Harry Vafias - President & CEO
Konstantinos Sistovaris - CFO
StealthGas, Inc. (GASS) Q2 2012 Earnings Call August 17, 2012 11:00 AM ET
Welcome to the StealthGas Inc. second quarter 2012 results call. At this time all parties are in a listen-only mode. (Operator Instructions) I would now like to turn 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 and six months 2012. I’m Harry Vafias, CEO of StealthGas, and I would like to remind you that we will be discussing forward-looking statements in today’s conference call and presentation.
Regarding the Safe Harbor language, I would like you to refer to slide number one of this presentation as well to our press release on our second quarter and six month results.
With me today is Konstantinos Sistovaris, CFO, and if you need any further info on the conference call or the presentation, please contact to Konstantinos or myself.
Before I start with the slides, I would like to comment on the results we released today which highlight a considerable year-over-year improvement in our operations.
Our income from operations went from 1.2 million last year to about 10 million this year, a 740% increase, I repeat 740% increase. But even looking at our bottom line not a net income of $0.35 a share, but our adjusted figure of $0.31 a share that excludes the losses and gains on [western] sales and hedging compared with a $0.16 a share for the same quarter last year which was close to a 100% increase, even compared to the previous quarters adjusted EPS of $0.25 is a 25% improvement.
This shows once again a significant improvement in the LPG market in contrast with the continuing difficult environment for more shipping companies where by few reporting earnings at all. As a result of our focus in the niche LPG market, we continue to operate profitably and we are confident that the fundamentals in our core segment point further market improvements in the future.
We have laid solid foundations for the company and improved our cash position which shall enable us to continue looking for strategic opportunities to control our freight and increase our market share.
Let’s begin our presentation with slide number two. As we have said in the past our medium term goal is to renew our fleet, buy new vessels and sell older ones. During 2012, we completed our newbuilding program to deliver our latest newbuildings, the Gas Husky and the Gas [Esco] in June. From 2011 we have taken delivery of five brand new LPG vessels and over the last five years we have taken delivery of 12 new brand new LPG vessels, all from Japanese shipyards. We also sold two vessels so far this year, the Gas [Lyne] in July and Gas Kalogeros in May.
We wish to keep the average age of our fleet low and still gradually older vessels that operate in the spot market, so what we improve our contract coverage in operational efficiencies. More than vessels that are more appealing to charters and can achieve savings of at least 10% on operating expenses.
In terms of leverage we have always been cautious to maintain more than leverage. At the end of the second quarter 2012 our net debt to capitalization ratio is 47.8% and we will maintain it at the region of 50%. Our data is approximately at 360 million and we do not expect it to increase any further for the time being. Our company's newbuilding program has been completed after the delivery of 12 brand new ships from Japan since 2007 and there are no remaining capital expenditure requirements.
We continue to strive to obtain a secure and visible revenue with stable and predictable cash flows. At the moment fixed voyage days for our fleet for 2012 stands at 80%, for 2013 at 56% and for 2014 already at 40%.
Just to remind you that the equivalent forward coverage numbers in the same quarter last year were 75%, 50% and 25% respectively. We have extended the forward coverage of our revenues by entering the number of long-term charters. We continue to operate relatively modern fleet of Gas ships. And in this respect the average age as of today is about 10 years not including our four modern oil tankers, which is ever young compared to the industry average?
We have managed to maintain the average age of our fleet at around 10 years for the past five years at least. We continue to believe that within our core sectors, this gives us a competitive advantage as younger vessels have less operating expenses, consume less bunkers and are more appealing to blue chip charters. We continue to have strong charters which lowers our counterparty risk because of the strength of the LPG market and the participation of more established names in it, we don’t expect to have an issues with LPG counterparties.
These LPG rates continue to strengthen and we did have a charter that (inaudible) would expect to be able to find a new charter at even higher numbers. Now in terms of course the efficiency of our operations, I am pleased to report yet another good performance in second quarter. Our net income breakeven level per ship per day excluding losses on the (inaudible) was $5,817 per vessel per day compared to $5,847 in the previous quarter and $6,161 in the same quarter of last year, which puts us comfortable in the profit making territory.
We continue to concentrate heavily on managing our cost base and the economies of scale we have allow us to contain cost as much as we can. During the past quarter, we did not send significant increases in any expense category except in bunker fuels for the few vessels we operate in the spot market.
But lately the drop in oil prices is leading to decreases in bunker costs. I would also like to remind you once more that our general and administrative expenses are amongst the lowest in the public shipping sector. Finally, regarding our 50 million share buyback program. Since the program's inception, we have bought back approximately 1.8 million shares or 8% of our shares outstanding at a cost of approximately 8.5 million. We did not proceed with any buybacks during this last quarter.
Slide three, at (inaudible) the employment profile charge having included an percentage of fixed employment days for 2012, 2013 and 2014. This enables you to assess the stability and predictability of our earnings. For 2012, 80% of voyage days are already fixed while 56% are fixed for 2013 and 40% for 2014 with a number of charter extending beyond 2014.
We will continue to see opportunities to employ our vessels on long-term charters. During the first six months of this year we announced a conclusion of seven charters of duration of one year in (inaudible). The latest charter extension we did was for the Gas Cerberus whose charter was extended by one year.
Total contracted revenues are approaching 200 million up to 2017 and we estimated this equivalent for the LPG vessels on long term charters is approximately 9,500 day. In terms of charter types out of the fleet of 37 vessels we have 14 of these vessels on (inaudible) 17 on time charters and six in the spot market.
The company’s policy is to find employment for long-term charters in order to secure a profitable cash flow.
Now we turn to the financial highlights for the second quarter and six months, so I will pass you on to our CFO Mr. Sistovaris.
Thank you, Harry. Good morning everyone. Let me continue with this presentation with slide number four, the financial highlights for the second quarter and six months of 2012. With an average of 37 vessels owned and operated in the second quarter we realized a net income of 7.2 million on voyage revenue use of 29.1 million.
EBTDA was 16.5 million and earnings per share for the quarter were $0.35. Our adjusted net income for the quarter were 6.5 million or $0.31 per share that is before the net non-cash loss of 0.3 million on interest rate swaps, 1 million on swap interest paid and 0.1 million gain on the sale of a vessel the Gas Kalogeros and 0.1 million unrealized foreign exchange loss.
The free cash balance at the end of the quarter was approximately $57 million versus $46.5 million at the end of last quarter. We also have about $4.9 million in restricted cash as part of loan agreements. For the six months of 2012, with an average of 36.7 vessels our net income was $14.6 million compared to a net loss of $2.1 million for the same period last year.
Voyage revenues were $58.3 million and EBITDA was $33.4 million, adjusted net income for the six months period was $11.7 million or $0.57 per share compared to $6.1 million or $0.29 per share for the same period last year.
We now turn to slide number five, for summary of our income statement in order to compare our results for the second quarter versus the previous quarter and versus last year's quarter. Compared to last year when we had two more vessels in the fleet, our revenues decreased by $2.2 million. However, the big difference is in the expense side. Compared to last year, our voyage costs were reduced by $2.6 million while our operating costs were reduced by almost $2.4 million that is $5 million reduction in expenses in total. The reason behind the reduction of our expenses year-over-year is first that we had [too fewer] vessels and we had less vessels operating under spot charters that is not incurring voyage costs, the reason why we had lower operating cost is mostly due to having a higher number of vessels operating under [variable] charter that is not incurring any operating expense.
Our operating income increased from $1.2 million last year to $9.8 million this year. That is because last year we had incurred losses from the sale of the vessels. However, excluding the losses and profits from vessel sales, derivative instruments and foreign exchange, our adjusted net income was $6.5 million compared to $3.5 million last year that’s almost double.
Compared to previous quarter, with the same number of vessels in the fleet, our revenues were flat. Our voice cost increased by $0.1 million and our operating cost decreased by approximately $0.2 million.
Excluding the one-time gain from the sale of vessel in the first quarter, our adjusted income improved this quarter mainly due to the lower drydock expenses. We drydocked one vessel in the second quarter versus three in the first quarter. And also due to the slightly lower interest rate expenses. On an adjusted basis, our earnings per share were $0.31 compared to $0.25 in the previous quarter.
Slide number six. Looking at our balance sheet in terms of cash, we continue to maintain a healthy cash balance of $64 million include in restricted cash. As of June 30, our vessels book value net of depreciation to that $649.2 million as expected with a delivery of our newbuilding Gas Esco compared to $613.8 million at the end of last year.
In terms of liabilities, the current portion of our long-term debt that is what loan repayments are scheduled over the next year, increased to $35.7 million. We have around $9 million of principal debt repayments per quarter that we can meet comfortably from our internally generated cash flow.
Other current liabilities at $22.5 million have slightly increased. Our long-term debt increased to $327.5 million because of the new loan for the new vessels. I would also like to point out that we have no debt maturing in 2012 or 2013, so there is no need to refinance. The first balloon payments on our loans are due in mid 2014 around $32 million and then in 2016. We have no covenant breaches in our loans and have obtained a waiver from one bank for a mild minimum value breach. Other liabilities of $6.3 million relate to the fair value of interest rate swaps we have with our banks to protect us from increases in LIBOR rates.
This has been reduced from $9.4 million at the end of December because of these interest rate swaps are amortizing. As of today, we have around 35% of the interest exposure on our loans hedged. On average by 2013, we would expect half of our swaps to have expired or amortize unless by this time we enter into new agreement. Stockholders equity for the second quarter was $327.7 million, a $14.7 million increase since December 31.
We will now please turn to slide number seven for the operating highlights for the second quarter of 2012 and 2011. In terms of fleet data we had an average of 36.5 vessels in the fleet versus 38.7 vessels for the same period last year. Hence, the number of days for the fleet has been reduced by 6% to 3,319 days. However, you should notice two things; first the spot market days for the fleet have been reduced by half because the vessels we sold were operating in the spot market and because we have concluded more peer charters.
And second, our utilization ratio has increased as a result of the new charters and they reduced idle time due to repositioning between charters. In terms of average of daily results, we continue to see our average time charter equivalent rates improving from last year. We achieved time charter equivalent of $9,853 per day per vessel on an adjusted basis compared to $8,699 per day per vessel in the same quarter of 2011 and $9,682 in the previous quarter.
Our total operating expenses year-over-year increased below 1% from $4,283 per day to $4,307 per day. We still operate comfortably above breakeven levels in terms of income and cash flow. We now turn to slide number eight. As usual we are going to provide with some estimates for the remainder of 2012 the third and fourth quarters. We have contracted revenues under time and [variable] charters of approximately of $45 million, non-contracted voyage days for the vessels operating in the spot market or are coming off their charters are approximately 1,380. We have six vessels operating in the spot market and four that are coming off their peer charters before the end of the year.
We expect our operating expenses will be around $8 million per quarter, as far as drydock expenses, we have had six vessels to drydock this year compared to nine in the previous year. We already drydocked four vessels and have two more to go before the end of the year.
Interest payments on our loan and our cash payments on our swaps for the remainder of the year, we estimate to be $7 million and depreciation expenses of $14.5 million.
Thank you very much and I will now hand it back to Harry for some further comments on the market.
Slide nine please. As we’ve said in the past, one of the key drivers in LPG market is supply of the product. LPG is a by-product of natural gas and we expect that as more natural gas producing facilities are being built, there will be more LPG available for shipment, especially since it's too costly too store.
The Middle East is the main exporter of LPG and usually VLGCs are used to carry the products from the Middle East to hubs in Asia such as Singapore where our vessels take care of the local distribution. The Middle East and countries especially Qatar have increased their quantities, that produce and is expected to further increase will continue throughout LPG seaborne trade in total could reach 70 million tonnes by '13 and 82 million tonnes by '15.
As a result, we see increased interest from business coming to Asia from Middle Eastern companies. On the other side of the equation, the managed (inaudible) increasing developing nations especially in the Far East, where the majority of our fleet is trading. A recent trend we've seen is increasing demand for LPG from petrochemical plants especially in Europe. In the US shale gas increases LPG export potential. Although, US has never been a major exporter of LPG and only have a couple of vessels occasionally trading there as a potential for an additional 2.5 million tonnes to 3 million tonnes of LPG of exports. Although not a huge amount, it is a welcome development.
Slide 10. In this slide, we show you one year time charge rates for the average size ship of our fleet which is 5,000 cbm. We have updated these slides last quarter rates, current rates and future estimates for the third quarter of 2012.
So looking at the 5,000 CBM pressure a ship, the rates have been steady averaging $310,000 per month and the forecast is for the rates to remain at the same levels as we are starting to come off the summer season that is usually slower especially for vessels trading in the spot market.
What we consider an encouraging sign is the willingness of some charters to engage in longer period charters from two to five years. We assume this is because they want to cover themselves from any future increase in rates. We have managed to conclude a number of such charters previously announced, the last one being a five year deal for our newbuilding vessel delivery in June. We have recently extended the charter of Gas Cerberus for one year and we expect that as we enter into the winter months we will receive more enquires for long-term business as the market will tighten.
Slide 11, as we showed in the previous slide charter rates have improved from last year. We believe the fundamentals in our core segment which relates to supply and demand are favorable and as a result the recovery will be sustainable despite any short-term seasonal ups and downs. The order book for small sized LPG ships is fairly small at the moment. On the other hand, we expect the order book over the next years to decline, so far we have seen few new orders for pressure ships and newbuilding prices have not come down.
The Japanese charge porting for new ships are not competitive and we don’t expect the situation will change drastically as long as the Yen remains at the level it’s currently is. The Chinese do not have the experience yet to build high specification ships for international and the Koreans have received some orders, but they are not particularly active in this segment.
LPG trade is a very niche segment and there are barriers-to-entry, so we would expect mostly established players to show any interest in older ships and not new comers, but would order on a speculatively basis.
On the other hand, the existing fleet is relatively old which means more vessels will need to be scrapped. Around 10% of the fleet is over 20 years of age; overall net growth is more suggesting the demand for vessels will be higher than supply. If this projection might materialize, we believe that with a fleet of modern ships we’ll command premium rates and we are positioning our company to take advantage of the strong fundamentals in our sector for the next 24 months.
Slide 12; we have included this slide to emphasize a point about the order book. The order books in these slides are spread over a period of at least three years. Although, in most cases the leverage are front loaded. As you can see for the two main shipping segments, although the numbers have come down since last quarter, especially for drybulk, the order book continues to be elevated and the huge numbers of vessels delivering this year in the drybulk and tanker markets are the culprits for the horrific chartering market that we are seeing today.
We have also seen interest in LNG newbuildings due to the current slowing in chartering market; at this point increasing LNG volumes may absorb the increase in the order book, but unless there is a restraint in the ordering of new vessels this space could be over supplied in the next year or so.
The last bar in the graph is our own LPG sector with only 12% order book for our segment. We continue to have one of the smallest order books in the segment, but still does not get as much attention. Out of a total of 254 pressurized and semi-ref vessels in our size, category excluding the Chinese fleet, (inaudible), there are 30 vessels in order to be delivered over the next three years.
At the same time as I previously mentioned around 24 vessels are older than 20 years and even do not directly compete with us or will need to be scrapped in the near future. And at this point, if you don’t mind, the increases at the annual rate of 5% or some reports suggest this could easily absorb the current small order book.
We added slide 13 just to compare our company with some of the average US listed shipping companies operating in different segments such as gas tankers and dry. I just want to conclude, there are many companies whose stock trades above net asset values. Although, there maybe a variety of reasons for that, as I had mentioned in the past, I still don’t believe that any uses the company operates in a sector that has better fundamentals on the LPG segment and yet our stock continues to trade far below our NAV.
I would like to close this presentation by saying that over the last year we have managed to take advantage of improving markets, keep posting solid operational profits and in a very challenging environment for more shipping companies. The gas market is steadily improving and we can be optimistic about the future based on the market fundamentals we presented to you today.
Looking beyond the bottomline into qualitative aspects of our business, we have managed to renew our fleet, keep the average age low and at the same time, we have increased our liquidity position to take advantage of rising markets and growing our fleet further and consolidate our leasing position and our strategic focus.
We have now reached the end of our presentation. We’ll like to open the floor for questions. So please open the floor. Thank you.
(Operator Instructions) Your first question comes from the line of [Jack Wilson] of UBS. Please go ahead.
Your stock buyback program is definitely the best thing you can do with your seep discount; when we recommend stocks decline or so however, the first question is where is the dividend yield, that’s very important to investors in the current environment? Could you possibly consider restarting the low cash dividend policy and that would open the door for many investors?
Thank you Jack; probably you are not on the last call. We said very precisely on this question that we will wait and see how the last six months of 2012 pan-out and thereafter, we will sit down with the Board and discuss the possibility of a dividend reinstatement. But just to add something, if these investors are clever and just as a basic maths of GASS to see whether the company with 45% debt to market values, $65 million cash, $80 million of projected EBITDA and leader in its segment and tiny book and is trading at 60% discount of NAV. So I do understand that dividend is very important, but I think it’s no-brainer whether this level is definitely bargains, big bargain, so.
(Operator Instructions) Your next question comes from the line of [Vic Peters]. Please go ahead.
Good morning, Harry. This is actually [Jeff Gegas]. When your interest rate swap start to roll up, would you intend to further hedge your interest rate exposure?
Depends; I cannot say at the moment. We have nothing that is very prompt to be discussed, but we don’t foresee rates going up in the near future.
Second question, you have got four ships coming off charter, six in spot; what is your expectation in terms of where your fleet will end up at year-end with regard to spot versus fixed?
I don’t know which vessels these are, because I don’t have the list in front me. But I suppose at the year-end it will be approximately at the same percent as that we are today; we will have about five to six vessels spot.
And a last question and you may have mentioned this on your prior call, but I didn’t recall, what is your intention with respect to your cash, if not buying in shares?
We are entering the second stage of expansion, so some of the cash will go towards that. And two, as we discussed previously, there is going to be either dividend reinstatement or share buyback.
Thank you. Your next questions comes from the line of [Martin Barrow] of NSR Please go ahead.
I just wonder if you could talk about the statement in the press release about evaluating strategic opportunities to grow and renew fleet; are these acquisitions that you are looking at or new orders; I am a little bit puzzled by what you said?
No, we are not; and generally we prefer to buy the ships on an individual basis i.e. one-by-one, or two-by-two at a maximum. We have not seen any groups of ship or any fleets that we want to acquire. Our priority is modern ships either very, very modern second hand ships or brand new ships. At the moment, we haven’t done anything, but obviously the time is coming that we have the money, we are very bullish for this year and the next and we need to keep our leading position with brand new vessels that not only are in high demand, but also give much better operational efficiency, because of new engines, lower consumption and lower running costs basically.
(Operator Instructions) There are no further questions at this time. Please continue.
We like to thank you very much for joining us at 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 third quarter results in October.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.