Dorian LPG Ltd. (LPG) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Dorian LPGs Third Quarter 2015 Results Conference Call. All participants will be in the listen only mode. [Operator Instructions] This conference is being recorded today, February 05, 2015. I would now 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, thank you all for joining us for us third quarter 2015 results conference call. With me today are John Hadjipateras, Chairman and CEO of Dorian LPG Limited and John Lycouris, Chief Executive Officer, Dorian LPG USA. As a reminder, this conference call webcast and replay of this call will be available through February 13, 2015. 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 that any forward-looking statements are proved 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 underline assumptions or estimates proving correct, actual results may vary materially from those we express today. Additionally, let me refer to you to our third quarter 2015 results filed this morning with the SEC on Form 6-K and on Annual Report on Form 20-F, where you will find the 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 third quarter 2015 financial results. I will provide a brief update on our operating performance in Q3 before handing over the call to Ted to review our financials, including our recent financing agreement. Ted will then pass the call to John to comment on the current operating environment. We continued to build out our fleet in the third quarter with a delivery of the Corvette in early January 2015. We now own and operate a modern fleet of six VLGCs and one pressurized LPG carrier. With new building contracts for the construction of 16 new fuel efficient ECO designed VLGCs to be delivered in the next 12 months. The start date of our pool is scheduled to be later this month. The pool has been named Helios [ph] LPG pool and its fleet were initially comprised the four spot VLGC owned by the company and the five owned by Phoenix tankers a subsidiary of Mitsui OSK. Helios will market the ships from our London office and from its Singapore office of Phoenix tankers. We have two ships on five year Time charters to Shell, our first new building Comet went on Time charter on delivery from the shipyard in July and our 2006 build Captain Marcos NL in November following completion of the Time charter with spot oil. Our newbuildings Corsair and Corvette which delivered in August end 2014 and January 2015 respectively are trading in the spot market as are our 2007 built Captain John NP and 2008 built Captain Nicholas ML. For the quarter ended December 31, 2014 our spot VLGC utilization was 84% and overall VLGC utilization was 90%. Our Pressurized LPG Grendon operated for 19 days during the quarter. LPG exports last year exceeded 14 million metric tonnes which is roughly a 45 % increase over 2013. This growth was supported by export terminal expansions in the U.S. Gulf which continued to drive strong rates for VLGCs. U.S. export in 2014 amounted to 19% of the Global LPG supply volumes versus 15% in 2013 and 8% in 2012. The trend continues in the first month of 2015 with exports from the U.S. exceeding 1.5 million pounds of propane, a record. As John Lycouris will tell you later, we expect that with the solid ongoing demand for LPG transportation supported by increasing exports and the potential of LPG in the industrial, power and retail sectors. We believe that LPGs seaborne trade can increase by 20 million metric tonnes over the next several years which would be sufficient to absorb the current order book. Since our last call we have expanded our board and we welcome two new independent directors, they are Ted Kalborg, Founder of Tufton Oceanic and Malcolm McAvity, former vice chairman at Phibro. Ted comes with a deep knowledge of the shipping industry and Malcolm with extensive experience of energy trading and both will be valuable contributors as members of the board of directors. Last but not least, I am pleased to report that we have financing commitments to complete the funding of our new building program with no need to raise additional debt or equity. We are positioned to take advantage of the trends that will benefit the LPG industry over the long term as one of the world’s leading owners and operators of modern eco fuel efficient VLGCs. When the last of our newbuilding were delivered to us we expect to own and operate one of the world’s largest and youngest VLGC fleet measured by a number of ships and carrying capacity. Let me now hand over the call to Ted who will discuss our financial results.

Thank you, John. We delivered very solid results for the quarter and we were pleased with the operating metrics, profits and cash flow generation of the business. Again, before I move onto discuss the results for the quarter, I’d like to point out that our business should be viewed to a long term lend. As a reminder, we are affected by the seasonality of the market and it is important to understand how the seasonality may affect our quarterly financial results. The LPG shipping market is typically stronger in the spring and summer and preparation for increased consumption of propane and butane for heating during the northern hemisphere winter. For the quarter ended December 31, 2014 we reported revenues of $32.6 million representing charter hire and voyage freight revenue earned for the five VLGCs and the pressurized vessel. Revenues from our VLGCs amounted to $32.4 million on a time charter equivalent of nearly $60,000 per day. Focusing solely from [Indiscernible] spot VLGCs we realized a daily key [ph] fee of nearly $78,000. The results reflect the benefits for our balance chartering strategy and continued focus on striking the right balance between utilization and rate for our spot vessels. Our voyage expenses were approximately $7.8 million and mainly related to bunker cost of $5.6 million. While bunker cost are not a part of our daily operating expenses, we estimate that our average bunker price for IFO 380 declined by $300 per metric tonne over the quarter. Our vessel operating expenses for the fleet which were reflected by the age and size of the various vessels were approximately $5 million or $8994 per vessel per calendar day. If we calculate by dividing the vessel operating expenses by calendar days the relevant time period. Focusing for a moment on our VLGC only vessel operating expenses, we operated these ships at an average cost of $11,237 a day, this included our investment in training officers for the future deliveries of approximately $775,000 in the quarter. We expect these training costs to continue for each quarter throughout Q3, 2015 results. Adjusting for that investment, the daily OpEx for our VLGCs amounted to approximately $9550 per day. With each new delivery we encourage certain outfitting cost that cannot be capitalized and that takes several months to run through the income statement. Therefore by Corsair OpEx was a bit about average, the Comet our first new building had a lowest daily OpEx among our VLGCs. Depreciation and amortization for the quarter was approximately $4 million and it mainly relates to the depreciation expense for our operating vessels. General and administrative expenses for the quarter were approximately $4.3 million and were comprised of $1.9 million of salaries, wages and benefits, $800,000 of non-cash stock based compensation expense, $700,000 of professional, legal, audit and accounting fees and $900,000 of various other cost pockets. Controlling for the non-cash comp expense we reported about $3.5 million of cash, G&A expense for the quarter. Not that some of these items reflect cost or associate [ph] with their transition to being a public company, the establishment of certain infrastructure and expenses incurred with the preparation and filing of the F1 in December. Therefore we don’t expect all these cost to recur. So based on the revenue expenses outlined above we reported adjusted EBITDA as defined in our filings for the quarter of $15.1 million. The deposit of interest expense were detailed in our 6-K and we remind you that we report interest expense in two line items on our P&L and the interest in finance cost lines and the line entitled of loss, gain and derivative net but not [Indiscernible] described further the composition of these line items. During the quarter, we also repaid $1.3 million of bank debt under our RBS facility. We finished the quarter on December 31, with $183 million on unrestricted cash. On January 12 we announced that Dorian received commitments for up to $761 million of debt financing for VLGC newbuilding program. These commitments from our banking group represent a strategic milestone for Dorian as we are now fully funded with no need to raise any additional debt or equity take delivery of our fleet of new ECO VLGCs. The financing has four separate tranches as we previously reported. A $250 million tranche being provided by commercial bank, a $205 million tranche being provided by Commercial bank, a $205 million tranche that’s being provided directly by KEXIM or the Export Import bank of Korea. And the remaining $306 million is provided under two tranches, one of $203 million which is guaranteed by KEXIM and another for $103 million which is insured by the Korea Trade and Insurance Corporation also known as K-sure. Pursuant to the commitments, we received the debt financing will be secured by among other things 18 of our VLGC newbuidings and will represent a loan to contract cost ratio of approximately 55%. The blended margin over LIBOR across all four tranches of the financing will be approximately 2.1% and the weighted average amortization profile will be approximately 14 years. The KEXIM and K-sure tranches have a 12-year maturity and the commercial tranches have seven year maturity. We will receive advances on the facility upon each delivery and each of them will be allocated with pro rata across all four tranches. Once fully drawn, we expect the annual principal repayments were approximately $56 million per year on this facility. Closing the transaction remains subject to final documentation and customary closing additions and we expect to close the transaction before the end of this quarter. At this point, I’d turn it over to John Lycouris, of Dorian LPG USA.

Thank you, Ted. I will discuss our operation in newbuilding program and other developments in our business. Having taken delivery of our third ECO Vessel, the Corvette during the first phase of 2015 we were looking forward to a challenging newbuilding delivery schedule in 2015 or 14 ECO newbuilding vessels. We continue to scale up five teams, crew and shore personnel in support of such a significant delivery schedule during the year. This course of action ensures the continued delivery of high quality service to our customers. The delivery of our ECO VLGC Corvette in the first phase of 2015 coincided with the commencement of a new emission control regulations that went into effect in January 2015. It is a requirement on all vessels or in emission controlled area to consume ultra low sulphur, diesel and gas oil. The Corvette is equipped with a state of the art exhaust gas cleaning system, a scrubber that enables the vessel to comply fully with the emission control area regulational requirements consuming less expensive fuel oils that are priced about $220 per tonne than the typical ultra low sulphur diesel oil. Dorian LPG continues to invest in equipment and technology that differentiates its newbuilding vessels in performance and features from the existing fleet of gas carriers. As we reported, the superior field of such [ph] a performance is achieved by our first two ECO newbuilding, the Comet and the Corsair amounting to about 8 metric tonnes per day which is a saving of about $2400 per day continued to differentiate our vessels to those of the existing fleet. We have seen that LPG prices declined in line with crude oil price decline. During the quarter, we saw no significant reduction in cargos [ph] or in the demand of our vessel and day rate remained at highly attractive rates. The Baltic index average for 2014 finished at a record high of $92 per tonne for the typical voyage from the Arabian Gulf to Japan, highlighting the increasing [Indiscernible] of LPG to the international markets. Dorian LPG has been committed since the inception to service this opportunity with its ECO newbuilding program vessels providing shipping for the significant LPG production growth, increased our miles required for LPG transportation and the lack of enough modern and efficient ships to transport it. The February Saudi CP Propane price forcing a 450 per metric tonne is up from low level of 425 last month which was the lowest CP posting since 2009. The U.S. --LPG propane product price is at about 250 per metric tonne currently up from the low to about 230 last month. Global oil price levels in 2015 will influence the level of budget cuts on increased production activity and growth impacting the smallest size producers in the United States. At current levels we do not anticipate supply or capacity of reductions. The existing and upcoming LPG and export terminal products are well underway and most of their capacity has already been committed. The contractual commitments of the U.S. export terminals are estimated to be at the level of about 70 million tonnes in 2015. To highlight this point Captain Markos is the first VLGC currently loading for Shell in the first expo cargo of 45,000 metric tonnes of propane from the new launch star terminal in Netherland, Texas. Another five vessels are slated to be loaded at that terminal in February and then further six in March, before the terminal commences for less productivities in April 2015. On the demand side, LPG has continued to grow in the Indian subcontinent in Southeast Asia, China and the Far East. It is notable that India have seen a fully 3% increase on LPG reports last year mainly for urban and rural use. Meantime China has seen a 96% increase in delivery to LPG from about 4 million tonnes in 2013 to 7.8 million tonnes in 2014. LPG demand for PTH [ph] clients in China continues to develop with four plants kind of the overall ratio requiring more than 2.5 million tonnes per annum and a further two plants expected to commence in early 2015 that will require a further 1 to 2 million tonnes of propane. [Indiscernible] plant demand for LPG has been on the rise both for fixed and flexible feed plants with the greater percentage of the plant flexibility utilized by LPG feed stock. We have seen an increase through 66% in 2014 and expect it to go to 75% in 2016. To summarize we currently see no change in supply patterns from the U.S. and we believe natural gas liquids remain well positioned to support growth of LPG as a significantly cleaner fuel for the global energy markets and the world economy.

Thank you, John. With this we’ll turn over for questions.

[Operator Instructions] The first question comes from Michael Webber from Wells Fargo. Please go ahead.

Hey, good morning guys. How are you?

Good, Michael. Good to hear you.

Thanks. A handful of questions, I want to start off with something for Ted just as it pertains to new financing. One, can you give us a bit more details in terms of returns. And then, as you mentioned the amort rate on an annual basis, can you kind of talk to your long-term cash breakeven levels reflective of the new facility just on a total cash basis?

Ted?

Yes, sir. Mike. So, I guess, in no particular order, I think in terms of lot more detail will come out when we file the loan agreement which will be only complete the transaction. But generally you’ve got pretty attractive – very low rates on the two KEXIM and K-sure guaranteed tranches call like around 1.5% of a LIBOR. And the commercial tranche and the KEXIM direct tranche and the price for KEXIM direct tranche of the commercial tranche. And when we – and we think about that is being around 2.5%. It can flex up or down 25 basis points depending on how much the fleets on Time Charter. That only relates the commercial tranche not the KEXIM tranche. KEXIM tranche is fixed at 245. So hopefully that gives a little bit of sense. From a long- term cash breakeven, when we’re fully delivered, I guess we think of it being around somewhere between $23,500 and $24,500 a day, is probably zip code I’ve guide you to, depends obviously little bit on when do you look at it, because OpEx increase over time, and interest decreases over time. So that’s an event – that’s kind of how we think about it. So done or that was all the points you had or there’s other ones in this.

No, no we can get, do it offline, I mean it’s kind of a bit inside of we were, but I think the financing costs are a bit better that we’d expected.

Yes. I think its difference Mike, just to what it’s worth. I think in the past we’d expected doing solely a commercial tranche which has a longer profile, and the profile on the commercial tranches. If you work through the math you could figure that it’s around 18 years and the commercial tranche, the KEXIM, all the ECA tranche is of 12 years. So we’re slightly short of profile while drove up the breakeven probably about $1000 a day.

Got you. In the end you saw the annual amort on the consolidated new facility is $56 million per annum?

When we’re fully drawn, so we’re going be taking draws as we build during this year and as we take delivery of the ships, so when we’re fully drawn. So during this year we’ll [indiscernible] facilities you have interim repayments not just annual and so as this year goes on as draw we’ll also be repaying.

Great. Okay. I just want to shift quickly and maybe talk about there’s a couple of broader points and then you guys went through, this is a high level impact or like there of lower commodity prices on your business. Is there anything like stuff lying out, but I’m curious in terms of shorter interest in long term deals and there is so much trap [ph] within the energy paths whether you guys have seen a noticeable kind of pause in terms of enquiring around or maybe setting up some longer term charters or whether taking kind of wait and see approach, just curious to as what they’re saying?

Mike, it’s a constant that I thought you would come with the easy question at some point. It’s a constantly changes landscape and as always it follows a little bit what the spot markets doing. So whether spot market falling at the – few weeks ago, the interest sort of cooled off and market having rebounded very strongly. We see the interest is rekindling. So we’re still in a number of decisions. And I think that we’re expecting a strong year this year. Certainly the start will be -- has proved to be very strong. And we are continuing our discussion with number of people. I can’t report anything.

That’s fair. But when you think about the long term mix within your Charter profile, any reason at this point to think that it might be even more spot heavy than maybe you thought it would be three to six months ago?

I hate to disappoint a few people, but I’d say no. We would expect it to be the same mix.

Okay. That’s helpful. And just one more and I’ll turn it over the around the HNA JV [ph], just curious one is that, what’s happening there. And maybe if you can give specifics kind of the direction that those conversations are going in terms when we can actually see some of sort capital call over – kind of what move – in what direction you guys are moving in terms of utilizing that agreement. And then, there’s also been a relatively high profile investor within HNA that may ask you to liquidate, that’s been in the press. I’m just curious as to whether or not that has any impact whatsoever around the longer term liability I guess with that agreement.

No impact. No, no impact at all. We’re very close to HNA. We continue very actively to try and develop something on – in China or on the island of Hainan we have – we are making slow progress but we are making progress.

Okay. Great. All right. Thanks, guys. I appreciate it.

Thanks Mike.

Our next question comes from Erik Stavseth from Arctic Securities. Please go ahead.

Good morning, guys. Very quick question from me really, but it relates to dividends, I mean, you have – even the markets that’s going to turn out pretty decent this year. And you’ve already taken substantial chunk of your CapEx commitments already and you have finance in place? Can you give us any color on when the potential dividend could be instated without the – after you’ve taken delivery of the vessels or would you consider taking dividend before you taking delivery of the entire fleet?

That’s a good question. We expect to consider the question of dividends at our next Board Meeting. And as we did in last and we have shareholders who I know are interested in us having a dividend policy and starting a dividend. And I think that we wouldn’t have to wait – we would not wait until we have delivery of all our ships. We would consider the cash flow and earnings and commitments from time-to-time as time before the next 12 months when we would have taken delivery of everything. So it will be a matter that will be on our agenda in our next Board Meeting.

All right. And last question from me. Do you see any talks or consolidation in the industry? I know that been [indiscernible] off for quite a while, but that something you’re seeing viable discussions at this point given where share prices or many of the public companies are trading?

Yes. We haven’t had any discussions lately within. We’re open, as we’ve said before to talk to people and in the meantime we’re just focusing on the build out of our business and delivery of our shares concluding the financing and the chartering.

Perfect. Thank you.

Thank you, Erik.

Okay. [Operator Instructions] Our next question comes from George O'Leary of TPH. Please go ahead.

Good morning, guys.

Hi, George.

Lot of my questions has been touched on, but just curious, what your updated thoughts regarding the MLP formation and maybe you could provide some color on how many vessels you need to get under long term charter before you would consider forming in an MLP?

We were going to ask TPH that, but Ted will answer.

Hi, George, I’d say, look there’s sort of two considerations as you read the outline on the MLP, one is sort of the capital market risk activity and there are certain stand to the evaluation have come in, so we have to continue to kind of moderate that a little bit, still think there is no arbitrage that we’d like to capture. In terms of how we sort of minimum size, look it’s going to be function of charter rate, ultimately, because I think we sort of think about it is needing to generate some more between $14 million and $15 million of EBITDA with obviously growth potential on top. And depending on the charter rates, vessels you’d be dropping down, that could be anywhere from three to five vessels I suppose. So that’s again that’s really depending on – are putting together the right group of charters with the right duration.

Sure. That’s helpful color. Thank you. And then, another [indiscernible] featured question, yes, still potential cost inflating given into adjacencies, the U.S. will be exporting ethane as well as also, any updated thoughts around potentially getting into the ethane vessel market?

Yes. I’ll let John Lycouris answer that one.

Hi, George. Well, the ethane market seem to have kind of flatten out recently because of the new pricing setup and propane being a lot more attractive than ethane for export in view of the pricing difference between one and the other. Look, ethane is very interesting commodity to look into and see how it develops. But we have not had any more discussions or thoughts or seen any development from the shipyards on these assets.

Great. Thanks for the color, guys.

Thanks, George.

Pleasure. Thanks George.

The next question comes from Mark Suarez of Euro Pacific Capital. Please go ahead.

Good morning, guys. Thanks for taking my question. Just to go back on the chartering activities here, over the past I would say, two three months especially in January we have seen LPG spot rates actually attracting strong than seasonally normal. And I’m wondering what your thoughts on in terms of – you knew those come in to throw them out on the long term contracts. I know, you have one come in and I think that’s under spot right now. If it’s just an expectation that you guys have that pricing will be go higher or is it just timing seasonality issue that you may get, maybe a higher rate from Q2 and Q3?

Thank you. That’s really good question because it’s something that we have to balance. We’re looking at – we would like to execute long term charters by preference with our shift that are delivering later in the year. So we’re trying to skew it that way. Now if we have a good opportunity with a early shift, we are one that’s on the water, I’m not saying that we’re not going to – we’re not looking at it and we have discussions and in some cases we’re trying to, if we’re doing a multishift [ph] deal offer a package. But we feel that – we’re using the leverage of our early shifts to get some of the later shifts employed as well.

Got you.

And kind of where our thinking is.

Good. That’s very helpful. But you’re still targeting an employee mix of about two-thirds of your vessels in the long term charter that hasn’t changed?

That hasn’t changed, like I said before, hasn’t changed, no.

Okay. And just to go back I think John, you mentioned the ethane market has flattened out and I tend to agree with you. Now if that’s the case, have you seen any maybe less pressure out of shipyards for the VLGC if will and does maybe placing some downward pressure on pricing for our newbuilds in VLGC plants, is that’s something you’re seeing right now or is that – you think that’s a trend they could play out over the next 12 months?

No. We haven’t seen. We’ve seen prices for some types of shifts that reduce very marginally from the little spike that they had. Prices from last year have increased and then they’ve retreated but they are still higher than they were. But in terms VLGCs we haven’t seen any sort of aggressive marketing on a part of shipyards, even though like you said you might have expected that with ethane enquiry kind of disappearing.

Right, right, right. Okay.

So we feel, we feel we’re in the right space, frankly we continue to be very bullish about our business, but – and we’re grateful if there aren’t many people who share that bullishness and at least on the ship owning side and there seems to be a pause and the enquiry from ship owners and in the offering from shipyards for at least aggressively pricing VLGCs.

Okay. That’s fair enough. And then maybe my last question on bunker field, I know that has some impact on some of the ship owners out there from daily vessel point expense at least from the indirect items that go to that line, is that something you’re seeing impact Europe on expense line, or is that not meaningful enough here?

John Lycour address that briefly before I think it is meaningful. We can tell you a little more about.

It is substantial and of course it reduces the breakevens on the spot vessels and makes a lot of difference for the economics and improves the bottom line. And to add to that of course with the [indiscernible] vessels that we are building the added benefit of the eight extra tons of fuel at essentially a lower price makes a lot of difference as well.

But just to clear Mark, the bunker price is don’t figure to our daily OpEx calculation, that’s only the classic running cost, but that figure into that figure.

Right. Okay.

Thanks for your time guys. That’s what I have now.

Thank you, Mark.

Okay. [Operator Instructions] There are no questions at this time. This concludes our question and answer session. I would like to turn the conference back over to John Hadjipateras for closing remarks.

Well, thank you all very much for your attending this morning and for your interest and continued support. Have a great day.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.