John Hadjipateras - CEO Ted Young - CFO John Lycouris - CEO, Dorian LPG USA

Michael Webber - Wells Fargo Noah Parquette - JPMorgan

Greetings and welcome to the Dorian LPG Second Quarter 2018 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. [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 Web site, which is www.dorianlpg.com. I'd now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you. Mr. Young, please go ahead.

Thank you, operator, good morning. Thank you all for joining us for our second quarter 2018 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; and John Lycouris, Chief Executive Officer of Dorian LPG USA. As a reminder, this conference call webcast and a replay of this call will be available through November 10, 2017. 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 annual report 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.

Thanks, Ted. Good afternoon and thank you for joining our financial year 2018 second quarter earnings call. After my introduction, Ted will review our financials and recent developments, and John L, will update you on the broader market and operating environment. Then, we'll take questions. Dorian is the second-largest operator and owns and operates the most modern fleet of VLGCs in the world. The Helios LPG pool, which we found it with our partners Phoenix Tankers, subsidiary of MOSK, has commercial control of over more than 25 ships. Working through our London office, and Phoenix's Singapore office, our commercial teams continue to execute a strategy which reflects our commitment to provide our customers safe, reliable, and trouble-free transportation services on a worldwide basis and to timely meet regional demand changes. We believe that our utilization rate underscores the benefit of this approach. During the last quarter, our spot fleet operated at 90% utilization, a good result in an improving, but challenging market. We also believe in a balanced portfolio of time charters and spot both in pool and outside of the pool. This is important for financial as well as commercial reasons. Our quarterly fleet-wide utilization increases to 91.8% when considering our time charters and commercially we gain insight into the needs of our customers and hopefully find additional opportunities to grow with them. The technical management of our ships is performed by our in-house operations in Athens. This approach is rooted in our experience that our customers many of whom represent the most technically sophisticated charters in the world are best served by organizations that have direct control over the day-to-day management of their ships. Our technical management is proven to be a point of commercial differentiation in the marketplace, and the recent improvements in our daily operating expenses reinforces our conviction. This in-house approach enables us to pursue safety and excellence at sea and on shore always. From our inception, we have placed a high priority on financial flexibility and on the strength of our balance sheet. As previously announced, we repaid RBS at a discount and this was funded by a bridge facility arrangement provided by our friends at DMB. We have taken the first step towards a long-term refinancing of this by entering into a sale-leaseback agreement for one ship with a Japanese partner. Ted will describe this transaction. LPG is increasingly recognized as an alternative clean fuel. We aim to position Dorian to take advantage of interesting market opportunities arising from the expanding trade of LPG. One potential use not far from home for us is the maritime fuel. We previously reported that we're working with ABS on evaluating the potential of LPG as a maritime fuel. The prevalence of LPG terminals around the world and a relatively low infrastructure cost, position LPG uniquely to become a major part of the global maritime fuel market. We look forward to sharing more information on this project in the coming months. With our focus on executing our commercial operational and financial strategies, we will continue to create value for our shareholders. Now, I hand over to Ted, who will discuss the financial results and other matters for the quarter.

Thank you, John. The quarter's results reflect the general continuation of the environment that we experienced in the first half of this fiscal year and steady execution within our operations. Before I move on to discuss results for the quarter, I wish to remind you that we look at our business from a long-term perspective. As we announced this morning's earnings release, we expect to close on a Japanese operating lease with call option, JOLCO transaction in the next week or so. In addition to having a strong ship owning partner, we found the financing quite compelling. With an 80% advance rate, fixed interest rate of 4.9% for 12 years and a 16-year profile, the financing provides an attractive addition to our current funding mix and allows us to maintain competitive cash breakeven levels. Upon the closing of the JOLCO, the principal amount under the DNB bridge loan will be reduced to $66.9 million. Pro forma for the free cash generated in the sale, we would've reported unrestricted cash at September 30, 2017 as $72.8 million. We're having a range of alternatives for refinancing the remaining principal amount of the DNB bridge loan. For the quarter ended September 30, 2017, we reported total revenues of $34.7 million, representing net pool revenues from the Helios LPG Pool, voyage charter revenue from a spot voyage outside the pool, and charter higher revenue earned from VLGCs. Our share of net pool revenues as defined in our filings for the quarter was $20.5 million. Time charter equivalent revenues per day across all of our VLGCs including those in the Helios Pool amounted to $18,015 per day, while our VLGCs employed in the Helios Pool on spot on COAs and under time charters of less than two years duration earned $14,220 per day for the quarter. Vessel operating expenses for the quarter were approximately $15.7 million or $7,777 per vessel per calendar day, which we calculate by dividing the vessel operating expenses by calendar days for VLGCs, the relevant time period. For the comparable three-month period in 2016, our OpEx per day for our VLGCs was $8,073. The year-over-year decrease of $296 per day was related principally to reductions in insurance costs reflecting lower premiums along with reductions in spare stores, in repairs and maintenance. Our technical management platform continues to deliver operational actions to our customers and cost efficiency to our shareholders. Total general and administrative expenses were approximately $5.4 million for the quarter, and excluding non-cash compensation expense amounted to $4.2 million which was relatively flat with last year's $4.1 million, reflecting our continued focus on tight cost management. Our reported interest and finance costs for the quarter was $8.6 million, which was comprised of interest expense on our debt, amortization of financing costs and other financing expenses and compared to $7.2 million for the same period last year. The other piece of our cash interest expense both within realized loss on derivatives amounted to $0.4 million, a decrease of $1.9 million versus last year mainly due to the prepayment of our interest rate swaps related to the RBS facility during the previous year, as well as increases in floating LIBOR. We also have an unrealized gain of $0.7 million from the changes in the fair value of interest rate swaps related to the 2015 facility due to the increase in forward LIBOR rates during the period. The unrealized gain on derivatives amounted to $0.01 per share for the quarter. Under the JOLCO arrangement, the daily principal and interest costs reduced over time. For the first year, we estimate the average daily cost to be $15,685 per day, of which $8, 904 reflects a reduction in the underlying principle balance. As a reminder, we will be making full quarterly principal payments under the 2015 facility beginning in the quarter ending December 31, 2017. We also will be depositing a $11 million into the restricted cash account at the end of this month as required under the amendment to our 2015 facility. Overall for the quarter, we reported a net loss of $11.9 million or $0.22 per share and an adjusted net loss of $12.6 million or $0.23 per share. Adjusted net income for the three months ended September 30, 2017, strips out the effects of the unrealized loss on derivatives of $0.7 million. Our EBITDA as defined in our filings for the quarter was $14.1 and we also repaid $3.4 million of bank debt under the 2015 debt facility. Over the next quarter's, we will remain our focus on maximizing our cash generation and evaluating refinancing alternatives for the remaining portion of the DNB bridge loan in order to best position Dorian for continued success. With that, I will turn it over to John Lycouris.

Thank you, Ted. U.S Gulf LPG export volume surged recently following a temporary stoppage of activities due to hurricane Harvey flooding in the area. The U.S LPG exports registered close to an all-time monthly high in September and particularly in October. U.S East Coast saw sharply increased exports that left October propane inventory levels lower for the start of the seasonally stock drawing heating season. The strong increase in LPG exports and the slowing of the U.S propane production growth caused U.S propane prices to increase further. We expect the propane markets to remain very tight on supply and firm product prices worldwide. Chinese LPG imports for September reached 1.7 million tons for the first nine months were up 14% year-on-year compared to 2016. We expect LPG imports to continue strong in fourth quarter 2017 and into first quarter 2018 as Chinese residential and petrochemical demand will be supported by higher LPG users -- usage on the government's mandate to shut down coal-fired boilers in Northern China by the end of October and the demand growth by a number of planned PDH plants starting up or ramping up after having exited the recent plant maintenance period. As anticipated, the Indian government has implemented the flat goods and services tax which became effective in July 1 and caused Indian LPG imports to jump to almost 1.1 million tons in August, increasing year-on-year demand by 7.2%. The Indian Auto Gas LPG sector benefited significantly on a favorable price differential with gasoline registering growth of 19% year-on-year in the second quarter of 2017. The third quarter of 2017 is expected to show continued growth in the Auto LPG sector as 10,000 to 15,000 vehicles on average are being converted to use of LPG each month as it has been reported by the Indian Auto LPG coalition. There are currently 2.3 million vehicles in India running on auto LPG. As Asian demand for LPG begins to firm up in advance of the heating season, markets will likely source incremental product from the U.S., adding significant ton-miles to the fleet. We have generally seen reduced LPG export volumes from the Middle East in October partly due to [indiscernible] field plant and South Pars field on plant maintenance. The waiting time experience for Panama Canal transits have recently increased to 3, 4 days on account of much higher export activity from the U.S post Hurricane Harvey and the increased traffic from other sectors with freight rates moving higher on the Houston to Chiba voyage via the Canal, we expect improving fleet utilization. The order book stands at about 11% of the VLGC fleet, while the old VLGCs, over 20 years of age, currently comprise 15% of the fleet. There are four new building vessels expected to be delivered in 2017, and likely another eight in 2018. We maintain our thinking that stronger demolition prices and new environmental regulations will make older VLGC vessels more attractive demolition candidates and eventually remove from the fleet. We expect the markets in the first quarter 2019 to remain tight in LPG supply and demand and the product price likely to remain high. The LPG supply and demand market is expected to return to a normal territory and results in a modest weakening of product pricing relative to crude leading to a recovery of the petrochemical demand later in 2018. Looking to the future, we are optimistic that LPG will continue to penetrate world markets at a significant rate. In complying with the upcoming IMO 2020 mandate on an 85% reduction of sulphur emissions, we believe LPG as marine fuel has the potential to capture a meaningful share of the marine fuels market and is likely to become an attractive and cost-effective alternative to other marine fuels. We therefore believe that it further supports the case for LPG as a mainstream fuel to the global energy markets and to consumers around the world. Thank you.

With the prepared remarks completed, we'll now open the lines for questions. [Operator instructions]

Before we open for questions, operator, can you hear me?

Yes, sir.

Okay. Before we open for questions, I have a -- I want to make a statement, because we’ve had a few questions from various people about our ATM. So anticipating there may be questions in the -- amongst the listeners today, I want to say to confirm that we have not made any share sales under the ATM. The ATM was -- we put it there for optionality. It continues to be an option amongst other options, and including as you see from this morning's announcement the sale-leaseback which we thought -- which we believe is a bit of a positive move. So, we delivered -- we continue to deliver and we expect to be taking out the DNB refinancing when appropriate at the best possible arrangement -- with the best possible arrangement. So, with this I like to open-up for questions. Thanks.

Thank you, Mr. Hadjipateras. Our first question is coming from the line of Mike Webber with Wells Fargo. Please proceed with your question.

Hey, good morning, guys. How are you?

Hi, Mike.

Welcome back, Mike.

Thanks, John. That was a timely statement, because that was actually my first question. But I guess, maybe to add a wrinkle on that and maybe a second question for Ted, within the context of the sale-lease back deal and the other liquidity mechanisms you have, where does the ATM fall right now within your priority list? And maybe if you kind of walk us through your liquidity levers and maybe kind of [technical difficulty] priority or [technical difficulty] right now?

What we don’t -- we don’t have a ranking. We are looking at everything and [multiple speakers] yes. I mean …

John, Mike said some things …

Yes.

Mike's question was but some are more attractive than others and I think, Mike, John's point is the following. I think first of all, probably be impolitic and not really wise for us to discuss a lot of detail around financing plans until they’re more concrete. Whereas you know we're pretty focused on executing everything we do right. So whether its ship operations or financings, we don’t take a ton of risk. I think, from a broader perspective, there's a -- there are a variety of opportunities available to us. Look, we’ve obviously shown our ability to tap the sale-lease back market. We noted there are bank markets out there, there are bond markets out there, and there are equity markets both ATM registered, there is converts, there is a whole range of things and I'd say look we tend to look at a -- at the whole menu all the time, because markets are constantly changing. And so we try to put ourselves in a position to be able to execute on what we see as the most attractive option at the time. So I know you're looking for more specificity than we are willing to give, but that sort of the -- that’s sort of how we think about it.

I know it’s a tough question. I guess, maybe coming at a different way to the sale-lease back deal and I forget the snazzy acronym or name, you guys gave it, the Korean [ph] sale-lease back with the option, in terms of where that’s priced and I guess the pricing there does that change the way you think about your alternatives either into -- right way?

Well, the pricing …

Go ahead.

Sorry, Ted. I’m not clear what you mean by the pricing. Do you mean the pricing of the cost of the finance or the shared price …?

Yes, the other cost, the pricing of the finance, effectively the cost of the financing for you.

Yes, yes. Well the sale-lease backs have -- being a good opportunity cost wise, if everything else falls into place. But -- and we’ve seen activity from Japan such as the one we’ve done. We’ve seen a lot from China as well and others, but right now I'd like to leave it with everything is on the table. We are looking at optionality, we like to deal that we’ve done. We think it's a right deal at the right time, but it doesn't mean that we are precluding doing anything else,

Okay, right. Now that’s helpful and I appreciate you guys saying that. Just one for me and I will turn it over. Just curious around traffic through the canal seeing as its pretty meaningful driver and I guess inflection point in terms of global ton-miles, particularly when it comes to maybe where street expectations are versus where freight flows end up settling out. Do you have a sense on maybe on a monthly basis what sort of VLGC traffic we’ve seen kind of through the canal and how you see that evolving over the next call 6 to 12 months?

Well, we do have a sense. If you want precise numbers, I’m not sure you want to -- you need to get them now on this call, but it's been a yoyo. When the canal opened, a long expected opening and it opened suddenly. The VLGC portion of the transits was more than 50% and that -- and it's been reducing steadily. And it affected not only by the alternate demand from -- on allocations, which have since settled down for containers and LNG -- increasing LNG, by the way, but also from the economics of the freight market of LPG. So you have it -- I don't think you can project to put it this way. I think that it is increasingly tight and it will be affected by mostly by economic conditions in the LPG market of whether people are willing to pay the extra money to go through the canal. And John actually -- Lycouris may have something to add there in terms of the economics of the new canal and the old canal.

Yes. Hi, Mike.

Hi, John.

The total structure has changed recently out from the 1st of October and it has become about 30% more expensive and the rates have gone up on both the old Panama Canal and the new Panama Canal by this 30%. So the differential between the two is not that significant. And so, we expect that traffic is going to continue as before, a little bit more expensive it adds to the cost of the voyage and we have seen in actuality that LPG has taken the second place after container ships. But forward going -- forward looking, we expect that LNG may take a larger piece of that business of that transit through the canal.

Okay. That’s helpful and I appreciate [multiple speakers].

Yes, it almost certainly will. And the other -- the reason I’ve mentioned the old canal is because we’ve seen some new buildings that are built to go through the old canal and that may or may not be -- it gives some optionality which is always attractive, but in terms of economics I'm not sure that it can -- you can justify it today.

Got it. All right. That’s helpful, guys. I appreciate your time. Thank you.

Yes.

Thank you, Mike.

[Operator Instructions] The next question is from the line of Noah Parquette with JPMorgan. Please go ahead with your question.

Yes. I just wanted to follow-up on the Panama Canal, it was interesting. I mean, when you’re talking about the rate increase to go through the canal, can you give us a sense on what the day rate is roughly, where it's breakeven for an owner to -- or charter to avoid the canal and go the long way so we have a sense on perhaps when vessels would sort of avoid the canal?

No. I mean, I don't think we like to give you that. And I suffice it to say that if we're in the teens it becomes a big question mark. There is also the choice of going through one way and around the Cape the other way. It's not always a choice of performing a voyage on a round trip basis, but its -- and it's not always the owner's choice too. There is often a requirement by a charter if they have a tight window or conversely if the arb [ph] is working the other way and they wanted a longer voyage. But I don’t think it would be appropriate to kind of give you the numbers that we kind of look at.

Yes, just a sense. Something like the teens is helpful. That’s all. Thank you. And then on the follow-up to -- when you’re talking about what’s driving the reduction in OpEx, it seemed like those things were fairly permanent. Is that correct? How to think about that?

Well, Ted is hawking -- hawkishly watching it, so he can tell you.

Yes, I mean, we all hawkishly watch it. I think -- I’d like to think that they are going to be permanent. I mean, they are -- the biggest thing was underlying that improvement was I see some operational changes that we put through in terms of some internal procedures about it in some revision of how we do things. So barring an increase on the actual factor cost that go into some of those items, we'd expect that to be pretty durable.

Okay. All right. That’s all I have. Thank you.

Thanks, Noah.

At this time, I will turn the floor back to management for closing remarks.

So I would just like to add to Ted's comment about that, because its being part of our strategy when we rolled out, because of the number of deliveries we focused on executing and strengthening the organization, so that we could take delivery of 19 ships in the space of roughly two years. Has been part of our plan all along, once that’s is done, that we start optimizing and we expected that our costs would be reduced. So thank you very much for joining us this morning and we hope to meet you again in the next quarters.

Thank you. This will conclude today’s teleconference. Thank you for your participation. You may now disconnect your lines at this time.