Dorian LPG Ltd. (LPG) Earnings Call Transcript & Summary

Welcome to the Dorian LPG Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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, Daryl. Good morning, everyone, and thank you all for joining us for our third quarter 2023 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; 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, 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 December 31, 2022, 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 could cause actual results to differ materially from those forward-looking statements. Finally, you may find it useful to refer to the investor highlight slides posted this morning on our website. With that, I'll turn over the call to John Hadjipateras.

Thank you, Ted. Good morning, and thank you for joining Ted, Tim and me to discuss our third quarter financial year 2023 results. John Lycouris isn't with us this morning because he's having knee surgery. John Lycouris has contributed a slide you will find in the deck with much interesting information, which I think you will may -- want to note and take and we will follow with. We will have some remarks read by -- from him at the end of our presentation and for any questions you may have. After me, Tim will present and then -- sorry, after me Ted will present and then Tim. Including the $1 a regular dividend announced today, we will have returned over $500 million to shareholders since our IPO. Our Board has focused on returns to shareholders while remaining commercial -- retaining commercial flexibility and ensuring a strong balance sheet. We are still investing in our business as evidenced by the 4 vessels joining our fleet in this calendar year and our commitment to the installation of 3 additional scrubbers. For the quarter, our EBITDA was $76.2 million, and net income was $51.3 million. The net income is the second highest in our corporate history. Our net debt to capitalization was about 34%. And Ted will give you details and of course, answer any questions you may have on our quarter's financial results. Global LPG market fundamentals strengthened in 2022 with increased volumes from both major export basin and more frequent cargo routes to Europe. Global exports increased 4% this past quarter and are up 6% for the year with support primarily from North America. Total exports for 2022 increased to $117.5 million from 110.9 million tonnes in 2021. U.S. exports increased 6% or 700,000 metric tons from the third calendar quarter, supported by favorable arbitrage economics, which persist today. 2022 U.S. volumes were up 3%, an increase of 1.3 million tons from 2021. Middle East export volume showed continued growth despite maintenance in some terminals in the beginning of December. Annual volumes out of the region are up 18%, increasing by 6.4 million tons from 35.9 million tons in 2021 to 42.3 million in 2022 driven by reversals to OPEC plus production cuts. Freight rates were this past quarter, underpinned by a strong arbitrage and increased waiting time in Panama. Rates fell in early December as can now waiting ease and some terminals in the Middle East underwent maintenance and demand in Asia was subdued. We are now seeing a rapid reversal and an increase in freight rates in both basins. On the shore side, Dorian's operation, we continue to work hard to ensure the well-being of our crew especially our Ukrainian and Russian sea fares and their families. On the performance side, we have been very focused on our strategy to comply with the 2023 IMO emission regulations, the EEXI and the CII. We have built out dashboards and forecasting tools that assist our commercial team in optimizing our utilization and achieve a solid CII score for each vessel in the pool. Our team has spent the past 2 years preparing for these regulations and see this year as a turning point and a journey to decarbonize shipping. We will continue our research efforts and installations of various energy-saving devices and premium paints to reduce consumption cost and carbon footprint. Looking ahead, at the market estimates for U.S. exports point to further growth in '23 and '24. And its January short-term outlook report, the EEIA said it now estimates that U.S. LPG exports will grow 15.9% in 2023 year-over-year. This is up from their October estimate of $11.3 million in 2023. The U.S. is now producing well over 100 million tons of LPG a year with 2022 numbers coming in at about 106 million tons. I'll hand you over to Ted now for his remarks.

Thanks, John. my comments to be will focus on the recent capital allocation events, our financial position and liquidity and our unaudited third quarter results. At December 31, 2022, we reported $129.8 million of cash which was net of the $40 million dividend payment made at the beginning of the month. On January 30, 2023, we had roughly $165 million in cash with the increase from December 31, reflecting the January distribution from the Helios Pool. Also, as John mentioned, we will pay another $1 per share is an irregular dividend of roughly $40.3 million in total of dividends on or about February 28, 2023, to shareholders of record as of February 15, 2023. The irregular dividend announced this morning reflects the strong rate environment and our resulting cash flow. Once paid at the end of February, Dorian will have paid over $300 million in dividends and have repurchased nearly $229 million in stock, representing 18.8 million shares which together totals nearly $530 million in capital returned to our investors since our IPO in 2014. Our Board continues to take a pragmatic quarter-by-quarter review of the company's performance, the LPG chartering market environment and other macroeconomic and industry factors to determine whether to pay and if so, how much in dividends. With a debt balance at quarter end of $635.6 million, our debt to total capitalization stood at 43.2%, and our net debt to total cap is, of course, even lower given our large cash balance. Moving into this calendar year, we will take delivery of our dual fuel new building from Kawasaki at the end of March as well as 3 long-term time chartered in dual fuel ships, representing nearly 20% growth in our commercially managed fleet. With these additional vessels, our cash cost per day will increase to $24,000 to $25,000 a day, but I would also note that these vessels offer higher earnings potential given their size, fuel efficiency and dual-fuel optionality. For the discussion of our third quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. Turning to our third quarter chartering results, we achieved a total utilization of 97.8% for the quarter with a daily TCE per operating day as those terms are defined in our filings, of 52,768 yielding a utilization adjusted TCE of about 51,630, that again is TCE per available day. Spot TCE per available day, which reflects our portion of the net profits of the Helios Pool for the quarter was about $52,583. Also, the overall Helios pool reported a spot TCE, including COAs, of approximately $57,000 per available day for the quarter. You will note that these results are somewhat correlated with the average Baltic rate recorded on a 2-month lag. As many investors and analysts look to model the business, we would note that a 2-month lag Baltic is more in line with the actual cycle of the business. Our team books voyage is about 30 days out and the average load to discharge i.e., one-way age is about 30 days. It is also worth reminding the investment community that the published Baltic rate assumes 100% utilization and is based only on the Ras Tanura-Chiba route. Turning to the cost side. Our daily OpEx for the quarter was $9,739 which is up marginally from the quarter ended September 30, 2022. The Crew costs, which include crew travel, appear to have found a new normal as crew cost per day has been relatively stable over the last 3 quarters, and spares and stores were actually down sequentially. Repairs and maintenance and lubricant costs drove the increase this quarter. Our time trigger in expense for the 2 TCM vessels remained stable at $5.2 million. Total G&A for the quarter was $6.9 million and cash G&A is G&A excluding noncash compensation expense, was $5.9 million. Included in the $5.9 million is approximately $200,000 that we spent to provide accommodation and food to the families of our seafares affected by the war in Ukraine, we also recognized about $250,000 of performance-based bonuses for some employees in the quarter. Thus, our core G&A for the quarter was about $5.5 million, which is consistent with our expectations. Our reported adjusted EBITDA for the quarter was $76.2 million, up sharply from the prior quarter's $46.2 million. We look at cash interest expense on our debt as the sum of the line items, 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 $6.6 million. Our hedges saved us $1.4 million in cash interest this period, and we recently extended our existing hedge profile to ensure that the 2022 debt facility is 80% hedged until its maturity in 2029. Although we currently hold an 87.5% 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 used to provide some additional data in order to give a more complete picture. As of Monday, January 30, 2023, the Helios Pool held $20.5 million of cash on hand. Page 5 of the investor highlights materials outlines the economics of our scrubber investments, and clearly, this investment has been valuable for our shareholders. Of note, the total scrubber cost savings have now paid back the entire initial investment. In addition, as John noted, we have committed to 3 additional scrubbers and I would note that the installed cost of these 3 scrubbers will be roughly 2/3 of the cost that we incurred on the first 10 retrofits. You also note that our investments in performance monitoring have also proven their value as both our AER and EEOI have on the basis of unaudited figures for calendar year 2022 falling by mid-single-digit percentages versus the prior year. Thus, Dorian's contribution to a cleaner environment continues unabated. The significant irregular dividends in the last 12 months underscore our Board's commitment to a sensible capital allocation policy, the balances market outlook operating and capital needs of the business and appropriate level of risk tolerance given the volatility in shipping. We also continue to evaluate potentially interesting investment opportunities that may represent attractive risk-adjusted returns. With the continuing solid freight market backdrop, we remain cautiously optimistic about our cash flow generation over the coming months. With that, I'll pass it over to Tim Hansen.

Thank you, gentlemen. Good day, everyone. Thanks for filling in. The October to December 2022 quarter saw increased LPG export as well as import demand, which translated into a current freight market. North American export was void by regulatory winter, dampening domestic LPG consumption and continued record-setting production levels. The quarter is often characterized by seasonality as Asian importers tend to stock pilot of the winter and 2022 was no exception. North American exports set a record for exports for the quarter, while South Korea and Japan posed a strong import level, also helped by demand for the [indiscernible] to navigate the cold winter. Middle East export volumes were slightly down compared to previous quarter, but nonetheless, it was a record high fourth quarter exports. The East of Suez market saw the BLPG1, which is the benchmark for [ cheaper rate ], continued the upward trend from the quarter prior despite a brief low during the Golden Week holidays in the Far East. Several delays at key discharge ports in India and in the Far East saw considerable tonnage during October and November. Meantime, market players also had to plan with long lead times because the West market was seen fixing in those 5 to 6 weeks in advance of the low delay hands. The result of the favorite product market of solving tonnage discharge port and navigating long lead times was a bullet market in October and November. On the 21st of November, we saw a record high BLPG1 posted at $148 per metric tons. December was relatively quiet as a seasonal back rotation in the market impacted the product market and a significant downward correction was seen in the second half of December. For the rest of Suez market, it was likewise -- the rest of Suez likewise saw a rising market during October and November with a down mark correction in December. The rest of the Suez market was also impacted by delays at this charge for, but also had to contend with increasing delays for transiting the Panama Canal. These delay factors to vessels resulted in market players having to secure tonnage well in advance of the lake cans. The Western Suez market did not climb at the same pace as these market, partly due to the fact that shipowners being enticed to lock in firm earnings and longer voyages. Which increased the competition for cargoes known to be destined for the Far East discharge ranges. By September, a weakening in arbitrage, as you can see in our investor deck online, due to the forward delivery prices of product in the Far East, the activity levels in the last few trading days of calendar. This resulted in a significant grade market reductions. The East and West market rates indicated a well-balanced shipping market supported by strong fundamentals, whereas in the summer, the balance shipping market demonstrated that the VLCC market could weather seasonal summer doldrums, the early into demonstrated how strong the market will rise when shipping demand increased. The positive fundamentals of the market has been deemed over the quarters. This remain, however, the market players attempting to understand the impact of the new COVID-19 normal in China and whether a world recession is looming in the horizon. Despite the present external risk, propane inventories continue to build in North America, and demand for LPG remains robust. Also, there is reasonable optimism of increasing demand for LPG in China once a hard landing of sudden opening is handled with more PDH truly coming onstream and industry operating on more and the industry operating on a more stable basis. With that, now I hand it back to John.

Yes. Thank you. As I said in the beginning, I think, we'll have the remarks briefly that John Lycouris had prepared briefly read now, and then we'll go back for questions. Thank you. [ Peter ]?

Thank you. In John's absence, I'll give everyone a brief on scrubber operation results and our near-term ESG strategy. Starting with our scrubber fuel spreads for calendar fourth quarter '22, our third quarter '23 widened between LSFO and HSFO, benefiting our scrubber vessels with improved voyage economics averaging about $5,831 per day, net of our scrubber OpEx costs. The realized average cases were about $246 per metric ton of HSFO consumed by our scrubber vessels versus the cost of LSFO. The hybrid features of our scrubbers provided additional upside for all ECA and SECA areas of trading. In addition, scrubbers reduced not only stocks but also significantly reduce particulate matter and black carbon and we feel are necessary precursor for putting future carbon capture systems on our vessels. Pivoting to our ESG strategy. Our immediate focus is on our fleet's IMO mandated EEXI and CII rating, which will come into effect in stages in 2023. We are reducing emissions and improving commercial performance by installing various energy-saving devices or ESDs. We have also implemented real-time data monitoring, as we mentioned before, with sensors that track performance and optimize onboard operations and voyage completion. We combine this with robust crew training efforts, which we feel are paramount to getting this done. In addition, we have contracted 3 additional scrubbers, which will be installed in the next 2 quarters on 3 of our vessels, which have upcoming dry docks. Looking ahead, we are investigating the potential for carbon capture and storage onboard our vessels. We're continuing to improve our energy efficiency, onboard our vessels with a focus in vessel performance and emissions improvement, and we're continuing to study technological innovations and advances as they mature and implementing them as soon as we can. With that, I'll pass it back to our Chairman.

Thank you. Thank you. And Daryl, we can go to questions now. Thank you very much.

Thank you. With the prepared remarks completed, we will now open the line for questions. [Operator Instructions] Our first questions come from the line of Omar Nokta with Jefferies.

It's a nice solid quarter obviously, and it looks like more is on the way here, especially given what we've seen in the spot market here in the past week or so. [indiscernible]. Sorry, John. What was that?

I said from your mouth to God's ear. I'm sure God is listening to the analysts, right?

He's looking happily on you. I would say that the dollar dividend you declared, I think, clearly, you're conditioning us to -- or I think I'm being conditioned to expect these payments and I know you're still viewing them as irregular. And you mentioned on the -- in your opening remarks that the Board takes a more pragmatic approach to the payout each quarter. But how should we think of Dorian's use of cash here as we think about the near to medium term? Are dividends the #1 priority?

No. They are not, our capital allocation is our #1 priority. And our -- the way we think about the dividends are as part of a whole. And which includes -- it has included in the past, buybacks and now they could include them again. Dividends, obviously, and reserves for a rainy day and for investment so -- including renewal. So up until now, we've -- as you know, we've invested on only 1 new ship. We feel that we're covered with the 3 double fuel ships that we've chartered in, plus the new building that we're taking in for ourselves. We've got -- we're investing a little more in the scrubber because we feel that, that has given us good returns, and we think the prospects are good. So while dividends are right up there, I think you asked specifically are the first priority, and I think we should say that there are equal weight in -- that's how we view them, equal weight within every quarter capital decision allocation, which is kind of long term and medium term.

Okay. That's fair. I appreciate that color. And maybe you did mention the investment and you've got the 1 new build, the 3 charter-in and at this point, it looks like you're deploying capital on those 3 scrubbers. Just out of curiousity, you mentioned that those will carry a cost. That's about 2/3 of the initial program a few years ago. I think generally, people have just assumed that it would be more costly today. And so I just want to get a sense of what makes it cheaper this time around?

I think the production really because you're right, there should be more expensive. But if you compare it to the first time we put scrubbers on board, which was in our initial 2 new buildings, it's not only -- it's probably 1/3 of the cost, not just 1/3 of the -- 1/3 off of. So they're just -- they keep coming down. I'm sure there's -- they will level off somewhere, but they're more efficient. They're more compact, easier to install. And that's it really. I think, Ted, do you want to add to that?

I mean I think the other thing is there was some costs when we initially did the first retrofit some basically, I'm not talking of that, but like high-tech MRIs of the structure to see exactly what it puts stuff Well, now we know the plan of the ship. So some of that we've avoided, and we've gotten better at installing them, our piece of it and the yards have gotten better, too. So it's all the learning curve, I think, like John said.

Okay. Yes. And is it -- what do you think in terms of timing? It sounds like -- I think Peter had mentioned in the second and third quarters, you expect to complete them. What's the expected sort of off-hire time for those ships?

We've modeled for the time being 30 days. That's what it's worked out to historically. We've been a little bit better than that, 27, 28 days but we've assumed 30 for our internal modeling purposes.

Okay. And that will happen anyway with the surveys that are due?

It would, except it's worth remembering, Omar, that when we normally do our special surveys, we actually are only in dock for 15 days. So it takes sort of an additional 2 weeks to install the scrubber. So we normally do not have 30-day regular dry dockings.

Okay. Got it. And then maybe just one more. And I guess maybe a bit more bigger picture just on what we're seeing in the market. You referenced this earlier in the commentary. And maybe Tim, just what's been going on, I guess, with the spot market here recently? It kind of came into the year a bit softer, trended a little lower. It looks like the first couple of weeks. And then here, maybe over the past week or so we've seen a big jump. Just wondering what's driving that uptrend here recently?