Dorian LPG Ltd (LPG) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Dorian LPG Second Quarter 2018 Earnings Conference Call. (Operator Instructions) 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.

Thank you, operator. Good morning. Thank you all for joining us for our second quarter 2018 results conference call. With me today are John Hadjipateras, Chairman, President and CEO Dorian LPG Ltd.; and John Lycouris, Chief Executive Officer of Dorian LPG (USA). As a reminder, this conference call webcast, and a replay of this call will be available through November 10, 2017.

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 annual report on Form 10-K, where you'll find risk factors that could cause actual results to differ materially from these forward-looking statements.

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

Thanks, Ted. Good morning, and thank you for joining our financial year 2018 second quarter earnings call. After my introduction, Ted will review our financials and recent developments, and John L. will update you on the broader market and operating environment. Then we'll take questions.

Dorian is the second-largest operator and owns and operates the most modern fleet of VLGCs in the world. The Helios LPG Pool, which we founded with our partner, Phoenix Tankers, subsidiary of M.O.S.K., has commercial control of over -- more than 25 ships.

Working through our London office and Phoenix in Singapore office, our commercial teams continue to execute a strategy which reflects our commitment to provide our customers safe, reliable and trouble-free transportation services on a worldwide basis and timely meet regional demand changes.

We believe that our utilization rate underscores the benefit of this approach. During the last quarter, our spot fleet operated at 90% utilization, a good result in an improving but still challenging market.

We also believe in a balanced portfolio of time charters and spot, both in-pool and outside of the pool. This is important for financial as well as commercial reasons. Our quarterly fleet-wide utilization increases to 91.8% when considering our time charters. And commercially, we gain insight into the needs of our customers and hopefully find additional opportunities to grow with them.

The technical management of our ships is performed by our in-house operations in Athens. This approach is rooted in our experience that our customers, many of whom represent the most technically sophisticated charterers in the world, are best served by organizations that have direct control over the day-to-day management of their ships.

Our technical management has proven to be a point of commercial differentiation in the marketplace, and the recent improvements in our daily operating expenses reinforces our conviction. This in-house approach enables us to pursue safety and excellence at sea and onshore, always.

From our inception, we have placed a high priority on financial flexibility and on the strength of our balance sheet. As previously announced, we repaid RBS at a discount, and this was funded by a bridge facility arranged and provided by our friends at DNB. We have taken the first step towards a long-term refinancing of this by answering into a sale-leaseback agreement for one ship with a Japanese partner. Ted will describe this transaction.

LPG is increasingly recognized as an alternative clean fuel. We aim to position Dorian to take advantage of interesting market opportunities arising from the expanding trade of LPG. One potential use not far from home for us is as a maritime fuel. We previously reported that we are working with ABS on evaluating the potential of LPG as a maritime fuel. The prevalence of LPG terminals around the world and the relatively low infrastructure cost position LPG uniquely to become a major part of the global maritime fuel market. We look forward to sharing more information on this project in the coming months.

With our focus on executing our commercial operation and our financial strategies, we will continue to create value for our shareholders.

Now I had over to Ted, who will discuss the financial results and other matters for the quarter.

Thank you, John. The quarter's results reflect the general continuation of the environment that we experienced in the first half of this fiscal year and steady execution within our operations. Before I move on to discuss the results for the quarter, I wish to remind you that we look at our business on a long-term perspective.

As we announced in this morning's earnings release, we expect to close on a Japanese operating lease with call option, a JOLCO transaction, in the next week or so. In addition to having a strong ship-owning partner, we found the financing quite compelling. With an 80% advance rate, fixed interest rate of 4.9% for 12 years in a 16-year profile, the financing provides an attractive addition to our current funding mix and allows us to maintain competitive cash breakeven levels.

Following the closing of the JOLCO, the principal amount under the DNB bridge loan will be reduced to $66.9 million. Pro forma for the free cash generated in the sale, we would have reported unrestricted cash at September 30, 2017, at $72.8 million. We are evaluating a range of alternatives for refinancing the remaining principal amount of the DNB bridge loan.

For the quarter ended September 30, 2017, we reported total revenues of $34.7 million, representing net pool revenues from the Helios LPG Pool, voyage charter revenue from the spot voyage outside the pool and charter hire revenue earned for our VLGCs. Our share of net pool revenues is defined in our filings for the quarter with $20.5 million.

Time charter equipment revenues per day across all of our VLGCs, including those in the Helios Pool, amounted to $18,015 per day, while our VLGCs employed in the Helios Pool on spot, on COAs and under time charters of less than 2 years duration earned $14,220 per day for the quarter.

Vessel operating expenses for the quarter were approximately $15.7 million or $7,777 per vessel per calendar day, which we calculate by dividing the vessel operating expenses by calendar days for our VLGCs for the relevant time period.

For the comparable 3-month period in 2016, our OpEx per day for our [VLGCs] was $8,073. The year-over-year decrease of $296 per day was related principally to reductions in insurance costs, reflecting lower premiums, along with reductions in spare stores and repairs and maintenance. Our technical management platform continues to deliver operational excellence to our customers and cost efficiency to our shareholders.

Total general and administrative expenses were approximately $5.4 million for the quarter, and excluding noncash compensation expense, amounted to $4.2 million, which is relatively flat with last year's $4.1 million, reflecting our continued focus on tight cost management.

Our reported interest and finance costs for the quarter was $8.6 million, which is comprised of interest expense on our debt, amortization of financing costs and other financing expenses, and compared to $7.2 million for the same period last year. The other piece of our cash interest expense, booked within realized loss on derivatives, amounted to $0.4 million, a decrease of $1.9 million versus last year, mainly due to the prepayment of our interest rate swaps related to the RBS facility during the previous year as well as increases in floating LIBOR.

We also had an unrealized gain of $0.7 million from the changes in the fair value of interest rate swaps related to the 2015 facility due to the increase in forward LIBOR rates during the period. The unrealized gain on derivatives amounted to $0.01 per share for the quarter.

Under the JOLCO arrangement, the daily principal and interest cost reduce over time. For the first year, we estimate the average daily cost to be $15,685 per day, of which $8,904 reflects a reduction in the underlying principal balance. As a reminder, we will be making full quarterly principal payments under the 2015 facility beginning in the quarter ending December 31, 2017. We also will be depositing $11 million into the restricted cash account at the end of this month as required under the amendment to our 2015 facility.

Overall for the quarter, we reported a net loss of $11.9 million or $0.22 per share and an adjusted net loss of $12.6 million or $0.23 per share. Adjusted net income for the 3 months ended September 30, 2017 strips out the effects of the unrealized loss on derivatives of $0.7 million. Our EBITDA as defined in our filings for the quarter was $14.1 million, and we also repaid $3.4 million of bank debt under the 2015 debt facility.

Over the next quarters, we will remain our focus on maximizing our cash generation and evaluating refinancing alternatives for the remaining portion of the DNB bridge loan in order to best position Dorian for continued success.

With that, I will turn it over to John Lycouris.

Thank you, Ted. U.S. Gulf LPG export volume surged recently, following a temporary stoppage of activities due to Hurricane Harvey flooding in the area. The U.S. LPG exports registered close to an all-time monthly high in September and particularly in October. U.S. East Coast saw sharply increased exports that left October propane inventory levels lower before the start of the seasonal stock-drawing heating season.

The strong increase in LPG exports and the slowing of the U.S. propane production growth caused U.S. propane prices to increase further. We expect the propane markets to remain very tight on supply and firm product prices worldwide.

Chinese LPG imports for September reached 1.7 million tons for the first 9 months, were up 14% year-on-year compared to 2016. We expect LPG imports to continue strong in fourth quarter 2017 and into first quarter 2018 as Chinese residential and petrochemical demand will be supported by higher LPG users -- usage on the government's mandate to shut down coal-fired boilers in Northern China by the end of October and the demand growth by a number of plant -- PDH plants starting up or ramping up after having exited their recent planned maintenance period.

As anticipated, the Indian government has implemented the flat good and services tax, which became effective in July 1, and caused Indian LPG imports to jump almost 1.1 million tons in August, increasing year-on-year demand by 7.2%. The Indian autogas LPG sector benefited significantly on a favorable price differential with gasoline, registering growth of 19% year-on-year in the second quarter of 2017.

The third quarter of 2017 is expected to show continued growth in the auto LPG sector as 10,000 to 15,000 vehicles on average are being converted to use of LPG each month, as it has been reported by the Indian Auto LPG Coalition. There are currently 2.3 million vehicles in India running on auto LPG.

As Asian demand for LPG begins to firm up in advance of the heating season, markets will likely source incremental product from the U.S., adding significant ton miles to the fleet. We have generally seen reduced LPG export volumes from the Middle East in October, partly due to [Merben] field plant and South Pars field on plant maintenance. The waiting times experienced for Panama Canal transits have recently increased to 3 to 4 days on account of much higher export activity from the U.S. post-Hurricane Harvey and the increased traffic from other sectors. With freight rates moving higher on the Houston to Chiba voyage via canal, we expect improving fleet utilization.

The order book stands at about 11% of the VLGC fleet, while the old VLGCs over 20 years of age currently comprise 15% of the fleet. There are 4 newbuilding vessels expected to be delivered in 2017, and likely another 8 in 2018. We maintain our thinking that stronger demolition prices and new environmental regulations will make older VLGC vessels more attractive demolition candidates and eventually removed from the fleet.

We expect the markets in the first quarter 2018 to remain tight in LPG supply and demand, and the product price is likely to remain high. The LPG supply and demand market is expected to return to normal territory and result in a modest weakening of product pricing relative to crude, leading to a recovery of the petrochemical demand later in 2018.

Looking to the future, we are optimistic that LPG will continue to penetrate world markets at a significant rate. In complying with the upcoming IMO 2020 mandate on an 85% reduction of sulfur emissions, we believe LPG as a marine fuel has the potential to capture a meaningful share of the marine fuels market and is likely to become an attractive and cost-effective alternative to other marine fuels. We therefore believe that it further supports the case for LPG as a mainstream fuel to the global energy markets and to consumers around the world.

Thank you.

(Operator Instructions)

Before we open for questions, operator, can you hear me?

Yes, sir.

Okay. Before we open for questions, I have -- I want to make a statement because we've had a few questions from various people about our ATM. So I am anticipating there may be questions amongst our listeners today. I want to say, to confirm, that we have not made any share sales under the ATM. The ATM was -- we put it there for optionality. It continues to be an option amongst other options. And including, as you see from this morning's announcement, the sale-leaseback, which we thought -- which we believe is a very positive move. So we delivered, we continue to deliver and we expect to be taking out the DNB refinancing when appropriate at the best possible arrangement -- with the best possible arrangement. So with this, I'll let you open up for questions. Thanks.

Our first question is coming from the line of Mike Webber with Wells Fargo.

John, that was a timely statement because it was actually my first question. But I guess, maybe to add a wrinkle on that and then maybe a second question for Ted, within the context of the sale-leaseback deal and the other liquidity mechanisms you have, where does the ATM fall right now within your priority list? And maybe if you can kind of walk us through your liquidity levers and maybe kind of rank -- priority-rank (inaudible) right now?

We don't have a ranking. We're looking at everything. And...

(inaudible) the numbers, right?

Yes -- I mean John, Mike said some things -- Mike's question was, but some are more attractive than others. And I think, Mike, John's point is the following: I think first of all, it'd probably be impolitic and not really wise for us to discuss a lot of detail around financing plans until they're more concrete. We're -- as you know, we're pretty focused on executing everything we do right. So whether it's ship operations or financings, we don't take that a ton of risk. I think from a broader perspective, there's a -- there are a variety of opportunities available to us. Look, we've obviously shown our ability to tap the sale-leaseback market. We know that there are bank markets out there, there are bond markets out there and there are equity markets, both ATM-registered. There's converts. There's a whole range of things. And I'd say, look, we tend to look at the whole menu all the time because markets are constantly changing. And so we try to put ourselves in a position to be able to execute on what we see is the most attractive option at the time. So I know you're looking for more specificity than we're willing to give, but that's sort of how we think about it.

Yes, and I know it's a tough question. I guess maybe coming at it a different way, does the sale-leaseback deal -- and I forget the snazzy acronym or name you guys gave it, the Korean sale-leaseback with the option. In terms of where that priced and I guess the pricing there, does that change the way you think about your alternatives, either in a good way or bad way?

Well, the pricing -- sorry, Ted. I'm not clear what you mean by the pricing. Do you mean the pricing of the cost of the finance or the shared price or what?

No, the elevated cost for you, the pricing of the financing. Effectively, the cost of the financing for you.

Yes, yes. Well, the sale-leasebacks have been a good opportunity cost-wise if everything else falls into place. But -- and we've seen activity from Japan, such as the one we've done, where we've seen a lot from China as well and others. But right now, I'd like to leave it with everything is on the table. We're looking at optionality. We like the deal that we've done. We think it's a right deal at the right time. But it doesn't mean that we're precluding doing anything else.

Okay. All right. Now that's helpful, and I appreciate you guys swinging at that. Just one more for me and I'll turn it over. Just curious around traffic through the canal, seeing as it's a pretty meaningful driver and, I guess, inflection point in terms of global ton miles, particularly when it comes to maybe where Street expectations are versus where freight flows end up settling out. Do you have a sense on, maybe on a monthly basis, what sort of VLGC traffic we've seen kind of through the canal? And how you see that evolving over the next, call it, 6 to 12 months?

Well, we do have a sense. And if you want precise numbers, I'm not sure you want to -- you need to get them now on this call. But it's been a yo-yo. When the canal opened, a long-expected opening and it opened suddenly, the VLGC portion of the transits was more than 50%. And it's been reducing steadily, and it's affected not only by the alternate demand from -- on allocations, which have since sort of settled down for containers and LNG, increasing LNG, by the way, but also from the economics of the freight market of LPG. So you have it -- I don't think you can project, to put it this way. I think it is increasingly tight and it will be affected by -- mostly by economic conditions in the LPG market, or whether people are willing to pay the extra money to go through the canal. And John, actually, Lycouris, may have something to add there in terms of the economics of the new canal and the old canal.

Yes, Mike, the toll structure has changed recently from the 1st of October and it has become about 30% more expensive. And the rates have gone up on both the old Panama Canal and the new Panama Canal by a -- by this 30%. So the differential between the 2 is not that significant. And so we expect that traffic is going to continue as before, a little bit more expensive. It adds to the cost of the voyage. And we have seen in actuality that LPG has taken the second place after container ships. But forward-going, forward-looking, we expect that LNG may take a larger piece of that business, of that transit through the canal.

Yes, it almost certainly will. And the reason I mentioned the old canal is because we've seen some newbuildings that are built to go through the old canal. And that may or may not be -- it gives some optionality, which is always attractive. But in terms of economics, I'm not sure that it can -- that you can justify it today.

(Operator Instructions) The next question is from the line of Noah Parquette of JPMorgan.

I just wanted to follow up on the Panama Canal; it was interesting. I mean, when you're talking about the rate increase to go through the canal, can you give us a sense on what the day rate is? Roughly where it's breakeven for an owner or charterer to avoid the canal and go the long way? Just so we have a sense on perhaps when vessels would avoid the canal.

No. I mean, I don't think we'd like to give you that. And suffice it to say, that if we're in the teens, it becomes a big question mark. There's also the choice of going through one way and around the Cape the other way. It's not always a choice of performing a voyage on a round-trip basis. But it's -- and it's not always the owner's choice, too. There's often a requirement by a charterer if they have a tight window, or conversely, if the arb is working the other way and they want the longer voyage. But I don't think it will be appropriate to kind of give you the numbers that we kind of look at.

Yes. Just a sense. Something like the teens is helpful, that's all. And then on the follow-up, to -- when you're talking about what's driving the reduction in OpEx, it seemed like those things were fairly permanent. Is that correct? How do we -- how to think about that?

Well, Ted is hawking -- hawkishly watching it, so he can tell you.

Yes. I mean, we all hawkishly watch it. I think -- I'd like to think that they're going to be permanent. I mean, the biggest thing was -- underlying that improvement was, I'd say, some operational changes that we put through in terms of some internal procedures about and some revision of how we do things. So barring an increase on the actual factor cost that go into some of those items, we expect that to be pretty durable.

Thank you. At this time, I'll turn the floor back to management for closing remarks.

So I'd just like to add to Ted's comment about that because it's being part of our strategy when we rolled out. Because of the number of deliveries, we focused on executing and strengthening the organization so that we could take delivery of 19 ships in the space of roughly 2 years. Has been part of our plan all along, once that is done, that we start optimizing. And we expected that our cost would be reduced.

So thank you very much for joining us this morning. And we hope to meet you again in the next quarters.

Thank you. This will conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.