Dorian LPG Ltd.

Greetings, and welcome to the Dorian LPG first quarter 2022 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.

Thanks, John. Good morning, everyone, and thank you all for joining us for our first quarter 2022 results conference call. With me today are John Hajibateris, Chairman, President, and CEO of Dorian LPG Limited, John LaCouris, Chief Executive Officer of Dorian LPG USA, and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through August 11, 2021. 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, 2021 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 it over to call to John Hajimateris.

Thanks, Ted. Good morning, everybody. Thank you for joining us this morning to discuss our first quarter financial year 2022 results. And Ted, John, and I are speaking from Stanford. Tim Hansen from Copenhagen. We had a healthy market this past quarter. North American exports rebounded swiftly going into April and May as winter storms abated in the Gulf and U.S. LPG production and export capacity once again proved resilient. This swift increase resulted in temporary ship shortages in the West and pushed rates up. The Baltic began the quarter on an upward trend, reaching a peak rate of 64.57%. in mid-May before the increase in bunker prices started to put some pressure on earnings. Rates remained healthy for the rest of the quarter, and we are optimistic about market strength going into fall and winter. On the operational side, our shoreside staff have worked very hard to continue to facilitate safe crew changes around the world, despite the continuous and new logistical challenges due to the COVID pandemic. Our dry docking and scrubber upgrade program is now complete. The last two ships left the shipyards in late May and early June. In total, we have installed 10 scrubber systems since the summer of 2019. Twelve of our 22 own ships are now capable of operating with hybrid scrubbers, enhancing their earning potential and commercial flexibility. In June, after the MEPC 76 meeting, the IMO announced their near-term carbon and greenhouse gas emissions reduction measures. We have been planning for these measures and are now in the late stages of our analyses of various emissions-reducing technologies. We plan to compare these add-on technologies to the environmental and financial considerations around converting some of our vessels to burn LPG as fuel. In calendar year 2020, Efforts to reduce emissions also achieved about $1.5 million in fuel savings, and we continue to enhance those efforts with new software and technologies. We have classified the Captain Marcos NL, which is debt-free, as available for sale, and we will be reporting future developments in due course. The past quarter saw commodity market fundamentals stabilize as crude prices rose to double their averages in second quarter 2020. LPG demand is consequently also rising, especially in the East. Global exports were up by about a million and a half tons this quarter, with the largest increases coming from Houston and the rest of the U.S. As we come out of summer, we expect exports from both the U.S. and the Middle East to increase as OPEC implements production cut reversals in August and winter demand returns. Our outlook for the second half of 2021 remains optimistic. Production forecasts continue to be revised higher. Demand continues to ramp up, driven by the PET-CAM sector. The Panama Canal has seen increasing congestion from container and LNG ships, and this may push more VLGCs to balance around to keep increasing ton-mile demand. We expect this trend to continue and be amplified when new emission regulations come into force. Continuing our commitment to returning shareholder capital, the Board of Directors has declared a cash dividend of $1 per share to the company's common stock, returning over $40 million of capital to shareholders. We have now returned over $260 million since our IPO in 2014. This announcement does not reflect the commencement of a regular dividend, but we have responded to clear feedback from our investors that they wish to see dividends alongside stock buybacks, and we will continue to evaluate both. I'd like to point out that the declaration of a dividend in no way changes our view that our stock is still trading at a meaningful discount to our intrinsic value. I will now pass the line over to Tim to further brief you.

Thank you. Thank you, John. Good day, everyone.

To begin with some macro factors, the crude oil prices rose throughout the quarter with Brent averaging around $69 per barrel compared to just 32 barrels in Q2 of 2020. The prices of propane and butane consequently rose, however, the relatively price to crude oil drops from the previous quarter across all major regions. LPG therefore remained a desirable commodity. As a result, the global seaborne LPG supply rose as an estimated 1.5 million tons in Q2 2021 from the previous quarter and a 6% increase from the same period of 2020. The majority of the rise was from the U.S., where exports reached an average of 4.4 million tons per month, rebounding swiftly after the polar storm in February, which demonstrated the robustness of LPG production and export capacity in North America. Middle East LPG sea-borne supply remained relatively constant with production cuts and Iranian sanctions remaining in place through the quarter. Imports into the major consumption region rose, particularly into China, where LPG imports increased from around 5.7 million tons in Q1 2021 to 6.5 million tons in Q2 2021. This was after two new PDH plants began operating in Q1 2021. and the new steam Craddocker utilizing propane as a feedstock started production in April-May of 21. The imports for feedstock illustrate the consumption of LBG as a feedstock for petrochemicals, which increased in Q2-21 compared to the Q1-21, where propane favored as a feedstock for the production of ethylene and over nafta. The propane-nafta spread in Northwest Europe widened to $90 on average in Q2 compared to an average of $23 in Q1-21. The demand for LPG transported, translated to a shipping market characterized by monthly volatility by comparable quarterly freight markets to the first quarter. The Bolshevik VLGC index averaged $53 in the second calendar quarter of 21. only $2 below the performance of the Baltic Index during the first quarter of 2021. The BLPG-1, the Rastanur-Tiba route, made gains in April and the first half of May because of the relatively lack of available tonnage in the Middle East. This was when the West market fell dramatically on the back of the polar storm in February. Real owners tended then to stay East and avoid the weaker rates in the West. The knock-on effect was that by April, it was becoming evident there was not enough vessels en route to the U.S. via the Pacific or trading in the Atlantic Basin to cover all mail they can. Thus, the deficit of VLDCs for mail loading in the U.S. meant that about 20 VLDCs departed from the east of the Suez market during April and May, which again caused the lack of ship supply in the east, allowing the Baltic Index to rise. The second half of the quarter saw a declining Baltic. This was largely due to the death in export volumes from the Middle East. Furthermore, stricter restrictions imposed by the Chinese authorities on vessels having called India as a response to the increasing COVID cases in India at the time, forced UGC owners to reassess an already complicated situation, wanted to avoid a situation of vessels not being allowed to discharge in China. Many owners opting to avoid the cargo inquiries into India, which made the list of tonnages marketed for the Middle East to the Far East trade longer and contributed to a falling Baltic. Through April and May, the Houston cheaper rates traded between high 80s and low 90s per metric tons, a premium to the Baltic index. By June, there was an oversupply of tonnage in the West, that had ballasted in from the East market and the West premium to the Baltic index narrowed. Although the freight market measured in US dollar per ton was comparable to the first quarter, the increase in crude oil also made the shipping more expensive as bunker cost rose. For the last earnings call, we had forecasted LPG production in the United States to quickly recover from the polar vortex storm in February, and this has indeed materialized. Inventory levels trail the levels of previous years, but production and exports have rebounded. It was also forecasted that the OPEC Plus countries would agree to reverse production cuts during this quarter. While this did not materialize on schedule, the reversals have now been agreed from August onwards, and Middle East exports are expected to increase as the year progresses.

Over to you, John LaCrosse.

Thank you, Tim. During this quarter, we have completed the scrubber retrofit program of 10 hybrid scrubbers to our own fleet, which started in the third quarter of 2019. And Doria now operates 12 scrubber vessels. The last two vessels retrofitted with hybrid scrubbers were completed and commissioned in early June, including dry docking and the completion of their first five-year special survey requirements. With the completion of these two vessels, a total of 20 vessels of the Dorian LPG fleet have now successfully passed their five-year special service cycle. Since the beginning of the calendar year, the actual price spread of the high sulfur fuel oil to low sulfur fuel oil supplied to our scrubber vessel fleet has averaged over $105 a ton of fuel. As we envisage, this spread has produced an earnings advantage for our scrubber-fitted vessels and validates our original expectations on the payback period by having returned about one-third of the capex as of June 30, 2021, notwithstanding the oil market's collapse during most of the calendar year 2020. Dorian continues to evaluate LPG dual-fuel technology and those dual-fuel LPG new buildings and retrofitted vessels entering service. and we will continue to consider an upgrade for some of our vessels. We are continuing to invest in our vessels' performance and efficiency to reduce emissions and lower operating costs. An improved environmental footprint is very important to DOI and LPG, and we continue to explore other incremental energy efficiency technologies. Greenhouse gas emissions from shipping came sharply into focus over the last two months, both from the IMO and the EU with several environmental proposals made for future implementation. The IMO-MEPC-76 adopted several amendments on Marple annexes, which become effective later this year, and finalized the Technical Measure for Energy Efficiency of Existing Ship Index, and the EXI in short, and the Operational Measure of Carbon Intensity Indicator, CII in short. with implementation anticipated towards the end of 2022. They have now provided guidelines on how to calculate, implement, survey, and certify, and they have offered compliance alternatives on engine power limitation for vessels. The CII factor annual reductions have been agreed until 2026, which are phases one and two. And further discussion is to follow on Phase 3 for the years 2027 to 2030. The CII operational measure will impact the expected performance of existing vessels and reinforce the importance of an annual SEMP implementation plan, which prioritizes improvement options for each vessel. The EU Green Deal is now driving EU policies initiatives towards a climate-neutral Europe by 2050. These initiatives propose effective January 1, 2023, to include maritime transport into the European Union Emissions Trading Scheme, ETS, giving a phase-in period from 2023 to 2026 and requiring all vessels, inbound and outbound, to be responsible for 50% of their emissions. under an updated MRV regulation program, which is monitoring, reporting, and verification. The fuel EU maritime framework policy focuses on measures to drive a shift to low-carbon fuel. From 2025, all vessels inbound and outbound of the EU will be responsible on 50% of the yearly average well-to-weight energy intensity used on board. including electricity they receive from the shore, with a phase-in of 2% reduction in 2025 and aiming to reduce energy intensity by 75% in 2050. In view of all the above regulations, the options available to the VLGC fleet are limited to engine power limitation, energy efficiency technologies, dual fuel engine upgrades to LPGS fuel, carbon capture, and biofuels. Most of these options will have a significant impact on the VLGC fleet over the next two years, encouraging scrapping for older vessels and necessitating further capital expenditure and upgrades of the fleet towards improved efficiencies to reduce carbon intensity and emissions. The outlook from a regulatory perspective is that there will be an urgent need to consider energy efficiency for all existing vessels, and we conclude that a significant portion of the younger VLGC fleet trading capacity utilization could be reduced to address those upcoming compliance considerations. And with that, I will pass it over to Ted Young.

Thanks, John. I'd like to focus today on our financial position and liquidity and also discuss our unaudited first quarter results. At June 30, 2021, we had $78.3 million of free cash. As of August 2, Monday, our free cash balance stood at $82.6 million. Please note that since we repurchased $14.2 million of stock during the quarter and an additional $2.7 million following the quarter end, we really have generated quite strong cash flow through the quarter and beyond. With a debt balance of $589.1 million at quarter end, our debt to total book capitalization stood at 38.6%. We have no refinancings until 2025, ample free cash, and an undrawn revolver. Also, since the Captain Marcos has now been classified as vessel held for sale, we expect to generate additional cash upon completion of the transaction. We continue to expect our operating cash costs per day for the coming year to be approximately $21,000 to $22,000 a day, excluding an $8 million progress payment that is due for our new building in our fourth fiscal quarter, the quarter ending March 31, 2022. Further to John's comments, this dividend is an irregular dividend. The payment of this irregular dividend is responsive to our shareholders who have communicated very clearly to us that they want a dividend to be part of our capital allocation strategy, and we've heard them loud and clear. For the discussion of our first quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. Turning to our first quarter chartering results, we achieved a total utilization of 96.1% for the quarter with a daily TCE, that's TCE revenue over operating days, as we define operating days in our filings, of $31,571. yielding utilization-adjusted TCE, which is TCE revenue per available day, of about 30,342. We also show you a spot TCE per available day, which reflects our portion of the net profits of the Helios pool for the quarter of about 30,470. Overall, the Helios pool itself reported a spot TCE, including COAs, of approximately $30,256 per available day for the quarter. Daily OPEX for the quarter was $9,689, excluding amounts expensed for dry dockings. It was $10,131 including those costs, a modest improvement over last quarter. Within OPEX not related to dry dockings, we have seen increases in crew costs, most notably those associated with crew travel. Higher average airfares, additional hotel nights to comply with local COVID-19 restrictions and the like have been the main culprits. During the quarter, we saw our daily OPEX, again, excluding dry docking costs, decreasing sequentially, which is consistent with our expectation of improved OPEX as conditions slowly normalize. Our time charter in expense was $3.5 million, reflecting a full quarter of one vessel and the re-delivery of another during the quarter. As a reminder, we do not include time charter in-costs in our vessel operating expenses. Going forward, our TC in-costs should be $2.4 million per quarter starting July 1. Total G&A for the quarter was $8 million, and cash G&A, which is G&A excluding non-cash compensation expense, was about $7.4 million. Roughly $1.5 million of the quarterly G&A reflected bonuses to non-named executive officers. For members of senior management, as outlined in our recent filing, we will recognize those bonuses in an amount of approximately $2.41 million during the quarter ending September 30, 2021. We continue to be vigilant about all of our G&A costs. Our reported adjusted EBITDA for the quarter was $29.8 million. To give you some indication of the quarterly activity, we generated close to 45% of our quarterly EBITDA in the month of June, reflecting the uptick in chartering markets. As you know, we look at cash interest expense on debt as the sum of the line items on our P&L interest expense, excluding deferred financing fees and other loan expenses, and realize gain loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $5.6 million, roughly flat with last quarter. We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with the current interest costs, all in fixed hedge in a small floating piece of 3.67%. We repaid just shy of 13 million of principal during the quarter, which is consistent with our scheduled amortization payments. In addition to the nine special surveys completed during the fiscal year just ended, we finished two more with scrubber installations in the quarter ended June 30, 2021, bringing our scrubber equip fleet to 12 vessels. With the completion of those vessels, the first special survey cycle for our ECHO VLGCs is now complete. Although we currently hold a roughly 70% 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 is useful to provide some additional insight in order to give a more complete picture. As of Monday, August 2, 2021, the pool held roughly $22.3 million of cash on hand. Including the dividend just announced, Dorian will have returned over $265 million of cash to shareholders, including $170.6 million during calendar 2021 alone. Note that following the repurchases through to mid-July of $16.9 million, equating to 1,189,000 shares, we now have $31 million remaining under our current repurchase authorization. We, of course, remain interested in accretive growth opportunities that meet our risk-reward criteria, and we will always be prudent in deploying our cash, but our financial position allows us to act quickly on meaningful opportunities as they arise, including further opportunities to return cash to shareholders. With that, I'll pass the call back to John.

Thanks, Ted. Mr. John, operator, we can open for questions.

Okay, with the prepared remarks completed, we will now open the line for questions. At this time, we will be conducting a question and answer session. 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 handset before pressing the star keys. One moment, please, while we pull for questions.

You have it on your screen right now. Well, I told him he could re-prompt after.

Our first question comes from Sean Morgan with Evercore ISI. You may proceed with your question.

Hey, guys. You know, I appreciate this is maybe somewhat new news in terms of what's happening with the pipeline potential for the, I guess, LPG pipeline across the Panama Isthmus. How do you sort of gauge what that would do to utilization for kind of the global BLGC fleet? And if Panama does proceed with this project, is that an indication from the government of Panama that they think that we're going to be having high sustained overutilization of the canal kind of as a new normal going forward?

We take it as having that optimistic tone to it. But, and of course, we don't know if it's going to happen and when it will happen if it does. But it is a letter of intent. And I think we all have an answer for this. But I think I'll let John LaCouris give you the numbers that we've calculated that would be displaced and what it would do to overall demand. I think he has it encapsulated. John?

Yes, John, thank you very much. I'm sure Tim also might want to chime in, but we figured that, Sean, even if we built a pipeline, and even if it was 250,000 barrels a day, it would still take two days in the change just for one cargo VLGC to go through. So it's a kind of stopgag measure to help and alleviate the the pressures on the canal. And as we know, container ships have priority, LNG ships have priority. So it's probably an additional measure to help a little bit on being able to throughput enough cargoes through. On the other hand, it kind of sets up the country's as a two-tier, some fleet is going to be on the west side and some fleet is going to be on the east side. And so that's also going to cause increased ton miles and other activities and utilization of the fleet. So in general, the fact that it's being considered is positive for LPG, for sure. And secondly, it's just a way to try to help the the delays and the increased amounts of LPG that we'll have to go through. I don't know if Tim wants to add something to that.

Yeah, Tim.

Tim, go ahead. Yeah, I think John is right.

I think it's a positive that there is a problem in the Panama and that such a measure here should be even considered, which kind of demonstrates that the delays we've been talking about will will continue and probably rise. And when you look at the capacity of the project, it's maximum around five VLDCs per month. So it's not something that will make a big dent in the termile demand. If there is indeed a problem, the delay should be more than really 10 days in effect to make this a viable solution. So if there is 10 days delays in Panama going forward, that's a positive sign. And we will see more going around the Cape. And it's also, as the curse is saying, it will fragment the market more and call for more efficiencies. So that this is even considered, I think, as a, is a positive sign for the market. And again, the size of the project is not something that we should be too worried about in that sense.

So if I'm understanding you guys correctly, then there'll still be a need for VLGCs to transit the Panama Canal. This pipeline wouldn't fully supplant those canal transits that kind of exist today in a normal market.

Yeah, that's correct.

It will be a fraction of the total capacity needed or export needed from the U.S. to the East that this pipeline will be able to handle.

I don't think it would fully build. I don't think it would displace more than the demand for five ships fully built.

Is that correct? Yes, that's correct. Yeah, we estimate the capacity of 90,000 barrels per day to be around five year disease capacity per month. And that is then given that they build sufficient storage so that it's not just a throughput, but actually storage that doesn't cause any delay so that you can load the wheels fully in a normal two-day cycle and discharge in a full two-day cycle. If it's only a pipeline, then the the complications around the logistics will be worse and it will be less than four ships.

And then with the sale of the Captain Marcos, does that portend potential exit on your ownership of the John and the Nicholas that are kind of the same older vintage? Or is this just kind of a one-off?

Possibly. Yeah. We're looking at sales, and I think we do relate those to what I said in my script about intrinsic value. So while we're at a big discount, and it's a natural thing to look at the sales of the older ships, you shouldn't be surprised if we do more.

Okay. All right. Thanks, guys. I'm going to turn it over. Thanks, Sean.

Our next question comes from Omar Nocta with Clarkson Securities. Please proceed with your question.

Thank you. Hey, guys. Good morning. Good morning. Yeah. Obviously, you guys have become much more aggressive, I'd say, you know, returning capital to shareholders. You've done the share buybacks in the past. You did the big tender offer this past March, and now you have the special dividend. John and Ted, you guys made it pretty clear in your opening remarks that the special dividend or it's an irregular dividend. What are your thoughts about going forward with a regular dividend? How did you come up with the idea of just doing a special versus instituting a regular dividend policy?

Well, let Ted explain the difference between a special and an irregular dividend. It's a bit of an archaic definition, but we purposefully said it's irregular because we're saying it is not special. So we're not saying we will not have future dividends. We just want to keep the optionality while we have this. First of all, as long as we're generating enough money, obviously, and whilst we have this discount to our intrinsic value, we want to keep that optionality very much in the front. And if you want, Ted, to give you a little textbook difference, he's right here.

Yeah, I think John kind of nailed it. But, look, the reason we're calling it irregular is and not special is special to us says it's unique, it may never happen again. Regular obviously means it's going to be pursuant to a policy, and irregular is something in between for us. I think we looked at our cash balance and took a look at how we felt about the short-term outlook and said, yeah, we can return capital. The next question was, and I think, again, we heard loud and clear from a large handful of shareholders, they'd like to see a dividend as part of this capital allocation plan. And so I think our board and management said, okay, let's be responsive. On the other hand, it doesn't necessarily follow corporate finance 101 given the discount at which we're trading relative to our intrinsic value. So, you know, as John said, we want to retain the optionality. We certainly wanted to reward shareholders, including ourselves as we own stock and weren't necessarily wild about, you know, selling out at different points in the cycle and But on the other hand, we continue to be mindful of the discount to our intrinsic value. And, you know, clearly a dividend or a dividend is part of the potential method of closing that gap. But buying back stock and capturing that discount directly for remaining shareholders is pretty attractive. So I'd say that our thinking is still – we're still pretty stuck on the fact that we're at such a significant discount. You know, we – I think we'd, you know, we want to continue to work on that. But again, dividends will undoubtedly be some portion of our capital allocation strategy going forward.

Thanks. I appreciate that.

Yeah, I just was going to ask you, it does make sense, you know, given the you know, as you mentioned, intrinsic value and what seems like you'll be selling the Marcos for versus, you know, the share price, definitely there's a big difference to capture. When we think about this irregular dividend, should we think about it as you're basically taking the proceeds from this vessel sale and giving it to shareholders? Is that a good way to think about it?

No. No. Okay. That'll be another capital allocation decision.

Got it. Okay. And then I guess one more, and I know, John, you had mentioned this, that you are looking at the older vessels. When it came to this one in particular, obviously it's the oldest in the fleet. The decision to sell that vessel, did it come about more as you looking to renew, you've ordered the Kawasaki new building as a replacement potentially, or was this more a buyer coming to you looking to acquire the asset? I know it's maybe not that big of a difference, but ultimately, how did you come to the decision to sell the vessel?

Holistic. I think we're looking at it as a market. We're optimistic on the market. We're not there to reduce our exposure, but I think it's natural in the cycle to kind of renew, and this is partly renewal and partly... Partly what you said before, again, intrinsic value. It's when you see you can sell an asset at such a premium to what the market is valuing it at. It makes sense in that respect. So it's all those considerations that our board took into account.

Got it. Thanks, John, and agree. Appreciate it, and I'll turn it over. Thank you very much, Omar.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please hold while we poll for questions. Okay, at this time, we have reached the end of the question and answer session, and I will now turn the call Over to John Hadjipateris for closing remarks.

Many thanks for all of you who dialed in and for the questions. And I wish you a happy rest of the summer. Please stay safe and talk to you in a quarter.

Bye-bye. This concludes today's conference. You are now free to disconnect at this time. Have a great day.