Earnings Call Transcript - LPG Q4 2023

Operator, Operator

Greetings. Welcome to Dorian LPG Fourth Quarter 2023 Earnings. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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.

Theodore Young, CFO

Thank you, Sherry. Good morning, everyone, and thank you all for joining us for our fourth quarter 2023 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 replay of this call will be available through May 31st, 2023. 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 March 31, 2023 that were filed this morning on 8-K. In addition, please refer to our previous filings on Forms 10-K and 10-Q, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. Please note that we expect to file our full 10-K in the first week of June. Finally, you may wish to refer to the investor highlight slides posted this morning on our website for additional information on the Company's speakers' comments today. With that, I'll turn over the call to John Hadjipateras.

John Hadjipateras, Chairman, President, and CEO

Thanks, Ted. Thank you all for joining John L in Athens, Tim in Copenhagen, Ted, and myself from Stanford. The fourth quarter marked the culmination of the best financial year in the Company's history. Strong chartering results and a solid balance sheet enabled us to return nearly $225 million to our shareholders during fiscal 2023, and we remain conservatively capitalized with net debt to net total capitalization at 33%. The VLGC freight market experienced significant volatility in the quarter, but has continued strengthening throughout 2023. Our financial results reflect the better rates and our diligent chartering management of the volatility. North America's export volumes have been supported by ample production and inventory, currently surpassing the five-year average by 30% and exceeding last year's levels by 43%. Estimates for U.S. exports point to further growth in '23 and '24. In its May short-term energy outlook, the EIA said it now estimates that U.S. LPG exports will grow 12.2% in 2023. The order book seems so far to be absorbed by increasing ton-mile demand. On the HR side, for our Ukrainian and Russian seafarers affected by the crisis, we introduced flexible arrangements. For joining and repatriation, we added free accessible data communication services on board, supplemented medical insurance, and are providing a monthly allowance for displaced families. On the social front, we tasked two key executives to spearhead our diversity, equity, and inclusion efforts on board and onshore in cooperation with the All Aboard Alliance, an initiative which we helped develop with the Global Maritime Forum. And on the environmental front, we joined the Maersk Mc-Kinney Moller Center for Zero Carbon Shipping as mission ambassadors and plan to lend our expertise to the center to elaborate on various decarbonization initiatives. The IMO's new EEXI and CII regulations resulted in an increasing focus by customers on quantifying voyage emissions, something we have been preparing for and are ready for. We are retrofitting our ships with energy-saving devices and premium paints and progressively reducing emissions and fuel costs through voyage optimization and close collaboration with our crews. As an example, we applied the first silicon paint on one of our ships with a target of about 5% in fuel savings. Our commitment to sensible and environmentally sustainable investment is evidenced by the addition of three dual fuel VLGCs so far this year, with a fourth coming later in the summer. These will trade in our Helios LPG pool. Three of them are capable of transiting the old and new Panama Canals, a strategic advantage we will leverage by trading around the congestion when it occurs in the new canal. John Lycouris will give you some more information and then followed by Tim and Ted. John?

John Lycouris, CEO of Dorian LPG USA

Thank you, John. During the first quarter of 2023, the average daily fuel cost of low-sulfur fuel oil versus high-sulfur fuel oil amounted to $5,226 per day, which benefited our scrubber vessels with improved voyage economics. The average realized savings over all available days of our scrubber vessels were about $212.5 per metric ton of high-sulfur fuel oil supplied versus low-sulfur fuel oil alternative. The hybrid feature of our scrubbers provided additional benefits for all emission control areas and the voyages in the North Sea. Our scrubber retrofit program for the fleet has been very successful in terms of return of capital invested, thereby validating our decision to make the retrofitted investments in 2019 and '20. Based on such good results, we have committed to retrofit a further three scrubber units in the next quarters to our vessels that are coming up for drydocking, which will increase our fleet of scrubber vessels to 15. Note that the installed cost of these scrubbers is about two-thirds of the previous scrubber installations. With most spot voyages originating from Houston, our LPG dual fuel vessels have benefited from attractive pricing of LPG versus low-sulfur fuel oil, which on average recently amounted to $180 per metric ton. This does not take into consideration the additional energy efficiency of LPG, which stands at 11% over fuel oil. At the start of 2023, the EEXI and CII regulations by IMO entered into force addressing international vessel carbon emissions. To comply with the EEXI requirements, we have adopted measures that improve the technical efficiency of our fleet. We have installed several energy-saving devices such as Mewis Ducts, as well as Propeller Boss Cap Fins, and are implementing fleet-wide engine power limitations. These initiatives reduce fuel consumption, ensuring significantly lower carbon emissions that ranked our vessels EEXI compliant. Additionally, we are implementing silicone anti-fouling hull coatings for our vessels during their upcoming drydocks, which provide additional improvements in performance and emission reduction and lead also to better CII ratings. Our fleet performance department in Denmark closely monitors daily vessel performance using state-of-the-art software, gathering live data to ensure optimal operational performance and emissions profile for our vessels. Our new tech department is following the latest developments in marine carbon capture and storage solutions, as well as wind-assisted propulsion, which we believe could be significant in addressing the IMO's mid-term decarbonization ambitions. We are also examining the retrofit of advanced propeller designs in combination with the energy-saving devices mentioned above. Last month, the EU Parliament voted for the implementation of the EU Emissions Trading System or ETS for shipping, which is expected to be adopted in June 2023. Under this regulation, vessels over 5,000 gross tons, which includes all our vessels in our fleet, calling at EU ports will be required to purchase and surrender EU carbon allowances commensurate with the amount of CO2 tons emitted while entering, departing, or staying in EU waters. In 2022, our vessels called at European ports 14% of the time, thus we believe the financial impact on us will be limited based on the current trading patterns. The regulation, when it comes into effect in 2024, will be phased in initially at 40%, then 70%, and in 2026 a 100% of all carbon emissions for those voyages coming in and out of the EU. The current European EU allowances are priced at EUR 90 per ton of CO2. This pricing is as of May 19th. Dorian LPG has been monitoring and verifying its carbon emissions since 2018, and we are well prepared to comply with these regulations when they become effective. Now, I would like to pass it over to Tim Hansen, Chief Commercial Officer, for the commercial update.

Tim Hansen, Chief Commercial Officer

Thank you, John, and good day, everyone. The fourth quarter fiscal year ending in March 2023 saw the increased seaborne trade of LPG. The January to March period was the strongest corresponding quarter on record in terms of LPG transported on VLGCs. As for the previous quarter, our North American export was buoyed by the relatively mild winter, dampening domestic LPG consumption and continued record-setting product levels. The quarter ending March '23 was a quarter with the highest export volumes on record for North America. Middle East export volumes for the quarter stood at about 10.3 million tons, down from the two previous quarters, but nonetheless, it reflected a record for our first calendar quarter. The start of the year is historically characterized by volatility in the freight markets. The market must absorb the post-holiday season while the LPG product market is historically in backwardation going into spring and the Lunar New Year celebrations in much of the Far East, resulting in a narrowing off and reduced trading activity. 2023 was no different. The East of Suez market saw the BLPG1, which is a benchmark for AG-Chiba rate, correct significantly downwards at the start of January. The impact through the first week of January was a fall of $41 per metric ton on the BLPG1 benchmark. This steep drop, however, was an overreaction after a quiet period, and it corrected towards the end of January as market players looked to lock away positions prior to the Lunar New Year celebrations. The activity in the market created upward momentum again in the freight rates. It must be kept in mind that the drop was from the high level of $119 per metric ton on the benchmark rate as the last quote in 2022, corresponding to a time charter equivalent in excess of $100,000 per day on non-scrubber ECO vessels. It fell to the lowest point in January, at the end of January where the benchmark rate bottomed out at $57 per ton, equal to a time charter equivalent of $33,000 per day, before climbing to $102 per metric ton in the second half of February or $85,000 per day, and then sliding back to $65 per metric ton or $45,000 per day at the end of the quarter. Thus, all in all, a strong growth this quarter despite the volatility and degradation, and the bottom of the market considerably stronger than what has been seen in the previous first quarters. Furthermore, with the West freight rate market in February being at a premium to the East, many vessels were positioned out of these markets and into the West. The month of February was mostly a story of steady improvement in the Eastern market, and March was largely a story of sales decline and deal activity. For the rest of the Suez market, it followed a similar trend to the East of Suez market. January was the most volatile month of the quarter, with the first half of January seeing VLGC operators competing for the East-only discharge voyages, choosing employment over freight discipline. It was only in the last week of January that the market regained a bullish sentiment. Although the Lunar New Year celebrations usually result in a quiet period for the VLGCs market, this year it was active. Product market fundamentals were positive and activity was strong. The advancements with the freight market truly taken off was the West having to absorb the China's ballasting in from the East and also when the relet tonnage were absorbed did the market see bigger jumps in the freight market. Likewise, we saw a rising market during October and November with a downward correction in December. March was acquired months in the spot market, somewhat explained by the market needing to digest a strong finish of February month, and many players leaving the trading desk for business trips to the Far East. Some hauling activity is likely also explained by the macroeconomic worries after the banking sectors levels. The disappearance of risk appetite by central banks around the world considering rectifying action softened the activity and freight rates gradually softened as well. By the time activity had again picked up at the very end of March, the VLGC3, which is the West to East index, was posted at $90 per metric ton on the Houston sea barrack, somewhat not seen since August 2022, still earnings being equal to $33,000 per day at the bottom with a top in February, reaching $162 per metric ton or $86,000 per day. Over the quarter, there has also been more activity on the time charter market. Despite 12 VLGC new buildings being reported delivered during January and March and scheduled new building deliveries for the rest of the year, there is seemingly a drive to ensure vessel supply from several market players. This is indicative of the positive fundamentals of the VLGC market, with seaborne trade increasing and vessel supply being absorbed by the inherent inefficiencies in the market. The positive market fundamentals for VLGCs therefore remains, as do the macroeconomic concerns, but as was seen during the banking turmoil of March however, the VLGC market is resilient as propane inventories continue to build in North America, and demand for LPG remains robust.

Theodore Young, CFO

Thanks, Tim. My comments today will focus on the recent capital allocation and then, our financial position and liquidity and our unaudited fourth quarter results. Again, you may wish to refer to the investor highlight slides posted this morning on our website. At March 31, 2023, we reported $148 million of free cash. As of yesterday, May 23rd, our free cash balance stood at a virtually identical level of $148.6 million, which is net of the $40.4 million dividend that was paid on Monday. In addition, I'd note that on top of our free cash, we also have $11.4 million in available for sale securities. A highlight of the quarter was the delivery of the Captain Markos, our dual fuel 84,000 CBM VLGC delivered to us on March 31 at the Shikoku shipyard in Japan. She was financed under a Japanese financing arrangement that we agreed in 2021. The tenure of that agreement is 13 years and we amortize $210,000 per month until year five and thereafter, $250,000 per month until maturity. The interest rate is 2.59%, including the credit adjustment spread plus one month term SOFR. Additionally, during the quarter, we voluntarily prepaid $15 million of debt under the Cresques Japanese financing arrangement. With a debt balance at quarter end of $663.6 million, our total debt to total book capitalization stood at 43.2%, and net debt to net total capitalization at 33.5%. Our leverage ratios were up marginally from last quarter due to the delivery of the Captain Markos, which added $56 million in debt on March 31. We have no refinancings until 2026, ample free cash, an undrawn revolver, and one debt-free vessel. Thus, we have a significant measure of financial flexibility. We currently expect our cash cost per day, that's OpEx, G&A, time charter-in cost, principal and interest for the coming year to be approximately $24,000 to $25,000 per day. Now, I'd like to turn to our chartering results and again would remind you to look at the slides posted this morning on our website. For the quarter, we achieved total utilization of 95.7% for the quarter, with a daily TCE, that's time charter equivalent revenue over operating days as we define those terms in our filings, of $68,135 yielding utilization adjusted TCE, or TCE revenue per available day of about $65,187. Spot TCE per available day, which reflects our portion of the Helios net profits of the Helios Pool for the quarter was about $68,019. Overall, the Helios Pool reported a spot TCE including COAs of approximately $78,530 per available day for the quarter. We note that we had previously indicated that a two-month lagged average is a good proxy for our chartering results. That guidance did not hold this quarter because of the volatility that Tim referenced, including a significant drop in rates from the end of December to the beginning of January. Daily OpEx for the quarter was $10,304 excluding drydocking-related OpEx. It was $10,528 per day including those amounts. Our OpEx increased somewhat sequentially as we experienced moderately higher cost per day for spares and stores, repairs and maintenance, and other miscellaneous expenses. Our time charter-in expense for the four time charter-in vessels increased to $7.2 million, reflecting the partial quarter of the HLS Citrine and the HLS Diamond. For the quarter that ends on June 30th, we expect total TCE-in expense of approximately $10.5 million, which will reflect full quarter contributions from the Citrine and Diamond. We expect the Crystal Ball, the fourth dual fuel VLGC to join our fleet to deliver during the quarter ending September 2023, and thus for our TCE-in cost to increase to $12.9 million for that quarter. On a fully delivered basis, we estimate total quarterly TCE-in expense to be $13.2 million to $13.3 million. All these numbers are provided for your reference in the investor highlight slides posted this morning. Our total G&A for the quarter was $7.5 million and cash G&A, which is G&A excluding non-cash compensation expense, was about $6.7 million. Since we incurred about $0.5 million in pre-delivery G&A expense, if we exclude that amount, our cash G&A was about $6.2 million. Since our G&A normally skews higher in the fourth fiscal quarter or the first calendar quarter because of certain statutory accruals that we must make, we were pleased with our G&A control this quarter. Our reported adjusted EBITDA for the quarter was $102.1 million, which is the highest quarterly EBITDA in our corporate history. To put that amount in context, our total EBITDA for fiscal 2022 was $161.1 million. Interestingly, the March 2023 quarter also represented the highest ever level of U.S. Gulf loadings, 267 liftings to be precise, underscoring the significance of U.S. exports to the global LPG trade. Turning to interest expense. Our cash interest expense, which we define as the sum of the line items' interest expense, excluding deferred financing fees and other loan expenses plus realized gain or loss on interest rate swap derivatives, resulted in a cash interest expense for the quarter of $7.1 million. With the addition of the Captain Markos and the reduced debt on the Cresques, we estimate that our total quarterly interest expense for the current quarter, that is the one ending June 30th, will be about $8.1 million, reflecting a full quarter of the Markos and the higher SOFR rates on our floating rate debt. Nonetheless, we continue to benefit from our hedging policy and the favorable pricing of our Japanese financing, leaving us with a current interest cost on a weighted average basis of 4.1%. Although we currently hold a roughly 86% economic interest in Helios, we do not consolidate its P&L or balance sheet accounts, which has the effect of understating our cash and working capital. Thus, we believe it's useful to provide some additional insight in order to give a more complete picture. As of Tuesday, May 23rd, the pool had roughly $8.7 million of cash on hand. Turning to capital allocation. With the payment of another $1 of regular dividend, we have now paid dividends in seven of the last eight quarters, totaling $8.50 per share or $343.3 million. When coupled with our $113 million self-tender offer and $115.5 million of open market repurchases, we've now returned over $570 million to our shareholders since our IPO. The significant dividend payments in the last year underscore our Board's commitment to a sensible capital allocation policy to balance its market outlook, operational and capital needs of the business, and appropriate level of risk tolerance given the volatility in shipping. We remain cautiously optimistic about our cash flow generation over the coming months. But we would be vigilant for changes in the global macroeconomic and energy market outlook.

John Hadjipateras, Chairman, President, and CEO

Thank you, Sherry, we're ready to take some questions.

Operator, Operator

Thank you. With the prepared remarks completed, we will now open the line for questions. Our first question is from Omar Nokta with Jefferies. Please proceed.

Omar Nokta, Analyst

Thank you. Hey guys, good morning and good afternoon. I wanted to ask about the state of the VLGC market. Obviously in your opening remarks, you talked about just the strength that we're seeing, but just wanted to maybe dive a little bit further into it. You mentioned the new building. They've been absorbed so far, but given year-to-date rates have averaged basically two times that they did last year at this time, with perhaps the new buildings just aren't enough. So, I just wanted to get a sense from you, kind of what's really been driving this market upturn that we've been seeing and the sort of relentless strengthening as we proceed through the year?

John Hadjipateras, Chairman, President, and CEO

Thanks for the great question, Omar. I'll let Tim have a go at answering it because he is right there on the front lines. I think I can introduce him by saying that last year, the expectation was a fear of the order book, but already by the end of last year we were seeing a stronger '23 than had been generally projected, and of course, we are pleased that it's continuing, but I'll let Tim give you a little more color as to how confident we are about it strengthening going forward with the usual caveats, of course, Tim?

Tim Hansen, Chief Commercial Officer

Yes, I mean, I think what has kept the market strong is the high production in the U.S., which was also supported by higher crude prices and LNG prices due to the war in Ukraine and the sanctions against Russia. We have seen more products coming into the market than we initially had expected. We've also seen the global economy recovering better than was expected after COVID, especially China has recovered better. With the high oil prices, we have also seen the demand for both during some of the winter as a substitution for LNG, which I think we've discussed on previous calls. In the second market as asset substitution, there has really been good pricing of the LPG due to the competitive pricing of LPG because of the high production of both crude oil and natural gas. With China recovering more quickly, the import demand in China has increased, giving the long-haul voyages, which have also absorbed a lot of ton miles compared to what the average has been. Voyage lengths and the additional tons have had some, so to speak, gone longer haul. We have yet to see the impact of the CII and the EEXI, and also the Panama delays have not been worse than what was normal, or if there is a normal for Panama delays. There still are some factors that we see, that could give some upward movement even if there is some downturn in the market. As I mentioned, going forward, we do see this reduction continue. We have seen more time charter inquiries also for longer periods where it has been initially shorter periods because people were nervous about the market being dull, but now we do see two and three-year time charters being concluded well at a decent level, so there seems to be a general perception that the market should hold up.

Omar Nokta, Analyst

Thank you. That's very helpful and that actually does touch on your last comments just about the time charter market has definitely a bit more liquidity. I was going to ask about that. You've generally in the past secured some vessels on medium-term charters, but recently over the past few years have become more maybe spot-focused. I know you extended the Concorde and course there. Maybe just on those two, were those options that were exercised by the charterer or were those new one-year contracts? And then, so that's the first question. And second is, as you mentioned about the two, three-year charters being done at decent levels in the market, are those interesting enough for Dorian to put on contract as well?

John Hadjipateras, Chairman, President, and CEO

Tim, I can address the last question. Yes, we are being somewhat conservative. We are securing some vessels, including new contracts with Chevron and an option with Equinor. Tim, please correct me if I’m mistaken.

Tim Hansen, Chief Commercial Officer

That's correct. Yes. One was options and the other one was an extension of the contract that expired. Then we have done the periods when we saw like in December be resolved. We like the shorter haul one-years with prompt deliveries wherever the charters could take advantage of the $100,000 per day market and then kind of hedge the risk overall. Now, we are seeing two and three years' time charters concluded through the pool to take a little bit of coverage there lately. We didn't do much over the winter, which is usually the time to the extent we didn't really see the value as there was too much nervousness still about the forward market of the LPG and the influx of the new buildings where we had a bit more bullish view, I think, than most of the time.

Omar Nokta, Analyst

Okay, got it. And sorry, just a final question or sort of final follow-up. It sounds like just from your comments that if you were to enter into a time charter, that would be via the pool; the pool would put the vessel on contract, you wouldn't necessarily pluck it out of the pool and put it away?

Tim Hansen, Chief Commercial Officer

Yes. The pool is structured so that longer-term deals are done outside the pool because that's more, you can say, that is more like a financial decision. Whether we consider one, two, and sometimes three-year time charters, it is a more spot trading strategy that these are deals that complement the U.S. spot trading strategy. So, that is done via the pool.

Omar Nokta, Analyst

Great. Well, thanks, guys. I'll turn it over. Congrats on the quarter.

Theodore Young, CFO

Thanks, Omar.

Sean Morgan, Analyst

Hi everyone. John mentioned in his prepared remarks some of the initiatives you are implementing to reduce carbon consumption and enhance operating performance to save on fuel and other costs. What are your expectations for the developments following IMO 2020? Do you think there will be a need to change propulsion systems or increase efforts towards carbon savings compared to the current state of the industry?

John Hadjipateras, Chairman, President, and CEO

Did you say change propulsion, you said?

Sean Morgan, Analyst

Yes, just kind of like the next iteration of IMO 2020, what are you sort of thinking in terms of where the industry is headed?

John Hadjipateras, Chairman, President, and CEO

If we had the answer, we would definitely share it. Right now, we're examining all options. We believe there isn't a straightforward solution yet. No one can guarantee that we'll be entirely wind-powered in the future. It seems to us that a combination of approaches is needed. We are managing our fleet effectively, utilizing a good blend of dual fuel, scrubbers, energy devices, and continuously discovering new technologies. These small improvements, even by 1%, 2%, or 3%, can add up significantly over time. Of course, there's been discussion around ammonia and methanol, and LNG has been the leading dual fuel option. However, for us, that hasn't made much sense given our trade. It’s tempting to consider LPG as the optimal fuel, yet the industry still hasn’t identified a single solution. Interestingly, this scenario helps maintain balance because it has made investors hesitant to build new ships, which is beneficial from a fleet balance standpoint.

Sean Morgan, Analyst

That's sort of interesting. So you think after we kind of absorb this current wave of VLGC newbuilds that are sort of on for delivery that we might see kind of a pause as the industry tries to take account of the best positioned for potential new rules coming down the pipe?

John Hadjipateras, Chairman, President, and CEO

Yes, we already see a pause, and after '23 because the shipyards are quite full and the orders that have been coming in. There are still orders coming in for VLGCs, but they are trickling in. I think that the bulges are in '23 and early '24, and then that's it. And it's a normal sort of replacement.

Sean Morgan, Analyst

Thanks a lot, John. That's it for me.

John Hadjipateras, Chairman, President, and CEO

Thanks, Sean.

Operator, Operator

And that concludes our question-and-answer session. I would like to turn the call back over to John Hadjipateras for closing comments.

John Hadjipateras, Chairman, President, and CEO

Thank you, Sherry. I want to express my gratitude to everyone for listening and for your questions. Have a good summer until we meet again. Goodbye.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.