount relates to costs incurred prior to vessel delivery that cannot be capitalized, thus we would expect our cash G&A to typically be in the range of $4.5 million per quarter.

Our reported interest and finance costs for the quarter was $4.6 million which is comprised of interest expense on our debt, amortization of financing costs and other financing expenses of $5.7 million offset by capitalized interest of $1.1 million. The $5.4 million gain on derivatives was comprised of an unrealized gain of $7.4 million from the changes in the fair value of the interest rate swaps and a realized loss of $2 million. The unrealized gain was principally the result of favorable interest rate movements during the quarter.

We currently have approximately 66% of our new debt facility hedged and this percentage will increase to over 70% by the end of the hedge period as our bullet hedges represent a greater percentage of total exposure. We are continuing to consider entering into additional interest-rate hedging transactions.

Overall, for the quarter we reported net income of $54.7 million or $0.97 a share. Our adjusted EBITDA as defined in our filings similarly benefited as we reported $68.7 million of adjusted EBITDA for the quarter. We will see these earnings convert into cash in the coming months, particularly those related to demurrage which have a somewhat longer collection cycle.

During the quarter we also repaid $10.6 million of bank debt under our two bank facilities. We finished the quarter on December 31 with $22 million in unrestricted cash.

Looking ahead on a fully drawn basis we expect our annual principal amortization under the 2015 facility to be roughly $3.1 million per vessel per year. During the quarter the Company repurchased $5.8 million worth of stock bringing our total repurchases under the stock buyback plan to $10.1 million.

We've remain focused on operating our fleet safely and cost effectively and ensuring that we have a balance sheet that allows us to operate our business in all economic climates. Thus, we are pleased that we carry a prudent level of leverage and that our business continues to generate good earnings and cash flow.

With that I will turn it over to John Lycouris.

Thank you, Ted. As John reported Dorian LPG took delivery of seven eco-newbuildings during the last calendar quarter and the fleet now stands at 21 VLGC vessels. All shipyards have performed on schedule with their respective vessel deliveries.

The deliveries have gone smoothly with crew being positioned and trained on schedule at our site offices by our site and newbuilding teams. All vessels have completed gas drives in short order after delivery and entered commercial service by promptly entering the spot market via the Helios LPG pool.

One of the newbuilding vessels upon completion of gas trials entered into a five-year time charter to a major Asian oil company. We believe our customers continue to benefit from the competitive advantages of the Dorian LPG eco-VLGCs and the efficient and smooth integration of these newly delivered vessels into our fleet.

Global liquefied petroleum gas export volumes for the calendar 2015 reached 80 million metric tons, an 11% increase over the previous year. US LPG exports alone reached a record of nearly 21 million metric tons which is a 50% increase over the previous year.

The US became the largest LPG exporter in the world, accounting for 25% of the global seaborne export volumes that were shipped to Central and South America, Asia, Europe and the Mediterranean at a share of about 43%, 29% and 26% respectively. The strong LPG export volumes from the US Gulf and in particular large cargo movements on VLGC vessels from west to east have increased ton miles for the segment Dorian LPG has focused on and has generally supported shipping demand for VLGC vessels. Other LPG exporting regions have shown growth in 2015 and have contributed to a generally stronger Baltic rate market resulting in strong utilizations and freight rates seen by the VLGC vessels.

Propane and butane prices have followed crude oil prices downward, making LPG attractive not only to the retail domestic market but also to the petrochemical industries around the world. Propane prices in the US Gulf declined along with crude oil and remained for most of the year below 45% of the price of WTI crude, maintaining the propane to naphtha spread in Northwest Europe in favor of propane.

US Gulf LPG inventories were recently reported at about 90 million barrels with the majority of the product located in the Gulf Coast PADD 3 area. We believe this is a result of increases in storage capacity for the export terminals and for the petrochemical plant developments in that region.

As reported by Enterprise Product Partners, the US Gulf terminal increased annual capacity by about 5.5 million tonnes in late 2015 and beginning of 2016 for a total of about 14 million tonnes capacity. The target terminal exported about 5.5 million tonnes in 2015 and the Sunoco terminal followed by about 3.9 million tonnes of exports.

On the US East Coast the Sunoco Marcus Hook terminal started with an export of about 1.1 million tonnes for the year and the US West Coast, the Petrogas terminal at Ferndale Washington had exports of about 550,000 tonnes. The continuing US LPG export capacity growth is evident with the recent enterprise expansion, the expected Marcus Hook Mariner East export terminal which is commencing in February 2016, the expected Petrogas terminal capacity increase of 350,000 tonnes during 2016 and the Phillips 66 terminal commencement with 4.4 million tonnes annual capacity at Freeport Texas which is expected to come in online on fourth quarter of 2016.

We therefore expect the US LPG export volumes may reach higher levels in 2016 which would support additional ship supply in the reasonably robust freight rate market environment for the sector. We continue to see record LPG imports into China in the current and the next month which is February 2016 and likely this will likely confirm that this country will become the largest importer of LPG in the East during 2016.

To summarize, we continue to see LPG export growth which will support the fleet growth and establish LPG as a mainstream fuel and feedstock to the global energy markets and the world economy. Thank you.

Thank you, John. So we're ready to take questions. Operator, could you please open it up for questions?

(Operator Instructions) Noah Parquette, JPMorgan.

Thanks for taking my question. I just wanted to ask a little bit about your chartering strategy and your comfort level with your spot exposure.

Are you still looking at long-term charters? Are you happy with the mix?

What kind of liquidity for three-plus year charters are you seeing? Some color there would be helpful.

Thank you, Noah. We are happy with our mix at the moment because they spot market is higher than the period market. We continue to be looking for time charters and when and if we see them coming -- as you know, we booked one in the last quarter of the calendar year 2015, a five-year charter.

We're engaged in discussions with various charters. There is still liquidity in the market. There is inquiry and we continue to be opportunistic about going from spot to period and vice versa.

Okay. And can you, are you able to give any guidance on your bookings to date on the spot fleet for the quarter?

The bookings to date for this quarter you mean?

Yes.

In line with the market. I think if you look at the market we're very much in line with that.

Okay. That's all I have. Thanks.

Mike Webber, Wells Fargo.

Hey, good morning guys, how are you? I wanted to start up with a question around uses of capital.

Obviously ongoing theme since really the summer has been around how you guys are going to deploy the cash generation from the fleet that's fully delivered, now we're getting very close. And I'm curious how the current weakness in the market and the relative yield of your competitors impacts your thought process around dividends or buybacks and those kinds of solutions and then at some point it comes down to a decision around whether the current weakness is transitory or longer term in nature. I'm just curious as to how you guys think about and go about making that kind of decision.

Mike, are you talking about the weakness in the stock price or weakness in the market in the shipping market?

Weakness in the equity market.

The equity market. Okay.

Or the energy sector.

The whole energy, yes, yes, yes. I think we're being bundled into the energy and despite the fact that our fundamentals, our business fundamentals are very strong and continue to be ahead of our expectations our price, our share price has suffered along with everybody else's. So I think, Mike, I think the best thing I can say to this is consistent with our past practice we continue to focus on the fundamentals of our business and we think that is the way that we can deliver value to our shareholders.

Now whether we can -- when we can return money to our shareholders by way of dividends and/or buybacks, that is something that we continue to and actually now we'll be looking at more closely because as you observed we are in the phase now of actually collecting money for having almost completed the buildout of our fleet. So really we're looking at the fundamentals of our business and we are conscious -- our Board is conscious of our shareholders sensitivities and we will be there to either be doing a dividend or doing a buyback.

At the moment the values are very compelling on the buyback front. I think that is the main takeaway from the weakness in the stock market that we see.

That makes sense. Obviously it's a tough environment in that regard outside of what you guys are actually earning. But around the fundamentals, the only real overhang around fundamentals is going to be the 2016 order book and how and if that ends up weighing on rates.

I'm just curious I know you guys have pretty detailed models around this, but how do you see that getting layered in from maybe from a sector-wide utilization perspective? When do you start seeing it having a tangible impact I guess on sector-wide utilization? Is it a Q2 event or do you think it could be sometime a bit beyond that?

We've been surprised to the upside. And I will let John Lycouris tell you more specifically how and what we think going forward for the next few quarters.

Hi, Mike. As I said on the text before we've been surprised with US Gulf exports. It appears that there's going to be at least 5 million to 10 million tonnes more of LPG exported out of the United States.

We have seen West Africa, Algeria, Northwest Europe produce additional tonnes and I believe that everybody is expecting Iran to come into the market strongly this year. So we will see abundant supply of LPG. You will need shipping, take care of that abundance of LPG and the pricing of LPG nowadays has made it the most desirable source of energy for India, for China, for all these developing countries that have put LPG as one of their main sources of energy.

Fair enough. Thanks, John. One more for me and I will turn it over.

During your prepared remarks I think you referenced an amortization for your fleet that I believe you said it was around $3 million to $4 million. I just wanted to double check that I heard that correctly. And then in terms of that amortization profile is that relatively flat over the next several years and in your mind is when the balloon hits on that facility?

Yes, it's $3.1 million per vessel per year. So that's the way, and remember that's on the newbuilds, that's 18 vessels. So that's about an 18 vessels it would be about $56 million a year.

That profile is flat for quite a while. The way the facility works is that we've got a seven-year initial or about six years remaining under the commercial tranche of our loan and then the other three which are supported by the Korean export agencies are 12 years. So aside from a refinancing event that we'd expect at year seven, the facility doesn't really doesn't have a balloon per se because the Korean export facility actually is a flat amortization down to zero.

Right, okay. That's very helpful. Thank you guys for the time.

(Operator Instructions) Spiro Dounis, UBS.

Good morning guys. How are you? Just wanted to start off with a quick one on cost metrics.

Continue to surprise, I think over the last few quarters they have definitely come in lower that we've expected anyway. And I know you've given guidance in the past on cash breakevens of around $23,500 to $24,000 a day for these vessels. Just wondering that in connection with the amortization you mentioned before, do those numbers still hold or is it actually a little lower these days?

Well, there are currency factors here at play too. Ted will give you a little bit of an explanation on that.

Overall over the longer term historically vessel OpEx costs have continued to go up around at 2%. So we tend to stick by original guidance of $24,000 plus or minus per day in terms of cash breakevens. The benefit that we've seen is that these newer vessels clearly are operating at a lower cost.

Some of that is crew cost, other major savings factors probably spares and repairs and maintenance. Repairs and maintenance are pretty expected given where we are in the life of these vessels. Spares and also lubes they just seem to be more efficient.

And so we're expecting some long-term benefit from that. But nonetheless they are also just as John points out there are other factors at play that as we think about over the long term we kind of stick to our original guidance.

Got it. Okay. Perfect. I'm just one last maybe big picture question.

So sorry for not giving your any breathing room here before taking the delivery of your last vessel, but I guess what's next for Dorian? I know an MLP was once considered, I'm pretty sure that's off the table for now, but obviously you're going to be returning cash to shareholders like you said. Just wondering if you see any opportunities out there that maybe look interesting right now just given the carnage in the energy space?

Yes, there's a lot of interesting things. At the moment we're securing our business.

We continue to focus on securing our business but you're right we are now slowly turning to looking around at opportunities. As you know from time to time we've been looking at consolidation which we still are alive to possibilities and we're looking at other things as well. And you'll be the first to know when we're getting close to book something.

Perfect. And just to follow up on that real quick, as far as consolidation goes your preference obviously you're a VLGC owner, any interest in the smaller classes? I'm guessing probably not as much.

Will yes there is interest. We're looking at other classes because as pricing changes other things become interesting as well. So I think that the relative pricing of everything we take into consideration.

We just are very hot on the LPG story. We just think that LPG has a lot, a very strong future and an expanding future and I think it's going to make inroads as a fuel and I think that there will be a lot of opportunities out there in the shipping of it and in the distribution of it. And so this is where we -- that's what we wake up and go to sleep with.

Got it. That makes sense. I appreciate the color. Nice quarter, guys. Thanks.

Erik Stavseth, Arctic Securities.

Hi, Erik. He's gone away.

Erik, your line is live.

Well, it looks like Erik has dropped off. So thank you.

I'm mindful that a lot of you are calling from Europe so we're going to let you start your weekend for those of you who are and especially those in Norway who want to go off to their cabins. Thank you very much for calling in and talk to you next time.

Thank you. Ladies and gentlemen, this concludes the conference. You may disconnect your lines at this time and thank you for your participation.