StealthGas Inc (GASS) 2018 Q3 法說會逐字稿

Good day, and welcome to the StealthGas Third Quarter 2018 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Harry Vafias, Chief Executive Officer. Please go ahead, sir.

Good morning, everybody, and welcome to our Third Quarter 2018 Earnings Call. This is Harry Vafias, the CEO of StealthGas. With me today is our Finance Officer, Mr. Sakellaris, who will discuss our financial performance at the later stage of our call.

Before we commence our presentation, I'd like to remind you that we'll 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. Risks are further disclosed in StealthGas' filing with the Securities and Exchange Commissions. 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 for the third quarter results we released today. Overall, our performance in Q3 was softer than what we anticipated due to several factors other than seasonal factors that always prevail in the third quarter of any year. Although our market fundamentals are strong and will continue to be so, this quarter, we noticed an unexpected slowdown in the Asian LPG market, with some charters not extending charters for several ships. Inevitably, this led to a break in the spot markets. Scheduled maintenance of Chinese PDH plants, along with fewer spot cargoes, led to a poor spot activity in the area with lower-than-expected revenues for the owners.

Thankfully, the market conditions described above were temporary as in the past couple of months, the Asian market has improved. We believe it's a strong demand for LPG and the positive fundamentals of the small LPG segment that fuel our market.

As per our company's performance this quarter and in spite of a tough Eastern market, we mark a 96.1% operational utilization and a 15% reduction of commercial off-hire days compared to the same period of last year. As the time charter market in Asia has improved, we grasp the opportunity of fixing numerous new time charters, and we now have about 84% of fleet days secured on period charters for the remainder of '18 and almost 60% of '19.

In terms of financial performance, we achieved voyage revenues of $42.7 million and a lower-than-expected EBITDA of $15.3 million for the reasons that we'll explain at the later stage of the call. As per our leverage and cash position, our gearing remains at low levels around 43%, while we maintain a healthy unrestricted cash balance of approximately $65 million, an increase compared to previous quarters following the sale and delivery of some of our older ships.

In Slide 4, we provide some information on the sale and purchase activity of StealthGas. Since the beginning of 2018, and as previously announced, we have agreed to sell 7 LPG vessels for a total price of $40 million.

Up to date, 5 vessels that were sold for about $30 million have been delivered to their new owners. 3 of these sales took place close to the end of the third quarter. Therefore, we expect the easing of our cost base to be visible from the fourth quarter onwards. The 2 remaining sales of vessels that of the Gas Sincerity and Gas Texiana will both take place in the first quarter of '19 and combined, will add approximately $10 million to our cash base.

Slide 5 provides an analysis of our fleet employment. In terms of charter types, out of the fleet of 50 operating vessels, we have 12 of these on bareboat, 32 on time charters, and 6 in the spot market.

During the past 3 months, deemed as the soft seasonal period for our market, we concluded 11 new time charters and charter extensions. The interesting aspect of these renewals is that all of them occurred at daily rates of approximately 50% higher than their previous fixtures. We have about 84% period coverage for the remaining of '18 and almost 60% coverage for '19. In terms of secured revenues, we have about $151 million in contracted revenues up to 2022, with $70 million to be received until the end of 2019.

In terms of our fleet geography 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 ships as of November 5. Currently, 47% of our LPG fleet trades in the Middle East and Far East, 37% in Europe, 10% in Africa and 6% in America.

In the third quarter of '18 and compared to the previous quarter of this year, we decreased slightly our presence in the Far East as the series of our consecutive spot voyages in the area came to an end, and we increased slightly our presence in the Europe and Africa.

We now turn the call to Mr. Sakellaris for the financial performance.

Thank you, Harry, and good morning to everyone. So let me continue the presentation focusing on our financial performance for the third quarter and 9 months of 2018.

As explained at the beginning of our call, our performance in the third quarter of '18 was hindered by a temporary slowdown of the Asian LPG markets. Adding to this, we faced some technical issues of 3 small LPG vessels, thus increasing our cost base. Although our operational utilization of 96.1% was not a bad performance for a third quarter, increased spot activity at soft time charter rates lowered the revenues compared to the previous quarter of the year. In addition to this, the increase of maintenance and repair costs beyond expected levels undermined our profitability even further. It is promising, however, that the market disruption in Asia wasn't corrected and that market rates continue to be on the rise.

Let us move on to Slide 7, where we see the income statement for the third quarter of '18 against the same period of the previous year. Voyage revenues came at $42.7 million, marking a rise of $4.2 million compared to the same period of last year. This quarter, our revenues from period contracts increased by almost 9.2%, while spot revenues by 6% compared to Q3 '17 due to higher prevailing market rates. However, our spot earnings were realized utilizing almost twice as many than customary number of vessels in the spot market and with 50% higher oil prices.

Voyage costs amounted to $5.8 million, marking a $2.1 million increase compared to Q3 '17. This increase is an outcome of higher spot days and the sharp rise of oil prices, which increased our bunker bargain costs compared to Q3 '17 by almost $1.2 million.

Net revenues, that is revenues after deducting voyage costs, came at $36.9 million corresponding to a net revenue margin of close to 87%, a lower number than customarily given the reasons explained above. Running costs at $15.6 million marked about $450,000 increase compared to Q3 '17. This increase in cost was mostly attributed to the scheduled maintenance and repair of 3 small LPG vessels, which burdened our OpEx base by almost $0.5 million. As mentioned earlier during our call, towards the end of the third quarter, we concluded with the sale of 3 LPG vessels, therefore, the easing of our cost base will be apparent from next quarter onwards.

Drydocking costs amounted to approximately $0.8 million, resulting from the drydocking of 2 small LPG vessels. As far as our impairment charges of $0.6 million are concerned, these relate to charges for 3 vessels agreed to be sold. Based on all of these, our EBITDA is in the order of $15.3 million, while our adjusted EBITDA, excluding noncash items that is, is stronger in the order of $16.4 million, which is about $1.3 million higher than in the same period of last year.

Interest and finance costs marked a $1.7 million increase attributed to the increase of our bank debt but also to the increase of LIBOR rates. Based on all of the points analyzed above, we ended the third quarter of the year with a net loss of about $780,000 corresponding to an EPS of minus $0.02. However, excluding noncash items, we generated an adjusted net income of about $300,000 and an adjusted EPS of $0.01.

Slide 8 demonstrates our performance indicator for the period examined. As mentioned earlier on, our operational utilization of Q3 '18 was in the order of 96.1%, a good performance given that it was achieved during a soft seasonal quarter. Our adjusted time charter equivalent marked a noticeable rise of almost $400 per day compared to the same period of last year, an outcome of improved market conditions.

In terms of operating costs, we preserved our daily OpEx, assuming no bareboat charters, at the same levels of Q3 '17. Had the unforeseen mechanical issues of some vessels we faced this quarter been avoided, our operating cost base would have decreased.

Looking at our balance sheet in Slide 9. Our liquidity was enhanced mainly from the vessel sale proceeds and our unrestricted cash base is now around $65 million. Our gearing remains at low levels in the order of 43%.

In terms of net debt ratio, we stand at about 37%. Compared to our balance sheet as at the end of 2017, our leverage is higher by $70 million as a result of acquisition of our new semi-ref LPG vessels. Our current debt is $454 million, and we will follow a tight principal repayment schedule for the next couple of years, which is actually positive given that we have entered an increasing LIBOR environment.

Slide 10 presents on a daily basis the evolution of our breakeven against our average time charter equivalent. What we notice is that our daily average time charter equivalent has increased due to improved market conditions, while our breakeven has remained at last quarter levels.

I will now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.

Let's proceed with market update in Slide 11. China's demand for LPG has grown significantly during the past years. Demand is anticipated to grow even further as China currently operates 8 PDH plants with LPG processing capacity of 5.5 million tons per year and propylene production capacity of 4.6 million metric tons per year. There are currently a number of plants in various stages capable to double current propylene production by 2022. It's worth to be mentioned that recently imposed LPG tariffs on U.S. LPG imports are expected to have little impact on the overall demand for LPG carriers as China has increased imports from the Middle East and West Africa.

Focusing on India, LPG imports have grown at a strong pace of about 16% per annum over the last decade. The government is setting out incentives in order to further promote LPG penetration in rural areas, which is anticipated to strengthen demand even further.

Other countries, Australia, one of the world's largest LNG exporter, is set out to increase its LPG exports substantially over the next years. In addition, LPG is also capturing a growing share of Bangladesh's energy mix, an important market with a population of over 265 million and a promising growth potential for LPG demand.

In Slide 12, we see that during Q3 '18, rates for small LPG ships remained relatively flat, mostly due to seasonal factors and the unexpected slowdown in the Asian LPG market. Compared to a year ago, rates of all segments have increased by an average of about 15%, which is equivalent to about $1,000 per day.

As per the future evolution of rates, it's expected that the market will continue to firm throughout 2019 and probably 2020.

In terms of trade, west of Suez, the spot market in the West was relatively soft through August. But from September onwards, the market has firmed up significantly, and we are now seeing a very tight market with cargoes even being withdrawn without fixing due to the lack of suitable tonnage. Naturally, this has resulted in stronger rates and owners are firmly in the driving seat at the moment.

East of Suez, the spot market has not been as exciting for owners as the western spot market. To the contrary, the spot market in Asia has been relatively slow, and we have seen a surplus of available tonnage compared to cargoes and,, therefore, rates have suffered and owners have incurred significant idle time.

We have the past couple of weeks in more spot activity, especially on petchems. So we are announcing a gradual clearing out of the tonnage overhang.

On the period side, we show some charters delivering several 5,000 cubic meter vessels. And as a consequence, the period market went quiet and made a downward adjustment, both from the activity wise and rate wise. However, the underlying fundamentals remain strong. We're announcing more activity again in addition to the vessels heading to the tighter west markets. So we expect that the excess tonnage is absorbed by year-end and that we foresee the new year with the owners being in a stronger position.

As far as scrapping is concerned, the small LPG segment has substantial old tonnage, which together with a new environment regulations may trigger recycling and even fleet decline. Since the beginning of the year, we have witnessed 5 pressurized small LPG ships sold for demolition.

As per published newbuilding orders, there are 8 vessels. That is only 2.3% of the total fleet to be delivered in the period between now and the end of 2020, the smallest order book of any ship type prevailing in the shipping market. It's worth to be mentioned that all of the vessels on order have secured employment, therefore, demand and supply fundamentals will not be disrupted upon their delivery.

On Slide 13, we comment on the share performance over the past 7 months. The performance of our stock is presented along with selected GASS carriers peer group and the price of oil. During the past months, the price of oil declined from its October peak, mainly driven by the strong crude stock built. Most energy-related stocks follow the oil price trend. During the past quarter, the GASS shares have faced downward pressure.

On Slide 14, we are showing various scenarios on the company's performance for the year 2019. 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 the fixed vessel.

Revenues were calculated using an estimated spot rate based on current market and then individual utilization rate for each ship. Compared to the previous forecast presented, we increased our estimate for operational utilization, as we have fixed several new time charters. For '19, spot rates increase has an impact on our figures. A $1,000 increase in daily rates will boost our annual EBITDA by about $10 million, while a $2,000 hike in rates will increase our annual EBITDA by as much as $20 million.

In Slide 15, we see some valuation 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 $130 million, and based on this, we quite -- we have quite the low enterprise value close to $570 million, which is quite low given that our asset base exceeds $1 billion.

Concluding our presentation with 16, we'll 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, and we feel quite optimistic for the years ahead. At this stage, I will summarize our concluding remarks. A temporary slowdown of the Asian LPG market was the main driver of our third quarter performance. The third quarter of the year usually has a soft element due to the seasonal factors, but in addition, this quarter, market conditions in Asia were less favorable than usual, and we witnessed some charters not renewing time charter vessels, thus leaving more than usual vessels to operate in the spot market. This impacted our revenues. The market in Asia has now corrected itself, and time charter fixing has picked up, as is evident from the 11 new time charters we have concluded since our last earnings report.

The most important aspect of our segment, however, is that the fundamentals that is increasing LPG production consumption, a very low order book and an aging global fleet continue to drive our market. We feel optimistic for the couple of years ahead as rates in our opinion likely to increase even further.

StealthGas as the largest owner in the sector with a relatively young fleet is well positioned to seize the opportunity. We have concluded our fleet expansion program, enhanced our cash base, have agreed to sell 7 mostly older vessels since the beginning of 2018. And we are, therefore, ready to create value from our market significant potential upside. We have now reached the end of the presentation and would like to open the floor for your questions. So operator, please open the floor. Thank you.

(Operator Instructions) We will now take our first question from Mr. Randy Giveans from Jefferies.

So yes, following the announced sale of those 7 older LPG vessels. You still have another 7 vessels older than 17 years of age that could obviously be sold in the coming quarters. So what are your plans for those 7 older vessels as well as your 4 semi-ref LPG carriers?

Since we sold more vessels than expected, we don't expect to sell another 7 vessels so fast. Obviously, we want to get rid of the -- slowly of the ships that are over 20 years of age or close to that. But because the market seems to improve -- to be improving again and those debt-free vessels are very good cash generators, it's not our first priority to sell another 7 ships within the next 6 months. Generally speaking, of course, sooner or later, these ships will be sold. On the semi-refs, there's not much to say. You never sell a ship at the bottom of the market. We are slightly off the bottom. Now it's slightly better, but we are still very close to the bottom of the market. These are brand new, very high-spec ships, built in the best yard in the world, very expensive vessels. So we need to see the market improving, making some good money out of those ships and then we'll decide what we're going to do. It's not the time, of course, to sell those ships.

Okay. And then can you give a little more details about those 11 recently completed time charters or maybe just like an average rate of those 11?

I don't think we have announced that, Randy. So it would be a breach of our rules. We have given some details on the script, which we just read. Give me a sec.

On Slide 8, you mentioned...

The rates are up 15% on average from the previous charter rates.

15%, okay, perfect. That's helpful. And then, yes, so your $65 million in cash is the highest since, I guess, 2016. So I guess, 2 questions on that. Any interest in buying some secondhand vessels from your peers and consolidating that way? Or what about repurchasing shares? You obviously had a very steep discount to NAV.

Very good question, Randy. As per the board's decision, this will be discussed after the -- within Q1. Let's put it like that, within Q1, depending on what the market has done, depending on how much cash we have and depending on the stock price. There are not too many ships for sale anyway. So even if we wanted to buy good secondhand Japanese built ships, it wouldn't be an easy task. But we have to compare and weigh the advantages of buying more ships versus buying shares at a big discount to NAV. As you know, we've been keen buyers of our stock. In the last buyback, we bought $21 million worth of shares. Then the market collapsed and the board wanted us to keep our cash for -- to weather the storm and take delivery of our 26 newbuildings, which we did result in a hiccup. So this, I think, will have more clarity on that in Q1, so in the next 2, 3 months.

All right. And then last question for me. Utilization is usually pretty strong in 4Q. Are you seeing that tick up from the 3Q levels from 96.1%, to, let's say, 97% or so in 4Q?

We expect to have better utilization in Q4, yes.

We will now take our next question from [Lance Gard] from [One Senior Island].

Yes. I had another -- Randy asked about the buybacks and I was curious about that. I noticed ships in the used market have been -- prices have been strong. We've been getting a good percentage of scrap prices, but notwithstanding that, we lose money on the sale notwithstanding the good performance. I'm wondering if that says something about our depreciation rates on our overall portfolio because if we're losing money in a stronger ship market, wouldn't I conclude that our depreciation rates weren't conservative enough?

[Lance], very good comment. We've -- we had, let's say, exactly the same thinking. Some companies have 25 years depreciation, some companies have 30 years. There is no right or wrong on this because ships do trade up to 30 years. This -- some ships were bought in a strong market environment at higher prices. So when you sell them, they have a loss or a small loss. I don't have an answer to give you. We have 30 years depreciation instead of 25. Maybe if we had 25, it wouldn't be a loss. It would be at breakeven. It doesn't make a huge difference because even if you have 25 years depreciation, then the money you would lose from the sale, you lose it from the depreciation. So between us, doesn't make a huge difference.

Right. One other question. Are our ships -- I guess, the new rules that are coming in, let's say, 2020 or 2021, do the new ships that we bought, they all qualify under the new proposed rules, right?

There are no new rules. The only new rules that are coming in 2020 is the emissions. I don't know if that's what you're talking about.

Right, right, that's what I'm talking about.

Yes, with the emissions you don't need to comply with anything. You just buy more expensive fuel. There's nothing to comply with. There is an option, if you want to install a scrubber, in order to be able to burn cheap fuel. We have already installed one scrubber on 1 of our most expensive newbuildings, and we have prepared the other 3 newbuildings to be scrubber ready, but we have not installed the scrubber on the other 3. Except from that, we haven't done anything else.

So is that a test case? Or do you think it's -- do you want to see if it's worthwhile?

Yes, exactly. Because it's a very expensive system, we couldn't, obviously, go and buy 50 of them. We're talking about $2 million to $3 million per ship. So we did it on one. And let's say, we prepared another 3 as an experiment to see the pros and cons.

Right. One final -- I don't know if I should go in queue again. One final thing. Last call, you commented you thought the NAV was still at the $12 share level and we've kind of used that number over the years. Our stock is $3.35 or $3.30. I mean, that's a tremendous differential. Presumably, if we could sell the company and NAV shareholders would have an instant 3 or 4x gain. Has the board ever thought of that?

No. The board hasn't thought of that because we were in the past at $3 and if you go and look at the share graph history and by the time we started thinking of that, we were back at $12. So people made 4x their money by just holding the stock. Of course, if that thing -- if that price stays for a lot longer, then, of course, it's a topic to be discussed at board level, yes.

(Operator Instructions) We will now take our next question from Mr. David Sachs from Hocky Capital.

So if you could just refresh us in terms of the contribution to EBITDA and to revenue to the extent you can, the 4 SRs are on either specific to third quarter or in run rate basis?

About 15%.

So they're about 15% of revenue. And what about of the EBITDA?

I'm talking about EBITDA.

Okay. So 15% of the fourth -- of the third quarter reported EBITDA were from the 4 SRs?

Yes.

Great and could you also comment on the contribution from the Aframax and the 3 MRs?

About 15%.

(Operator Instructions) It appears there are no further questions at this time. Mr. Vafias, I would like to turn the call back to you for any additional or closing remarks.

We'd like to thank you for joining our conference call today and for your interest and trust in our company. We look forward to having you again at our next conference call for our fourth quarter 2018 results in February '19. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.