Dorian LPG Ltd. (LPG) Q2 2015 Earnings Report, Transcript and Summary

Welcome to Dorian LPG Second Quarter 2015 Results Conference Call. [Operator Instructions] This conference is being recorded today, November 6, 2014. I now would like to turn the conference over to Mr. Ted Young, Chief Financial Officer of Dorian LPG. Mr. Young, please go ahead, sir.

Thank you, operator. Good morning, and thank you, all, for joining us for our second quarter 2015 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 U.S.A. As a reminder, this conference call, webcast and replay of this call will be available through November 17, 2014. 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 incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our second quarter 2015 results filed this morning with the SEC and Form-6K and our annual report on Form 20F where you will 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.

Good morning, and thank you for joining us today as we report our second quarter 2015 financial results. I will provide a brief update on our operating performance and strategic position in Q2 before handing the call over to Ted to work you through our financials. Ted will then pass the call along to John who will provide more color on the current operating environment. Q2 was an important quarter for Dorian as we continue to execute on our strategic plan to be a leader in the LPG transportation business. Our spot ships were the Captain John and the Captain Nicholas. The Captain John was employed for the whole quarter and Captain Nicholas for 2/3 of the quarter, and they delivered steady returns as did our time charter ships which were employed for the entire quarter. We currently own and manage a modern fleet of 5 VLGCs and 1 pressure LPG carrier. This is an increase in our fleet from when we last reported earnings as we took delivery of the Corsair at the end of September. The second -- that was the second ship in our newbuilding program. Our next delivery is expected at the beginning of January, and we plan to trade that ship in the spot market. And thus, we will have 4 VLGCs trading spot. We take delivery of 14 newbuildings in 2015, and I can report that construction remains on schedule and our staffing levels both onboard and shoreside are on track. When the last of our newbuildings is delivered to us in January 2016, we expect to own and operate one of the world's largest VLGC fleets measured by number of ships and carrying capacity. Regarding our 2 newest deliveries, as we mentioned last quarter, COMET commenced a 5-year charter to Shell and with its recent delivery in September, the Corsair is now trading in the spot market. Both ships were built at HHI in South Korea. We delivered a strong operating result with a utilization rate of over 90% and time charter equivalent rate per day, revenues were up slightly on a sequential basis. Looking solely at our VLGCs, we had a utilization rate of 99.1%. In the spot market, the Captain Nicholas operated 87 days during this quarter following her redelivery from Statoil. Captain John operated for 92 days during the quarter, and the Corsair, which was delivered on September 26, had 0 operating days for the quarter. For the time charter vessels, the Captain Markos operated for 92 days during the quarter; Comet, which delivered on a 5-year charter to Shell, for 65 days during the second quarter. Finally, our pressurized LPG carrier Grendon operated for 14 days during the quarter. While we had planned a drydocking for this quarter, the extent of the work we try [ph] to bring the vessel to our standard exceeded our expectations. The total cost of the drydocking was, however, within our budget. The resulting reduction in operating days is a reminder of the extra challenge of older vessels. On the other hand, we are very pleased to report that our newbuilding ships have delivered savings in excess of what we had previously predicted in terms of fuel economy. This strong performance vindicates our decision to invest in ships being built in proven shipyards and underscores our commitment to our customers, shareholders and the environment. Finally, we announced earlier this week that Robert Bugbee has left our Board. Robert has been a good friend and adviser and has made a significant contribution since the company's acquisition of Scorpio's VLGC business. We wish him continued success in his multiple and very impressive endeavors. Overall, LPG exports this year are on track to exceed 13 million metric tons which is roughly a 50% increase over 2013. This growth which has been supported by export terminal expansions in the Gulf has continued to drive high global utilization and strong rates for VLGCs. The recurrent rates in the spot market for October were roughly 60% higher than they were the same period last year, the same month of last year. And the average year-to-date on the Baltic equivalent has been 60% higher as well. The time charter equivalent for both the periods I mentioned were more than 100% higher than at the same time last year due to lower fuel costs. On this, I will hand over to Ted who will walk you through our financials.

Thank you, John. We're pleased with the results as we continue to build out our fleet with the delivery of the Corsair and we continue to position ourselves to be the preferred VLGC supply chain partner of the leading oil majors and traders in our industry. Again, before I move on to discuss the results for the quarter, I would like to remind everyone that our business should be viewed through a long-term lens. As a reminder, we are affected by the seasonality of the market and it's important to understand that this seasonality will affect our quarterly financial results. The liquefied gas carrier market is typically stronger in the spring and summer months in anticipation of increased consumption of propane and butane for heating during the Northern Hemisphere months. You'll note that we do not provide comparative figures for all periods in the prior year as the predecessor companies have different accounting policies and use the IFRS. For the quarter, we reported revenues of $20.4 million representing charter hire and voyage charter turn [ph] for the 5 VLGCs and the pressurized vessel. Revenues from the VLGCs employed in the spot market amounted to $13.6 million or a time charter equivalent rated $61,244 per day. If you exclude repositioning days following the end of the time charter for the Captain Nicholas, the overall TCE rate for our spot vessels is closer to $70,000 per day. If you work through the details of our disclosure, you can calculate that the daily TCE for our VLGC fleet time and spot was $45,000 per day or actually a bit better than that which reflects our balanced approach to chartering, combining the steady returns of time charters, in some cases, with profit-sharing as well as the upside we derived from our spot chartering approach. Our voyage expenses were approximately $4.4 million and mainly related to bunker cost of $3.4 million. Our vessel operating expenses for the fleet which are affected by the age, size and condition of the various vessels were approximately $5.2 million or $11,764 per vessel per calendar day, which is calculated by dividing the vessel operating expenses by calendar days for the relevant time period. As John mentioned, the Grendon did not contribute to our profits this quarter and had operating expenses of almost $1 million including portions of her drydocking that were not capitalized. We do not consider this level of operating expense to be reflective of our future performance. Focusing on our VLGC-only vessel operating expenses, we incurred a cost of approximately $700,000 in the quarter due to the investment that we are making in training new officers for our VLGC newbuilds. We expect these training costs to continue each quarter through our Q3 2015 results. Adjusting for that investment and again working through the detail in our filings, the OpEx for our VLGCs amounted to approximately $10,020 per day. These operating expenses were slightly higher this quarter due to the COMET's higher OpEx and Corsair's higher OpEx due to certain fitting out expenses that could not be capitalized. If you adjust further for that, our operating expenses for our vessels remained well in line with our historical levels of between $9,000 and $9,250 a day. Depreciation and amortization was approximately $3 million for the 3 months ended September 30 and mainly relates to depreciation expense for our operating vessels. General and administrative expenses for the quarter were approximately $4.3 million and were comprised of $2 million of salaries, wages and benefits; $800,000 of stock-based compensation; $600,000 of professional, legal, audit and accounting fees; and $900,000 of other G&A expenses. So controlling for the noncash comp expense, we have about $3.5 million of cash G&A expense for the quarter. Note that some of these items reflect costs that are associated with our transition to being a public company and establishing certain infrastructure, thus we don't expect all those costs to recur. Consistent with our policy effort, we are not at this point giving any guidance on our full year expectations for G&A. So the basis of the revenue and expenses reported above, we reported adjusted EBITDA for the quarter of $7.3 million. The components of our interest expense are detailed in our 6K, and we remind you that we report interest expense in 2 line items on our P&L, in the finance cost line and loss on derivatives net. The notes describe the composition of these items and note that the interest expense related to our LIBOR hedges as part of the line item loss on derivatives net. During the quarter, we also repaid $3.5 million of bank debt under our RBS facility. We finished the quarter at September 30 with $283 million in unrestricted cash. As of September 30, we had approximately $1 billion in remaining commitments under our VLGC newbuilding program, of which $696 million comes due in the next 12 months. We're currently working on finalizing our debt financing and have mandated Citibank and one other well-established international shipping bank to arrange debt for both commercial banks and the Korean export agencies. Our initial financing plans have contemplated 2 separate financings but the current terms being negotiated will allow us to complete our entire $750 million financing need in one transaction. We are targeting completing this transaction in February 2015, so we expect to provide an integral [ph] update before then, when we are able to share more detail. At this point, I'll turn it over to John Lycouris, CEO of Dorian LPG U.S.A.

Thank you, Ted. I will discuss our operations in newbuilding program and other development in our business. First, our newbuilding program is running on plan, and we continue to scale up shore personnel in support of our significant delivery schedule in the coming year. We are making investments in respect of our seagoing personnel, and both of these investments are reflected in our crew doubling up costs and administration cost. We have no doubt that this course of action is the most prudent way to ensure that we'll continue to deliver high-quality service to our customers. The recent foreign crude oil prices have generated a number of questions about its potential effect on the LPG supply and shipping markets. Thus far, we have seen no reduction in cargoes or in the demand of our vessels, and day rates continue to be at highly attractive levels. In addition, we note that propane and butane prices have fallen in concert with those of crude and NAFTA, thereby reinforcing LPG's position as a cheaper shore [ph] for home, PDH plant and petchem feedstocks. Currently, the Saudi November CP [ph] price is at $610 per metric ton, down from $735 last month. U.S. value is priced at about $462 per metric ton, down from $538 last month. Both of these prices have moved in tandem. It is expected that any sustained level of lower crude prices will continue to provide additional incentive for U.S. producers to produce NGLs. Furthermore, LPG production has been well correlated with GDP. Thus, we see no change in demand patterns as U.S. NGLs remain well positioned to support growth in the global economy. Based on the significant investments that have already been committed in export capacity in the Gulf, we have no expectation for any change in the U.S. export growth. Exports from the U.S. Gulf have reached higher levels year-to-date from the previous year in line with our expectations of about 35% growth. The LPG demand has also continued to be buoyed by China, India, Thailand and Korea. The VLGC order book remains at about 50% of current fleet with no further ordering evident at this time. We'll continue to review employment opportunities for our newbuilding vessels which are expected to arrive in the coming year. Finally, we are very delighted to report the superior performances achieved by our first 2 ECO newbuildings at Comet and the Corsair which were delivered in July and September of this year, respectively, and we look forward to a delivery of the CORVETTE in the end of this third quarter which would be equipped with an exhaust gas cleaning system, a scrubber, that will enable to comply with the upcoming emission patrol area requirements commencing in January 2015. Thank you very much for your time today. And operator, can you please open the call for questions?

[Operator Instructions] And first question comes from Michael Webber with Wells Fargo.

Just a handful of questions. I wanted to start first on the cost side. It looks like G&A came in north of our expectations and some of that and some of the OpEx that was also above our expectations seems related to the fleet buildout. But if you can maybe kind of break down how we should think about G&A on a go-forward basis and how much of that was maybe lumpy during the quarter? And then specifically on the OpEx side, it looks like on a per vessel day, that was coming in about $2,000 higher quarter-over-quarter. So just curious as to what was leading to that inflation.

Well, there are 3 factors. The per vessel is affected both by the additional cost of the doubling up, which I think we've given as estimates before and we're not -- we haven't moved away from what we've given, they are in line with our expectations. The other factor in this case which really is a distortion is the fact that the Grendon was not earning, but she was expending for that, and then it's included in the daily here. And as far as G&A, there were some one-off items here which we don't expect will be repeated, including costs related to the Greek office. And there, I think, just -- you can put them down to the rapid increase in staffing that we have, and I think they would smooth out to the normal levels that you've seen in our previous presentations.

Okay. So on a go-forward basis, what should we be modeling in for a ballpark figure for the back end of the year on a run-rate basis for [indiscernible] the next 2 or 3 quarters for G&A?

On OpEx -- on G&A I'll wait for Ted to come on to you to give you the number. But on operating expenses, it would be between $9,250 and $9,500 a day, we would expect on the VLGCs.

Okay, all right. And then you're saying the $11,700 per day was moving -- what drove that specifically? Because if had vessels that were off higher that were still taking expenses that wouldn't drive the per day vessel expense up, right?

Mike, it's Ted. What John is saying is it included the -- that number is a blended number, the $11,764. It includes all the vessels and includes the operating -- the calendar days for the entire period. So that's -- so it actually does and it does -- it affects the weighted average of the OpEx.

All right so they get the calendar days, I've got you. Okay. Just moving on to some of your strategic stuff, I wanted to get a sense on how your JV or your work with HNA is going and maybe any new developments there? And then John mentioned you guys are out in Korea, just a sense on what kind of parties [ph] are telling you over there and maybe incremental demand for either longer-term tonnage or preference for stop tonnage [ph] right now.

Yes, HNA, I'll answer the HNA. We're continuing our dialogue. We are engaging more closely but we still have nothing that we can report to you. There are several projects that we kind of are working on and are hopeful we'll see materialize in the near future, but nothing solid that we can share with you yet. On Korea, I'll let John and Ted who are over there to give you -- since they're back on the line, give a little update [ph]. Oh, you asked about MOL as well? I'm sorry.

Yes, I did. And then just, in general, what sort of indications are you getting while you're over there for demand for a longer-term tonnage?

Okay. John, you want to pick that one up?

I want to say that for demand, we see the assumption of a number of PDH facilities that we were expecting to come on board. And on operation, we have actually discharge in a couple of them. So we see that they are starting to increase production. So that means that more propane will be going to China. We have seen increased demand from India. We have seen a number of cargoes going to India and also, we have seen increased demand from Korea where we are. So we see a pretty robust demand coming from the Far East, and that kind of is substantiated by the business of that -- to get our vessels employed [indiscernible].

The next question will come from George O'Leary from TPH & Co.

It's starting [indiscernible] nicely around $75,000 a day, pretty strong levels. I apologize, my -- [indiscernible] hung in there nicely around $75,000 a day. The opportunity to lock up a longer-term contract in the midst of these high spot rates, the opportunity comps too high or are those longer-term contracts at elevated versus historical rates out there as you guys look at the market today?

That is a really good question and one that we try to answer every day because the current rates, as I said, are very strong. They're at historic highs and the immediate prospects show that the market is tight and this will continue. Our model, as you know, is for a balanced chartering strategy. So we would -- we're out there looking at 2, 3, 5, 7, 10-year charter possibilities. And selectively, we find that there are some which do not discount the future as much as others but there are -- there is a sacrifice, of course. So it's a question of balancing. Balancing both the security of a long-term charter against immediate earnings and also balancing the extent of the bet that we make on the color [ph] market. I mean, we don't -- we have a high regard and total respect for our investors' money, and we don't believe in gambling everything on 1 number. So we like -- this is why we've continued to persevere with a balanced chartering approach.

That's helpful color. And then any strategic interest at this point in pursuing opportunities in what I would call adjacent markets, things like the FA [ph] exporter -- FA [ph] shipping market rather? Anything in that vein that you guys are pursuing or analyzing at this point?

Yes, analyzing, yes, but in pursuit of, specifically at this moment, no.

And the next question comes from Nicolay Dyvik from DNB.

Just a question. Based on where your share price is trading relative to NAV, have you considered buyback?

Yes.

Would you like to say something more or just yes?

I feel like we should be asking you some questions about where the market's going. But yes, of course. And we've noted that you consider that our price is pretty attractive and indeed, we follow you quite closely. So it's something under consideration, but something -- but we cannot comment on more than that at this time.

And in terms of the volume of the long-term charter market, if you were to fix 5 vessels over the next week, would that be possible for you to do?

I think that -- would it be possible to fix 5 vessels? You mean on a spot charter or on a long-term time charter or what?

Long-term time charter.

On long-term time charter. Nicolay, I think, the answer is very easy. It depends on what rate you want to take.

Assuming that you would like to do it at [ph] market, is 5 vessels too much to push down the market or is...

In 1 week? It's a very technical question. I mean, we have a list of requirements that we constantly update which is many more than 5. They reflect the month for many more ships than 5. There are a number of charters that have requirements for multiple ships and others for 2 or 3. So I think the answer to your question really, although it's very speculative, but if you want to engage me, I would say yes, I could, yes.

And Ted Young, just one question, we -- or John said that you would answer it, some guidance on admin into '15.

Yes. So let me give you -- let me share with you what we can here. So in the cash cost that you saw for the quarter, there's probably at least $700,000 that we would not expect to recur. For example, there was $300,000, which was accrual that we had to take when we insourced all the operations. It's a statutory accrual under Greek employee indemnities. And so, we don't expect to pay it out in cash but we booked that. We booked -- we had some other professional legal fees that again, we don't necessarily expect to recur that are sort of unique to where we are at this point in our life cycle. So at the very least, I'd tell you, from a cash cost perspective, that $3.5 million, I'd take at least $700,000 out of that. I would expect a bit more but at this point, I don't want to speculate on more than that. I think again, I don't -- but by no means do we expect our annual G&A cost to be running at $14 million.

You do not expect, was that what you said?

We do not expect it to be at $14 million which should be the annualized $3.5 million. We don't expect to be at that level. It should be below that level. So the cash G&A for the quarter, Nikolay, was $3.5 million and I'm saying at least $700,000 of that, we would not expect to recur.

And the next question comes from Mark Suarez with Euro Pacific Capital.

John, just to go back on your comment on demand here from the Far East, you're seeing increased demand especially from South Korea. Now if you go back into the market right now and you want to employ these vessels, do you think a profit-share component is something that you still have leverage on, given the demand levels?

Yes, I think the profit share is always negotiable. I mean, some charters don't like to look at it at all but others, it's how much of a discount you'll take. If you have a, let's say, a 3-year rate is $50,000 a day, you could take $40,000 and a profit share. It varies on each occasion, depending on the charter's mentality. As you know, historically, we've managed to do all our long-term charters with profit share. But going forward, I have no sense that, that can be -- whether we can repeat that, but we try in our negotiations. We do try and introduce that element because we think the upside is usually worth the sacrifice on the immediate rate.

Got you. And you also talked in the past that you're sort of targeting to an employment mix where 2/3 of your vessels could be in the long-term charters. Do you think that where we are in the cycle, do you get the sense that this can actually be achieved over the next, say, 12 to 18 months? Is this more of a long-term target or is this something that as you get your newbuilds, that you think you can build on that fairly quickly?

Well, at the moment, we're at 1/3 time chartered and we like that. But we would like, by the time we finished our buildout, to be closer to the target of 2/3. So that's over the next sort of 12, 18 months. That's what we would be aiming at.

Okay, great. And then the last one from me and I don't know if it's been asked in the past, but in terms of your growth strategy, I know there's been a lot of orders right now in the VLEC segment. And I'm wondering if you're looking at that and also if you can maybe talk about newbuilding capacity of the shipyards. I know there's been a lot of competition and do you get the sense that there's been increased competition for space also for the VLGC? And how do you see newbuilding prices trending in 2015?

My comment is that I think newbuilding prices are steady and possibly increasing, probably increasing a bit. As far as capacity, I'll let John who's been talking to the 3 major yards while he's -- during his visit there, to tell you. On the question of VLECs, we do see projects that have materialized and others that -- 1 or 2 that really materialized and some that have been reported but not yet really usually booked. We are looking at it but only on a project basis, if it's something that we could tie up with long-term employment. So it wouldn't be -- we wouldn't do a speculative order. But on the capacity, maybe John Lycouris might have something to add there.

Sure. Just on the last comment that John made on ethane, there's also a technical aspect on that. The competing technologies for ethane carriers are not sorted out yet. There's a number of technologies that are thinking of using ethane as the cargo. That is there are some type B tanks, type A tanks, type C tanks. So really, the jury is out on that, what would be. Whether it would be membrane tanks or something else. So that was just a small comment I wanted to make on ethane carriers. So it's not really defined what's going to happen on that. And on the order book and on the capacity here from the yards, it appears that there is space in the yards for additional vessels. However, there haven't been any more orders in the sector. I believe that with 50% of order book, there is very -- the requirement for more ships has abated and people are not stepping up to order any more ships, and I think this is a good thing for our market.

I think I might add, and John, correct me if I'm wrong, but there also is some stress on equipment manufacturers. So although the order book could be expanded more, I think that there are -- we are seeing a little bit of stress in terms of the ability to increase the order book as much as it's been increasing until now. I think we could be -- I'm hoping, and I think we could be in for a steadier rate of fleet growth in the future years after '17 -- in '17 and later.

I agree with your comments, John.

And the next question comes from Beyond Road [ph] from Danske [ph] Bank.

I just have a question regarding your bank facility. Could you just provide me some color on why this takes time and you're trying to settle that after delivery of at least your first 3 vessels?

Well, we didn't need the money until now and we don't need it until the first quarter or after the first quarter. So we feel that we can afford to take the time to negotiate the best structure and the best deal that's out there. We have agreed terms with the commercial banks, and we are in active discussion with the credit agencies in Korea.

And could you share what kind of terms or covenants, et cetera, could we expect based on what you know today? And do the banks require long-term time charters to finance you or is this completely up to yourselves?

We haven't bought any requirements from the banks for long-term charters. The arrangements we made do not include any requirement. I'm sure as a banker, you would agree that they desire it, but they haven't made any terms, any requirements of that. So we're confident and we're proceeding with terms that are, I think, favorable. But again, I think, you will agree, it's not -- we can't really share at this stage, what our covenants are and what the terms are specifically.

And then your other interesting comment initially here on the fuel economy. On the newbuildings, could you share some figures on that from what the fuel savings are?

Yes, I'm very positive on that, actually. And I'll let John Lycouris tell you specifically what the results have been. But we're very happy to -- because you see things on paper but then when you actually see them proven out with ships on the water and they exceed your expectations, you feel good, and I feel good about that. So John, do you want to give some detail?

Yes. What we have seen, the current new ECO ships produce about 8 tons improvement on the consumption over modern VLGCs that we've been running which are the 2007, 2008 ships. 8 tons translate into over $4,000 a day as we had said from before. But now, it is confirmed that these vessels provide a superior performance and we're very pleased with that.

And as there are no more questions at the present time, I would like to turn the floor back over to John Hadjipateras for any closing comments.

Yes. I'm very grateful to you. Thank you for your patience during our technical trouble with the connection here between us and Korea. We're here for any more questions that you have later on. And I'd like report that we had a doubling in the number of questioners from our last call. So we're very grateful for that and have a good day.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a nice day.