Dorian LPG Ltd.

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.

Thank you, Shamali. Good morning, everyone, and thank you all for joining us for our first quarter 2021 results conference call. With me today are John Hajbateris, Chairman, President, and CEO of Dorian LPG Limited, John LaQuiris, Chief Executive Officer of Dorian LPG USA, and Tim Hansen, our Chief Commercial Officer. As a reminder, this conference call webcast and 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 expressed 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 Hajibateris.

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 have taken advantage of windows to move people off and their replacements onto 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 of 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 LaCourse 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 Hanson, who will review the seesaw of the spot market. Finally, Ted will present the quarter's financial results and recent events. John?

Thank you, John. At Dorian LPG, the commitment to address environmental issues started back in 2012-13 when the first new building vessels were ordered. We had 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. Currently, the IMO decarbonization strategy aims to reduce greenhouse gas emissions by at least 50 percent by 2050, when compared with 2008. The vessels built by Dorian LPG in 2014 through 2016 were equipped with echo engines, ballast water treatment systems, scrubbers, and LPG as fuel features, which were novel and implemented new technologies. Many of these features were integrated in the vessel design and engineering phases in advance of regulatory frameworks and rule implementation. There were an early response in the advancement of sustainable shipping by managing emissions and pollution at the new building stage. The Dorian LPG fleet as built has an attained fleet average energy efficiency design index, EDI called, of 5.96 grams of CO2 per ton-mile, versus a regulation requirement for the fleet of 7.72 grams CO2 per ton mile. The first annual emission report was submitted by the entire shipping sector to the IMO data collection system for the calendar 2019. Each ship over 5,000 gross tons had to submit data, obtain a certificate of compliance, and was issued an international energy efficiency certificate. The data collected from each vessel is extensive and covers, among others, observed distances, fuel consumptions, engine running hours, and other environmental parameters. That data is used to monitor and report the CO2, shocks, NOx, particular matter emissions produced by each vessel and to assess each vessel's ship efficiency and performance. The data will regularly provide rolling average indexes and establish a good guide of 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 grams of CO2 emission per ton mile for each vessel and for the fleet in total. The average efficiency ratio, AER, metric is derived from the vessel's IMO DCS data and uses fuel consumption, distance traveled, and design dead weight as parameters, and calculates the carbon intensity in grams of CO2 per ton mile. This metric is selected by the members of the Poseidon Principles, representing financial institutions in the maritime sector, and is applicable to commercial ship lending facilities. The Dorian LPG Fleet reported for calendar 2019 that an EEOI of 17.7 grams of CO2 per ton mile, and an AER of 7.93 grams of CO2 per ton mile, compared with the Poseidon Principles 2019 trajectory value for the same type of vessel in 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 pursue actively 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 dry docking and first special survey. Eight vessels are now retrofitted with hybrid scrubbers and completed dry docking 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 their 2015 delivery. We are programming for the retrofit of two scrubber vessels in the coming months to coincide with vessels' upcoming five-year special surveys and dry dockings. Dorian remains committed to improving environmental emissions, which, with the use of scrubbers, achieves significant reductions in sulfur oxide emissions, as well as black carbon and particulate matter emissions that normally are released by vessels burning low sulfur QLOF. The current DOJC fleet, according to Clarkson's, comprises of 299 vessels, of which about 10% is either idle in storage 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. Included in the 2022 deliveries are the three LPG-fueled new building vessels, VLGC orders, which were announced by AW Shipping, an ad hoc one-wire joint venture aimed to service 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?

Yeah, thank you, John. Thank you for the day. Global seabourn 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 tonnes. 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 decline in Middle East volumes. Through the second quarter, American export volumes increased by 17.8% to close to 22 million tons compared to the same time last year. On a quarterly basis, U.S. volume grew 5.2% to 10.1%. 10.8 million tons in the second quarter of 2020 versus the same period in 2019. Over the same period, however, the Middle East volumes decreased by roughly 8%. April marked the record months for the global volumes, which recorded an all-time high of 9.8 million tons. Not surprisingly, U.S. cargoes also marked record activity with 74 cargoes before stabilizing. to an average of 65 cargoes in May and June. Middle East cargoes in April was also strong, but declined significantly through the quarter end. The Baltic market index on the Ras al-Nura 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 liftings, 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 VLDC parcels in two years, and on the back of reduced demand for pet chems and plastics, as well as travel restrictions in Turkey, a reduction in also gas machines. In May, U.S. production and exports declined due to the falling crude prices. However, the bond value prices held up due to nervousness of shortage and with a low crude price, NAFTA 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 in May, made an abundance of products available in Asia, which closed the arbitrage from the U.S. and reduced the U.S. liftings for May. Saudi exports announced for May also reflected the cuts 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 was accelerated by multiple trader relets. New building deliveries in Q1 as well as less vessels unexpected going into dry dock also impacted the links of the shipping market and the fall in TCE was something somewhat arrested by simultaneous fall in the bunker prices. The spread of HFO and low-submerged fuel oil also narrowed, partly due to the lower overall prices of the fuels, as well as more availability of low-submerged fuel oil. With Asia and Europe slowly opening up in the second half of the quarter, along with cautious optimizations on forward demand and with less volatile crude oil prices making containment prices in Asia possible, LPG again 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 helped the demand for shipping. Shipping rates through May and June dropped down to OPEX levels and some owners started to slow steam as well as ballasting via CAVE. At the end of the The quarter dry docking again slowly picked up and helped the market turn around. It took some time to clear the lens, however, and started to build on rage, 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 throughout July with the 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 US and gel production volumes has decreased. Propane storage levels are healthy. They are standing 10% higher than this time last year, while production has averaged 4% ahead of last year, and last week's production was reported 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 LBG imports declined. Declines 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 7.9 year-on-year to 2.2 million tons, and Indonesian importers grew 29.1% year-on-year to 1.8 million tons. While the propane NAFTA spread favored NAFTA for most of the quarter, adversely impacting industrial LPG demand, the spread has more recently turned in favor of the LPG-cracking economics. Thus, we remain quite constructive on the market fundamentals at this time, but we acknowledge the potential for unforeseen disruptions. With this, I will pass on to Ted.

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 highlights 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 particularly the first part of the quarter, $26.8 million from the two debt transactions that we completed, and 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 coverage ratio covenant, reduces the minimum cash requirement to $27 million from $40 million, and eliminates the upward ratchet mechanism on the shareholders' equity covenant. In return for these improvements, we did agree to a modestly higher value-to-loan covenant, 145% versus 135%. There was a tremendous amount of headroom under that particular covenant, as we are currently well over 200% as it relates to this facility. We are 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-month notice to the lessor of the Captain John that we plan to repurchase the vessel in October by repaying the debt to be outstanding at that point, about $18.3 million, and applying the seller's credit from the inception of the transaction of $26.6 million. When we complete the payoff of the Japanese financing arrangement for the Captain John, which carries a fixed 6% interest rate, we will realize 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 of that's 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 defined in 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 pool 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 is filed for insolvency, and we recognized the pro rata impact on our results in this quarter. Daily OpEx for the quarter was $8,295 a day. excluding amounts expensed for dry docking. 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 dry docking 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 costs, 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. And as we completed our first fully integrated audit this past fiscal year just ended. We do hope 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 astimose 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 slightly 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 pricing of our Japanese financings, leaving us with a current interest cost fixed hedged in 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 dry docking program, but I would add that our current financial position allows us to finance whatever dry docking schedule best supports our charters. 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, the pool had roughly $20 million of cash on hand, reflecting the fact the pool had just paid a distribution at the end of the prior week. We feel that our liquidity and capital structure have positioned us well for whatever rate environment we face in the coming months, and we believe that 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 if 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 may arise. With that, I'm going to turn it back to John. Thanks, Ted.

We're happy to take some questions.

Sure. With the prepared remarks completed, we will now open the line for questions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand before pressing the star keys. One moment, please, while you poll for questions. And our first question comes from the line of Omar Nota with Clarkson & Patso Securities. Please proceed with your question. Thank you.

Hey, guys. Hi, Omar. I just wanted to ask. Hi there. You know, I just wanted to ask, obviously the market's gotten, you know, much stronger here over the past six, seven weeks. And, you know, you've talked a good amount about, and it was in the release, the fact that the, you know, 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 have now reached 50,000 a day plus on the spot market. I guess one, 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?

Omar, we're always nervous and cautious. But I think that Tim has a good answer for the generic ARB question that you're really putting here, right? You're saying if you're on paper, there doesn't seem to be an ARB. Can we... How is it that the prey rates are supported? Tim, you want to have a go at that?

Yeah. First of all, you can say the ARP is not massively wide, but it has been enough that we have seen the pet chem buyers in Europe come back to the market and do the shit. So whether the ARP is as strong as it was before is questionable, of course, but but it has been enough to support the shift. And it actually went pretty quick when we saw the rest of the Europe also returning and the demand going up also in Turkey for also gas and other. So it created this kind of surge where everybody was scrambling for those tons. But I think also the return of the market has been as I touched upon a little bit, that there was a little bit more discipline from the owners when the market fell to OPEX levels with slow steaming and holding back a bit on the fixing. And I think with the big and quick change, maybe someone was caught a little bit out by surprise and didn't see it changing that quickly anymore. and that helped, of course, and the markets went back pretty quickly. I think it always kind of goes in waves where the ships are, so this was enough. The imbalance of the shipping should maybe not have gone to the OPEX levels, you can say, because the market was actually not as long as it seemed, but the negative sentiment of the market made the rates go so deep.

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

Yeah, again, I'll defer to Tim.

Yes, definitely, of course, with the tighter market and the higher rates and fixing further ahead, the utilization is coming back. I think also the the way that you look at these 80% is what was booked and 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 yeah, of course the market will tighten and the idling time will be less when the market is at the stage that it is at present.

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?

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

Okay. And then, you know, Ted, on the financial side, clearly you guys have built up a lot of cash and liquidity. And I did want to ask about the sale lease back on the Captain John NP. You've 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. That looks to be kind of the carrying value of the ship, at least in 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?

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

In the economics, just to be clear, it's a seller's deposit, Omar. 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 sort of 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 will be debt-free. You know, as John just touched on, that gives us a lot of flexibility to do whatever we want with it.

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

Correct. Correct. It lowers the break-even a bit and, yep.

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

Thanks, Omar. Appreciate it. Take care.

And, again, if you have a question, you may press star 1 on your telephone keypad, just as a reminder. And our next question comes from the line of Sean Morgan with Evercore. Please proceed with your question.

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

You know, I think, Sean, the glib answer is probably a bit all of the above. I think, you know, I don't think anyone should read anything into the fact that we plied a lot of excess cash into the into paying off the John as any belief that our buyback activity should be curtailed. I think it was a smart move at the time, and, you know, we like it. You know, I think going forward, it's going to be fact and circumstance dependent. Obviously, things look good at the moment, as Tim has pretty well outlined. And I think, you know, as our confidence grows in near-term outlook, You know, we may, and depending on how the stock price responds or doesn't respond, you know, we'll certainly look at buybacks. You know, we still could pay down some debt, but we're really happy with where we're sitting, and, you know, we'll have to see what other opportunities may present themselves in terms of, you know, potential opportunities to grow the fleet or whatever else. I think the point of this financial flexibility is to give us full optionality, and I think that's what we've achieved. And I'm not trying to dance around the question, but it's going to be fact and circumstance dependent.

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

Yeah, John L. Hi, Simon.

Yes, there is optionality and there is flexibility precisely. We will do it whenever it's suitable and it fits the scheduling of the ships. And we do have a number of ships that need to be dry docked and special surveyed, et cetera. And we will try to combine it. It adds days to the works, but it is effectively, as we said before, an advantageous solution environmentally and also fuel-wise. We understand that the spreads are smaller in actual terms. However, as percentage, they are still around 20% cheaper than than the compliant fuel of today to buy high sulfur fuel oil. So that spread may change in the future. We understand that fuel oil has been sought after to distill and crack additional low sulfur fuel oil. However, at some point, things are going to reverse back, and we may see those spreads change again. So it's a moving market as we see it.

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

Thank you. Thank you, Sean.

And we have reached the end of the question and answer session, and we'll now turn it back over to Travis for any closing remarks.

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

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