StealthGas Inc. (GASS) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the StealthGas Third Quarter and Nine Months Financial Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday 21st of November 2019. I would now like to hand the conference over to first speaker today, Mr. Michael Jolliffe, the Chairman of StealthGas. Thank you. Please go ahead, sir.

Thank you very much indeed. Well, good morning, everyone. And welcome to our third quarter 2019 earnings conference call and webcast. This is Michael Jolliffe, the Board Chairman of StealthGas. And with me on the call is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris, who will later on discuss our financial performance. 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 two 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 three summarizes the key highlights of the third quarter of the year that we released today. Although the third quarter was soft in terms of seasonal aspects and even though the weak spot market in Asia persisted, we managed to achieve an outstanding operational utilization of 98%. Therefore, our revenues increased within the limits of market conditions. In spite of our efficient operational approach, the weak spot earnings hindered our profitability once more. In addition, this quarter, we also incurred heavy one-off charges, mostly of a general and administrative nature. Nevertheless, the signs of our segment's improvement are more evident than ever, given the charters have become more eager in concluding longer period contracts at rates favorable to owners. In this environment, we managed to increase our period coverage for the remainder of 2019 to 88% and position ourselves strongly for 2020 as well. Concerning our sale and purchase activity, we finalized the sale of yet another middle age, small LPG vessel, the Gas Ethereal, which was sold for further trading at a very good price when compared to a similar-sized new building. Looking briefly at our financial performance highlights. Our voyage revenues came in at $36.6 million, a decrease of $6 million compared to the same period of last year, due to the net reduction of our average owned fleet by 9 vessels. It is interesting to raise two important points though. Firstly, and in spite of our revenue contraction, due to our fleet decline, our daily time charter equivalent is rising. Compared to the third quarter of 2018, our daily time charter equivalent increased by about $450. Secondly, on a percentage basis, our operating cost base declined more substantial than our voyage revenues. Our adjusted EBITDA of $14.7 million was lower than expected due to softer spot net revenues. Looking at our financial structure. We continue to deleverage at a strong pace. Our debt to assets now stands in the order of 39% and we still maintain a strong cash position of almost $66 million. Last, but not least, based on our further stock repurchase program, despite the very low trading volume, we have purchased to-date almost 415,000 of our Company shares for an aggregate consideration of about $1.4 million. Slide number four provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 43 operating vessels, excluding our joint venture vessels, we have 11 of these on bareboat, 27 on time charters, and 5 in the spot market. During the last three months and in spite of a tough Asian market, we concluded 13 new charters and charter extensions, all at improved rates. We now have 88% of our feet days secured for the remainder of 2019 and 53% for 2020. It is optimistic to note that since our last announcement, our secured employment for 2020 strengthened by 18%, and that our average period charter duration increased to 14 months. Our contracted revenues are in the order of $138 million, with about $92 million secured up to the end of 2020, about $33 million for 2021 and 2022 and around $13 million from 2022 up to the end of 2029. As evident, our secured employment, particularly in the short term, remain strong. In slide five, I would like to provide a brief summary of our recent strategy concerning our sale and purchase activity, and our joint venture. As mentioned earlier, on September the 27th 2019, we concluded with the sale of the Gas Ethereal, a 2006 built 5,000 cubic meter pressurized LPG vessel. As evident from the table presented, we sold a 13-year old vessel at $10.9 million gross price, when a similar sized new building is valued at between $20 million to $21 million. With regard to our joint venture activity four out of five of our joint venture vessels are under time charter contracts. In terms of our fleet geography, present in slide six, our Company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels, excluding our joint venture vessels as of November the 11th 2019. Currently 46% of our LPG fleet trades in Europe, about 36% in the Middle-Far East, 8% in Africa, and 10% in America. In the third quarter of 2019 and compared to our previous quarter, there were no significant changes in our trading profile. I will now turn the call over to Fenia Sakellaris for our financial performance. Thank you.

Thank you, Mr. Jolliffe, and good morning to everyone. I will continue the presentation focusing on our financial performance for the third quarter of 2019. This quarter, we managed to significantly enhance our fleet utilization. However, as the spot market in Asia was weak in terms of rates, this improvement was not reflected in our profitability. In addition, this quarter, our results were burdened by one-off general and administrative costs. Let us move on to slide seven where we see the income statement for the third quarter of 2019 against the same period of the previous year. Voyage revenues came in at $36.6 million, marking a $6 million decrease compared to the same period of last year. This contraction in revenues was expected due to the strategic reduction of our average owned fleet by nine vessels, one less charter-in vessel and relatively low revenues stemming from the spot market. Voyage costs amounted to $5 million, marking a 15% decrease compared to Q3 2018, as a result of spot das reduction by 21%. We need to note that compared to the second quarter of 2019, our voyage costs were higher due to commercial of high decline in conjunction with higher fuel prices. Based on all of the above, our net revenues for the period were $31.6 million. Running costs of $12.3 million marked about 21% decrease compared to Q3 2018. This decrease in cost was mostly due to our average owned fleet reduction by nine vessels and the receipt of an insurance claim credited to our OpEx. It’s quite positive to note that the decline of our OpEx was as a percentage far higher than our revenue reduction due to our fleet decline. General and administrative costs for which we usually do not incur heavy charges, increased compared to the same period of last year, mostly due to a $300,000 one-off charge pertaining to a legal claim. Along with $200,000 stock-based compensation charge, this plan ended in August. We incurred this quarter $0.5 million of non-recurring G&A costs. Based on all of these, our adjusted EBITDA is in the order of $14.7 million. Interest and finance costs marked close to $1 million decrease, mainly attributed to the lowering of our debt, LIBOR decrease and several loan margin reductions we managed to agree during the past months. Concerning the net proceeds from our joint venture, our loss is solely attributed on the balancing of the Eco Nebula for which we incurred heavy costs as the repositioning voyage lasted in excess of one month with associated cost of around $1 million. Based on all the points analyzed above, we ended the third quarter of the year with an adjusted net income of about $400,000 corresponding to an adjusted earnings per share of $0.01. Slide eight demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational utilization for Q3 2019 was in the order of 98%, which marks the very strong performance. In terms of our adjusted time charter equivalent, we noticed a rise on a quarterly basis by about $450, which is an outcome of improved time charter rates. Indeed, when analyzing the evolution of our voyage revenue breakdown, we notice a gradual but promising rise of our time charter revenues expected to strength even further following the conclusion of new charters. Spot revenues, although stronger are not sufficient to compensate for the related voyage cost incurred and therefore produce a satisfactory spot time charter equivalent. Looking at our balance sheet at slide nine. Our strongly continues as our unrestricted cash base around $66 million, and including the restricted cash, our liquidity is close to $80 million. Our gearing is in the order of 40%. In terms of net debt ratio, we stand about 32%, a very healthy ratio. Slide 10 gives a more detailed analysis of our loan balance reduction as well as our loan interest costs in the quarters ahead. Based on our scheduled principal repayment, we will reduce our leverage by around $40 million per year. We have no balloon refinancing during 2020 with minimal refinancing obligations of around $30 million in 2021. We also expect a strong reduction of loan interest costs in the quarters ahead. Assuming no change in LIBOR rates, we anticipate by the end of 2020, our loan interest cost to reduce by another $1 million. I will now hand you over to our CEO, Mr. Harry Vafias who will discuss market and Company outlook.

Let’s proceed on slide 11. Global LPG trade looks promising, as going forward LPG demand, particularly in Asia, is bound to increase. As per research done by DNB, LPG demand for the top four Asian importers Japan, Korea, China and India, will increase during the period from this year until 2021 with a compounded annual growth of 8%. The new PDH plants coming on line in China and South Korea will mostly drive this demand. Overall, it's estimated that worldwide demand from PDH plants will increase in the coming years. Focusing on Europe, propane demand will increase due to the new PDH plants planned to be operational within the next three years in Poland, Turkey and Belgium. So, broader demand side is bound to stand strong. Looking at the supply side, following the 25% tariff on U.S. LPG that was levied in August 2018, China’s LPG imports from the U.S. gradually declined. From importing 14% of U.S. LPG volumes in 2017, Chinese LPG imports, fell to 9% in the first half of 2018, 5% in second half 2018, down to 1% in the first half of 2019. In spite of this decline, the share of U.S. exports heading to Northeast Asia has remained steady at about 50%, meaning that in practice trade patterns altered without affecting broader trading volumes. On slide 12, we see that during 2019 rates for small LPG shares remained almost flat, both in East and West. The Western spot market experienced relatively normal summer but the first part of the fall was very quiet due to several refiners in Northwest Europe being down for an extended maintenance period in preparation for the IMO fuel switchover. This resulted in a weak September, October period. But the market has since then improved again, and now going forward, we expect to see a normal winter market with overall fir rates. On the time charter side, there has been some activity. But generally, demand has been relatively soft. There is, however, a fine balance of demand and applying in this market and doesn't take more than a few fixtures to keep the scale in favor of the owners. We believe this is about to happen as we’ve seen a few vessels getting fixed lately and there is more to be done, especially renewals by the end of the year, beginning of next year. On the Eastern side, the spot market remained uninteresting and usually quiet during the summer and early fall. Very low activity on the petchem side meant that there was no chance for the LPG volumes to be sufficient enough for the owners to avoid idle time. Rates were very soft, especially through the summer months. The past few weeks have however given the owners some room for optimism. The new petchem JV between PETRONAS and Aramco in Malaysia has finally started, and the first pressurized cargoes has been loaded. This plant is expected to provide significant employment for the pressurized fleet. In addition to this, a new refinery in Brunei has just now started the production and will be pushing out regular LPG cargoes for the pressurized market. Both very welcome additions for the owners trading in Asia, and has already improved the sentiment and the freight rates. On the period side, the summer was quiet and charters found themselves in no need to take coverage, considering the ample spot availability. We are however seeing a lot more activity in the last month, which is both as a result of an improving spot market in addition to the fact there is a lot of contract renewals starting from the beginning of January and several charters are looking for time charter coverage against their product contracts. Time charter levels have gone from softening until recent to now stable to firming trend. With regards to scrapping, small LPG pressurized segment has substantially old tonnage. 26% of the fleet is currently above 20 years of age, and therefore we expect an acceleration of recycle in the upcoming years. Since the beginning of '19, we have recorded the demolition of one small pressurized vessel. As per published orders, there are 15 vessels, that is 4.4% of the total fleet to be delivered in the end of 2021, probably the smallest order book of any ship category. The smaller gas carrier fleet has approximately 90 vessels above 20 years of age. The current order book of 15 ships is not large enough to offset the older tonnage expected to be recycled in the period ahead, especially where water ballast must be fitted. And we also have the IMO 2020 emission laws coming into force next year. I will now continue on slide 13, discussing the Company's outlook commencing with our share performance for the past 11 months. The performance of a stock is presenting along with the selected gas carriers peer group and the price of oil. In terms of correlation with oil prices, which we have -- which have remained relatively stable during the past couple of months, we see that all stocks in the group follow a broad correlation with oil prices. With regards to events affecting energy-related stocks, we need to know that the breakthrough in the U.S. China trade war has remained out of reach for some time. And this situation seems to be weighing on investors, thus affecting our segment. In slide 14, we're showing various scenarios for the Company's performance for 2020. The different scenarios were created based on the existing fixed charters plus vessels open on the spot market, assuming no new charters upon the expiration of a fixed vessel. As evident, different sport rates incremental is assumed for the smaller LPGs, the two semi-refs that are coming open and one Aframax that is also opening between Q1 and Q2 2020. In comparison to our previous forecast, we lowered the estimated daily average spot revenues for the LPGs to be even more conservative and account for higher expected fuel costs. In addition, we adjusted upwards our dry docking and water ballast cost estimates for 2020. Based on this realistic forecast, we see that a $2,000 hike in our daily LPG support rates in combination with a $6,000 rise for our semi-refs and Aframax, our single Aframax ship will bolster annual EBITDA by $16 million. It's noted that our EBITDA from our JV company is not accounted as earnings from our joint venture only affects our bottom line. Slide 15, we see some valuation multiples of StealthGas and cash comparable companies. As evident, our Company trades at a greater discount than its peers in terms of NAV. Our market cap is currently close $138 million, creating a large discrepancy between the values of our assets, which are close to $1 billion, and in essence, investors are valuing us at about $65 million above our cash balance or in other words, slightly more than one of our 22,000 semi-ref ships. We are confident that the market will correct its view on our Company and that we will soon reach a stage that our market capitalization will be a realistic reflection of our assets, value and growth potential. Concluding our presentation on slide 16, we present a brief summary of our company’s and market’s strong points, placing emphasis on the fact that we operate in a segment with solid fundamentals, going forward in which we enjoy being market leaders with a very strong balance sheet, earnings visibility and a good cash position. At this stage, Mr. Jolliffe will summarize our concluding remarks for the period examined.

Thank you, Harry. Our performance in the third quarter of the year improved to an optimal level in terms of fleet efficiency, as reflected in our operational utilization of 98%. Although we manage to contain our operating costs at moderate levels, the persistently weak earnings stemming from the Asian spot market did not allow us to enjoy a profitable quarter. We feel however that should market conditions improve as they seem to have, based on the 13 period charters and charter extensions we managed to conclude during the last couple of months, our profitability will be enhanced. Indeed rates for all our newly concluded charters in each of our operating segments are at higher levels. We have 53% of our fleet base secured for 2020 with a $138 million of secured revenues for all subsequent periods. Therefore, there is plenty of upside potential. The intensification of period charter activity during the past couple of months may be a positive sign that the market situation is in fact turning including in Asia and we are eager and well-positioned to take advantage of this opportunity. 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.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Randy Giveans from Jefferies. Thank you. Please go ahead.

Good morning. This is Chadd Tribo on for Randy.

Hi.

It looks like utilization increased to 98%, which is above our expectation. So, now that we’re more than half way through the quarter, what do you expect utilization to be in 4Q?

A bit of a difficult question. I would say, the goal would be to be above 95%.

Okay. Thank you. That helps. And then, now looking at the two vessels you recently purchased by the JV. What was the reason for entering those two new asset classes? And then, do you think there is any opportunity to acquire some vessels below the 7,000 cbm level?

Are you referring to the large vessel and 11K new building?

Yes.

This -- only one was bought by the JV, the larger should -- the 38,000 cubic meter. The 11,000 new building was brought only StealthGas.

Okay. So, can you kind of speak on the reasoning for entering into the larger vessel class to the JV? Do you look to do that in the future or do you think that was kind of the opportunistic thing?

Listen, I mean, we cannot foresee the future. We saw a ship, which was in extremely good condition for its age. We saw a price, which we thought was very good value for the age and size of the ship. And we decided to split the risk by buying it through the JV, thus sharing the equity contribution with our JV partners. Up to now which has proven a very clever decision because already the value is up by couple of millions, since July. And obviously, the rates for the MGCs, if you’re following them, is quite up the last three to four months. The 11K, because as you know, we are operating in the whole spectrum of pressurized ships, the Board believes that we cannot not be in a specific sub segment of the characterized market. And we found the opportunity to buy a ship from a top shipyard with top specs of equal technology at a fair price, and that's why we did it.

Okay. Thank you. So, now focusing on share repurchases, it seems like your preferred use of cash has been kind of the second hand acquisitions, as you talked about. So with that, how did you decide on the $1.4 million of share repurchase to-date? And then, should we expect a greater degree of purchases 4Q, 2020 as earnings are expected to improve?

The $1.4 million spent on shares has nothing to do with what we want. It’s the amount allowed by the rules of the SEC.

Okay. And then…

We will continue buying back stock. I think, the Board has approved up to $10 million for us to spend. So we are -- we have spent already 15% of that.

Okay. Thank you. And then, my final question, do you have any updated plans on your seven vessels that are over the age of 17 years, could be sold in the coming quarters? If you kind of speak to that that would be great.

Yes. I mean, generally speaking, as you have seen in the past, we don't like keeping very old ships for a very long time. We sold a very big amount of old ships last year. Some of the ships are fixed. So, if they're fixed and they’re earning a good freight, they're not number one priority to be sold. If they’re trading spot, which means they are earning less and are facing idle time, then of course they're bigger candidates to be sold. Obviously, for the buyers to come and pay with prices, they need to see first better trading environment. So, if indeed Q4 or Q1 prove to be better quarters for the pressurized ships, both East and West, I'm sure we'll find buyers for a couple of them. Yes.

Your next question comes from the line of Lance Gad [ph] from the Gad [ph] Foundation. Please ask your question.

I had a question. Could you give us some information as to what we will have to spend to have our ships comply with the 2020 regulations? Could you give us some color there?

Do you mean for the emissions -- the new emissions laws?

Yes, please.

Yes. As you know, in order to comply with these regulations, you have a choice of two things. One is to feet a scrubber, which depending on the size of the ship costs around $2.5 million to $3.5 million per ship, or you can do nothing and just buy specialized fuel with less sulfur. The companies that manage big ships that have big consumptions of fuel, a lot of them opt for scrubbers because they can repay the scrubber down quite fast. We have small ships with very small consumptions. Therefore, fitting a scrubber is not -- doesn't make economic sense. So, except for one ship that we have fitted already a scrubber, all the rest of the ships will be buying compliant fuel, and therefore, we don't need to spend anything on top to fit any new technology. Don't forget that the majority of our fleet is on time charter or bareboat. Therefore, the cost of buying the compliant fuel is for the charter’s account and not StealthGas’ account.

Great. Also, I had one comment about our website. I find it difficult to get the presentation that you're talking about, the number of pages. I don't see how you get that on the website. And I also find it difficult where you use this yellow -- a yellow color; it becomes very difficult to read. I'm concerned that it's not particularly investment friendly.

Lance, thank you for that. I have not personally designed the website, as you can understand. But, we will look into it and hope to make it more readable for everybody.

And how do you get the presentation that you've been talking about? I would think there's no easy way? How do you get it on the website currently?

You go to the tab, which is named Investor Relations and then you see the quarter that we are talking about.

Right. I get that. I get the press release, but I don't get the pages. But, anyway, okay. Thank you.

Thank you, Lance.

[Operator Instructions]

I see there is no further questions. So, Mr. Jolliffe can give his concluding remarks.

There are no further questions at this time. Please continue.

Right. We'd like to thank you all for joining us at our conference call today and for your interest and trust in our Company. And we look forward to having you with us again at our next conference call for our fourth quarter results in February. Thank you all very much. Bye, bye.

Thank you. That does conclude the conference for today. Thank you all for participating. You may all disconnect.