StealthGas Inc (GASS) 2011 Q2 法說會逐字稿

Thank you for standing by and welcome to the StealthGas Inc. second quarter 2011 results conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that the conference is being recorded today, Thursday, August 25, 2011.

I would now like to hand the conference over to your speaker today, Harry Vafias. Please go ahead, sir.

Thank you and good morning everyone. Welcome to our conference call and webcast to discuss the results for the second quarter ended June 30, 2011. I am Harry Vafias, the CEO of StealthGas and I would like to remind you that we will be discussing forward-looking statements in today's conference call. Regarding the Safe Harbor language, I would like you to refer to slide number one of this presentation as well as to our press release and our second-quarter results.

With me today is Konstantinos Sistovaris, our CFO, and if you need any further information on the conference call or the presentation, please contact Konstantinos or myself.

Let's start with slide two to review how we are implementing our business strategy. As previously announced, our immediate term goal is to renew our fleet with the delivery of five new building gas carriers. In February and April, we took delivery of the first two vessels, the 5000 CBM Gax Elixer and Gas Cerberus which we then fixed on long-term time charters.

Then in the second quarter, we also proceeded with the sale of four older vessels. The average age of the four older vessels sold was 16 years and three of them were operating in the spot market. We successfully delivered three of these vessels to their new buyers during the same quarter and the fourth was delivered in July.

We wish to maintain a strong focus on our operational side and that is the reason behind the sale of these four older vessels. We believe that by removing them from the fleet and replacing them with brand-new larger and higher specification ships we will improve the overall performance of the Company going forward.

As far as our new building program is concerned, we have three more vessels to take delivery of. One is scheduled to be delivered next month. A second is scheduled for January 2012 and the last one is scheduled to be delivered in May.

After taking into consideration the total fleet of 37 ships at the end of the second quarter 2011, our net debt to capitalization stood at only 44.8% similar to the previous quarter and taking into consideration the scheduled vessel deliveries, we estimate that we will continue to have a moderate ratio of below 50%.

Our gross debt stood at approximately $350 million at the end of the quarter will [kick] at about $370 million in the second quarter of 2012 with the sale of the older vessels we received after repaying the debt outstanding on three out of the four vessels, about $[17] million but has further strengthened our balance sheet and liquidity.

We looked at the sale from an operational side as a good opportunity to enhance our liquidity and remove from the fleet these vessels that due to their age and condition it was difficult to trade them profitably and replace them with new vessels that we can charter out at much higher rates with significantly less cost.

On the fleet side, we had to write a book loss on the sales as we had already said. Approximately $5.6 million for the second quarter of 2011. We continue to strive to obtain a secure and visible revenue stream with stable and predictable cash flows. At the moment fixed employment for the fleet for the remainder of the year is 75% with almost 50% fixed for 2012 while the equivalent forward coverage numbers at the same time last year were 70% and 35% respectively.

Our fourth goal has been to own and operate a modern fleet of LPGs and in this respect the average age as of today is 11 years not including the four tankers which is rather young compared to the industry average. Last quarter the average age of our LPG fleet was 12 years. Including the product tankers, the Aframax tankers and the new building vessels, we estimate that at the end of 2011 our fleet will have an average age of 10.5 years.

We continue to believe that within our core segment this gives us a competitive advantage as younger vessels have less operating expenses, consume less bankers and are more appealing to blue-chip charters and that this factor will be important as we move forward into 2012 beyond.

Our next objective has been to maintain close customer relations. The quality of our customer relationship is exemplified by the quality of our charters which also lowers our counterparty risk. Out of a fleet of 37 vessels that we previously announced, we had one incident whereby we agreed to a rate reduction of only 10%. Because of the strength of the LPG market and the participation of more established names in it we don't expect to have any issues with our counterparties.

Our sixth goal has been to maintain cost efficient operations. I am pleased to report yet another good performance in the second quarter. Our net income breakeven level per vessel per day excluding losses on derivatives was $6,161 per vessel per day compared to $6,426 in the first quarter and $6,183 per day per vessel in the fourth quarter last year.

As we had expected, we managed to decrease our daily operating expense compared to the last quarter where there was an unexpected increase. We continue to concentrate heavily on managing our cost base and we expect an additional four vessels going on bareboat charter during the year and the addition of brand-new vessels to the fleet will be able to contain upward pressures on operating costs.

I would also like to remind you once more that in terms of our general and administrative expenses, we have amongst the lowest in the public shipping sector and we are very keen to contain costs not only on the operational side but also on the managerial side.

Finally, I am pleased to announce we have started buying back shares once more. We have in place since last year a share buyback program allowing us to buy shares up to $15 million. We recently bought approximately 350,000 shares. Since the program's inception we have bought back approximately 1.6 million shares, or about 7% of our total shares outstanding.

Slide number three. This slide demonstrates the development of our fleet. During the first quarter of last year, we sold the three older ships but replaced with one Aframax crude oil tanker. During the first quarter of this year, we added to our fleet one newbuilding LPG carrier. During the second quarter, we sold four older vessels, one delivered during the present quarter and we added another LPG newbuilding ship. With the additional three more newbuildings, we maintain a strong presence in the LPG segment.

StealthGas continues to hold the number one ranking in owned vessels in the 3000 to 8000 CBM segment and while there is no other company that owns more than 15 such ships. We continue to believe this segment of the LPG space has strong fundamentals coupled with relatively stable charter rates as we are demonstrating.

As of today we have taken delivery of three newbuilding vessels funded partly through bank finance and partly through internally generated cash flows. The same will apply for the remaining three years we have committed finance in place. As of June 30, $23 million have already been paid as advances for the remaining newbuildings and we expect another $60 million of capital expenditures.

Slide four. This slide demonstrates our fleet employment profile and provides you with the earnings visibility for the (inaudible) [36] vessels currently in our fleet.

At the bottom of the employment profile chart we have included the percentage of fixed employment days. This enables you to assess the stability and predictability of our earnings. As you can see, 75% of voyage days are already fixed for 2011 and almost 50% for 2012 with a number of charters going out to 2014.

During the second quarter, we announced new time charters for five of our ships securing revenues of about $13.5 million over the next year. Total contracted revenues are approximately $150 million and we estimate the time charter equivalent for the LPG vessels on long charters is $8,700 a day.

In terms of charter types, out of a fleet of 36 ships, 13 of the vessels are on long bareboat charters, 15 of the ships are on time charters and eight are on spot charters. The Company policy is to arrange for long-term charters however with the staggered employment profile, there will be always opportunities to take advantage of a firming market.

We now turn to the financial highlights so I will pass you on to our CFO, Mr. Sistovaris.

Thank you, Harry. Good morning, everybody. So let me continue the presentation with slide number five, the financial highlights for the second quarter of 2011.

With an average of 39 vessels owned and operated in the second quarter, we realized a net loss of $3.6 million on voyage revenues of $31.4 million. Included in the net income figure is a $1.5 million expense due to the change in the fair value of derivatives. This consists of a cash loss of $1.2 million relating to payments under the interest rate swaps as well as a non-cash loss of $0.3 million on interest rate swap and currency hedging arrangements due to the movements in the fair value of these instruments. Also included in the net income figure is a non-cash loss of $1 million on the valuation of foreign currency deposits in yen that we held and used for the payments on the delivery of our newbuilding vessels.

In relation to the sale of the four vessels there is a non-cash impairment loss of $2.6 million and a non-cash loss from the sale of $3.1 million. Excluding the non-cash items I just mentioned, our adjusted net income was $3.4 million or $0.16 per share calculated on an average of 21.1 million shares outstanding. We believe this is a more meaningful number for investors to see what level of profits or losses we incurred from the chartering of our vessels.

The free cash balance at the end of the quarter was approximately $42.5 million versus $34 million at the end of last quarter. Our net debt to capitalization stood at 44.8% at the end of the quarter similar to last quarter's levels.

We continue to believe that maintaining our leverage at moderate levels is important and believe that when all vessels have been delivered we will maintain a debt to cap ratio below 50%.

We now turn to slide number six. This slide provides you with an overview of the development of our income statement for the same quarter last year and the previous quarter. In comparing our results for the second quarter of 2010 when we had an average of 38 vessels in our fleet to the second quarter of 2011 when we had an average of 39 vessels in the fleet, revenues increased by 17% and amounted to $31.4 million which I may add is the highest revenue figures since the Company became public and even surpassed last quarter's revenue figure that was our previous record.

Revenues were up $4.5 million year on year. The increase in revenues year over year is due to three factors. First, the addition to the fleet of our Aframax tanker the Spike and the two newbuilding LPG vessels. Second, the increased exposure in the spot market. And third, the significantly better charter environment compared to last year.

The increase in spot market activity also means that we had higher voyage expenses so in effect our voyage revenue minus our voyage expenses were up by $2.7 million year on year.

The net loss for the second quarter was $3.6 million. EBITDA was $5.3 million and loss per share was $0.17. As previously mentioned if we are to exclude the non-cash items, our earnings per share were a solid $0.16 compared to $0.09 per share in the same quarter last year and $0.13 per share in the previous quarter.

Slide number seven please. Looking at our balance sheet in terms of cash, we continue to maintain a healthy cash balance strengthened by the addition of the net proceeds from the sale of the vessels of about $[30] million for the second quarter which are reflected here and another $4 million which will be reflected in the third quarter.

Our vessels book value net of depreciation stood at $601.4 million at similar levels last year. With the scheduled deliveries of new vessels we would expect to see this figure reach $650 million in a year's time.

In terms of liabilities, the current portion of our long-term remain constant at $34 million. Other current liabilities related to products and services provided to us by our manager and other third parties. These were reduced slightly to $22 million.

Our long-term debt increased slightly due to the new facility for the Gas Elixir and the Gas Cerberus to $380 million and we would expect to see this figure top at around $335 million after we take delivery of the scheduled vessels.

I would also like to point out that we have no debt maturing over the next couple of years so there is no need for refinance. The first balloon payments on our loans are due in 2014 and then in 2016.

Other liabilities of $10.7 million relate to the interest rate swaps we have with our banks to protect us from increases in LIBOR rates. As of today, we have around 45% of the interest rate exposure in our loans hedged. Equity for the three months ended June 30, 2011 was $304 million.

I would also like to point out that with our share trading at $4 we are greatly undervalued and the net book value of our fleet on a per share basis is around $14.

We are now pleased to turn to slide number eight. These are our operating highlights for the first and second quarter of 2011 and the second quarter of 2010.

In terms of fleet data, in the second quarter of 2011, we owned and operated an average number of 38.7 vessels compared to 37.6 vessels in the same period last year. As a result, total voyage days for the fleet for the second quarter increased by 4% to 3496 days. While the increase in voyage days was not as significant, there was a big increase in the number of spot charter days which is partly why we reported higher revenue figures and also higher voyage expenses.

While activity in the spot market was fairly solid for this time of year, we would expect spot days to be reduced as a result of the sale of three vessels that were operating in the spot market and the delivery of four more vessels on bareboat charters in the latter part of the quarter. We still have eight vessels operating in the spot market.

In terms of average daily results per vessel in the second quarter, we achieved a time charter equivalent of $8,601 per day per vessel on an adjusted basis compared to $7,835 per day per vessel in the same quarter last year and $8,967 in the first quarter of 2011. We can see significant increase from last year's numbers approximately 10%. When comparing to last quarters, we expect to see a small drop of spot trading coming into the summer usually leads to lower utilizations.

In terms of vessel operating expenses on an adjusted basis, we had $4,070 per day for the quarter and as we had discussed during our last conference call, we expected to see this number be reduced compared to the previous quarter when it stood at $4,209 per day. And of course, we are constantly focusing on reducing it further. We still operate above breakeven levels in terms of income and cash flow.

We now turn to slide number nine where we are going to provide you with some estimates for the remainder of the year, that is the third and fourth quarters. We have contracted revenues under time and bareboat charters of approximately $42 million. We expect that with the sale of the four vessels and the bareboat charters for another four vessels, our operating expenses will be reduced to our around $8 million per quarter for the next two quarters.

As far as dry dock expenses, this is a heavy dry dock year. We have already drydocked four vessels and we are scheduling to dry dock another four at a cost of around $2 million spread evenly over the next two quarters.

Interest payments on our loan and cash payments on our swaps we estimate to be $6.8 million and depreciation expenses of $13.8 million. Finally as far as the payments for the new building vessels are concerned, as we said, we have committed finance for the remaining three vessels covering the full amount of the future cash outflows and we will be paying like before in predelivery installments and get the financing at the time of each one's delivery.

Thank you very much and now I will hand you back over to Harry for some further comments on the market.

Let's move on to slide number 10 where I will talk about the freight markets and this slide will show you the one-year time charter rates for our market. The figures are based on independent estimates by Lorentzen & Stemoco. We have updated this slide to last year's rates, current rates, and future estimates.

What you can deduce from this slide is we have been experiencing our chartering operations. In the segment, we operate 3,000 to 8,000 CBM. We have seen a strengthening in the market compared to last year in the region of between 10% and 20% depending on the size.

It is also encouraging to see that rates in the larger categories that are usually much more volatile have been in an upward trajectory approximately $800,000 per month rates for VLGCs which are solid numbers. Although we do not own these type of vessels, we provide complementary services as VLGCs mostly trade on long-haul routes for example Middle East to Far East and we perform the local distribution in the Far East.

We believe that the strengthening in our market has allowed us to conclude charters at elevated levels as previously announced. Our fleet has a staggered employment profile and as more vessels are coming off charters, we hope to renew them at higher levels. We have already seen an improvement in our operational figures and we expect to see more of it in the future.

In this slide, we only show a forecast for the current quarter where you can see the time charter rates are holding nicely. Otherwise, I have previously mentioned we normally expect rates mainly in the spot market to slightly ease during the summer months but at elevated levels that keep our operations comfortably in profitable territory.

Slide 11, the first point I would like to make relates to the volatility in our segment. As you can see on this slide since 2005, time charter rates have fluctuated for a more than 3,500 CBM vessel between 7,000 and 10,000 a day. This kind of volatility in the world of shipping is very limited if you consider for example that VLGCs fluctuate from 30,000 a day to 3,000 a day or a dry cape size fluctuates from 150,000 a day to 10,000 a day with potentially huge losses.

The lower volatility protects our cash flow and revenue stream and makes us a safe investment.

As we showed in the previous slide, charter rates have been on an upward path recently. The most important question is whether this recovery will prove to be sustainable in the longer-term. We believe that the fundamentals in our core segment that relate to supply and demand are favorable.

On the demand side, we would expect the completion of several large LNG projects that are due to come onstream after unfortunate delays due to the financial crisis and will prove to be a catalyst for this trade. We have already seen an increase in volume of LNG being transported and the connecting link is that LPG is partly derived from LNG production. There were 54 million of LPGs shipped in 2010 and estimates are for 58 million tons for 2011 and steady increases after that.

There are solid indications that the supply of LPG product will increase during 2011 and beyond supported by strong growth in Asia. On the supply side, the order book for Handysize LPG ships is very small at the moment. On the other hand, we expect the order book over the next few years to remain steady and what is encouraging is that the fact that we still have not seen increases in the order book and newbuilding prices have not come down as much.

On the other hand, the existing fleet is relatively old and that means more vessels will need to be scrapped. Overall net fleet growth is minimal and depending on the level of scrapping, it could become negative in 2012 and beyond. If this projection materializes we believe that we have a fleet of modern ships, we will command premium rates and we are positioning our Company to take advantage of the strong fundamentals in this sector.

Last slide 12. We have included this slide to emphasize the point about the order book. Actually that the figures shown here in the graph are for all LPG size categories and as we have just discussed in our core Handysize sector, the order book is much lower. As you can see for the two mainstream shipping sectors, tankers and bulkers, the order book continues to be at very high historical levels that could point to difficult years ahead.

For containers, the situation has somewhat improved but we have seen lately a renewed interest in newbuildings. There are two sectors where the order book continues to be low, LPGs and LNGs. And in LNGs, just like in the containers, we have recently seen increased interest in newbuildings.

As opposed to most of the sectors listed here, it is not just the order book that is low for the Handysize LPGs, it is also the fact that the fleet is aging and currently around 20% of the fleet is over 25 years of age making these older ships unfit to compete in the international market.

I would like to close the presentation by saying that although reporting a loss is never desirable, I believe that we made the right decision selling the older vessels in an effort to improve our liquidity and improve our operational efficiency. In order to have a deeper understanding of our business and our potential, one has to look through and beyond the one-off items in the accounting treatments of derivatives and foreign exchange hedges and focus on what I call the operational side. And in that respect, I am pleased with the results we announced today as we reported record revenue figures.

We managed to take advantage of improving markets and posted solid operational profits. Even though we faced some difficult markets in the past, we have never reported a loss from the operational side. I believe that we have significantly improved our balance sheet and liquidity recently and are focusing on the operational side of our business so that we are in a position when we see sustainable turnaround in the markets we will be able to take advantage of it.

Although we face, some difficult markets over the past three years, we managed to grow the Company through our internally generated cash flow and did not have to resort to the dilutive equity offerings. We continue to present a very attractive prospect to investors in shipping. We are share trading at around $4 and we feel that we are valued inappropriately by the market. With an NAV close to $13, we are a safe investment in my view based on the fundamentals we have discussed here today, the outlook for our sector is the best amongst all of other shipping sectors.

Of course markets have been very volatile recently and the economic news coming out of the US and Europe are not encouraging. The recent drop in stock markets have also led to further drops in our stock price and so we decided to step in and repurchase some of our stock.

As we announced today, we have recently bought back about 350,000 shares. In total, we have bought back since the program began in 2010 over 1.6 million shares.

We have now reached the end of the presentation so we could open the floor for questions. Thank you.

(Operator Instructions). Natasha Boyden, Cantor Fitzgerald.

Thank you, operator. Good morning, gentlemen. I am just curious -- thank you for the presentation but what is your general strategy going forward? I mean, do you find asset values attractive where they are now and continue to expand the fleet or do you think you are going to focus more on cash flow generation and deleveraging?

It all depends on the markets, the general economic conditions and the lending environment. At the moment we are staying put. We are not doing any new investments. We think the best opportunity to use our money is buying back stock since it is so cheap. Obviously if we see opportunities with bankrupt companies, fleets that are up for sale, or individual ships that are up for sale at very attractive prices of course we will look at them. At the moment, we haven't seen anything like this on the gas side. As you know very well, we have seen bankruptcies and auctions mostly in the tanker and dry dock space.

Okay. And then you have obviously been busy selling some of your smaller older ships. When you look at your fleet now in total, are there other ships you continue selling or do you think you have sold everything that you would like to sell for the time being?

If you see our fleet list, we still have some early mid '90s ships and obviously if we get reasonable prices for them, we would like this year or the next to sell them and keep only the mid-'90s and the younger ships.

Okay, great. Thank you very much.

Jeff Geygan, Milwaukee Private Wealth Management.

Hi Harry. This is Nick. Jeff had to step away. I was wondering if you could give us a little bit more color on the reason why you gave a 10% discount on one of your product tanker charters?

Nobody has said that it is a product tankers. So I would like to rephrase your question and ask it on your behalf and say why did you give a 10% discount?

Okay, that sounds fair.

Okay. Because as you can understand and you have read, you read it in the shipping papers and in the maritime reviews a lot of charters either have financial problems or are just bullying owners into accepting big discounts or other things that will make their situation easier. We always think of our shareholders' interest first and we thought that if we did not agree we would have a long drawn court case, a very expensive court case with not 100% sure results. And in the meantime, we would get zero.

So we decided together with the BOD to better accept a 10% discount and get paid on time than having to fight a battle with not very -- with no guaranteed success.

Okay, sounds good. Thank you.

(Operator Instructions). George Burmann, J.P. Turner.

Good morning, gentlemen. Congratulations for a very good quarter.

Thank you.

I have got a quick question on your financial estimators on your slideshow for the third and fourth quarter of 2011. Are all the revenues and expenses etc. for the two quarters combined or in each individual quarter?

They are combined, the revenues are combined. The non-contracted voyage days, they are combined. The operating expenses as we said, it is $80 million per quarter. Dry dock expenses are combined and interest rate swaps and depreciation also combined.

Okay, great. Also maybe just a comment I think as you alluded in your presentation the best use for your cash is probably buying back your stock. If you can buy an asset worth $14 for $4, I think that makes a lot of sense to take in as much as possible. I look forward to a further profitable future into 2012.

Thank you. Another question?

Jay Weinstein, Highline.

I have a quick question. I apologize if you mentioned it. Did you -- for the latest stock repurchase this month, do you have an average rough average price -- doesn't have to be exact? And how much do you have left on the original authorization before you would have to do another one?

It is about off my head because I don't have the data in front of me -- 4.15.

Okay and how much -- I don't know -- how much would that leave left on the original authorization?

About $7 million, $7.5 million approximately.

Okay. That's what I wanted to know. All right, thank you very much. I appreciate it.

Carl Flournoy, private investor.

Good morning. Is there an opportunity in the gas trade versus the product, LPG versus LNG, is it so much different market?

It yes it is a different market.

And you are not geared up to enter that market?

I don't understand the question.

Well the liquid gas, the frozen gas trade versus the petroleum product, your ships are all petroleum.

No, you have confused yourself. There are three different trades. There is a liquefied petroleum gas trade which actually we are the leaders in it. There is the petroleum trades, petroleum products trades, which is a trade that the product tankers do and we have a few ships of that. And there is also the liquid natural gas trade which we don't do. So of which trade of the three are you referring to?

I was referring to the liquid gas, the liquid gas.

LPG or the LNG?

Liquid natural gas, liquid natural gas.

Right. We are not operating in this trade.

Is that because it is a wholly different technology trade to do?

No, actually the technology is exactly the same. It is a matter of capital expenditure. A typical LPG ship costs approximately $25 million and a typical LNG ship costs $200 million.

Thank you.

Jay Weinstein.

Hi, thank you. I had a couple of questions about the non-cash items just to help me understand. When you take delivery I guess it is next year of the last new LPG ship, essentially that will be the end -- will that be the end of the foreign-currency part of the non-cash items. Is that fair to say?

Yes, yes. That is fair, yes.

Okay. So as you -- I guess as you take delivery that number will sort of -- the fluctuations in that number will sort of decline over time until they are gone at the -- next year, correct?

Correct.

Well that will make it decidedly less complex. In terms of -- would you mind repeating the statistics on the notional amount of your interest rate swaps versus your total debt? I know you mentioned that but if you could repeat that.

Could you repeat. I didn't understand which number?

You know, I am curious as to how much of your total debt you actually have fixed interest rate swaps on.

Oh, the swaps that we have around 45% swapped out at around 3%, 3.5%

Okay. And those -- what are the general maturity rates of those swaps? The realized cash loss for this quarter, was that as swaps kind of rolled off?

These swaps I mean, we did them to cover our loans so they are usually you know for many years we do these transactions. We have quite a few expiring in 2013 where this what I mentioned before, the 45% coverage will go down to around 30%.

Okay. So it is a big slug. It is not like they roll off a little bit every couple of quarters?

No, they do amortize yes, they do amortize.

Okay, they do amortize, but not that quickly. Okay. All right, thank you. So those fluctuations we are likely to see some quarters up some quarters down, right?

Yes, these fluctuations we are going to have unfortunately.

Okay, that's fine. I just sort of wanted to understand them better. Thank you, I appreciate it.

You are welcome.

George Burmann.

Hi, one more time. A quick question, could you give us the geographic locations of where your 37 LPG tankers are operating right now?

Of the geographic locations of the LPG tankers?

Yes.

The majority are in the Far East, then approximately one-third is in Europe and we have a couple of ships in South America.

Okay. Any of those regions project stronger growth versus the other?

Of course, the Far East.

The Far East. Okay, thank you very much.

Thanks.

(Operator Instructions). Jeff Geygan.

Going back again to the interest rate swaps, I know you currently have -- you are fixed at about 45%. Is there a target you want to be at so when you go back down to 35%, would you look to fix some of that interest rate back to get close to 50%?

It depends on our view of what will happen with the interest rates and the global economy. But obviously, we don't like to be exposed to meaning not have any hedges. We feel that at about 40% we are comfortable with the level such as that if the economy remains as it is right now. Of course this is evaluated every quarter.

Okay, thank you.

(Operator Instructions). There are no further questions at this time. Please continue.

We would like to thank you for joining us on 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.

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