Earnings Call Transcript - LPG Q1 2021

Operator, Operator

Greetings, and welcome to the Dorian LPG First Quarter 2021 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. 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.

Ted Young, CFO

Thank you, Symalee. Good morning, everyone, and thank you all for joining us for our first quarter 2021 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, our Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through August 11, 2020. 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 June 30, 2020, that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K 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.

John Hadjipateras, Chairman, President, and CEO

Thank you for joining us today. It has been a challenging quarter particularly in our mission to keep more than 500 seafarers safe, while facilitating crew movements whenever and wherever possible. With COVID conditions and regulations fluctuating around the world, we've taken advantage of windows to move people off and their replacements on to our ships, observing the protocols which are mandated and more when considered necessary or desirable. Our legacy has held the seafarer at the core of our business; indeed, we see seafarers as essential to the world economy, but during this pandemic, many of them have had to make sacrifices, some by extending their tour duty and others by not getting back to work when they're ready. We have increased our focus and intensity in our efforts to ameliorate these hardships. Following our strong performance last fiscal year, the New Year has begun positively, and we remain optimistic. Concern about forward U.S. production volumes has waned to a large degree. We continue to strongly believe in LPG as an environmentally friendly fuel. Though we have witnessed and are prepared for further disruption, we do not see permanent demand destruction. Dorian LPG stands strongly positioned to service our customers and create shareholder value with our young echo fleet, a strong balance sheet, and ample liquidity. Our Board continues to evaluate capital allocation options including dividends, acquisitions, debt reduction, and stock buybacks. The format of our call today is a little different from previous calls. John Lycouris will focus on a subject that investors have been increasingly interested in and sensitive to. He will brief you on the company's environmental and energy efficiency profile and activities as well as update you on our fleet and the world fleet. Fluctuating COVID conditions were not the only volatility we have been coping with during this quarter. And I'm introducing our CCO, Tim Hansen, who will review the seesaw of the spot market. Finally, Ted will present the quarter's financial results and recent events. John?

John Lycouris, CEO, Dorian LPG USA

Thank you, John. At Dorian LPG, the commitment to address environmental issues started back in 2012-2013 when the first newbuilding vessels were ordered. We have considered the marine industry's fundamental objective was to align with and advance the IMO initiatives regarding the promotion of environmentally sustainable shipping. Pollution control and prevention were part of the IMO's mission and vision statements. The IMO decarbonization strategy aims to reduce greenhouse gas emissions by at least 50% by 2050 when compared with 2008. The rest is built by growing LPG in 2014 through '16 were equipped with eco-engines, ballast water treatment systems, scrubbers, and LPG fuel features with the novel and implemented new technologies. Many of these features were integrated into the vessel design and engineering phases in advance with regulatory frameworks and real implementation. There were early responses in the advancement of sustainable shipping by managing emissions and pollution at the newbuilding stage. The growing LPG fleet has booked and attained a fleet average Energy Efficiency Design Index, EDI code of 5.96 grams of CO2 per ton mile versus a regulation requirement for the fleet of 7.72 grams of CO2 per ton mile. The first annual emission report was submitted by the entire shipping sector to the IMO data collection system for calendar 2019. Each ship over 5000 gross tons had to submit data, obtain a certificate of compliance and associate an International Energy Efficiency certificate. The data collected from each vessel is extensive and covers observed distances, fuel consumptions, engine running hours, and other environmental parameters. That data is used to monitor and report the CO2, SOx, NOx, particulate matter emissions produced by each vessel to assess each vessel's efficiency and performance. The data will regularly provide rolling average indexes and establish a good guide to vessel and fleet management over time. A main metric calculated from the data is the annual and quarterly reported Energy Efficiency Operational Indicator, EEOI, which shows the ground for CO2 emissions per ton mile for each vessel and for the fleet in total. The Average Efficiency Ratio, AER metric is derived from the vessels IMO DCS data and uses fuel consumption, distance traveled, and designed deadweight as parameters and calculates the carbon intensity in grams of CO2 per ton mile. This metric is elected by the members of the Poseidon Principles representing financial institutions in the maritime sector and, if applicable, to commercial ship lending facilities. The Dorian LPG fleet reported for calendar 2019, an EEOI of 17.7 grams of CO2 per ton mile and AER of 7.93 grams of CO2 per ton mile compared with the Poseidon Principles 2019 trajectory value for the same type of vessel and size of 8.6 grams of CO2 per ton mile. With these results, Dorian would qualify for a sustainability margin adjustment under the 2015 amended and restated facility as reported. The company is a signatory to the 2018 Global Maritime Forum's call to action in support of decarbonization and plans to actively pursue those objectives. Now, we'll review the technical update of the fleet. We have completed a hybrid scrubber retrofit installation on the vessel Constitution, including drydocking and first special survey. Eight vessels have now been retrofitted with hybrid scrubbers and completed drydocking special surveys during the last 12 months, including two vessels which were fitted with ballast water treatments. Dorian operates a total of 10 scrubber vessels, including two which were fitted during the 2015 delivery. We are programming for the retrofit of two scrubber vessels in the coming months to coincide with vessels' upcoming five-year special service and drydockings. Dorian remains committed to improving environmental emissions with the use of scrubbers achieving significant reductions in sulfur oxide emissions as well as black carbon and particulate matter emissions that normally are released by vessels burning low sulfur fuel oil. The current view of the sea fleet, according to Clarkson's, comprises 299 vessels of which about 10% is either installed or undergoing repairs. The order book currently stands at 34 vessels or about 11% of the VLGC fleet, with four vessels due to be delivered this year, 21 vessels expected in 2021, and nine vessels in 2022, including the 2022 deliveries are the three LPG newbuilding vessels confirmed by AW Shipping and ADNOC Wanhua joint venture to enter service on a 10-year LPG supply contract. There are currently 27 vessels in the fleet which are 25 years and older. With that, I finish my comments and I will pass it over to Tim Hansen, Chief Commercial Officer. Tim?

Tim Hansen, Chief Commercial Officer

Yes, thank you, John. Global Seaborne LPG volumes year-to-date held steady compared to last year, growing less than 1% year-on-year to a total of 53.8 million tons. Volumes during the second calendar quarter of 2020 totaled 26.8 million tons, which was a 2.7% year-on-year decrease. U.S. export growth has largely been counterbalanced by the decline in the Middle East volumes. Through the second quarter, American export volumes increased by 17.8% close to 22 million tons compared to the same time last year. On a quarterly basis, U.S. volume grew by 5.2% to 10.8 million tons in the second quarter of 2020 versus the same period in '19. Over the same period, however, the Middle East volumes decreased by roughly 8%. April marked the record month for global volumes, which recorded an all-time high of 9.8 million tons; not surprisingly, U.S. cargos also marked record activity with 74 cargos before stabilizing to an average of 65 cargos in May and June. Middle East cargos in April were also strong but declined significantly through to the quarter end. The Baltic market index on the cheaper route fell from 52 to 47 metric tons within the first decade of April. However, the increased U.S. and Saudi exports, combined with the China listings, the attacks on U.S. origin LPG, and the Chinese PDH buyers returning to the market after the extended Lunar New Year and COVID lockdown helped push the Baltic back up to $60 per ton at the end of April. In April, with the lockdown spreading, Europe saw the lowest number of VLGC partners in two years. On the back of reduced demand for petchems and plastics, as well as travel restrictions in Turkey, there was a reduction in auto-gas. In May, U.S. production and exports declined due to the oil and crude prices. However, the value prices held up, and with low crude prices, naphtha became more attractively priced than propane for the European crackers as well as steam crackers in Asia. The high exports from the U.S. and Algeria, along with increased Saudi exports in April hitting the Asian market, made an abundance of product available in Asia; this closed the arbitrage on the U.S. and reduced the U.S. liftings in May. Saudi exports announced in May also reflected the cost in crude and were significantly reduced from April levels. Lack of shipping demand both east and west started to create links and falling freight rates, which were accelerated by multiple trader relets. Newbuilding deliveries in Q1, as well as fewer vessels expected going into drydock, also impacted the length of the shipping market. The fall in rates was somewhat arrested by a simultaneous fall in the bunker prices; the spread of HFO and that of the fuel oil also narrowed partly due to the lower oil prices of the fuels, as well as more availability of low sulfur fuel oil. With Asia and Europe slowly opening up in the second half of the quarter, along with cautious optimism on forward demand and with less volatile crude oil prices making conservative prices in Asia possible, LPG started to replace naphtha in European crackers and towards the end of the quarter, also in Asian crackers. The PDH demand also started to increase, which helps the demand for shipping. Shipping rates through May and June dropped down to OpEx level, and some owners started to slow steam as well as ballast via cape. At the end of the quarter, drydocking again slowly picked up, and we witnessed the market turnaround. It took some time to clear the lens, however, and started to build on rates, which only started towards the end of the quarter. The impact of the increased demand as well as the stabilizing of U.S. production have been apparent into our July with a rapid recovery of the Baltic from low 20s at the end of June to low 60s at the end of July. On the supply side, concerns over U.S. production volumes have decreased; propane storage levels are healthy, standing 10% higher than this time last year, while production has averaged 4% ahead of last year, and last week's production was recorded 6% higher than in 2019. Given the wave of infrastructure additions completed during the first calendar quarter going forward, we believe that U.S. production may continue to surprise on the upside. On the demand side last quarter, Chinese LPG imports declined continued mainly due to the COVID-19 lockdowns, falling 8.7% year-on-year, while Indian, South Korean, and Indonesian demand grew significantly. Indian imports grew by 16% year-over-year to 3.8 million tons, while South Korean volumes grew by 7.9 year-on-year to 2.2 million tons, and Indonesian imports grew 29.1% year-on-year to 1.8 million tons. While propane-naphtha spread favored naphtha for most of the quarter, adversely impacting industrial LPG demand strength, it has more recently turned in favor of the LPG cracking economics. Thus we remain quite constructive on market fundamentals at this time, but we acknowledge the potential ongoing disruptions. With this, I'll pass it on to Ted.

Ted Young, CFO

Thanks, Tim. My comments today will focus on our financial position and liquidity as well as our unaudited first quarter results. For the discussion of our first quarter results, you may also find it useful to refer to the investor highlight slide posted this morning on our website. We finished the quarter with nearly $158 million of free cash and short-term investments, which reflects an increase of about $94.6 million from last quarter's $63 million. We generated $34.4 million of that from operations, reflecting the strong chartering results realized during the first part of the quarter, $26.8 million from the two debt transactions that we completed, as well as $33.3 million of cash transferred from our restricted cash account as a result of the implementation of the new financial covenants in our 2015 amended and restated facility. On the last point, on July 14, 2020, we received the final approvals required to implement a new set of covenants, which among other things, eliminate the interest covenant, reduce the minimum cash requirement to $27 million from $40 million, and eliminate the upward ratchet mechanism on the shareholders equity covenant. In return for these improvements, we did agree to a modestly higher loan covenant of 145% versus 135%. There was a tremendous amount of headroom under that particular covenant as we're currently well over 200% as it relates to this facility. We're extremely pleased with the all-around improvement in terms that we received under the 2015 AR facility which recognized our strong performance through the cycle and rewarded us with improved financial flexibility. Importantly, in July, we also gave three months' notice to the lessor of the Captain John that we plan to repurchase the vessel in October by repaying the debt outstanding at that point about $18.3 million and applying the seller's credit from the inception of the transaction of $26.6 million. We completed the payout of the Japanese financing arrangement for the Captain John, which carries a 56% interest rate; we realized annual savings of $1,447,500 in principal and about $1.1 million in interest and other commissions. These savings equate to about $300 per fleet day. That's calendar days plus TCN days for sake of clarity. Turning to our first quarter chartering results, we achieved a total utilization of 82.3% for the quarter with a daily TCE, that is TCE revenue over operating days as those terms are defined in our filings, of $41,249 yielding utilization adjusted TCE or TCE revenue per available day again available days according to our filings of about $33,935. We estimated industry utilization for the quarter at about 87% which reflected the slowdown in industry activity that Tim's already touched on following some fairly high utilization in April and May. Spot TCE per available day, which reflects our portion of the net profits of the Helios pool for the quarter, was $34,535. Also, the overall Helios pool reporting as an entity achieved a spot TCE including COAs of approximately $37,000 per available day for the quarter. Our reported chartering results were reduced by about $829 per available day due to the reallocation of full profits as a part of the periodic assessment of relative speed and consumption of the pool members. In addition, the Helios pool had a small exposure to ZenRock, the Singapore-based commodity trader that has filed for insolvency, and we recognized the pro-rata impact on our results from this quarter. Daily OpEx for the quarter was $8,295 a day, excluding amounts expensed for drydocking; it was $86.86 including those costs. On a sequential basis, we saw a modest decrease in our OpEx from last quarter's $8,556 a day. Again, that number excluded drydocking costs. Our total G&A for the quarter was $11.3 million and cash G&A, i.e., that's G&A excluding non-cash compensation was about $9.4 million. This amount included annual employee bonuses awarded during the quarter in the amount of $4 million which means that normal, in quotes, G&A was about $5.4 million. This number was a little higher than we would normally expect as we incurred about $300,000 of G&A costs related to our transition from an emerging growth company. As we completed our first fully integrated audit this past fiscal year just ended, we do have to reduce these costs going forward. Our time charter expense per day was slightly elevated because we had 11 days overlap between the lower prime and the Astomos Earth. Our reported adjusted EBITDA for the quarter was $41.1 million. To give some indication of the chartering market environment, we generated roughly 90% of our EBITDA during the first two months of the quarter. We look at cash interest expense on debt as the sum of the line items of interest expense, excluding deferred financing fees and other loan expenses and realized gain/loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $6.9 million, which was certainly below the guidance we gave in our remarks at the end of last quarter. We continue to benefit from our hedging policy and the favorable parsing of our Japanese financings, leaving us with a current interest cost fixed hedged and a small floating piece of 4.11%. That will decline a bit further after we complete the payoff of the Captain John in October. As a reporting matter, I'd like to point out that our realized and unrealized gain and loss on derivatives as reflected on the face of our P&L also include the effect of our FFA portfolio. The calculation of EBITDA on our filings adds back only the interest on the realized gain/loss, not the FFA piece. John's already touched on our drydocking program. But I would add that our current financial position allows us to finance whatever drydocking schedule best supports charterers. Our cash flow and liquidity remain strong since quarter end through to July 31, 2020, our restricted and unrestricted cash and short-term marketable securities is up at about $160 million. Although we currently hold a 76 plus percent economic interest in Helios, we do not consolidate its balance sheet accounts, which has the effect of somewhat understating our cash and working capital. Thus, we believe it is useful to provide some additional insight in order to give a more complete picture. As of Friday, July 31, 2020, we deployed roughly $20 million of cash on hand, reflecting the fact that we paid the distribution at the end of the final week. With an overall liquidity and capital structure position as well for whatever rate environment we face in the coming months, we believe that allows our company to make capital allocation decisions from a position of strength. As John noted, we've elected to deleverage, which we believe represents an excellent use of shareholder funds as it permanently reduces our cash costs per day, particularly with the backdrop of some global uncertainty. We still have over $50 million remaining under our share buyback authorization, and we remain interested in the creative growth opportunities that meet our risk/reward criteria. We will continue to be prudent in deploying cash, but our financial position allows us to act quickly on meaningful opportunities as they arise. With that, I'm going to turn it back to John Hadjipateras.

John Hadjipateras, Chairman, President, and CEO

Thanks, Ted. We're happy to take some questions.

Operator, Operator

And our first question comes from the line of Omar Nokta with Clarksons Plateau Securities. Please proceed with your question.

Omar Nokta, Analyst

I just want to ask, obviously the market has gotten much stronger here over the past six, seven weeks. And we've talked a good amount about, and it was in the release, the fact that the propane-naphtha spreads have reverted back to kind of where they were prior to the disruptions. But we haven't really seen that reversion back where regional prices between propane here in the U.S. versus Europe and the Far East were wide; they're still fairly tighter. But despite that, rates have strengthened and now reached 50,000 a day plus on the spot market. I guess, are you surprised at just how strong the market has gotten without those differentials in place? And then, two, does that make you nervous or cautious on the outlook?

John Hadjipateras, Chairman, President, and CEO

Omar, we are always careful and aware, but I believe the team has a solid response to your question about the generic ARB situation. You're asking how pay rates are justified when on paper it doesn't appear to be an ARB. Tim, would you like to address that?

Tim Hansen, Chief Commercial Officer

Yes. Firstly, the arbitrage isn't extremely wide, but we've observed that petrochemical buyers in Europe have returned to the market. While the arbitrage may not be as robust as it previously was, it has been sufficient to support the shipping activity. We experienced a quick turnaround when we sold the remaining inventory in Europe, which coincided with increasing demand for cash. This created a surge where many were eager for those shipments. Additionally, the market's return has involved more discipline from owners, especially when rates fell to operational expenditure levels, which led to slow steaming and a cautious approach to fixing. A sudden shift may have caught some off guard, contributing to a rapid recovery in the market. The dynamics often fluctuate based on ship availability. The shipping imbalance perhaps should not have dipped below operational levels, as the market wasn't as oversupplied as it appeared; however, negative market sentiment drove the rates down significantly.

Omar Nokta, Analyst

Appreciate. Thanks for that color. We've seen obviously and we've been seeing reports that and then looking at the fixtures, that vessels are being fixed, five, six weeks ahead of time. In the second quarter where we had the COVID-19 disruptions and a slowdown and just overall trade, utilization was 80% as you highlighted for the spot fleet. How are you guys thinking about where utilization is heading in the third quarter? Can you see it recovering back to that 90% plus it had been through the prior quarter?

John Hadjipateras, Chairman, President, and CEO

Yes. Again, I'll defer to Tim.

Tim Hansen, Chief Commercial Officer

Definitely. Of course with tighter market and higher rates and facing further ahead, the utilization is coming back. I think also the way that you look at these 80% is what was booked at the end of June. If you look at like operational idling time, it was still in the low 90s at that point. So, I think, but of course, the market will tighten, and it will be less when the market is at that stage.

Omar Nokta, Analyst

Okay. And just to make sure I heard you correctly, you're saying that by the end of June, it was back into the low 90s?

Tim Hansen, Chief Commercial Officer

No. I'm saying that the 80% that is calculated here is the financial idling time which doesn't change what was fixed into June or July at that time.

Omar Nokta, Analyst

Okay. And then, Ted, on the financial side, clearly you guys have built up a lot of cash and liquidity, and I didn't want to ask about the sale leaseback on the Captain John MP. You exercised the option and just want to make sure I understand it correctly, you're basically going to give the owner $18.3 million of cash; they will also take the $26.6 million of restricted cash, and so that totals somewhere in the mid 40s. Does that to look to be kind of the carrying value of the shift, at least on your financials? What are your thoughts or plans with this vessel going forward? Is it one that you want to own and just have it all cash? Will you refinance, or do you intend to sell it?

John Hadjipateras, Chairman, President, and CEO

For the moment that’s our thoughts, the ship is going to be all cash. But I think Ted wants to clarify a little bit from your question.

Ted Young, CFO

Yes. Just to be clear, it's a seller deposit on margin, and there is no restricted cash. So basically, all that's going to happen is, we're going to pay them $18.3 million. And they notionally kept the deposit at the time. So we'll pay off the $18 million, and that's all that will happen. And then, as you point out, it'll be debt-free. And as John just touched on, that gives us a lot of flexibility to do whatever we want with it.

Omar Nokta, Analyst

Okay. And then the plan, I guess is to have a bit more flexibility. In exchange for the $18 million of cash, you'll just effectively have a debt-free vessel?

John Hadjipateras, Chairman, President, and CEO

Debt-free ship.

Ted Young, CFO

You are correct. It lowers the breakeven a bit and

Omar Nokta, Analyst

Okay, cool. Well, I appreciate the market color and financial color. I'll leave it there. Thanks, guys.

John Hadjipateras, Chairman, President, and CEO

Thanks, Omar. Appreciate it. Take care.

Operator, Operator

And our next question comes from the line of Sean Morgan with Evercore. Please proceed with your question.

Sean Morgan, Analyst

Hey, guys, so going into this sort of COVID disruption, it looks like you spent a fair amount of focus on sort of building the war chest of cash. I'm reticent to say that we're sort of through COVID, especially in light of potential second waves, but with the rates market improving for VLGCs, possibly lapping some of the worst parts of the market disruption. How are you starting to think about sort of the capital deployment? I think $50 million left on the authorization with the focus need to continue to be leveraging potentially buy back or what do you guys thinking sort of the light of the changing market?

John Hadjipateras, Chairman, President, and CEO

Ted, do you want to take that?

Ted Young, CFO

Sure. I think the overall answer is that it's probably a bit of everything. I don't think anyone should infer anything from the fact that we allocated a significant amount of surplus cash towards paying off John. This doesn't imply that our buyback activity should be limited. It seemed like a wise decision at the time, and we stand by it. Moving forward, our actions will depend on the specific circumstances. Things appear to be looking positive right now, as Tim outlined, and as our confidence in the near-term outlook grows, we may consider buybacks based on the stock price's performance. We might still pay down some debt, but we are pleased with our current position. We will also evaluate any other opportunities that may arise regarding fleet expansion or other options. Ultimately, the goal of this financial flexibility is to provide us with complete options, and that’s what we’ve accomplished. I'm not trying to avoid the question; rather, it will be dependent on the situation at hand.

Sean Morgan, Analyst

Okay. And then I think you have two commitments right now remaining for the scrubbers. And you did obviously a long preamble on ESG; you believe the scrubbers are an important part of your ESG focus. But is there any thought now with the lower spread, high sulfur to low sulfur fuel oil, and most likely not like a massively resurging steel demand, especially in light of probably more work from home and other changes? Would you consider trying to delay those scrubbers or cancel a scrubber? Is there any contract optionality there or you just going to continue to do that one possible?

John Lycouris, CEO, Dorian LPG USA

Yes, there is flexibility, and we will proceed whenever it’s appropriate. We have several ships that need to be drydocked and undergo special surveys, and we will aim to combine these efforts. While this may extend the duration of our work, it remains a beneficial solution both environmentally and in terms of fuel efficiency. We recognize that the price spreads are currently wider, but as a percentage, they are still about 20% cheaper than the compliant fuel available today when purchasing high sulfur fuel oil. This spread may fluctuate in the future. We are aware that fuel oil is being utilized to produce and refine additional low sulfur fuel oil. However, at some point, we may see these spreads alter again. It’s a dynamic market as we observe it.

Sean Morgan, Analyst

Okay. So even right now, those are economically attractive. All right. Thanks, guys. That's all.

John Lycouris, CEO, Dorian LPG USA

Thank you, Sean.

Operator, Operator

And we have reached the end of the question-and-answer session. And I will now turn it back over to John Hadjipateras for any closing remarks.

John Hadjipateras, Chairman, President, and CEO

Thank you very much. And thank you all for coming to the call and stay safe, and see you next quarter. Bye-bye.

Operator, Operator

And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.