Dorian LPG Ltd (LPG) 2018 Q3 法說會逐字稿

Greetings, and welcome to Dorian LPG's Third 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.

Many of the 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 the company believes that such forward-looking statements are reasonable, the company cannot assure you that any forward-looking statement 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 expressed today.

Additionally, please refer to the company's annual report on Form 10-K, where you will find risk factors that could cause actual results to differ materially from those forward-looking statements.

I would now like to turn the conference over to your host, John Hadjipateras, Chief Executive Officer of Dorian LPG. Please go ahead.

Good morning, and thank you for joining our financial year 2018 third quarter earnings call. We have changed the format for this call. And instead of remarks from each of John Lycouris, Ted Young and myself, I will make a brief introduction, after which John L. and Ted will join me, and we will be opening for Q&A.

Dorian owns and operates the most modern fleet of VLGCs in the world. Our spot ships are operated in the Helios LPG pool from our London office and the Singapore office of our partner and cofounder, Phoenix Tankers, a subsidiary of Mitsui O.S.K.

Working in a challenging freight market environment, our chartering teams have remained focused on our commitment to excellence and customer service, and the benefit of this is reflected in a time charter equivalent rate achieved for the quarter which was $22,833, and the overall fleet utilization rate of 95.6%. Our spot ships earned $20,357 per day with a 94.6% utilization rate.

In-house technical management by our team in Athens with direct control over the day-to-day management of our ships enables us to control costs without compromising the safety and excellence which we strive to achieve at sea and onshore.

Our daily OpEx continued to improve in the last quarter to $7,800 a day, roughly flat with the prior quarter and a significant decline from $8,450 per day in the same period last year.

Our adjusted EBITDA was $24.7 million; net income, $1.7 million; and EPS, $0.03, including mark-to-market on swaps. We are very focused on the robustness of our balance sheet and believe that its health reflects the good work of our financial team. The outstanding balance under the bridge loan provided by our friends at DNB was reduced to $66.9 million.

We recently concluded a refinancing of the Concorde, a second ship under a Japanese financing base, on the sale price of $70 million and 80% advance rate. The gross proceeds of $56 million will net the company $21 million after repayment of $35 million due under the 2015 debt facility.

The weighted average cost of the company's debt under the 2 loans and leases is 4%. The company's cash, including restricted cash, amounted to roughly $85 million at year-end and pro forma for the proceeds from the Concorde Japanese financing to over $105 million.

During our last board meeting, it was decided to accelerate the expiration of our shareholder rights agreement from August 31 to January 26, 2018. This had the effect of terminating it on that date. HNA completed the sale of their shareholding, which was distributed amongst a number of new investors. The BW Group, already one of our shareholders, increased their stake.

The year 2017 was a good year in terms of LPG industry fundamentals, and we enter 2018 with good tailwinds. U.S. LPG exports for 2017 amounted to over 29 million metric tons, a 16% growth over 2016 and another annual record. The U.S. increased its global market share from 29% in 2016 to 33% in 2017 and is now the single largest NGL exporting nation.

The depth of the NGL markets, including the liquidity and availability of hedging opportunities in the U.S., are likely to position it as the price setter for the global markets.

LPG deliveries into China increased by more than 10% in 2017 from 2016. We expect demand growth into 2018 with a start-up of 2 new PDH plants and higher petrochemical demand from state-owned refineries starting new alkylation units for gasoline production.

The winter season in North China brought increased demand for LPG from residential and commercial users and some industrial users faced with natural gas supply shortages who switched to LPG. The same natural gas supply shortages also affected methanol and propylene production plants, causing propylene prices to reach levels close to 2013 highs, resulting in a 10% increase in PDH plant utilization.

India's most LPG imports averaged 1 million tons per month over the course of 2017, surpassing Japan for the first time. The Indian government's cleaner energy program objective was to add 50 million LPG connections within 5 years. Over the past 2 years, the program achieved 2/3 of the LPG connection objective. Demand for the residential sector and auto gas sectors are also set to grow on account of recent tax reductions.

Indonesian LPG demand growth was about 20% in 2017, and according to Pertamina, it will likely continue into 2018. The country has started diversifying its sources of LPG imports to include LPG sourced from the Phillips 66 operated terminal at Freeport, Texas.

Waiting related to Neo Panama Canal transits northbound and southbound averaged 2 to 3 days. LPG vessel traffic ranked second with 28% of the total, compared to container vessels, which ranked first at 54% of the total.

The newbuilding order book stands at about 13% of the VLGC fleet, and 20 years of age or older ships currently comprise 14% of the fleet. There are 8 vessels expected to be delivered in 2018 and another 18 in 2019. We have seen 9 new VLGC orders placed in the last 2 months for delivery during 2019 to 2020.

We expect LPG supply and demand will continue to grow. With the upcoming IMO 2020 mandate for shipping to reduce its sulfur emissions by 85%, LPG, being a sulfur-free fuel, has the potential to capture a meaningful share of the marine fuels market and become an attractive and cost-effective alternative to other marine fuels.

LPG is increasingly recognized as an alternative clean fuel. We continue to work to position Dorian to take advantage of interesting market opportunities arising from the expanding trade of LPG.

I'd now like to open for Q&A.

(Operator Instructions) Our first question is from Noah Parquette with JPMorgan.

I just wanted -- you've outperformed the market by quite a bit this quarter, which I think was about 16,000. Without sharing your secret sauce, can you maybe talk a little bit about how that happened and is anything sustainable there?

Thank you. It's a good question, Noah. Well, there's no secret sauce. I mean, we do our job. We've continued -- I think it is not for the first time we've been outperforming. I think if you see, we've outperformed the market for several quarters in a row. And it's partly due to the fact that we have a very good team, partly due to luck and partly to the fact that we've traded more in the West than our -- some of our competitors. But if you're asking whether past performance is a guarantee of future, it's something that we can't do, unfortunately. We have confidence in our people and in our operation, like I said in our remarks, though.

Okay. And then shifting to the bridge loan. You pushed back step-up, I think, April. Can you give an update on where you are in terms of the refinancing of the rest of the ships under that facility?

Sure, Noah. Ted will give you an update.

It's Ted. Actually, I'm over in Asia as I finalize the transaction. So if there's a bit of a crackle on the line, that's it. We've continued to make good progress on the bridge loan. Number of different options, including the transaction structures that we've been looking at in Japan. So we continue to be pressing ahead. And I think our goal would be to try to get this done before the interest rate steps up. But on the other hand, we did the bridge loan initially to have as much flexibility as possible and make sure we don't unnecessarily enter into a financing transaction that may not be ideal. But all that said, I think we're guardedly optimistic that we're going to be able to consummate something that we're happy with and is good for the company in due course here.

Our next question is from John Gandolfo with Clarksons Platou Securities.

Just wanted to say congratulations on the solid quarter -- I mean, again, the outperformance has been pretty much over the last couple of quarters a surprise to The Street. And I mean, I guess, looking towards the broader market, and you did mention, John, that it has to do with maybe potentially positioning your fleet more towards Western voyages or Western loadings, so to speak. We've seen now, I guess, in terms of the pricing differentials start to widen once again on the U.S. to the Far East. Should we expect at least over the initial months relative to the current benchmark AG Far East quotes that we are starting to see more of a pricing or earnings differential between the 2 regions?

I wouldn't want to venture a guess. At the moment, there you can see a premium, but I really -- we really can't predict. I don't want to be apologetic for our performance to date, but I don't know that we can guarantee the sort of delta to continue. There are some changes in the structure of the market. There are more ships in the spot market. So the biggest operator hasn't renewed its COAs, and most of its fleet now is in the spot market, and we view that as a positive. So we're hopeful that the whole market will rise. So we're not just looking at the relative. We'd like to look at the absolute numbers being better down the line.

Okay. Got it. And I guess another general market question. If we're looking towards, I guess, the overall broader LPG fleet, there is still, I guess, a little bit of a headwind in terms of medium-sized carriers and below delivering this year. Do you see that having an effect on keeping rates subdued, so to speak, as we do go through that part of the order book?

No. We think that -- we don't see medium-sized as encroaching on our trade. It's a bit of the opposite, I'd say. The growth we've seen, and especially out of the U.S. East Coast, has facilitated movements in larger ships at the expense of smaller ships.

Our next question is from Eirik Haavaldsen with Pareto Securities.

Just quickly to begin, there's been some writing in the press about how Oriental is removing their ships from the -- from your pool. Is that changing anything? Is that true? And does it impact at all your operations? And can you also remind us how many ships are now in the pool?

We had 6 ships in the pool from Oriental Energy, and a COA, which was -- which both are winding down. And I expect by the end of the next month -- by the -- or middle even, of March, there will be none anymore. So to the extent that, that gives us -- that, that is what it is. It was a good relationship we have with them. I think it was mutually beneficial, but they had their own reasons to want to operate their own ships, one of which was including that they were anxious to trade to Iran, which is something that we are precluded from doing. So going forward, we expect that we'll maintain the relationship with them but also that we may expand the pool perhaps with some other partners so that we're -- and we're looking at that quite actively. But we have nothing that I can report to you right now.

Okay. And after those 6 have gone, how many ships are left in the pool? Can you tell me that?

At the moment, we -- well, after they've gone, it will be the 18 ships of Dorian and 4 ships from Phoenix, and there's a couple of more ships that are chartered in, but it's something we can give you more details if you like off-line. You could...

All right. No worries. Also on the transaction now, perhaps to you, Ted. The value you now placed on the ship is $70 million on Concorde, and it was $65 million on Corsair previously. I mean, that was a few months ago, and the ship is 1 year younger now, but it's still a year after as well. The difference there, is there anything in the transaction terms that would explain such a difference, other than just stage difference maybe?

Well, don't forget that, that ship also has a scrubber, which really explains most of the differential. So beyond that, no, the structure is pretty -- it's identical to what we did for Corsair. Pretty much identical documentation and advance rate, slightly longer loan profile but same interest rate even though the deal's a year longer. So Corsair was a 12-year deal. This is a 13-year deal. We had a 16-year amortization profile in the Corsair, 17.3 on the Concorde. So from our perspective, just reflects -- I'd say, relative -- the values have kind of held up okay in spite of what we've been through as an industry in the last couple of years.

Yes. And then you get -- I mean, all the proceeds you keep, as you said, $21 million of cash on the balance sheet. Any reason for why that's not just directly taken into the DNB bridge, is that because you can't? Or it's because you want to keep it for -- just for -- to have it?

I think you can read into it that it's a reflection in our belief that we will be successful in refinancing the DNB bridge in the short term. Right now, the DNB bridge is pretty attractively priced at L plus 2.50%. That's always an option to apply it to pay down the loan, but we think there should be good opportunities to refinance the bridge loan. And we're making -- okay, we're not making L plus 2.50% on our cash, but we're doing okay. And you never know what sort of buying opportunities there could be out there, so we generally like to have some dry powder.

(Operator Instructions) Our next question is from Greg Wasikowski with Wells Fargo.

I'm on for Webber. So just wanted to get your thoughts around removing the poison pill and then also on BW's increased stake.

I think I said in my statement -- or actually, maybe it was reported in the press, that we have a high regard for BW. I think they're very smart people. We're flattered by their interest in us. And the opportunity came, as you know, because of the sale that was not kind of foreseen by HNA. Or it might have been foreseen, but it was -- came almost suddenly. And they saw an opportunity, and I'm happy for them. As for the pill, the pill was a subject of a discussion. It had been placed there a while back for a specific reason, which no longer existed. And it had been scheduled to be removed, and it was removed following a board meeting that we had actually last week in accordance with decision that was reached at that board meeting.

Okay. Great. Very helpful. So then to, I guess, piggyback off of John's question from earlier. Do you think that the recent orders that we've seen, even though they're for a dedicated business, do you think they could push out a recovery at all?

I was going to give you John Lycouris to answer that, but I find he's too cautious when it is -- and I'm characteristically optimistic, although I don't want to encourage any more newbuilding. I find that the orders that are being placed, as you said, either by -- for a specific business or by end users. So, so far, I think we are fine. But I think, like in every other sector in the shipping -- in the world of shipping, ship -- an excess of ship building capacity does have the potential to destroy a recovery. So we see the industry fundamentals in LPG trade being very positive. It's increasing. The ton miles are increasing, and I think a restraint in newbuilding is welcome, but I don't see anything that has happened so far as being worrying.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

Thank you very much for joining us on the 1st of February. As they say in Greece, (foreign language), and see you next quarter. Thank you. Bye-bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.