Dorian LPG Ltd. (LPG) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Dorian LPG First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website, which is www.dorianlpg.com. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you. Mr. Young, please go ahead.

Thank you, operator, good morning. Thank you all for joining us for our first quarter 2017 results conference call. With me today are John Hadjipateras, Chairman, President 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 4, 2016. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer to you to our fourth quarter and full year 2017 results filed this morning with the SEC on Form 10-Q, where you'll 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.

Thank you for joining our call and good morning. As for my brief remarks Ted will review our financials and John Lycouris will update you on the broader market and our operating environment and finally we will take questions. Following the delivery of the Caravelle, the final VLGC for our new building program and the sale of our sole small pressurized gas carrier in the prior quarter, we began the first quarter by 2017 financial year as the largest of ECO VLGC's owning 22 high-spec VLGC's built at two of the world's best shipyards. Dorian significant commercial scale is enhanced by the deployment of our spot ships in the Helios Pool, the pool we co-founded and jointly owned with Phoenix tankers and Mitsui OSK subsidiary company. Helios Pool is the second largest LPG pool in the world. Its fleet comprises 26 VLGC's including 8 being owned Dorian, 4 owned by Phoenix tankers and 4 controlled by Oriental Energy. Oriental being one of the largest PDH plant operators and LPG importers in China. Outside the pool we have 4 VLGC's on time charters, 3 of which have a duration of greater than two years. These time charters account for approximately 18% of our fleet calendar days in the fiscal year 2017. For the quarter ended June 30, our spot VLGC utilization rate was 92.2%. We calculate fleet utilization as defined in our filings by dividing our total operating days in a period by the total available days in that period. John Lycouris will describe how global sea-born LPG trade has continued to expand although the rate environment has weakened. And he will share our views on the closest for the weakness and the prospects for improvement as we see them. I will just say that in my experience, the market sentiment has been more negative than justified by the balance of supply and demand fundamentals. We believe that our commitment to provide our customers safe reliable and trouble free service with the high quality and largely homogenously we operate and our competitive operating costs, position us well to navigate the market cycle. Our board continues to reassess the most appropriate capital allocation strategy to best serve our shareholders. We see value in our stock and have in accordance with our previously authorized share repurchase program, repurchased 1 ¼ million shares in the first quarter. The company had $67.4 million remaining under its authorized share repurchase program as of June 30, 2016. Ted will now review the financial results for the quarter.

Thank you, John. While our revenue increased reflecting a full quarter's contribution from our fully delivered fleet and good management of our cost base, we were not immune to the softness of the LPG market has experienced since the beginning of the year. With that said, we are confident that we are well positioned to sustain the current and in our view short term weakness in the market. Before I move on to discuss the results for the quarter, I would like to remind you that our business should be viewed from a long term perspective. For the quarter ended June 30, 2016 we reported total revenues of $50.5 million, representing net pool revenue from the Helios LPG pool, charter hire and voyage freight revenues earned from our VLGC's. As we have previously described, we reported our share of the Helios's result as net pool revenue in our income statement which represents our percentage participation in the pool revenues less pool voyage expenses and pool general and administrative expenses. Our share of net pool revenues for the quarter was $37.7 million. Time charter equivalent revenues per day across all of our VLGC's including those in the Helios pool amounted to $26,406 per day. While our spot VLGC's which reported exclusively to the Helios Pool are $24,640 per day for the same period. Our voyage expenses were $800,000 an 80% reduction from the 3 months ended June 30, 2015. The decrease is due to a number of our vessels operating in the Helios LPG pool, our voyage expenses are netted against our revenues. Vessel operating expenses for the quarter were approximately $16.1 million or $840,000 per vessel per calendar day which is calculated by dividing the vessel operating expenses by calendar days for our VLGC's for the relevant time period. For the comparable 3 month period in 2015, our operating expense was $10,203. The year-over-year decrease of $2,163 per day was related principally towards $1,689 per day reduction in cost related to training of additional crew and a higher proportion of newer vessels which incur lower OpEx. Our daily vessel operating expenses have continued to perform, at or exceed our originally budgeted levels and we are confident that these OpEx levels will remain competitive going forward, particularly given the young age of our fleet and our commitment to high maintenance standards. General & administrative expenses were approximately $5.6 million for the quarter compared to $7.2 million for the same period in 2015, a decrease of $1.6 million of which $2.1 million is due to the cash bonuses paid in the June 30 quarter last year partially offset by $600,000 increase in salaries, wages and benefits as our staff grew. Including non-cash compensation expense, cash G&A for the quarter was $4,550,000 which is consistent with our expectations. Depreciation and amortization for the quarter totaled roughly $16.2 million which is primarily attributable to the depreciation of our operating vessels. Our reported interest in finance cost for the quarter was $7 million which was comprised of interest expense on our debt, amortization of the financing costs and other financing expenses compared to $100,000 for the same period last year. The increase of $6.9 million was mainly due to $5.5 million increase in interest incurred on our long term debt, amortization and other expenses offset by capitalizing $1.4 million as we have not had any capitalized interest in the quarter just ended. The other piece of cash interest expense booked as realized loss on derivatives amounted $2.3 million. We also incurred an unrealized loss of $4.4 million from the changes in the fair value of our interest rate loss. The unrealized loss on the derivatives amounted to $0.08 per share for the quarter. The unrealized loss was principally a result of unfavorable interest rate movements during the quarter. We currently have approximately 80.5% of our existing debt facility hedged; so long the entry ended two additional hedge transactions during the quarter. Our RBS facility is over 99% hedged while the 2015 facilities are now approximately 78% hedged. The current weighted average LIBOR rate on the 2015 facility is approximately 1.39% including the unhedged portion while the RBS facility has a weighted average fixed LIBOR rate of 4.57%. Overall for the quarter we reported adjusted net income of $3.1 million or $0.06 per share in adjusted earnings per share in an unadjusted net loss of $1.3 million or a loss of $0.02 per share. Adjusted net income for the 3 months ended June 30, 2016 strips out the effect of the unrealized loss of derivatives of $4.4 million. Our EBITDA for the quarter as defined in our filings was $29.6 million and we also repaid $15.7 million of bank debt under our two bank debt facilities. During the fiscal first quarter, we generated nearly $30 million of cash flow from operations, an increase of roughly $30 million from the prior year. This increase is primarily due to the higher earnings driven by the size of our fleet from 10 vessels as of June 30, 2015 to 22 vessels as of June 30, 2016. As of June 30, 2016 we had total outstanding debt of $820.7 million including $712.5 million drawn under our 2015 debt facility and $108.2 million under the RBS facility. Please note that in accordance with new FAS-B [ph] guidance our deferred financing fees are no longer shown both as an asset and an increase in the debt balance on the liability side of the balance sheet. However, the footnote does reflect the full principal debt balance of $820.7 million. The RBS facility amortizes $9.6 million in principal while the 2015 facility is now fully drawn amortizes $56.4 million per year. We finished the quarter at $47.3 million in unrestricted cash and equivalents and $50.8 million of restricted cash. We are in compliance with all financial covens under the two loan facilities. We continue to cash break even cost per calendar day of $23,000 to $24,000 a day which includes vessel OpEx, cash G&A, cash interest expense and principal amortization. Since April 1, 2016 the company returned $12.7 million in cash to shareholders via buybacks bringing our total cash retuned to shareholders since inception of our buy-back authorization to $33.6 million. We continue to see good value in our stock relative to value we see in our fleet. We remain focused on conservatively managing our balance sheet and risk profile to allow us to operate our business in all economic and market climate. With that I will turn it over to John Lycouris.

Thank you, Ted. LPG trades fundamentals are developing favorably. Since July 2016, the global sea born LPG volumes amounted to 48 million metric tons compared to 45 million metric tons during the same period last year. LPG Sea born export volumes both from the US and the Middle East have remained strong during the first 7 months of this year at about 15 million tons and 21 million metric tons respectively, registering at 37% and 5.3% increase over the same period last year. These healthy export volumes have produced an abundance of stocks in the Far East markets keeping local prices softer. Mount [ph] LPG prices have on the other hand traded consistently higher than expected and they are adversely affecting margins from the term contracts and have closed arbitrage trades in the market. As a result of US LPG terminal operators have recently seen export cargo volumes cancelled or deterred some contracts may be negotiated in effect helping the seasonal buildup of U.S. inventory stocks for the upcoming winter demand. The new Panama Canal has opened to commercial traffic and a number of VLGC vessels have transited both in loaded and in ballast conditions, shortening voyage times but potentially increasing trade volumes. The transiting tours are about 20% higher than anticipated and he impact on the shipping markets and the vessel utilization is still to be determined. The VLGC fleet utilization is higher than 90% in spite of more than 30 new building vessels delivered in this calendar year-to-date. The VLGC order book now stands at about 20% of the current fleet with deliveries likely to slip a bit. 16.5% of the fleet is over 20 years old. In the view of lower markets rates, the disposal of the dedicated run freight vessels and LPG storage on younger vessels, we may see the first the VLGC's scrapped within the year. A combination of increased LPG trade, slow steaming, storage and scrapping will rebalance the market in time. On the demand side, China has exceeded expectations again this year. The ample supply of LPG cargos into the east has kept local market weak and inventories high. Propane prices are at record lows and propane is trading at about 75% of naphtha. The low shipping cost combined with the co-tango in the LPG future markets has seen vessel storage cargo increasing in the Singapore area. Meantime the 6 operating Chinese PDH plants are running at near capacity and 2 more PDH plants are expected to come online within the year. Low LPG prices may come to an end by the next quarter when the record lifting's of LPG destined to the Far East are delivered. The abundance of the products is absorbed by the local markets and at that time we expect the seasonal re-stocking program to commence in the west typically during the third and fourth calendar quarter requiring the rebuilding of stocks that invariably resolved increased activity for the LPG markets. To summarize we continue to see LPG exports grow which will support the fleet growth and continue to establish LPG as a main stream fuel and feedstock to the global energy markets and to the world economy. Thank you.

Thank you, Ted and thank you, John. We are ready to take questions. Operator, please open up for questions, thank you.

[Operator Instructions] Our first question comes from the line of Michael Webber from Wells Fargo. Please go ahead.

Good morning gentlemen, this is Donald stepping in for Mike, how are you?

Hi, how are you doing Donald?

Doing well, thank you. Just a quick question on the market, I mean typically you would see positive summer seasonality beginning to impact LPG carrier rates in the summer as people begin stock piling LPG for winter heating. Are you seeing any of the positive effects yet or just on a timing basis should we be seeing them or are they little bit forward more to the fall?

As for John Lycouris' comments, if you read them you will see, we have had a lagging with I would say a pushback in the timing of that so, what we should have seen as a customary uptick hasn't happened because of the arbitrage, unfavourable arbitrage. And I think it is, oh sorry, somebody just pointed out to me that you are Donald and not Mike but anyway, Donald sorry about that. We are always thinking about Mike, he is always in our minds. So there you are. So I think we are hopeful that it is pushed back a bit because at the moment there is still ample stock in the East and it was pushing down prices like John said but I think we hope to see prices softening in the West and get that push in this spot market that we have come to expect for this time of the year happening maybe in the fourth quarter.

Alright gentlemen, that's it for me, thank you.

Thank you, Donald.

Thank you. [Operator Instructions] our next question comes from the line of Peter Nikolai from Fernley Securities [ph]. Please go ahead.

Good morning guys, just a couple of quick questions from me. First on your OpEx; it has come down quite substantially after delivery of the new building program and you now report OpEx of roughly $800,000 a day. Do you see this improving going forward?

Ted, do you want to answer that for us?

Sure, you know I think there is some potential. But there is variability within the year and we are not taking any further initiatives other than the ones we are always doing to make sure we run the ships efficiently so there could be a bit of improvement there but otherwise we are happy with how we are performing and for us OpEx is pretty sacrosanct. Safety and reliability is absolutely and anything, any reduction in OpEx that would affect that is just going to be completely unacceptable to management so like I said we are just going to have to think about it.

Alright, thanks. Second question from me is just that this market is quite unusual with high utilization on one side and on the other side you have challenging product differential so given the high interest rates we are seeing in the market, do you see a materially high oil price, the only thing that I can kind of save this market in the short to medium term or do you want to highlight any other elements?

We could see more production even with other higher oil price and a lot of the production we see is from areas where maybe, US production I am talking about now, which are in, from gas producing areas. So I don't know. I think the higher oil price does help but I don't think it's the only thing that will move. Unless you mean of course the higher, the greater oil price will not only increase production but also create a demand more access, both side of the equation.

Okay, fine that's all for me, thank you.

Thank you.

[Operator Instructions] Our next question comes from the line from Colton Bean from Tudor, Pickering & Holt. Please go ahead.

Good morning guys, just wanted to see if you had further color on what you are seeing in terms of the contract renegotiation or some of the cargo cancellation from the US Gulf Coast? That's it for me, thanks.

I am sure you are seeing a lot of that too. No it is not much more than we have reported. We spent almost a year under the threat of cancellations where there was very few happening and I think in the last couple of months it's fair to say that these have started to materialize. We have got amount of 10 cargos cancelled or postponed and some renegotiations which are kind of consistent with what's happened in the past with buyers with Far East buyers especially when the market has moved very much against them. So there is the positioning and what I think we should know is the profitability of the business for the off takers in the Far East is still high and I view they try to renegotiate some of their contracts to improve that as opposed to kind of stay in the game. There is a big difference between try to improve your profitability and needing to negotiate a better price just to be able to survive. So, it's anybody's guess how it will go.

That's perfect, thanks.

Thank you. [Operator Instructions] Thank you ladies and gentlemen, that is all the time we have for questions for today. I would now like to turn the call back over to management for closing comments.

Well, thank you all for joining us and I hope you have a good rest of the summer. Don't forget to barbeque every day using your propane cookers and don't forget also to remember that the Carbon content of LPG is 50% lower than coal so down the line hopefully we are going to be seeing a lot of increased use for this product. Especially in places of the world where they need to clean up their air, so have a good summer and thanks again for joining us.

Thank you ladies and gentlemen. That concludes our teleconference.