StealthGas Inc. (GASS) Q1 2019 Earnings Report, Transcript and Summary

Good morning and good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's StealthGas First Quarter 2019 Results Call. [Operator Instructions] I must advise you the conference is being recorded today. I would now like to hand the conference over to your first speaker today, Michael Jolliffe, Chairman of StealthGas. Please go ahead.

Good morning, everyone, and welcome to our First Quarter 2019 Earnings Conference Call and Webcast. This is Michael Jolliffe, the Board Chairman of StealthGas. And with me today is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris, who will discuss our financial performance at a later stage of our call. Before we commence our presentation, I would like to remind you that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, if you could all take a moment to read our disclaimer on Slide 2 of this presentation. Risks are further disclosed in StealthGas filings with the Securities and Exchange Commission. I would also like to point out that all amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars. Slide 3 summarizes the key highlights of the first quarter of the year that we released today. The first quarter of 2019 marked a very positive start for StealthGas. In spite of our strategic fleet contraction, high voyage revenues driven by our remarkable fleet operational utilization of close to 99% allowed us to enjoy a profitable quarter. Although market conditions, particularly the Asian spot market demonstrated moderate improvement, we were in a position to utilize our fleet efficiently, committing only 13% of our fleet days in the spot market. In addition, this quarter, we incurred moderate ballasting costs. This together with our reduced spot exposure led to a sharp increase in our voyage costs -- a decrease in our voyage costs, sorry, thus improving our fleet's time charter equivalent by about 13% compared to the same period of last year. With regards to our newly formed joint venture partnership, we proceeded with the addition of 2 more small LPG vessels from StealthGas in the same structure. Looking briefly at our financial performance highlights. Our voyage revenues came in at $38.4 million, reaching, on a fleet calendar day basis, levels of close to $9,000, increase by about $800 compared to the same period of last year. Our adjusted EBITDA at $17.2 million demonstrates one of our best earnings generated in the last couple of years. Looking at our financial structure, we are deleveraging at a strong pace. Our debt to assets now stands at about 40%. The most important element of our capital structure, however, is the increase of our cash position. Following the sale of a number of mostly older vessels, we now enjoy an unrestricted cash base of close to $75 million. Taking into consideration our cash base, our net debt ratio has recently dropped to 33%. Slide #4. This provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 44 operating vessels, excluding our joint venture vessels, we have 12 of these on bareboat, 24 on time charters and 8 in the spot market. During the past 3 months, we concluded 7 new charters and charter extensions, all at improved rates, which on aggregate added $30 million to our secured revenues. Although this period we saw many charters having a wait-and-see position in terms of new period fixtures, we managed to conclude a 10-year bareboat charter for one of our smaller LPG vessels. This indicates that some market players take the view that rates will continue to rise and therefore, want to fix long term. With our new period fixtures, we have increased our period coverage for 2019 to 71% and maintain $124 million of contracted revenues up to 2029. In Slide 5, I would like to provide a brief summary of our newly established joint venture. At the end of March, we proceeded with a 49.9% equity sale of yet another 2 of our small LPG vessels, the Gas Haralambos and Eco Lucidity, for an aggregate consideration of $14 million. As evident from the joint venture's fleet employment table, all of these vessels are on time charters and therefore, act as a source of steady cash flow. We may add some more secondhand small- to medium-size LPG vessels in the joint venture structure should interesting market opportunities arise. In terms of our fleet geography presented in Slide 6, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels as of the 15th of May, 2019. Currently, 15% of our LPG fleet trades in Europe, about 34% in the Middle East and the Far East, 9% in Africa and 7% in America. In the first quarter of 2019 and compared to the last quarter of '18, we strengthened our presence in Europe and firmed our presence in Africa as we now operate 4 vessels in this region. I will now turn the call over to Fenia Sakellaris for our financial performance.

Thank you, Mr. Jolliffe, and good morning to everyone. I will continue the presentation focusing on our financial performance for the first quarter of 2019. The key driver of a much improved performance this first quarter of the year was indeed our chartering performance, an outcome of which was the exceptional operational utilization of close to 99%. It was not that market conditions particularly in Asia visibly improved, rather we lowered our spot exposure, at the same time, achieved minimal off hires. This along with improved rates in the time charter market compared to a year ago, allowed us to enjoy high time charter equivalent revenue and good profitability. Let us move on to Slide 7, where we see the income statement for the first quarter of '19 against the same period of the previous year. Voyage revenues came at $38.4 million, marking a $1.3 million decrease compared to the same period of last year. This reduction in revenue was expected given that we now operate 7 less vessels, including our JV vessels, thus lowering our revenue generation potential. However, looking at our voyage revenues per fleet calendar day, this came at around $9,000, which is close to 8% higher than the first quarter of '18 due to higher prevailing rates and better performance in the spot market. Voyage costs amounted to $3.8 million, marking a $1.8 million decrease compared to Q1 '18. As mentioned, this quarter, our presence in the spot market was only 500 days plus we include minimal ballasting cost, which usually burden our voyage cost. Related to individual cost categories and compared to the first quarter of '18, we saw a sharp reduction in our ballasting costs of around $1.3 million. Net revenues, that is revenues after deducting voyage costs, came at $34.6 million corresponding to a net revenue margin of 90%. Running cost at $12.9 million marked about $2.5 million decrease compared to Q1 '18. This decrease in cost was mostly due to our strategic fleet reduction by 7 operating vessels plus an evident reduction in our maintenance costs. Dry-docking costs amounted to approximately $200,000. The biggest part of this charge relates to a docking survey for one of our small LPG vessels. Based on all of these, our EBITDA is in the order of $17.1 million. Interest and finance costs marked a $900,000 increase mainly attributed to the increase of LIBOR rates. It's worth to mention that in the past quarter, LIBOR rates have decreased by approximately 20 basis points. At the same time, our company is deleveraging at a strong pace, therefore, we expect a gradual reduction in our finance costs as the quarters go by. Based on all the points analyzed above, we ended the first quarter of the year with a net income of about $2 million corresponding to an earnings per share of $0.05. Slide 8 demonstrates our performance indicator for the period examined. As mentioned earlier on, our operational utilization for Q1 '19 was in the order of 98.8%, which marks our company's best performance since the second quarter of 2008. Our adjusted time charter equivalent on a 12-month basis exceeded the $1,000 per day increase. In terms of operating costs, we slightly decreased our daily OpEx assuming no bearable charges by $100 compared to the same period of last year. Looking at our balance sheet in Slide 9. Our liquidity was mainly enhanced from the vessel sale process and our unrestricted cash base is around $75 million. Our gearing remains at low levels in the order of 40%. In terms of net debt ratio, we stand at about 33%, a very healthy company ratio. Compared to our balance sheet as of the end of 2018, our leverage has decreased by $41 million given the $30 million reduction of our loans related to the JV vessels, which no longer appear in our balance sheet and a tight principal repayment schedule that we follow. In relation to the loans for our joint venture vessels, we need to mention that StealthGas proceeded in the full repayment of a $60 million loan agreed to be refinanced in full by our joint venture, therefore, StealthGas' unrestricted cash base will be further enhanced by another $8 million. Our current debt is close to $400 million. We have no balloon payments for 2019, and we have agreed to refinance all balloon net payments for 2020. We are currently concluding the refinancing of 2 balloons due in 2020. Once concluded, our current portion of long-term debt will be further reduced by another $12 million. Slide 10 presents on a daily basis the evolution of our breakeven against our average time charter equivalent. What we noticed is that our daily average time charter equivalent has increased substantially since the last quarter, while our breakeven has remained relatively stable. I will now hand you over to our CEO, Harry Vafias, who will discuss market and company outlook.

Proceeding on Slide 11. Global LPG trade has grown on an annual basis by an average of 6% over the last decade driven largely by U.S. exports to Asian countries. Since August 2018, imposed LPG tariffs have left a sharp reduction of U.S. exports to China and have played a negative role in broader market sentiment. Indeed U.S. exports to China heavily reduced in 2018, and it's estimated that volume reduction of U.S. exports to China compared to '17 was in the order of about 45%. Both countries altered their trade pattern following the trade war. U.S. exports were redirected to other destinations like Japan, South Korea and Indonesia, while channel import were mainly sourced from the Middle East countries like the Emirates, Qatar and Kuwait. Looking at '19, Chinese trade will continue to be affected by the imposed tariffs should an agreement not be reached, in the sense that the country's demand for LPG is expected to grow at a slower pace. However, new investments in 3 PDH plants that will commence operation in China this year are expected to give a boost to the country's LPG needs. On Slide 12, we see that during Q1 '19, rates for small LPGs remain flat with the exception of the large pressurized vessels. These vessels gain momentum due to the cargo deliveries to Morocco and West Africa, where larger sized ships are preferred. Concerning the smaller pressurized vessels in the -- both in the East and the West, rates remained flat as there was a general reluctance from charters to take forward position in terms of period fixtures. In terms of trade, West of Suez, the market has come off a bit more since our last announcement, which is much in line with the usual seasonal trends. Activity both in the spot and time charter market has been very modest as charters are in the wait-and-see mode. Expectations remains though for a more exciting second half of the year in the region. East of Suez, although the spot market did pick up post-lunar new year, unfortunately, neither LPG nor petchems produced enough cargoes in the market to support a further increase in rates. There are, however, some interesting new trades coming up on the petchem side though, where both butadiene and propylene is being exported from West Coast India to Southeast Asia and the Far East. This is producing good ton-mile demand for the 3,500 and 5,000 cubic meter ships and could become an important driver for the market going forward. On the period charter side, there was a general reluctance from charters to be very active, and our view is that the U.S.-China trade war should take some of the blame for the hesitant market sentiment. The long-term picture continues to look healthy though as the fleet grows older, and especially in Asia, we see a significant phaseout of older tonnage within the next 2 to 4 years. With regards to scrapping, the small LPG pressurized segment has substantial old tonnage, 26% of the fleet is over 20 years of age, which together with new environmental regulations may trigger recycling to accelerate in the upcoming years. Since the beginning of '19, we have not recorded any demolition of small pressurized ships. As per published orders, there are 11 ships, that is 3.1% of the total fleet to be delivered until the end of 2021, probably, the smallest order book of any ship type prevailing in the shipping industry. The small gas carrier fleet has approximately 90 ships over 20 years of age. Therefore, the current order book of 11 ships is not large enough to offset the older tonnage expected to be recycled in the period ahead, especially when water ballast treatment system must be fitted, and we have also the IMO 2020 emission laws coming into force in about 6 months. On Slide 13, we discuss -- we commenced with our share performance for the past 5 months. The performance of our stock is presented along with selected gas carriers, peer group and the price of oil. During the first 5 months of 2019, the price of oil followed an upward trend, higher than what analysts expected, followed by OPEC's decision to cut production output and China's reported economic growth for the first quarter of '19, which exceeded expectations. At the beginning of May, however, we witnessed an escalation of the U.S.-China trade war, an event that had negative impact on all energy-related stocks but also affected the oil price. On Slide 14, we are showing different scenarios on the company's performance for the year '19. The different scenarios were created based on existing fixed charters plus vessels open on the spot market and assuming no new charters upon the expiration of a fixed vessel. Revenues were calculated using an estimated spot rate and an individual utilization rate for each ship. Compared to previous forecast, we remain conservative as per our LPG spot rates and slightly increased estimated spot rates for tankers and semi-ref LPG vessels as these segments marked improved performance. In addition, the 4 vessels currently comprising the JV were removed from the vessel count and 50% of their net profit was accounted as a contribution to our company's EBITDA. As evident, a $2,000 increase in daily spot rates will boost EBITDA by close to $8 million. The increase would have had much higher effect, but we have the majority of our vessels opening within 2019 expiring the period contract towards the end of the year, and therefore, by default, revenue upside cannot be that strong immediately. If market ameliorates further, the upside is much more evident in 2020 when a $2,000 hike in spot rates will increase our annual EBITDA by -- in excess of $20 million. In Slide 15, we can see some variation multiples of StealthGas against comparable companies. As evident, our company trades at a greater discount than its peers in terms of NAV. Our market cap is close to $128 million, creating a large discrepancy between the value of our assets, which are close to $1 billion and our company's potential. In essence, investors are valuing us at about $45 million above our cash balance. We are confident that the market will correct its view on our company soon and that we will reach a stage that our market cap will be a realistic reflection of our assets value and growth potential. We are concluding with Slide 16. We present a brief summary of our company's and market strong points, placing emphasis on the fact that we operate in a segment with solid fundamentals and we believe will leverage our segment in the near future. As communicated in prior quarters, we are firm believers of our company's strength, and we believe that for the next couple of years, our segment's performance looks very promising. We, as market leaders, are well positioned to fully leverage this opportunity. At this stage, our Chairman, Mr. Jolliffe, will summarize our concluding remarks for the period examined.

The first quarter of 2019 marked a good start for StealthGas in capturing the benefits of an improving market. Our much better results were mainly driven by our remarkable operation -- operational utilization of 98.8%, our improved performance in the spot market, and of course, we were leveraged by the higher prevailing period rates that are slowly starting to make a noticeable impact on our revenue levels and profitability. Our balance sheet stands strong with $75 million of unrestricted cash and a leverage ratio as low as 40%. Our solid capital structure, in combination with our leading market position, places us in an advantageous position. The small LPG segment has solid market fundamentals in terms of a low order book and aging fleet, factors that make it very probable that our market will improve further during quarters ahead, so we will be likely looking at some exciting times to come. With our stock trading at a large discount to our net asset value, our Board has taken the decision to initiate a share buyback program of up to $10 million. This is a means to support our stock, but also our shareholders for their commitment to StealthGas. We remain optimistic regarding the quarters ahead and hope that our good performance this quarter will be a turning point as to our profitability. We have now reached the end of our presentation, and we would like to open the floor for your questions. So operator, please open the floor. Thank you.

[Operator Instructions] Your first question today is from the line of from Randy Giveans from Jefferies.

This is Chris Robertson on for Randy. So on the last earnings call, you guys mentioned that the first quarter utilization would likely be higher than the fourth quarter utilization but not as high as maybe 3Q '18. But it looks like it's surprised to the upside, reaching 98.8%, which is the highest since the second quarter of 2008. So what caused the big beat there? And where do you expect utilization to be in the second quarter of '19?

Yes. I mean it has always a very nice surprise when we have the best utilization since 11 years ago. As discussed, we shouldn't be opening champagne bottles yet because with everything that is happening around us with the China-U.S. trade war; sanctions on Iran, Venezuela, Cuba; hostilities in the Middle East and so on, you never know what will happen 3 months later. If the exceptional performance was due to mixed factors, as you heard some of them on the script, no ballasting, more efficient utilization of the spot ships, no idle time between period fixtures and so on and so forth, the sale and delivery of 7 of our older ships and thus more efficient ships remain in the fleet that are more competitive and more appealing for the charters, all these things together, plus obviously the stronger market and the seasonally stronger period that is always Q1, all these things together led to this result, which was even ahead of our own expectations. I don't think we're going to have such a strong utilization in Q2. I would say that it would be something between Q4 performance and Q1 performance on utilization.

Okay. That's fair. So with regards to the share repurchase program that you had previously mentioned, kind of with shares trading at a big discount to NAV right now, the market appears to be strengthening faster than expected. Do you -- would you consider repurchasing all $10 million worth during Q2? Or do you have a strategy of spreading that out more over time?

Very good question, Chris. I mean we've shown in the past that not only we buy lots of our own stock when the price is good, but if you remember the last time we did a repurchase scheme, we tripled it when we saw that we have the money to do it and the share price was indeed quite low. And as you know, we don't have a huge daily share volume. So I mean if you -- even if you give us all the money in the world, it cannot be spent that fast. But obviously we have the authority to spend up to $10 million, we don't have a limit of how fast we're going to spend it. So we would start I guess from tomorrow onwards trying to buy stock in the open market. At the end of the quarter, if obviously we have spent all the money and the market continuously improve and we continue to show good results, we will go to the Board and ask maybe for that number to be increased again.

Okay. With regards to the new JV, it looks like the JV acquired 2 more vessels from StealthGas. How many vessels in total do you expect that you guys might sell to the JV this year?

Listen, the idea -- it's a bit misunderstood. The idea is not for StealthGas to be selling its own ships to its JV subsidiary, that's not the idea. The idea is for StealthGas with a partner to go and buy third-party ships. Because we don't see many secondhand modern Japanese ships for sale, that's why we started with a fleet of 4 ships coming from StealthGas, but the Board of the JV wants new additions to be from third-party owners, and therefore, I think there is going to be not many more StealthGas ships flying from the one fleet to the other.

Got it. That's clear. So looking kind of on the supply side, it looks like the small LPG sectors is actually shrinking with fewer deliveries year-to-date and some small LPG carriers have been scrapped. Do you expect this trend to continue throughout the rest of the year?

Again, it's always a matter of market conditions, as you know, Chris. I mean if suddenly we see a further 10% to 15% rate increase then I guess few people will be incentivized to sell for demolition. On the other hand, we're happy that very few people have taken the new building routes. So we're lucky that the big Korean and Chinese yards do not build those ships. So we are, let's say, "protected" from a big order of similar ships. I mean if market stays as is, with the new regulations that are coming into force very soon, yes, I would say that some of these 22-, 24-, 26-year old ships will have to go for scrap or get marginalized and trade in really, really unsophisticated areas.

[Operator Instructions] And there are no further questions at this time. So I'll hand back to the speakers.

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

Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.