Dorian LPG Ltd. (LPG) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Dorian LPG's First Quarter 2016 Results Conference Call. All participants will be in the listen-only mode. [Operator Instructions]. This conference is being recorded today, August 5, 2015. 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. Thank you all for joining us for us our first quarter 2016 results conference call. With me today are John Hadjipateras, Chairman and CEO of Dorian LPG Limited and John Lycouris, Chief Executive Officer of Dorian LPG USA. As a reminder, this conference call, webcast, and replay of this call will be available through August 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 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 to you to our first quarter 2016 results filed this morning with the SEC on Form 10-Q, where you'll find risk factors that cause actual results to differ materially from those forward-looking statements. With that I'll turn over the call to John Hadjipateras.

Thank you, Ted. Good morning and thank you all for joining us for our first quarter 2016 financial results. I'll provide a brief update on our operating performance in Q1 before handing the call over to Ted to review our financials. Ted will then pass the call along to John Lycouris to update you on our new building program and to discuss the broader market. Since our last call, we have taken delivery of four ships, the Cougar, Cobra, Concorde and Continental. Further the Constitution, Commodore, Cresques, Cheyenne and Constellation are expected to be delivered by end of September. We now own and operate a modern fleet of 10 VLGCs and one pressurized LPG carrier, with newbuilding contracts for the construction of 12 new fuel efficient eco-designed VLGCs to be delivered in the next six months. As we previously announced, the Helios LPG Pool commenced operations on April 1, 2015. The Helios fleet currently comprises nine spot VLGCs including one on a one-year time charter. Six are owned by the Company and three are owned by Phoenix Tankers; a subsidiary of Mitsui OSK. We are now reporting net pool income in our financials and Ted will discuss this in more detail. Outside the pool, we have one VLGC trading spot in the west and three VLGCs on time charter to more than two-year duration. We continue to see period employment consistent with our objective to balance our spot pool and period mix over time, while achieving appropriate risk adjusted returns on capital. For the quarter ended June 30, 2015 our spot VLGC utilization was 88% and our overall VLGC fleet utilization rate was 91.9%. These reported consistent with U.S. GAAP. Grendon has been employed during the quarter at roughly breakeven levels. We have now largely completed the build out of our personnel ensuring the continued smooth operation of our fleet. The five ship scheduled for delivery in Q3 2015 and the remaining six in Q4 2015 and the last in Q1 2016, we have been very focused on providing shore side support to our crews. When the last of our newbuildings are delivered, we expect to be operating one of the world's largest and youngest VLGC fleets measured by number of ships and by carrying capacity, to be the best position to take advantage of the continuing positive demand trends. Following the quarter end, Scorpio Tankers announced the sale of their stake in Dorian to BW Euroholdings Limited, an affiliate of BW Group and Sino Energy Holdings, an affiliate of HNA. The BW Group are highly regarded experienced knowledgeable investors in the shipping and gas and LPG business, and we are glad that their confidence in the Company has been demonstrated by this substantial investment in our stock. We also welcome the further investment from HNA, a prominent industrial Chinese conglomerate. Finally, with current cash flow exceeding original expectations, the Board has adopted a resolution authorizing management in its discretion to buy back up to $100 million of its Company shares. In using such authority, management would weigh the relative benefits of share repurchases, dividend or accumulating capital for strategic opportunities. The Company intends following the end of the calendar year in the delivery of the bulk of its newbuildings fleet to review its results and at that time determine if shareholder interest would best be served by special dividend or using funds to pursue strategic opportunities. Now, I'd like to hand over to Ted who will discuss our financial results.

Thanks John. We delivered very solid results for the quarter and participated strongly in the favorable rate environment. Before I move on to discuss the results for the year -- for the quarter, I'd like to point out 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 how this seasonality may affect our quarterly financial results. The LPG shipping market is typically stronger in the spring and summer in preparation for increased consumption of propane and butane for heating during the northern hemisphere winter. This quarter represents the first time that we're reporting results for the Helios LPG Pool, which commenced operations on April 1, 2015. For the quarter ended June 30, we reported total revenues of $20.3 million representing charter hire and voyage freight revenue earned from our VLGCs trading outside the Helios LPG Pool and our one pressurized vessel. We report our share of the Helios results as net pool income on our income statement which represents our percentage participation in the pool revenues, vessel voyage expenses and pool general and administrative expenses. Net pool income for the quarter was $15.3 million. Time charter equipment revenues from all our VLGCs, including those in the Helios Pool, amounted to $31.7 million corresponding to a daily TCE of $61,932 while our spot VLGCs earned $80,026 per day for the quarter. Our total VLGC operating days for the quarter were 512, of which our newbuildings delivered in June, the Concorde, the Cobra and the Cougar, contributed 12. Note that we do not begin recognizing operating days in our newbuildings until the successful completion of gas trials which is usually four to five days following delivery of the vessel. Our voyage expenses for the quarter were approximately $3.5 million and mainly related to bunker cost of $2.3 million. While bunker prices remained relatively low in this quarter, we continue to see that we're getting a benefit for eco-ships whose speed and consumption continue to perform ahead of expectations. Our vessel operating expenses for the entire fleet for the quarter were approximately $6.8 million or $10,203 per vessel per calendar day, which is calculated by dividing the total vessel operating expenses by calendar days for the relevant time period. Focusing our VLGC only vessel operating expenses, we operated these ships at an average cost of $10,822 per day, which included our investment in training officers for the future deliveries of approximately $1.1 million for the quarter. We do expect these training costs to continue through the quarter ending September 30, 2015. Adjusting for that investment, the daily OpEx for our VLGCs amounted to approximately $8,865 per day, was a very good result. Depreciation and amortization for the quarter was roughly $4.9 million and related mainly to our operating vessels. General and administrative expenses for the three months ended June 30, 2015 were $7.2 million and were comprised of $4.4 million in salary and benefits, which included a $2.1 million amount of discretionary cash bonuses paid to various employees that equated to roughly $0.04 per share. We also incurred costs of $900,000 stock-based compensation, $0.5 million for professional, legal, audit and accounting fees and $1.4 million of other G&A expenses, which included about $300,000 relating to the outfitting of three newbuildings that delivered during the quarter. Controlling for the non-cash comp expense, we incurred approximately $6.3 million of cash G&A expense for the quarter and excluding the effect of cash bonuses realized in the quarter, our cash G&A was $4.2 million. Our reported interest and finance costs was $136,000, the largest components of which were interest expense on our debt of $1.2 million, various other interest and finance related expenses of $300,000, offset by capitalized interest of $1.4 million. The $142,000 gain on derivatives can be analysed as realized cash expense on our swaps of $1.3 million offset by a $1.4 million gain in the carrying value of our derivatives. As a result, we reported net income of $13.7 million or $0.24 a share, which is representative of the growth in our fleet and the strong rate environment. Our adjusted EBITDA, as defined in our filings, similarly benefited as we reported $19.4 million for the quarter. During the quarter, we also repaid $2.8 million of bank debt under our two bank facilities. At August 3, 2015, we have remaining $611.1 million of payments due under our VLGC newbuilding program. We finished the year on March 31, with $134.7 million in unrestricted cash. For the quarter ended June 30, 2015, we reported $16.9 million in cash flow from operating activities, which is reflective of the strong rate environment and our successful management of our vessel operating expenses. At this point, I'll turn it over to John Lycouris, CEO of Dorian LPG USA.

Thank you, Ted. As John reported, Dorian LPG has taken delivery of four ECO newbuildings since our last call, and we expect five further vessel deliveries by the end of this calendar quarter. The fleet will increase from the current 10 VLGCs to 15 VLGCs by that calendar quarter end and it will be well past the halfway mark of our newbuilding program leaving seven vessels still to be delivered. This slippage with some vessel deliveries in one shipyard is directly related to the overhang of offshore projects there and the typhoon season which will hopefully subside. We expect work progress at the shipyard will be normalized after the customers' summer holidays have ended next week and once the offshore units has departed at the end of this month. The yard will then redirect its resources to all their ship projects. As we have previously mentioned, the other two shipyards are on schedule with the deliveries of 5 Dorian LPG ECO VLGC newbuildings and we do not expect any slippage at this time. The newbuilding deliveries have gone smoothly with our crews, our site teams and our newbuilding vessels are performing well. We believe our customers continue to benefit from the competitive advantage of the Dorian LPG ECO VLGCs which have delivered to our fleet. We have continued to see low propane and butane prices both in the Arabian and the U.S. coast, with Saudi contract pricing declining steadily over the last 12 months to currently at $395 and $425 respectively. In the U.S., we have seen inventories rise substantially over the last few months. This overstocking of LPG has pushed propane and butane prices lower and the record monthly U.S., Gulf exports and the newly added capacity have been unable to counter this trend. Indicatively propane is trading at roughly 25% of WTI crude pricing and butane at 37% of the WTI crude price. Last year, these percentages were at 42% and 50% respectively. We're seeing a continued decoupling of WTI crude price as a result of LPG Mont Belvieu pricing. The low prices have stimulated worldwide demand for LPG and a record number of VLGC cargos have moved west to east on long-haul voyages. We continue to see a shortage of vessels in the U.S., Gulf and the Middle East Gulf, which has led to LPG cargo lifting cancellations and sale vendors withdrawn. The long-haul trips combined with the LPG export growth, the lengthier port delays, the stock building of LPG and the lower market price bodes well for the absorption of the VLGC newbuilding order book and for the freight levels in the coming months. We continue to see record LPG imports into China, India with Japan and Vietnam and other Asia-Pacific countries showing good demand growth as well. The low prices have also caused increased demands for propane and butane for steam cracking in the U.S., Europe and Asia with margins at very attractive levels. These higher margins have incentivized producers to use propane and butane instead of naphtha or ethane as feedstock. It was reported that propane delivered price in some areas has reached levels that are below those of the LNG delivered prices. To summarize, we continue to see continued LPG growth which will support the shipping growth and establish LPG as a mainstream fuel and feedstock to the global energy markets and to the world economy. Now, I will pass it over to John Hadjipateras.

Thank you, John and gentlemen, ladies, we're opening up for questions. Operator?

[Operator Instructions] Our first question will come from George O'Leary of TPH and Company.

There's some good contracts you guys signed up during the quarter. Just curious what that contracting market looks like today. Are customers increasingly looking to contract in light of the very high spot rates and is there a big opportunity as you guys deliver five more vessels this quarter to ink some additional contracts at attractive levels?

George, we hope so. There has been increased interest and we're in discussions with several parties. Nothing that we can report firm yet, but the increase has -- the increase in rates has resulted in increased interest of period cover.

That's good to hear and then the buyback program I think is a nice positive to see. Can you discuss a little bit more around the decision to do a buyback versus a dividend and what strategic options you guys are considering that would proclaim the dividend down the road and then what would actually drive you to pursue a dividend? Is it more contracts or just the decision not to pursue some of those strategic options? Just a little bit more color there would be helpful.

The easy answer George is, when we have the money then we'll consider making the dividend or the -- whatever other capital allocation, but in the meantime, we're still building out, we still have a number of ships that we have to take delivery of before we concluded the program. It's a short time and it's also a short time that we've had more than five ships on the water. So, the amount of time that we've been earning these nice levels has been limited. So, we're accumulating cash now and when our Board considers that we have a surplus over our obligations and over our commitments, then we will consider whether to use the authority that we have for buyback or make a dividend or apply it to any strategic opportunities that may be available at the time.

Great, and then maybe if I could sneak in one more, the Helios Pool seems to have been beneficial for you guys, just curious how the development of relationships with customers in Asia is going and whether the investment by B&W, and the investment by HNA, have borne any fruit on that front yet or is it too early for those to really be beneficial and just kind of what you guys are doing from a customer relationship development within Asia?

Well, with HNA, as we previously reported, we do have -- we have signed a kind of, heads of agreement to pursue -- to investigate opportunities in Asia, either by way of transportation or getting involved in any projects locally, but that hasn't -- nothing's come to fruition yet, although our discussions are ongoing. With BW, their investment is financial as they said themselves, so we don't have any discussions at the moment about anything further, and as for our pool exposure, I think, largely the customers that we have overlap, but there's some that they have closer relationships to and some that we do and in general it's worked to our mutual benefit, and we're very happy.

Great. Thanks for the color guys. Good quarter.

Our next question today comes from Mike Webber of Wells Fargo.

Just wanted to go back real quickly to the strategic alternatives you mentioned John in your remarks and I think people, special dividend that you spoke of, but just to be clear in terms of the dividends, buybacks and maybe an ongoing program, that will all be at the end of the year and is there any one of those that you right now would prefer over the others in terms of the way you guys think longer term about the business. Specifically, [indiscernible] very often in conference calls, so just curious as to whether or not one would be favorable right now or whether it's too early.

Mike, I think it's too early. I think, you would agree that on some days our price looks pretty attractive. I think that the nature of our business sometimes calls for a special as opposed to a regular dividend, but again, wanting to give clarity which I do, and without wanting to signal anything to -- which would compromise the shareholders' interest, but wanting to give clarity is, I think what you should take away from me on the clarity issue is that we will do one of these three things or a combination once we have got the money. This is the key point here because I know that a lot of people have been asked this and a lot of analysts have been in good faith giving us advice about starting a dividend program, and we're happy to do that. We're not going to accumulate cash for the sake of accumulating cash, but we will do so when the Company has the money. We're not going to spend money that we don't have yet.

Sure. That makes sense. [Indiscernible] in line, I want to jump to rates, but still on the line, kind of sticking with the strategic stuff, you mentioned, earlier in your commentary and in the release earlier that BW has come in as an investor as well as HNA and it seems like it's a pretty solid outcome for what would look like a -- I guess, a bit of a dicey scenario with a large shareholder selling. I'm just curious as to -- I mean, the financial strategic initiatives possible with both those parties, I'm curious as to what conversation you guys might've had with them at this point, either something as simple as strategic synergies with BW and [indiscernible] HNA or something grander. [indiscernible] started at the most preliminary level or whether you just simply saw the same release we did.

Well, HNA, yes, but nothing solid that we can report. BW, no.

Okay. That's helpful, and then two more questions, one from a modelling, I'll get that out of the way first. Just on the G&A, the $2.1 million in discretionary cash bonuses is that part of the -- because of your fiscal year end, is that part of an annual program, very much like we see in other businesses or would we expect to see that in other quarters throughout the year?

No, no. Not in other quarters, but we'd like to think that it will be annual.

Yeah, so from like a GAAP perspective, John said exactly what I was thinking, but from a GAAP perspective, we didn't quite fully meet the criteria for a preapproved plan by the Board, there was -- approved by the Board, metrics were discussed and everything else but to make the accruals during the year, you have to meet some criteria that we didn't necessarily meet and so therefore we recognized the expense in Q1. Like John said, it'll be an annual amount and whether it -- we start making accruals pursuant to a GAAP compliant plan or is it's something that happens in this basis, we'll keep you guys apprised for modelling purposes, but that's not going to recur next year as much as I'd -- or next quarter as much as I'd personally love it too, but --

All right. I appreciate the solid figure. And finally on rates, and I'm just going to ask this in the simplest way possible, but our utilization [indiscernible] at rates easing already if you would have looked at it kind of in the beginning of the year and we've got a fair amount of supply coming online and certainly if anything but, as you guys look at the back end of the year and as we look at 2016, how have your expectations changed around where you think say normalized rates could be for the next, call it, 18 months? We still have a degree of [indiscernible] I think that's probably pretty reasonable if not anything, rates have been so firm, so much firmer than expectations and this air pocket has been delayed for quite a while, I mean, we and a number of other groups are starting to wonder how severe might -- if it would be severe at all and what sort of downtime we might actually if we see any at all. So, just curious as to -- your take on this rate, has gotten everybody by a bit surprise and [indiscernible] what do you think we're going to see going forward?

We have been surprised by how high the market got and how persistent it is and how sometimes we kind of pinch ourselves because we make a [indiscernible] which is just under $100,000 a day, which is down from $125,000 a day on the previous [indiscernible] that we did a month earlier or something like that. So these numbers are very healthy right and the only end -- as you can appreciate -- we don't want to -- we can't make predictions. So, I can't tell you what I think it will be. All I can tell you is that the strength of the market has been greater than we had anticipated and is lasting longer and it's giving us the opportunity hopefully to execute on our chartering program in the way that we had said that we want to do.

Okay. That's fair. My simplistic question which was nine parts, but the simplistic answer, I appreciate that. That's all I've got, but thank you guys for your time.

The next question will come from Erik Stavseth of Arctic Securities.

Very briefly, I mean, Joe now mentioned the delays of Hyundai still, are they going to take any longer on the basis of the typhoon also causing a little bit of issues and possibly how much delays are there to the remaining vessels at that yard?

John L will give you the rundown on it, but I have to tell you that overall the delays have been only at Samho and like he said, not a Daewoo, not at Olsen [ph] and there are some gains that compensate for the delays but John can you give a total number of the delays or is the expected future program now? John L?

Sure. Yes of course. Erik, I just wanted to say that it appears that the holidays and the monsoon season have added to the problems of the shipyard with too many projects going on. The good side is that we have heard that just the beginning of this week that one of the offshore projects -- the Seadrill project has moved out of the shipyard which means that a lot of labour is going to be redirected to shipping projects to ship projects which is going to be very good news for us. To answer directly your question, the ships that we're expecting to deliver in the quarter will be definitely be delivered in the quarter as John and I mentioned in our call, and the remainder of the vessels we expect in the fourth quarter are not going to be delayed. That's my preliminary approach to that, not even the Samho ships will be delayed. So, we believe that Samho has gone over that bump in their delay and they will be able to deliver on time.

Okay then turning to the market, I mean, we've seen pretty healthy Indian demand for LPG this year -- but we've also seen jelly and petroleum product demand being very stagnant. Can we expect LPG demand to see similar growth in the coming years? I mean, given now there's quite severe delays in many of the Indian terminals, the infrastructure there to take more and can we expect more growth there or is it kind of capped out at this point?

Well, don't you think, Erik a lot depends on the price. The relative price of propane and so far, I think the biggest benefit -- the best surprise we've had was that the price of propane went down more than the equivalent crude oil. So, where the people were expecting a drop in the demand as a result of the crude oil drops, the propane made inroads and gained market share and may be even is opening up to more markets like power gen for example or opening up auto gas in places where they haven't had it so far. John Lycouris, do you have a take?

Yeah, I want to add to what you said, John, which is exactly what I also mentioned in my report was that the number of projects in Qatar, two projects actually in Qatar but their chemical plants were cancelled, which means that more product is going to have to come to the markets and we believe also that the cheap price, especially when you see that ethane has reached its pure value while propane and butane keep coming lower, the preference is for the market to buy propane and butane and fill up their boots rather than buy anything else. So we see that these propane and butanes are going to move further and further and make more inroads in the world markets.

Okay, sounds good. Last question from me is in the spot market now, I mean the spot market has come down quite a bit over the past few weeks. Is that mostly attributable to the arbitrage having been closed for a while from the U.S. to Asia and the market adjusted to that arbitrage now being marginally open or is it something else that's been driving the rates down?

The U.S. is a bit of a mystery right. We saw a huge build-up of inventory and you would've expected more pressure on getting exports going, which we didn't see as much as we expected. On the other hand, we're seeing the arbitrage open again as you said, so I think the way we're looking at it is, it's a bit cyclical without necessarily knowing what -- when the cycle is kind of happening because it's all new. I don't know. You've done the rounds. You've talked to a lot of people and I think you'll agree that not many people really know or and certainly can predict how the export situation will develop short term.

Absolutely. Just wanted to see if you guys had any clarity, but I appreciate that color. Thanks so much guys.

[Operator Instructions] I'm showing no additional questions. This will conclude the question-and-answer session. I would like to turn the conference back over to John Hadjipateras for any closing remarks.

Thank you all very much. Have a great rest of the summer. Thanks for joining us.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.