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StealthGas Inc. (GASS)

Q2 2014 Earnings Call· Thu, Aug 28, 2014

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Transcript

Operator

Operator

Good day, and welcome to the StealthGas Second Quarter 2014 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Harry Vafias, CEO and President of StealthGas. Please go ahead, sir.

Harry Vafias

Management

Thank you, and good morning, everyone. Welcome to our conference call and webcast to discuss the results for the second quarter 2014. I’m Harry Vafias, the CEO of StealthGas. I would like to remind you please that we’ll be discussing forward-looking statements in today’s conference call and presentation. Regarding the Safe Harbor language, I would like to refer you to slide number 1 of this presentation as well to our press release on our second quarter results. With me today is Mr. Stavros Papantonopoulos and if you need any further information on the call or the presentation, please contact Stavros or myself. Let me begin by saying this has been a very busy period for us lately. Overall, the second quarter was another quarter of healthy profits even though we did see a reduction in our net income. The majority of the vessels produced revenues in line with our expectations. However, our performance was affected because of few of the older ships in our fleet that were trading in the spot market and faced increased idle days. Taking advantage of these days, we performed concentrated maintenance routine operations that drove our costs a bit higher. At the same time, we took delivery of our second newbuilding eco vessel, the Eco Chios, and we increased our newbuilding order book by two larger semi-refrigerated 22,000 cubic meter LPG ships, bringing the total number of eco LPG vessels under construction remaining to be acquired to a total of 17. These larger vessels are capable of carrying a wider variety of LPG gases and some with high ethane content. Finally, just three weeks ago, we concluded the third and final offering within the last 10 months with institutional investors, including members of my family that brought the total amount raised for the period to…

Stavros Papantonopoulos

Management

Thank you, Harry. Good morning, everyone. So let me continue the presentation with slide number 9, the financial highlights for the second quarter of 2014. With an average of 43 vessels owned and operated in the second quarter compared to 38 last year, our revenues came in at $31.9 million, higher than last year’s $30.3 million. This increase was primarily due to the increased number of vessels in our fleet. Our voyage costs decreased to $3.5 million, by $1.1 million, because we had fewer vessels under spot charters in the 2014 period. Our running costs increased to $10.7 million from $8.7 million last year. This was primarily the result of an increase in the number of vessels operated in the 2014 period and some concentrated maintenance operations in the idle days of the older vessels. We did not have any vessels drydocked during the quarter and the $100,000 figure is mainly an expense relating to the vessel that was drydocked during the previous quarter. Looking at the operating income, that marginally increased in the second quarter to $7.1 million compared to $6.9 million in the same period last year, while for the six months period of 2014, the operating income has increased by 10% compared to the same period of last year. Interest and finance costs were $2.6 million compared to $2 million for the same period last year. The increase was due to the combination of increase in the commitment costs and high outstanding loan balances. Total debt at the end of the quarter was $367 million compared to $327 million in the second quarter of 2013. Our net income for the quarter was $4.6 million compared to $5.1 million last year. Compared to the same quarter last year, the average number of shares outstanding increased by 35% for…

Harry Vafias

Management

Slide number 12, please. This is an important slide as it shows what differentiates our LPG sub-segment from other LPG sizes. We can see how the picture changes favorably in the smaller LPG segment where the order book is relatively much smaller to the existing fleet. The Handysize segment, as defined by 1,000 to 13,000 cubic meter LPG order book, that’s highlighted in this bar chart is about 10.4% of the existing fleet and the majority part of it is contracted by us, which we are a dominant player in this market. Additionally, in the adjacent pie chart, we see the age distribution of the small LPG fleet. A key characteristic in the fleet distribution is that older vessels are a significant part of the total tonnage. A lot of these older vessels cannot compete for employment with our newer fleet as they do not meet the appropriate venting requirements and many chargers are likely to fix some period ships over 18 years of age. About 25% of the fleet is older than 25 years of age and 17% of the fleet is older than 31 years of age. So there is a substantial amount of scrapping capacity in the event of a meaningful decrease in rates. The fleet profile of the smaller vessel segment that we operate has better fundamentals overall than bigger vessel segments. Slide 13. What we can say about the LPG shipping market that we operate in comparison to other shipping sectors is that it has small day rate volatility and few serious pure-play established companies. Rates do not fluctuate widely and that gives us downside protection. Historically, rates range between $7,000 a day during the bottom of the market and $13,000 per day during the peak. Another positive characteristic is that when the markets are…

Operator

Operator

Thank you. (Operator Instructions) We will now take our first question from Mr. Jon Chapelle from Evercore. Please go ahead. Your line is open.

Jon Chapelle - Evercore

Analyst

So the first question about the growth prospects, without saying too much, if we look at the remaining equity component of your CapEx of around $40 million, you have $140 million on your balance sheet, that means you potentially have liquidity of $100 million, maybe $200 million if you lever that at 50%. You mentioned two things, one, your recent investments in the semi-ref and then two, investing more in the core fleet. How do you look at comparing and contrasting those two, especially given all the favorable things you mentioned about your core business and how you’re so small in semi-ref right now?

Harry Vafias

Management

Yes, very good question. First of all, we cannot spend all our $150 million because to run conservatively a shipping company, you must, as a basic rule, have about cash of $1 million per ship. So, if we are ending up with a fleet of 60 ships, then let’s say $60 million have been - will be kept beside for any day. So that of course can be invested if we find attractive opportunities. Now going to your specific question, as we said before, we think that having four to six larger versatile eco semi-ref ships is a very good complement to our existing fleet. We do not intend to become huge in that segment. We don’t intend to be number one in the larger LPG segments, not now anyway. So I guess, if we expand more to that combination of a couple of larger ships with a couple of smaller ships as we’ve done recently.

Jon Chapelle - Evercore

Analyst

And is there any available tonnage on the water today or does it have to go the newbuild route?

Harry Vafias

Management

By more than Japanese, I consider it close to none. So because we cannot guess, we’ve seen a few sellers but they are asking for very, very, very high prices due to the, of course, expected good times. So if we see the sellers maintaining those price ideas. I guess we have no other choice but to continue the newbuilding route.

Jon Chapelle - Evercore

Analyst

And then given your commentary about the yards, you’re probably looking at 2017 delivery for any orders placed today?

Harry Vafias

Management

For bigger ships, yes. For smaller ships, maybe in ’16, if we’re lucky, third quarter ’16, if we’re lucky, but otherwise, yes, ’17 onwards.

Jon Chapelle - Evercore

Analyst

When you talked about the rate environment in the slides that had the $7,000 to $13,000 peak to trough kind of levels, you said the rates today for modern vessels are around $9,000 a day. If I go back to the slide and last quarter it said $9,500 to $10,000 a day, can you just talk about the dynamics of how rates in this segment have fallen about 10% while rates in the other segments of LPG have been strengthening?

Harry Vafias

Management

Yes, as you know, Jonathan, very well, every summer we see a minimum 10% reduction in the spot rates, sometimes also in the short period rates. Of course, that is amplified in the older ships but now talking for the modern ships, that’s why we see a small reduction from the winter because unfortunately Q2 and Q3 are always softer, there is a softer rate environment than Q1 and Q4.

Jon Chapelle - Evercore

Analyst

And then just thinking about that seasonality, we’re two months into the third quarter already, how similar is it to the weakness in the second quarter, has the carry over through, almost into September now?

Harry Vafias

Management

Up to now, the Q3 develops similarly to Q2.

Jon Chapelle - Evercore

Analyst

Final thing, you had no drydocks in the second quarter, what’s the outlook for drydocks in third and fourth?

Harry Vafias

Management

We have zero scheduled drydockings.

Jon Chapelle - Evercore

Analyst

So then if I just think about it and then I’ll turn it over. You did $0.12 in the second quarter, as you mentioned in the press release pretty emphatically higher share count in the third quarter, it would be a stretch to think that the third quarter could be significantly better than the second quarter, as you sit here two-thirds of the way in?

Harry Vafias

Management

Every year, we say the same thing, Jonathan, every single year. Every single year we miss Q2, Q3 results and we slightly beat Q4 and Q1 results. Exactly the same thing happened this year. Q3 and Q2, unless something spectacular happens, are going to be similar quarters.

Operator

Operator

We will now take our next question from Keith Mori from Barclays. Please go ahead. Your line is open.

Keith Mori - Barclays

Analyst

I just want to follow up on Jon’s earlier question around rates coming down for the smaller ship classes, that was really a good question. I kind of had a follow-up relating to, we don’t see that happening on the 30,000, the larger LPG ships, is this the seasonal factor that’s just targeted at the smaller ship classes or is this something going on in the marketplace that kind of pricing is coming down to kind of get the spot moving, keeping ships being utilized?

Harry Vafias

Management

I think it’s the former.

Keith Mori - Barclays

Analyst

And then, I guess, we think you weighed out a pretty bullish case on the LPG market. When we think about rates longer term, you think they are going to go back to mid-levels for the next few years, what’s kind of the thought process around locking in long-term rates on these new ships of five to ten years relative to letting them operate in the spot market given the differentials between spot and new ships that operators are looking at?

Harry Vafias

Management

At the moment, we are about at the midpoint of the cycle. I personally don’t make any predictions about the future, that’s why in the sensitivity analysis we have all kinds of all rates from relatively low to high rates. All our internal predictions are with current rates. We never use higher rates for our internal cash flows, just to clarify that. And to be honest we are conservative meaning that if rates stay as they are, the newbuildings in the water will still, as you’ve seen in the sensitivity analysis, will still deliver a very, very strong EBITDA number. Now, on the question about fixing the ships, this business is generally a period business. 65% of the business is period oriented and only the rest, only 35% is spot. We generally don’t want to have all those ships fixed as you’ve seen, but if we see a good rate from a good name, and for medium to long term period, we’ll take it. Don’t forget that we have so many ships on shore to medium-term charters that if we see an upside in the charter market we’re going to have at any given point [some 15] [ph] ships to take advantage of this firmness. So even if we have six already, seven ships on eight-year charters, with all our newbuildings coming and the ships that we already have either spot or short-term charters, we have ample capacity to accept and take higher rates if they do come in ’15 or ’16.

Keith Mori - Barclays

Analyst

And I guess the last one from me. I know you are pretty adamant that there will be no more equity raises over the near term here. You feel comfortable with the liquidity and the cash flow projections. I know in the past we’ve spoken about potentially opening up the dividend maybe share repurchases or what have you, is that still on the table or are you looking at more utilizing that cash to fund growth opportunities?

Harry Vafias

Management

On your first question about the equity raises, we’re done. Whatever we raised, we raised. Whatever came in as a major shareholder came in. Now there won’t be any other raises until the medium term at least. On the matter of the dividend, as we have said in the Q1 call, we will be discussing this with our Board in Q1 ’15. If our projections and charters done on the newbuildings as projected to the Board, the Board will allow us to reinstate the dividend. If, of course, we do worse than we’ve said and promised, of course, it will not allow us to restart the dividends. So, I guess, we’ll have to wait for another five months.

Keith Mori - Barclays

Analyst

If I could ask one last, the contract rates that you’ve been receiving, are they close to what you anticipated or are they stronger, is there any direction you can give us on those rates?

Harry Vafias

Management

The newbuildings on these very long charters we did announce recently, they were close to what I had projected for the Board.

Operator

Operator

(Operator Instructions) We will now take our next question from [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst

Analyst

I wanted to touch on that last question because maybe I didn’t get -- about the long term charters that you just did, like the rates where you fix them. Maybe I didn’t quite understand what you said, it was what you had projected to the Board, if that’s something that’s probably disclosed or --?

Harry Vafias

Management

No, it’s not publicly disclosed, but we have made certain projections for the Board for these newbuildings and I’m happy to say that the rate we achieved was what we’ve projected but the periods we achieved was much longer that what we have projected to the Board.

Unidentified Analyst

Analyst

And so you are comfortable that those rates compensate you over that period based on where -- kind of the spot market we know is kind of depressed right now, so you are able to - I’m assuming then you are comfortable going up to lock in that rate that compensate you for what potential upside could come over the next few years where you can lock it in higher?

Harry Vafias

Management

As I said with the 61 ships that we’re going to have very soon, fixing five or six on long charters doesn’t make at the end of the day any difference. We have at every given quarter 10 to 15 ships up for re-chartering, so, as I said before, if we see hotter market, we have plenty of ships to take advantage of that.

Unidentified Analyst

Analyst

Just quickly, I know I can figure this out if I compare the slides of ships, but I don’t have it all in front of me, the ships that are on the long-term charter, are those the 3,000 to 5,000 or the 5,000 to 10,000, I know I can go back and figure it out, [I don’t have it] right here.

Harry Vafias

Management

All of the sizes are on long charters.

Unidentified Analyst

Analyst

So it’s not skewed towards any - it’s not skewed towards any of the size ranges?

Harry Vafias

Management

Correct.

Unidentified Analyst

Analyst

Just to clarify so, you are done at least in the near term for equity raises but you would be looking at, you said there’s not really anything attractive on the water and it would be only another newbuild if just you are fortunate to get in the late ’16, so that would just have to come from cash on hand and whatever financing you could get which would seem to kind of based on your kind of $60 million minimal working capital number limited to the smaller end of the segment unless you --?

Harry Vafias

Management

No, we have plenty of money to do. We have plenty of money to do order whatever size of newbuildings we want.

Unidentified Analyst

Analyst

Without raising equity?

Harry Vafias

Management

Without raising a single cent.

Operator

Operator

We will now take our next question from Robert Alpert from Atlas Capital Management. Please go ahead. Your line is open.

Robert Alpert - Atlas Capital Management

Analyst

Would you clarify, you said in the response to Keith’s question that you thought that rates were down for the smaller ships and not the larger ships on a seasonal basis and it was really just specific to those smaller ships, why is that? To understand how rates are moving.

Harry Vafias

Management

The rates of the small ships do not follow the rates of the big ships. To give an example, two years ago, the rates of the small ships were extremely strong and the rates of the big ships were extremely week, they were highly loss making. So the rates of the big ships do not follow the rates of the small ships and vice versa. And for us, if we look our results over the last three or four years, every single summer we have experienced spot softness and about 10% lower spot rates. So again this summer we are experiencing the same kind of softness, which is understandable and it was expected as well. It’s not something which is a surprise. We hope, like last year again, from October onwards we’re going to see significant firming of our age, which means that our older ships won’t have a problem being employed and at the same time we fix more of the modern ships on period.

Robert Alpert - Atlas Capital Management

Analyst

So when you get these seasonal downturns and then you start contracting longer-term charters, it’s not based off of where the spot is on a seasonal basis?

Harry Vafias

Management

Yes, we try to fix the charters not during the weak quarters but during the strong quarters i.e. Q4 and Q1.

Operator

Operator

There are no further questions at this time. As there are no further questions, I would like to turn the call back to Mr. Harry Vafias for any additional closing remarks.

Harry Vafias

Management

We would like to thank you for joining us at our conference call today and for your interest and trust in our company. We look forward to having you with us again at our next conference call for our third quarter results in November. Thank you very much.