Earnings Call Transcript - LPG Q3 2024

Operator, Operator

Good morning, and welcome to the Dorian LPG Third Quarter 2024 Earnings Conference Call. 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 proceed.

Ted Young, CFO

Thank you, Rob. Good morning, and thank you all for joining us for our third quarter 2024 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; John Lycouris, Chief Executive Officer of Dorian LPG USA; and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through February 8, 2024. 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 you to our unaudited results for the period ended December 31, 2023, that were filed this morning on Form 10-Q. In addition, please refer to our filings on Form 10-K where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. Finally, please also refer to the investor highlight slides posted this morning on our website to which we will refer during the call. With that, I'll turn over the call to John Hadjipateras.

John Hadjipateras, Chairman, President and CEO

Thank you, and thank you for joining us. John Lycouris, Ted, Tim and I will discuss our third quarter financial 2024 results. As you will hear in more detail from Ted regarding the financial year-to-date, we earned a record average TCE, record spot TCE, and record EBITDA. While maintaining a strong balance sheet and capital to invest in our segment, while adding our decarbonization initiatives, we continue to return capital to our shareholders. Including our recently declared dividend of $1 per share, we will have returned over $690 million to shareholders since our IPO. As one of the largest operators in our segment, we believe we are well positioned to continue our profitable performance in the LPG sector and beyond. More than 40 ships were absorbed into the fleet in 2023, a 12% addition, which was the largest number of ships delivered in a single year since the delivery in 2016 of 46 ships, representing 23% of the then existing fleet. Of the 17 new buildings slated for delivery in 2024, 4 have already started trading. We view the market volatility of 2023 and particularly the big rate spikes as evidence of demand and supply being close to equilibrium. The recent near total elimination of waiting time for the canal, which is still draft-restricted, is not sustainable. The Canal Authority is prioritizing containerships and LNG ships over LPG. There are 109 neo-Panamax containerships and 73 LPG ships slated for delivery this year. For these reasons, as well as the power reduction resulting in slower speeds, which didn't happen last year, we are optimistic. On the HR side, we continue to invest in improving the quality of life of our displaced Ukrainian seafarers and their families. We recently introduced a simplified payment system through an e-wallet that enables them to receive their monthly allotments quickly and with less hassle. On the social front, we will enter our finalized program through the All Aboard Alliance, a global maritime forum sponsored initiative, which will enable accelerated data collection regarding diversity and increased opportunities for all genders at sea. We are evaluating compelling emission-saving devices and low friction paints for our ships. During Q3, we paid at one of our dry docks with silicon paint and have signed new contracts for energy-saving devices that will be retrofitted in the coming year. We also continue our real-time emission monitoring program and have enhanced the initiative by installing MAN's EcoTorque engine diagnostics tools on 20 of our own ships. We have expanded our performance team in Denmark by adding a mechanical engineer. We ordered a new building, VLGC, VLAC from Hanwa shipyard in Korea for delivery in 2026 and are investigating opportunities to upgrade some of our existing ships to carry ammonia. John Lycouris will speak further on this topic. Ted, you have the floor.

Ted Young, CFO

Thank you, John. This morning, I will discuss our capital allocation decisions. As of December 31, 2023, we reported $208.5 million in free cash, which is a solid increase from the $190 million reported after the $40 million dividend declared and paid during the December quarter. By January 31, we had an unrestricted cash balance of $215 million, accounting for the $23.8 million down payment on our VLGC AC newbuilding made in January 2024. We do not consolidate the P&L or balance sheet accounts of the Helios Pool, which has the effect of understating our reported cash. As of January 31, 2023, the pool held cash of $36.2 million, and given our approximately 86% economic interest in the pool, this equates to about $31 million in cash that is not included on our balance sheet. Our debt balance at quarter-end was $623.8 million, with a debt to total book capitalization ratio of 38.8% and net debt to total book capitalization at similar levels. We increased our revolving credit facility from $20 million to $50 million, adding a $100 million accordion line for vessel acquisitions. We appreciate their support and their endorsement of our stewardship of their capital. We are evaluating various pre- and post-delivery costs while maintaining a high level of financial flexibility. Looking ahead, we expect our cash costs per day for the upcoming year in capital expenditures for dry docking and potential upgrades for ammonia capability in our existing fleet, which John will discuss later. For the discussion of our third quarter results, please refer to the investor highlight slides posted this morning on our website. My remarks will include various terms such as TCE operating days, available days, and adjusted EBITDA. Please check our filings for the definitions of these terms. For our third quarter results, we achieved a TCE of $76,337 per operating day with a total utilization of 93.6%, leading to a utilization-adjusted TCE of approximately $71,431. This TCE figure is the best in the company's history. Our entire spot trading program operates through the Helios Pool, and the Helios spot results are the best reflection of our chartering performance. For the December 31 quarter, the Helios Pool recorded a spot TCE of $91,417 per day, the highest spot rate the pool has earned in a quarter. As shown on Page 4 of the investor highlights, we have 5 Dorian vessels on time charter within the pool, along with 1 MOL Energia vessel, indicating spot exposure of about 75% to 80% for the 27 vessels in the Helios Pool. Looking ahead to the quarter ending March 31, 2024, we currently have over 60% of the available days in the Helios Pool booked at a time charter equivalent of over $100,000 per day, reflecting the strong rates secured earlier for voyages planned for this calendar quarter. This rate includes both spot fixtures and time charters. Our OpEx per calendar day, excluding dry docking costs, was $9,909, a slight decrease from the previous quarter, driven by reductions in lubricants, spares, and stores. Our time charter expense for the four chartered vessels totaled $8.4 million, below budget due to some claims relating to fuel efficiency underperformance. Total G&A for the quarter was $7.7 million, with cash G&A—excluding noncash compensation—around $6.3 million. Of that, about $500,000 included expenses for Adour Ukrainian seafarers and some employee bonuses, with core G&A at approximately $5.8 million, consistent with our expectations. The noncash compensation expense for the quarter was $1.4 million, in line with our previous guidance. Our reported adjusted EBITDA for the quarter was $133 million, marking the best quarterly adjusted EBITDA in our corporate history, bringing our adjusted EBITDA for the last 12 months to nearly $415 million. Regarding debt service, our cash interest expense, calculated as the sum of interest expense—excluding deferred financing fees, other loan expenses, and realized gains/losses on interest rate swap derivatives—was $7.5 million, down about $200,000 from the prior quarter due to lower average debt and an all-in cost of debt of about 4.7%, which is below the current floating SOFR rates. Quarterly principal amortization remained steady at $13.3 million. Our trailing 12-month net income stands at about $304 million, and with average booked shareholders' equity for the same period at roughly $911 million, we generated a 33.4% return on shareholders' equity. We take pride in this figure as it not only indicates the strong profitability our platform can generate but also shows our success in maintaining our shareholders’ equity at an appropriate level, balancing capital retention while still providing notable dividends to our shareholders. The $1 per share dividend declared last week, payable on February 27 to shareholders of record on February 5, 2024, brings our total dividends paid to $11.50 per share or nearly $465 million in total.

Operator, Operator

Ladies and gentlemen, please stand by. We're experiencing technical difficulties, and our conference will begin momentarily. Thank you.

Ted Young, CFO

Thanks, Rob. Again, we're positive on the long-term prospects of our business, but we are mindful of the near-term headwinds. With that, I'll pass it over to Tim Hansen.

Tim Hansen, Chief Commercial Officer

Good day, everyone, and thank you for joining us. The VLGC market has been quite dynamic for participants. In December, we experienced record-high freight levels, but these contracted sharply in January 2024. The quarter ending December 31, 2023, saw exceptional freight rates for VLGCs, driven mainly by the widening U.S. to Asia arbitrage, new restrictions on the Panama Canal, and changes in vessel routing due to uncertainty surrounding transit through the Panama and Swiss Canals. In North America, the production of natural gas liquids has been on the rise, leading to record inventory levels amid an unseasonably warm start to winter. This increased supply of LPG has lowered U.S. export prices, alleviating some short-term concerns regarding Asia's import demand, which has also been affected by a warm winter. The drought in Panama has been a significant factor, as new restrictions on VLGC transit were implemented at the end of October. These restrictions, due to lower water levels, resulted in reduced daily transits and increased costs for booking VLGC transfers. By early November, auctions for neo-Panamax Canal transits peaked at nearly $4 million, and some operators faced challenges securing northbound transits. As a result, VLGCs began taking alternative routes, including turning back in the Mid Pacific and some ballasting around South America, leading to longer distances traveled and impacting arrival times in the U.S. Gulf for loading. These scheduling challenges were reflected in freight levels, and some late currents were fixed almost two months ahead of the fixing window. The uncertainties regarding scheduling and pricing affected vessels both in ballast and those laden, as charters navigated potentially high auction prices at the Panama Canal or chose longer routes through the Suez Canal. On average, in the quarter ending December 2023, we saw 25 VLGCs balanced to the U.S. Gulf per month, up from an average of 13 in the prior quarter. The preference for routing via the Suez Canal led to fee rates that were better priced than through Panama in December, demonstrating a significant shift in trading routes. However, geopolitical tensions in the Middle East quickly turned the Suez route into a temporary solution. With escalations during December, operators began to avoid the Red Sea route for safety reasons, which led to VLGCs being rerouted via the Cape of Good Hope for the first time in several years. This resulted in increased miles, supporting the freight market in the short term. As we progressed into January, several factors influenced fleet dynamics. The forecast for colder weather in the U.S. led to expectations of a spike in domestic LPG consumption, impacting the arbitrage between West and East. Index prices declined as Asian importers prepared for decreased demand due to lower heating requirements. In January, we saw the delivery of six new ships, representing 29% of anticipated 2024 deliveries, which increased vessel supply for the first quarter of 2024. Additionally, congestion in the Panama Canal decreased this month due to reduced VLGC traffic, container vessel rerouting, and increased rainfall. However, this could create a temporary oversupply in both the U.S. Gulf and Far East ports, putting pressure on rates, which we expect to stabilize as supply is absorbed. While our freight market remains volatile, numerous strong cyclical factors are in our favor. A warmer spring in North America should enhance LPG supply at competitive prices, supporting further widening of the West to East arbitrage. We anticipate only 15 new buildings will be delivered this year compared to 42 last year, and expect that the new deliveries will be absorbed based on forecasted export growth. LPG continues to take market share from alternative fuel sources. Significant growth in propane demand is predicted in Asia for 2024. The congestion issues in the Panama Canal persist, with daily transit numbers down 10 from July 2023, only expected to normalize during the summer. As VLGCs and other segments return to the Panama Canal, we foresee renewed congestion, especially with the expected delivery of 73 LNG and 109 neo-Panamax containerships in 2024, increasing demand for canal passage. Consequently, we anticipate a greater reliance on Suez routing for VLGCs in 2024, given the uncertainties surrounding the Panama Canal. Despite these challenges, we maintain a positive outlook for the medium- to long-term viability of our business while recognizing the potential for short-term volatility. I will now hand it over to Mr. John Lycouris.

John Lycouris, CEO Dorian LPG USA

Thank you very much, Tim. At Dorian LPG, we believe strongly in contributing to the world's decarbonization goals and providing long-term solutions. Our investment in scrubbers continues to yield significant returns, with an average daily net savings of around $3,000 per day for our scrubber vessels, totaling approximately $3.4 million for the quarter. The fuel price difference between high sulfur fuel oil and low sulfur fuel oil averaged about $202 in the last quarter of 2023. The pricing differential of LPG as fuel compared to low sulfur fuel oil was about $183 per metric ton, benefiting dual fuel engine vessels using LPG. We have a total of 14 scrubber-fitted vessels and one chartered-in vessel, with plans to retrofit another vessel with a scrubber unit in the second quarter of 2024. The installation of energy-saving devices and silicon hull coatings on our vessels has led to noteworthy improvements in fuel savings, reduced fleet CO2 emissions, and enhanced CII ratings. In addition to our Captain John NP vessel, which has been upgraded from a VLGC to a VLAC, we are also upgrading some of our vessels to carry ammonia, as it is feasible for many vessels in the global fleet. The EU emissions trading system, effective January 1, 2024, will apply to all ships calling at EU ports. Shipping companies will need to surrender their 2024 EU allowances by September 2025 and annually thereafter, based on the CO2 emissions tied to their vessels operating in EU waters. Following the end-user pays principle, the cost of complying with the EU ETS will be passed from the owner to the time charterer, who is ultimately responsible for purchasing and transferring the monthly EU allowances to the owner's account. For spot voyages, we anticipate that EU allowances will be included in the freight invoices as per the end users’ base rule. As part of our commitment to sustainability and improving our greenhouse gas profile, we have invested in companies focused on addressing climate issues, particularly carbon and methane emissions. Ionada is working to market a compact modular carbon capture system aimed at small and midsized carbon emitters across various industries, including marine applications. This patented technology promises 30% better efficiency than traditional carbon capture methods by utilizing a wide range of hollow fiber contactor membranes and absorbent solutions, achieving approximately 90% carbon dioxide capture from post-combustion flue gases. Additionally, another firm is concentrating on reducing methane emissions from wasted resources such as landfill gas, biogas, and waste biomass. Rather than being flared or vented on-site, these emissions are converted into valuable carbon-negative and carbon-neutral fuels like bio-LNG, bio-LPG, green methanol, and green ammonia. This modular and scalable technology can be deployed at methane emission sites, converting emissions into high-quality syngas which can then be processed and delivered to energy, marine, and aviation industries. Lastly, our recent contract to build a new VLGC at Hanwha Ocean in South Korea aligns with our strategy to allocate capital where there are commercial and financial prospects. We are confident that the future green hydrogen economy will rely heavily on substantial quantities of ammonia, utilized by specifically dedicated vessels. Alongside gaining robust economic returns, we remain committed to providing long-term solutions that contribute to global decarbonization goals. Now, I'd like to hand it over to John Hadjipateras for the closing comments.

John Hadjipateras, Chairman, President and CEO

Thank you very much, John. We're happy to take questions from anyone who is curious to ask them please.

Operator, Operator

Our first question will be coming from the line of Omar Nokta with Jefferies.

Omar Nokta, Analyst

Congrats, obviously, on a very strong and I guess, record quarter. And Ted, I just wanted to ask if you could repeat maybe the guidance figure you mentioned for the bookings to date. Did you say it was 100,000 for 60% of the quarter?

Ted Young, CFO

Yes, that's correct, Omar, in excess of $100,000 and in excess of 60% of the days.

Omar Nokta, Analyst

And that includes the TCE.

Ted Young, CFO

That includes the pool TCEs.

Omar Nokta, Analyst

I wanted to ask about last year, which was notably strong for VLGCs with a significant increase in U.S. exports and the impact of the Panama Canal, which offset new builds. As you mentioned, the fleet was fully utilized. Recently, however, we've seen a correction, which might have gone too far down, especially compared to the low point from last year. What do you think is causing the decline in rates, and when do you anticipate a turnaround?

John Hadjipateras, Chairman, President and CEO

Tim? Yes. You've asked Tim, so I'll let him. We have the same answer anyways.

Tim Hansen, Chief Commercial Officer

Yes, you’re correct that we’re currently at a lower level than the drop we experienced last year, and these declines typically occur in the first quarter. This year’s drop was quite rapid and drastic, especially coming off a very high point. Initially, everything was trending downward, but now we’re seeing a shift in direction. I believe this is largely an overreaction. Additionally, the U.S. inventory remains very high, so even with a cold winter, there won’t be the same concerns about running out of gas as we’ve seen before. I expect prices to stabilize quickly after the worst of the cold passes. Another factor to consider is the Panama Canal, which typically sees a decrease in container transits after the festive season in the U.S. This slowdown is particularly noticeable in January, especially with the upcoming Chinese holiday. We see this as a temporary situation, and we anticipate a return to congestion being the norm rather than an exception. As John noted, there are more new LNG cargo vessels on the way. Current transit numbers are still significantly lower than last year. If you think about how the new canal accommodates around seven transits a day, with nearly 200 additional ships expected to use the canal next year, most of which are on main trade routes, we can expect a rebound in transits. To answer your question about when we might see a turnaround, we believe it will happen fairly soon, likely within this quarter, as things have overshot on the downside. We anticipate corrections as we approach the upcoming holidays in China, which typically has a cooling effect on the market. There are also some unsold cargoes at sea, including Iranian shipments that are causing issues. It may take some time before we see recovery, but we do expect corrections within this quarter.

John Hadjipateras, Chairman, President and CEO

Thanks, Tim. Thanks. I would just add that we can never really tell which quarter it's going to happen. We can give you what we think is guidance for an average for the rest of the year or whatever. But hopefully, the market will react. And the question is, when it bounces, how well it bounces. So as I said, I think, before, when the market starts falling, they kind of forget where to stop.

Omar Nokta, Analyst

Yes, that's very helpful, and it makes sense. I appreciate the detailed explanation. I have a couple more questions before I hand it over. First, regarding the Red Sea, it's been very relevant lately. How would you assess the impact of the current situation in the Red Sea and the diversions? How does this impact the VLGC trade compared to what we experienced in the Panama Canal last year?

John Hadjipateras, Chairman, President and CEO

It's not straightforward, Omar, because the trade through the Suez Canal was somewhat influenced by the congestion in Panama. Regarding the Suez Canal itself, I'm uncertain about the situation. The main VLGC trade from the Red Sea originates in Saudi Arabia, specifically Yanbu. Jordan has taken on some of the cargoes that would typically head East from Yanbu, which has affected the flow of other cargoes that would have come from the region. This situation negatively impacts the ton-mile. However, Saudi Arabia could potentially shift the loading of cargo from Jordan to Rastadora, although that seems unlikely. Overall, around 4 to 5 ships a month are leaving Yanbu, accounting for roughly 30% of the exports from Saudi Arabia. Given the current uncertainties, it's difficult to predict the eventual impact of the ongoing hostilities in that area.

Omar Nokta, Analyst

I appreciate the summary, as it provides helpful context. I have one final question regarding the newbuilding and John Lycouris's comments about upgrading the existing fleet to carry ammonia. What does the cost look like for these ammonia upgrades? Also, is there a price difference between ordering a VLAC and a VLGC? Additionally, could you explain the differences between the VLAC and VLGC moving forward?

John Lycouris, CEO Dorian LPG USA

Yes, Omar, it is a cost that over a number of ships is going to be quite low. But we have been looking into this for some years now. And we think that it is significantly less than $5 million and probably even lower than that when it is amortized over a number of ships. So it is something that is, let's say, it takes time, but it is not a significant cost to carry out those conversions.

John Hadjipateras, Chairman, President and CEO

Omar, we are aware of that because it applies not only to some of our ships but also to a substantial portion of the global fleet. People often get overly enthusiastic about new ammonia carrier construction, but many existing VLGCs could still transport ammonia with some modifications and upgrades, even if they may not be as efficient as new ships.

Omar Nokta, Analyst

Understood.

Operator, Operator

Our next question is from the line of Øystein Vaagen with Fearnley Securities.

Øystein Vaagen, Analyst

Just a quick question for me. As you just discussed, your rates have been quite high over the last couple of months in this winter establishing the high. But you booked $91,000 roughly on the spot and pool for the fourth quarter. But again, that's not really at the highest as we saw spot rates go to $114,000. Now you're talking about the $100,000, which I guess makes sense as ship owners take some coverage on the way up. But my question is now spot rate is now below cash breakeven levels and close to OpEx. What kind of levels are you fixing at today? Does it work differently on the way down as well?

Ted Young, CFO

Well, I'd say a couple of things. First of all, just to be clear, the results that we mentioned going forward, there is a measure of time charter ships in there which are lower. The spot market rates that are booked in that forward number they're very attractive. And as for current fixing, look, that's pretty commercially sensitive information. We have a general matter don't really comment on it. But Tim was to give a little bit more he may, but I'd say in general, when we've thought when he described his strategy to us, look, our guys have been proving to be pretty good at figuring out when cargoes are going to be available, and how many ships are going to be able to meet the lake in and kind of flexing our planning around that. Tim, if you want to add anything to that, feel free or not.

Tim Hansen, Chief Commercial Officer

Yes, you can say that the drop was pretty quick. So only things that have been fixed was kind of like what was in the front. So I should say you take a couple of the way down, but actually, we had fixed pretty far forward already. So we didn't have much to fix in the fixing window when the market drops. So most of our positions comes only available more than a month ahead from now. So as the market has been dropping, then people doesn't fix that far ahead. So we're not really in that much of the fixing window yet. So we'll see if it turns around before we get there. But yes.

Øystein Vaagen, Analyst

And just to add on, you fixing window now in the market in general? Is that early March now? Or where are we now?

John Hadjipateras, Chairman, President and CEO

We may not – sorry, but we don’t want to go too much into the market.

Ted Young, CFO

It's commercially sensitive.

John Hadjipateras, Chairman, President and CEO

Yes.

Operator, Operator

We've reached the end of the question-and-answer session. I will now turn the call over to John Hadjipateras for closing remarks.

John Hadjipateras, Chairman, President and CEO

Thank you, Rob. Thank you for your questions, valued questioners. Have a good quarter, have a good February, and see you next time.

Operator, Operator

This will conclude today's conference. You may now disconnect your lines at this time, and have a wonderful day.