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Edited Transcript of LPG earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q2 2020 Dorian LPG Ltd Earnings Call

Stamford Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Dorian LPG Ltd earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John C. Hadjipateras

Dorian LPG Ltd. - Chairman of the Board, President & CEO

* John C. Lycouris

Dorian LPG Ltd. - CEO of Dorian LPG (USA) LLC

* Theodore B. Young

Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer

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Conference Call Participants

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* Gregory Adrian Wasikowski

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Nicolay Dyvik

DNB Markets, Research Division - Head of Shipping Equity Research

* Omar Mostafa Nokta

Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Dorian LPG Second Quarter 2020 Earnings Conference Call. (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.

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Theodore B. Young, Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer [2]

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Thank you, Stacy. Good morning, everyone, and thank you all for joining us for our second quarter 2020 results conference call. On the call 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 7, 2019.

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 result may vary materially from those we express today.

Additionally, let me refer you to our unaudited results for the period ended September 30, 2019 that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K and Form 10-Q 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.

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [3]

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Thank you, Ted. Welcome to our second quarter 2020 earnings call. I am in Singapore, where I attended the Global Maritime Forum and where much of the discussion concerned climate change. Although the long-term goal of the industry is zero carbon emission, in the meantime LPG provides a significantly better alternative to fuels currently being consumed.

John and Ted are in Connecticut and after I give you a brief report, Ted will follow with a discussion of our quarterly numbers and John, of the market and our fleet status. We will complete the call with questions.

On this date last year, the Baltic rate was $41 a ton and a year before that it was $30. Today the Baltic is above $70. The market appears to have reached a degree of stability, having traded above $50 a ton since April of this year. And just this quarter, the Baltic struck a highest level since 2015 at $81 a couple of weeks ago. This quarter's profitable results reflect the health of the current freight market. Our fleet is well-positioned to capitalize on the potential price differential between low-sulfur and high-sulfur fuel oil.

Two of our ships recently came out of dry-dock, bringing our scrubber-equipped fleet to 4 ships on the water trading. We believe that there are about 20 in all scrubber-fitted VLGCs currently. In addition, we expect to have 4 more VLGCs enter dry-dock -- 5 more before the end of this year, and 3 during next year. At the completion of our program, we will have 12 out of 22 ships scrubber-fitted.

The freight environment and cost control has contributed to strong cash flows, enabling us to fund the scrubber installation and stock buybacks from cash flow. Today we have repurchased $6.7 million of stock in accordance with our previously announced $50 million buyback authorization. This program underscores our board's commitment to thoughtful capital allocation. Our optimistic view of the market continues to be supported by market fundamentals with a contained order book and prospects for increased demolitions. And with this, I will hand you over to Ted.

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Theodore B. Young, Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer [4]

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Thanks, John. My comments today will focus on our unaudited second quarter results and our capital planning for the remainder of the year. For the discussion of our second quarter results, you may also find it useful to refer to the investor highlight slide posted this morning on our website.

Beginning with our chartering results, we achieved total utilization of 92.9% for the quarter with a daily TCE that is TCE revenue over operating days as defined in our filings, of $47,623, yielding a utilization adjusted TCE which is TCE revenue per available day again as defined in our filings, of about $44,241. Spot TCE, which reflects our Helios Pool results, per operating day for the quarter were $51,613 per day with utilization of 91.5%. I'd also point out that our spot results are net of the administrative costs of the pool and as a result our actual TCE is higher than this level.

Daily OpEx for the quarter was $8,594 or $8,403 per day excluding amounts expensed for dry-dockings. Those amounts compared to last quarter's $8,052, increased insurance premiums in some lines played a role in the cost increase which we will seek to offset by efficiencies and other cost categories.

Total G&A for the quarter was $5.9 million. And cash G&A, i.e. G&A excluding non-cash compensation expense, was about $5 million. G&A for the quarter also reflects bonus payments to our executive team of about $1.1 million. Excluding those payments, cash G&A of $3.9 million was down some $600,000 versus the prior quarter and $200,000 versus the same quarter last year, excluding the professional legal fees related to BW LPG's unsolicited proposal.

As we discussed last quarter, our G&A including non-cash compensation expense, should decline. For our non-cash comp expense, we expect to see a decrease because the original awards granted in 2014 invested in 2017, '18 and '19 have now been fully amortized. These awards hit our P&L by roughly $700,000 a quarter and thus we expect non-cash comp expense to be lower by this amount.

Our reported adjusted EBITDA for the quarter was $67.3 million, which was a significant increase from the prior quarter's $38.4 million and substantially stronger than the $19.6 million reported during the same quarter last year. That $19.6 million does exclude the cost related to BW LPG's unsolicited takeover proposal. The strong rate environment and lower G&A accounted for most of the improvement.

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 derivatives. On that basis, total cash interest expense for the quarter was $7.6 million, which was down about $100,000 from the prior quarter, largely due to continued debt pay-down. We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost fixed hedge and a small floating piece of 4.3%.

For the quarter, we have cash outlays of roughly $3.6 million for dry-dockings or $1,719 per fleet day. Fleet day is calendar days plus time charter-in days. Both of those latter 2 terms are used are defined further in our filings. We also managed to repurchase $6.2 million of stock during the quarter and an additional $500,000 since the end of the quarter. Our free cash flow to equity, which I'll remind you is a non-GAAP term, before outlays for stock buybacks and dry-dockings was $25.3 million or roughly $12,000 per calendar day for the 3 months ended September 30, 2019.

Clearly our cash flow and liquidity remain strong. Since quarter-end through to October 29, our restricted and unrestricted cash is up about $13 million to somewhat over $96 million. Although we hold an 80-plus percent economic interest in the Helios Pool, we do not consolidate its 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 Tuesday, October 29, the pool had roughly $35 million of cash on hand. And as a reminder, the pool has no debt whatsoever.

In light of the strong rate environment, we have taken advantage of a disruption at one of the shipyards to postpone installation of 3 scrubbers until the first calendar quarter of 2020. While we remain very constructive on the rate outlook, historically we have seen a bit of a rate pullback in the winter months and thus felt that a slight delay will reduce our opportunity cost from the installation. Based on this revised plan, we now expect to have total cash outlays of roughly $25 million or about $6,000 per day for the remainder of the fiscal year for the 10 dry-dockings, including scrubber installation and ballast water management systems. Since we do get extended payment terms from a number of our vendors, firm additional amounts in respect of these dry-dockings will not be payable until our fiscal year 2021.

Upon completion of the program, 12 of the 23 vessels in our fleet will be able to profit from the expected fuel price differential between low-sulfur fuel oil and high-sulfur fuel oil, following the implementation of IMO 2020. For the remainder of the fiscal year, we therefore anticipate cash cost per day of $29,000 which is the sum of the $23,000 a day to which we have historically guided, plus the $6,000 just mentioned. With a solid market backdrop and a strong balance sheet, we maintain our constructive view on our business and expect to continue to be able to generate solid cash on cash return for our shareholders.

With that, I'll pass it over to John Lycouris.

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John C. Lycouris, Dorian LPG Ltd. - CEO of Dorian LPG (USA) LLC [5]

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Thank you, Ted. (inaudible) seaborne LPG has grown 15% year-to-date over 2018, while U.S. export volumes in recent months have for the first time taken the global supply lead over the Middle East exports. According to Waterborne IHS, U.S. LPG exports to date are 34 million tons, while at [all] the Middle East liftings are at 32.3 million tons. This might be a direct result of the attacks last month in Saudi Arabia, reducing lifting volumes of September and October. The U.S. LPG supply has grown by 4.8 million tons year-over-year. The rest of the world supply growth has kept pace, growing 4.4 million tons year-over-year and recovering to roughly 2016 levels. Australia and Southeast and European volumes have experienced the largest growth, which we believe are favorable for ton-mile demand.

During the third quarter, we saw 187 VLGC liftings out of the U.S., about 6 monthly cargos on average more than last year and are likely attributable to Energy Transfer's Marcus Hook Terminal increased capacity during the year to about 15 VLGC liftings per month. We expect increased number of liftings in this quarter and next year on account of expanding U.S. export and fractionation capacity by Enterprise, Targa and Nederland terminals which would increase the total monthly VLGC liftings from all terminals to about 100 vessels.

U.S. propane inventories are still at the high end of their 5-year range, hitting 100 million barrels last week, 22% higher than last year at the same time. A wider LPG pricing spread between the U.S. and the Far East drove demand last quarter. In China, 2 BDH units started up operations: Donguan Grand Resource and Technology, 600,000 metric tons per annum PDH plant conducted trial production; and the Hengli Petrochemical in Dalian started a single-train dehydration unit. SP Chemicals put into operation a steam cracker which utilizes both propane and ethane as feedstock. Demand also increased in South Korea, as Hanwha Total and LG Chemical both restarted production of their steam crackers after maintenance which were expanded to increase their propane feedstock capabilities.

The order book overall remains stable, representing 13% of the current fleet and with implementation of IMO 2020, we remain hopeful that the cost of compliance may drive less efficient ships to demolition.

The scrubber adoption rate in all marine sectors continues to be strong and for the VLGC fleet we expect more than 40 vessels to have scrubbers installed by the end of first quarter 2020. We currently expect that our scrubber installation will be completed by the end of the third quarter 2020 which will mean that 12 out of our 22 ships will be scrubber-equipped. As Ted mentioned, we have decided to opportunistically push back installations, allowing our vessels to continue trading and take advantage of strong market rates and vessel demand. Given our fleet of installed and scrubber retrofit installations, we expect that our fleet will be commercially flexible and compliant with any regulatory or sovereign restrictions.

Thank you very much. I'll pass it over to John Hadjipateras.

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [6]

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Thank you, Ted. Thank you, John. Stacy, do we have any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Omar Nokta with Clarkson.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [2]

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That was a very good overview you gave on the market fundamentally for this year and the outlook, especially with the VLGC liftings being about a hundred or so each month. When you think about where things are right now, obviously VLGCs are very strong, earning $60,000 a day or so. We're supposed to be approaching or we're supposed to be feeling some of the winter seasonality that leads to a weaker market at least for the next several months. But clearly that's not happening. Is there something that's different this year relative to last year or the year before that's causing this strength to persist as we get into the winter?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [3]

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Yes, Omar. I think that there are many -- the market, the seasonality aspect of the market is being distorted for a while anyway. And there's less of it. And each year we go on to see the seasonality not sort of playing out, as we expect. It could be because of the new supply that we're getting. It could be because of the new terminals that are being established in the Far East. But I myself don't kind of count on seasonality. I look through it and I think we should be looking at the average for the year more, if we wanted to make a prediction, than when we're going to be spiking or falling. I just don't think the market will follow those usual patterns anymore.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [4]

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Okay, yes. That makes sense that there's probably more cyclical themes at play that are driving these seasonality issues maybe a bit towards the wayside. Just based off how strong the market's been, really as you said since effectively April, what's the inquiry looking like for longer-term deals from charterers?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [5]

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It's beginning. It's beginning again. And there is -- after a long period of course of a down market, there's reluctance on the part of charterers. And in such that in this spike earlier this year, when the market spiked during this year -- it also spiked a little bit the year before -- but when it spiked there was a little bit of a rush for people to cover. And you could see that the main incentive was to avoid being exposed to the spot rates. And so the period was maybe a year's period. At the moment, I think you're getting, it's maturing a little bit and people are looking further ahead and we see inquiries for 2 and 3 years. And of course we also at the same time have been seeing inquiries for projects, you know, for longer period time charters. So it's coming. It's coming -- I think, period. But we haven't seen anything sort of at the moment, which is for us actionable. But we're watching it very closely.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [6]

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Okay, got it. And just maybe just some color then potentially on the -- so you mentioned the project deals. Would those be, the ones you're seeing, are those for existing ships or ones that would be against a newbuild order?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [7]

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We try not to say that word. Yes. Look, I think both. Both.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [8]

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Okay, and maybe just one final one for me and maybe just taking a step back and thinking of Dorian. Obviously now pure-play VLGC company; 22 ships owned, obviously cash machine at the moment. What are your thoughts on the fleet from here as you think about the next phase in Dorian's lifespan? You had an aggressive investment 5 years ago in building up the fleet. But when you think about the next time you're ready for growth, do you want to continue on with VLGCs or do you look elsewhere within the LPG chain?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [9]

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That's a very good question. No. We look -- the further it gets from the VLGC, the more opportunistic we would be. But in terms of investing in a VLGC, as long as we feel some confidence in the prospects of the long term and we would be ready to do that. But I think we'd be very cautious, not so much because we fear the market, but we fear that a start of a newbuilding program can create a very unwelcome sort of --

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [10]

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Yes, no. Understood.

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Operator [11]

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Our next question comes from Nicolay Dyvik with DNB.

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Nicolay Dyvik, DNB Markets, Research Division - Head of Shipping Equity Research [12]

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Just a quick question on the Enterprise terminal, what do you hear in terms of volume ramp up? And you know, U.S. inventories are high (inaudible) for scrubber retrofits and the China LPG demand is finally strong after a weak H1 of 2018 and PDH ramp up that you talked about. So you now have higher terminal volumes. I just wanted to see if you have any insights on how that is shaping up, that ramp-up?

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John C. Lycouris, Dorian LPG Ltd. - CEO of Dorian LPG (USA) LLC [13]

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Can I take that then John H? Nicolay, the Enterprise has tested already a 175,000 barrel expansion and they're operational already. We've seen that this month. And we expect another expansion from Enterprise for 260,000 barrels in the third quarter of 2020. So we really expect that with their 85% utilization, they will be able to push a lot of cargos and liftings forward.

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Nicolay Dyvik, DNB Markets, Research Division - Head of Shipping Equity Research [14]

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So it is your sense that the 175,000 ramp-up is already now fully operational or yet to come?

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John C. Lycouris, Dorian LPG Ltd. - CEO of Dorian LPG (USA) LLC [15]

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We've seen in the last 2 weeks a very high utilization of the terminal. We assume it is and we have also heard that they have tested it and it is operational from the call a week ago.

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Nicolay Dyvik, DNB Markets, Research Division - Head of Shipping Equity Research [16]

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How should we think about you bought back some stock this quarter. How should we think about cash dividend versus buyback in our modeling for 2020?

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Theodore B. Young, Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer [17]

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Look, John, you on?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [18]

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Yes, I'm back on. I mean unless Omar, when I was talking about the things that I don't want to talk about.

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Theodore B. Young, Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer [19]

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Did you catch -- Nicolay-- if you want to pick up, your timing is impeccable. Nicolay asked about dividends versus stock buybacks, if you'd like to take that one, how they should think about that as they model out the coming 12 months.

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [20]

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We can't give you guidance on that. Because I think we look at it from time to time, and our board is looking at the most efficient way of returning to our shareholders. So at the moment, we can say that the buyback program is there. But we don't want to exclude the possibility of dividends or any other way of returning value which would be also debt reduction.

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Operator [21]

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(Operator Instructions) Our next question comes from Greg Wasikowski with Webber Research.

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Gregory Adrian Wasikowski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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So I'll bring up the scrubbers. So I just want to get the numbers right. So the original schedule was to have all 12 done prior to January 1, right? But now we're expecting 9 to be done by January 1 and 3 of those to slip past, right?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [23]

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Correct.

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Gregory Adrian Wasikowski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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Okay, so maybe what is causing those delays? Is it too many orders at the yards or is it more the installations are just taking a little bit longer than expected?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [25]

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It's not the installation. Where our ships have gone into the yards, they've come out in good time and within expected, both in terms of the cost and the time. We've not been far from our estimate and we don't expect to be very far. But the 3 ships that were delayed were [stemmed] in China and they weren't the only ones in China. But there were 3 in a particular Chinese shipyard which had problems. And so we have been examining alternatives. But we frankly have not been -- we've been a little bit relaxed to put it bluntly about looking for alternatives, because in the meantime we're taking advantage of the higher earnings. So I expect early next year we'll be proceeding, but by no means are we in postponement of any significance. It's just that in reaction to something that just came up unexpectedly, we kind of opportunistically took advantage of it to continue to do some voyages before we put the ships in the shipyard.

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Gregory Adrian Wasikowski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [26]

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Okay, and was it specific like operationally to the yard specifically or is it a broader issue?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [27]

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No. It's specific to the yard. That yard actually was closed down by the local authority because of a dispute between its owner and the local authority. I mean John, of course, is more aware of the details. But there's no -- I mean you've seen that in general, I think you may have heard also from other markets that there are delays and instances, particularly in China, where they're overbooked. This might not have as much impact now that people are taking the VLGCs out of the lineup and keeping them trading too. So I expect that it's not going to be an issue for us and other people to complete the scrubber programs, even if there is a little bit of a delay.

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Gregory Adrian Wasikowski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [28]

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Okay, that makes sense. And then the remaining 5 for this quarter, are they -- I'm assuming they are not in China?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [29]

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Two are in China.

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Theodore B. Young, Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer [30]

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John, I think 2 are in China.

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John C. Lycouris, Dorian LPG Ltd. - CEO of Dorian LPG (USA) LLC [31]

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One is there right as we speak.

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Gregory Adrian Wasikowski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [32]

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Yes, okay, cool. And then just from a modeling perspective, can you remind us how long we should expect those ships to be off hire for Q4?

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Theodore B. Young, Dorian LPG Ltd. - CFO, Treasurer and Principal Financial & Accounting Officer [33]

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We gave -- we've given guidance previously that it's 25 to 30 days. It could slip a little bit. But sometimes it could slip a little bit either way; sometimes a little faster, sometimes a little slower.

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Gregory Adrian Wasikowski, Wells Fargo Securities, LLC, Research Division - Associate Analyst [34]

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All right, and then just switching gears real quick, I always enjoy hearing about your developments as to LPG as a marine fuel. Now you guys had something going with MAN and Hyundai if memory serves. Do you have any updates there, and like when do you think we can start to talk about LPG engine retrofits becoming more realistic?

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [35]

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Yeah, John Lycouris, why don't you take that? You've been following it closely?

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John C. Lycouris, Dorian LPG Ltd. - CEO of Dorian LPG (USA) LLC [36]

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Thank you, John. Yes, Greg. We are continuing those discussions and we have progressed our engineering studies with all the parties concerned and we will be trying to put the whole project together as an economic proposition for the board to consider sometime towards later in the year.

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Operator [37]

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Thank you. I will now turn the floor over to John Hadjipateras for closing comments.

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John C. Hadjipateras, Dorian LPG Ltd. - Chairman of the Board, President & CEO [38]

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Thank you, Stacy, and thank you all and I wish you all a Happy Halloween, a good day and good night from me and good morning to all of you.

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Operator [39]

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This concludes today's teleconference. Thank you for your participation.