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GasLog (NYSE:GLOG)

Q2 2012 Earnings Conference Call

August 21, 2012 08:30 AM ET

Executives

Peter G. Livanos – Chief Executive Officer and Chairman of the board

Phillip Radziwill - Vice Chairman

Henrik Bjerregaard - Chief Financial Officer

Thor Knappe – Senior Vice President

Paul Wogan - Chief Strategy Officer

Analysts

Seth Lowery - Citi

Jonathan Chappell - Evercore Partners

Chris Combe - JP Morgan

Herman Hildan - Platou Markets

Martin Korsvold - Pareto Securities

Operator

Good morning. My name is Eva and I will be your conference operator today. At this time I would like to welcome everyone to GasLog’s Second Quarter 2012 Results Conference call. (Operator Instructions) After the speaker’s remarks, there will be a question and answer session. As a reminder this conference call is being recorded. Today’s speakers are Peter G. Livanos, Chairman of the board and Chief Executive Officer; Henrik Bjerregaard, Chief Financial Officer and to commence the call Thor Knappe, Senior Vice President of GasLog. Mr. Knappe, you may begin your conference.

Thor Knappe

Thank you operator. Good afternoon and good morning to those of you in the Americas. Thank you for joining us for our second quarter 2012 results conference call. In addition to Peter G. Livanos, GasLog’s Chairman of the Board and Chief Executive Officer and Henrik Bjerregaard, GasLog’s Chief Financial Officer also joining us this afternoon, is Phillip Radziwill, GasLog’s Vice Chairman and Paul Wogan, Chief Strategy Officer. As a reminder, this conference call webcast and the presentation we are using this afternoon are available on the Investor Relations section of our website gaslogltd.com. A replay of this call will be available until August 29 at 5:30 p.m. London time or 12:30 p.m. U.S. evening time.

As shown on page 2 of the presentation, many of our remarks this afternoon contains forward-looking statements. Let me refer you to our second quarter 2012 results press release and our reports filed with the SEC where you will find factors that could cause actual results to differ materially from these forward looking statements. In addition, some of our remarks this afternoon contain non-GAAP financial measures as defined by the SEC. A reconciliation of the non-GAAP financial measures to the most comparable GAAP measures is attached as an annex to this presentation.

Today’s call is set to end at 2:30 p.m. London time, 9:30 a.m. Eastern time. In order to maximize participation opportunities on the call please limit your questions to one with one follow-up question.

If we now turn to Slide 3, the agenda for the presentation and I will turn the call over to Peter Livanos, GasLog’s Chairman of the board and Chief Executive Officer.

Peter Livanos

Thank you Thor. On today’s call, I’ll provide you with an overview of our second quarter 2012 highlights and performance. Henrik will then review the second quarter 2012 financial results and provide a summary of our committed charter revenue picture. I will then present a short review of our fleets and charter information followed by an update on the LNG market and we’ll conclude with prepared comments with a strategic update on our business and it’s position within the industry prior to the Q&A.

Please turn to Slide 4 of the presentation for the highlights. We’re pleased with the performance of our business this quarter. Our operating result is in line with our expectation and the LNG shipping industry outlook remains positive, the strong fundamentals for the foreseeable future presenting exciting opportunities for GasLog. We’re reporting an adjusted EBITDA of $8.4 million for the quarter which was better than expected and reflects the continued full deployment of the delivered fleet.

Adjusted profit for the quarter was $2.6 million. On an unadjusted basis we incurred a loss of $3.6 million for the quarter. Adjusted earnings per share was $0.04 for the quarter and the loss per share was $-0.06. Our bottom-line results for the quarter were impacted by non-cash items namely a non-cash loss from interest rates loss and unrealized foreign exchange differences. Henrik will go into more details of our second quarter results shortly. In particular, the adjustments for the period included a $5.3 million non-cash loss on interest rates loss and an $800,000 foreign exchange difference that are mainly unrealized. These economic hedging transactions were done at levels better than our long term budget forecast.

The non-cash items are a consequence of our continued actions to eliminate risk from our business model are all -- fixed interest expense remained significantly below our long term budget, 62% of the floating interest rate exposure has been hedged at a weighted average interest of approximately 4.3% including margin as of June 30, 2012.

GasLog is on track to pay a dividend of $0.11 per share in the fourth quarter of this year. Our two ships in the water currently on multi-year charters to a subsidiary of BG Group performed without any off hire during this quarter ending on June 30, 2012, thereby achieving full utilization for the period. Our 8 ships under construction at Samsung Heavy Industries are on-time and within budget, of these 8 ships, 2 were launched during the second quarter of 2012 and are on schedule for delivery during the first quarter of 2013. In total, 5 of the 8 ships have now commenced construction by the ship yard.

I’ll turn the call over to Henrik Bjerregaard, our CFO who would take you through second quarter finances in more detail.

Henrik Bjerregaard

Thank you Peter. Good afternoon and good morning, again thanks for joining us today. I’ll now take you through the financial highlights so you should kindly turn to Slide 5 of the presentation. Revenues for the quarter increased by $0.2 million or 1.4% to $16.7 million over the same period in 2011. Please note this feature is net of intra-company revenues of $1.1 million at (inaudible) practice and consistent with our reporting practice for the previous period. The increase is a result of an increase in revenues in the vessel ownership segment with GasLog’s existing fleet performing at a100% utilization.

Adjusted EBITDA was $8.4 million for the quarter ended June 2012 compared to $10 million for the same period last year. The decrease in adjusted EBITDA is mainly due to higher general administration expenses, in particular $0.85 million was incurred at the final part of the equity settled compensation in connection with the IPO and an additional $0.79 million of additional legal expenses, fees and travel expenses can be considered in line with GasLog’s plant growth and the reporting and compliance requirement of being a public company.

For the second quarter adjusted EPS was $0.04 compared to $0.12 at the same quarter last year. EPS of $-0.06 compared to EPS of $0.12 reportedly in the prior year quarter. The decrease in both adjusted EPS and EPS are mainly due to higher VNA[ph] and in the case of EPS, the non-cash loss in interest rates swaps during the second quarter. Adjusted EPS and EPS were also affected by a significant increase in the weighted average number of shares outstanding after the completion of the IPO and the congruent private placement. The last line of the slide shows the high utilization of our two existent ships GasLog Savannah and GasLog Singapore. We are pleased to say that 100% utilization has been achieved since delivery in 2010.

Please turn to Slide 6 of the presentation. The main items on the balance sheet under tangible fixed assets are the two existent ships GasLog Savannah and GasLog Singapore with a book value of $433 million. In addition, our 8 ships under construction at Samsung Heavy Industries have a book value of $147.6 million with the increase reflecting the progress in the construction and the installment paid. If we look further down this table, you’ll see that GasLog has short term investments of $201 million and cash and cash equivalents of $90.9 million. The story here is a placement of IPO proceeds on time deposits with top tier banks prior to the deployment in the fleet growth.

Now, if you please turn to Slide 7 of the presentation. If we look at the equities and the liabilities we see that contributed surplus for the second quarter of 2012 was $628.9 million as compared to $300.7 million at the end of 2011. The increase of $328.2 million over a year in 2011 is mainly from the IPO proceeds and the pre-IPO shareholder contribution of $18.7 million. Major items on the liabilities relates to the two debt facilities on the existing ships Singapore and Savannah, $24.6 million in truant portion of loans and $243.1 million in non-truant portion of the two facilities.

Please turn to Slide 8 of the presentation where we can see the contracted revenue. This table summarizes GasLog’s contracted revenue and culverts within the vessel ownership segment over the next 10 years. You will notice the rise in our estimated contracted revenues over time reflecting the growth of our fleet over the period and the commencement of the committed charters from delivery for the 6 of the 8 LNG buildings. I must stress the revenue figures are only those showing the contracted and do not include any earnings for the two open ships and there are fewer earnings included for any of the ships following the completion of (inaudible) charter. Decrease in the culverts percentage beginning at the last day of 2014 reflects that the last two new buildings have not yet been committed to a charter as well as base for GasLog’s Savannah not yet on the firm charter. We believe this table illustrates our expectations of a low risk high growth business going forward.

Please turn to Slide 9 of the presentation. As we have mentioned before we have to jot that financing for 8 of the ships that we have on order. Gaslog’s (inaudible) new building program is fully funded from the proceeds of our IPO, the congruent private placement and the established debt facilities. Body shipped in two ships, we have debt facilities for each, one with Danish Ship Finance and one with a (inaudible) European Bank, total outstanding is $269.4 million.

For the 8 ships under constructions, we have 4 loan facilities with an aggregated amount of $1.13 billion. Borrowings under these facilities will be drawn up on delivery of the ships, which is scheduled for various dates between 2013 and 2015 and will be secured by mortgage on the relevant ships. You can see the banks are listed on this Slide. The keen among you will notice loan facilities on GasLog Singapore matures in 2014. We are considering the possibilities and they are comfortable given the quality of the assets, the charter, our bank relationships and track record as such. We have actually started out to sound out banks and have already seen a serious interest from banks on supporting the refinancing. We plan to re-leverage the facility on acceptable terms in due course before maturity in 2014. All of the facilities under 10 ships are naturally denominated in US dollars.

As of end June 2012, GasLog has entered into 15 interest rates swapped agreements for total nodal amount of $868.5 million. This is in relation to the outstanding investments of $269.4 million and the new loan facilities of $1.13 billion that will be drawn up on delivery of the respected vessel. In total, 62.1% of GasLog’s expected floating interest rate exposure has been hedged at a weighted average interest rate of approximately 4.3% including March end as of as of end June 2012.

During the second quarter of 2012 GasLog recognized a non-cash loss of 5.3 million on the interest rate swaps, mainly due to a $4.1 million loss from the mark-to-market evaluation of 6 interest swaps agreements signed in 2012, not qualifying for hedge accounting and $1.2 million loss recognized at the inception of free interest rates swap signed in the second quarter of 2012 and designated as GasLog Hedging Instruments.

That concludes the financial highlights of the presentation, and so please turn Slide 10 of the presentation and I’ll hand you back to Peter.

Peter Livanos

Thank you Henrik. As we discussed last quarter, you can see on Slide 10, our portfolio of ships and charters. We have strategically staggered our charter commitment through nations. Our counter parties are financially strong and well established in the LNG industry. In addition to our existing charters and the associated revenue stream, we maintain the flexibility to capture potential upside through our unconstructed ships and our undeclared options. GasLog remains focused on the latest diesel electric propulsion technology, which offers significantly lower fuel consumption and ignitions compared to traditional steam powered LNG carriers. We have one of the highest levels of experience with this technology having overseen construction and to date managed not only our two existing TFDE ships, but also BG’s 4 owned TFDE ships.

We consider our relationship with both BG and Shell strategic, as they are likely to be involved in future new LNG production projects.

We will now turn to slide 11 of the presentation, so we touch upon the LNG industry. We are confident that the current supply and demand dynamics of the LNG industry are positive for LNG shipping. Spot rates continue to strengthen in the second quarter, giving further support for our optimism on longer-term rates.

Recent announcements in the LNG industry regarding new production projects are expected to create increased requirements for LNG carriers. During the second quarter of 2012, we have seen events that support the continued growth of the LNG trade. Petronas of Malaysia announced the signing of a contract for a floating LNG production unit scheduled to be in service by 2015, and in Australia, (inaudible) LNG project commenced LNG production.

The planned addition of US exports and the potential for East African LNG development will lead to further strong future demand for LNG carriers. The spot market for LNG shipping remains very firm, and we expect this to be reflective in the stronger long-term charter market.

Moving on to slide 12 of the presentation. We continue to see buyers supporting new LNG production projects. Recent sales agreements from prospective US export projects confirm Japanese volumes as for what would be long haul voyages to the east.

In addition to strong demand from Japan, China continues to grow its LNG imports and the global trade growth of LNG continues to diversify. We feel that the cognition of a robust development of new LNG supply projects and a growing global demand for natural gas is likely to drive additional LNG carriers.

Now, let’s turn to slide 15 of the presentation. In summary, we are pleased with our financial results for the quarter. We are in line to pay our first dividends in the fourth quarter of 2012. Our contracted revenue performance for 2012 to 2015, we expect it to be on track with our eight ships under construction on time and on budget.

The LNG industry is likely to continue its growth trajectory, led by experienced LNG players with exacting standards for safety and reliability. With our current business model, our technical platform and our customer relations, we believe we are all well positioned to reap the benefits of continued demand in this sector. That brings us to the end of the presentation. Operator, please open the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) We will now take our first question from Christian Wetherbee of Citi.

Seth Lowery - Citi

I am sorry, I am not sure if you heard me. This is Seth Lowery in for Chris. If I could start off, it seems like we have about four months left till the end of the year, and when the options on or when your options are purchased, the two other vessels expire. Is there any update to the timing and when we could see a decision made on those vessels? And also, if there is any update on the timing of chartering the two unchartered vessels left in the new build of order book?

Peter Livanos

Thank you, Seth. It’s Peter Livanos here. Look, on the two uncommitted ships, we continue to look at the end of this year, first quarter of next year is the optimum time to commit those ships into charter arrangements. We have contact with a number of people in the industry who could potentially use the ships, but the option timing of that hasn’t changed and towards the end of this year, first quarter of next year.

As far as the options are concerned, we will monitor that. If we see the right opportunity to declare those options, we will go ahead and do so. But for the moment, we just keep those as they are.

Seth Lowery – Citi

Okay, thanks. And then, if I could just follow up with, if I look at slide 8 in your contracted time charter revenue and contracted day forecast, it seems like if I do the math on the rates, it implies the rate over the next four years in the mid-75,000 range until you get to that 2016 to 2021 timeframe, when the rates seem to increase to the upper-70,000 range. I am just wondering, does that imply that as some of these vessels like the Savannah roll-off, is there an opportunity, even if we hold market rates flat where you could re-charter that vessel at a higher rate, I guess the easier way to say it is, are the vessels that have the charters expiring early, are they below your average charter rate for the whole suite?

Peter Livanos

I will take a general stab at answering, Seth, then I will turn it over to Henrik. Bear in mind that the end users in this case, BG and Shell have the option to continue to maintain those ships under charter for a number of years going forward. We believe it is very likely that, that’s what they will in fact do. So, it would probably not be the right conclusion to come to that those ships will either, a, come off charter and that they will come off charter and then be re-chartered at higher rates. So, I would suggest that you continue to look at those as a continuation of the charter as the most likely scenario. Henrik, do you want to go into more detail on the numbers?

Henrik Bjerregaard

I will just probably add just more comment. In some of the charters, there is a small add-on on the CapEx. So, there is a small scaling almost of the charter rates after the initial term period. And again, also on the OpEx side, there is the continued escalation in some of the charters and the pass-through mechanism of the charters. So, there is room for a small increase in the combined charter rates going forward. But again, not a significant one, but definitely an increase.

Seth Lowery – Citi

Okay. Thank you. That’s very helpful. I will turn it over.

Operator

(Operator Instructions) We will now take our next question from Jonathan Chappell of Evercore Partners. Please go ahead, sir.

Jonathan Chappell - Evercore Partners

Thank you. Good afternoon guys. Peter, I wanted to ask a question regarding growth above and beyond what’s already been laid out. It seems that the ordering has slowed across the industry in the last few months, which is probably a good thing. Also, I guess what we call speculative owner has been rumored to cancel some new building slots. So, are you finding that maybe some people who don’t have the long-term customer relationships with the industry technical know-how, who might have placed order speculatively are looking to maybe get out of those contracts. Have you seen anything across your desk either from owners looking for you to help manage or potentially acquire ships? And also, just really long question here. The shipyard is coming to you, as they maybe get a little bit more nervous about the longer-term slots with some opportunities for GasLog.

Peter Livanos

I think you have been quite astute in picking up the fact that the ordering has slowed. So, on the back of a couple of things, one, the speculative newcomers that may have been seduced by some hype about how easy to just make money in this business are probably realizing that without the platform, that’s not quite so easy. So, we have been encouraged to see that happen. There is no doubt that on the debt side, the ability to generate debt is very much coupled with the platform, the track record of the borrower and the ability of the borrower to get meaningful revenue stream. So, both of those two points are really playing into the hand of the established players in this sector, really performing the bulk of the growth going forward.

As I look at the forward picture, again, it’s very simple. Look at the liquefaction projects that are coming on stream, you can make some simple calculation as to the number of ships they are going to need, and that will very quickly give you a sense of where the existing players, GasLog, first and foremost, may start to look at their next tranche of growth in the sector. I hope that was a helpful answer.

Jonathan Chappell - Evercore Partners

Yes. But just anything coming across your desk right now either from existing orders or whatever?

Peter Livanos

My desk is piled with things coming across. There is no shortage of talk in this industry. Consolidation is certainly becoming more and more of a concept that people are beginning to look at, whether they be existing players or new entrants. And so, we think that as we develop and getting closer to the deliveries of some of these ships, we will certainly start to see pressure on consolidation from people who are having difficulty in committing the ships to charter without the relevant platform.

So, we think that those opportunities are becoming a more and more reality in the coming months in a couple of quarters.

Jonathan Chappell - Evercore Partners

All right. Great .That’s very helpful, Peter. And then just my follow-up for Henrik. You pointed out some kind of one-time events, obviously the IPO kind of carried over a little bit in the second quarter. So, some of the expenses in the G&A may not be there on a go-forward basis. What’s the run rate you are looking for, the G&A in the back half of this year?

Henrik Bjerregaard

Well, I think what I can reveal and what I can say directly is basically we have the equity-settled program as part of the first half of the year or so of 2012. That one was finalized by the IPO. That’s an expense in the first half year of $3.2 million. So, that’s definitely a one-off. So, you should take that out of the first half year number. So, you probably have a good indication of things going forward. And there may be small valuations on legal stuff, legal fees, expenses and things like that, but I think generally we should say that the real one-off we have is the equity-settled program of $3.2 million in the first half of 2012.

Jonathan Chappell - Evercore Partners

Thank you Henrik.

Operator

We will now take our next question from Chris Combe of JP Morgan. Please go ahead, sir.

Chris Combe - JP Morgan

Good afternoon, Peter, Henrik, Thor. (inaudible). I had a follow-up question regarding your comments on optimal timing of the open vessels at year-end or end of first quarter 2013. Can you give us a bit of color as to what the underpinnings of that outlook and what your internal supply of demand outlook looks like over the coming months and the quarters?

Peter Livanos

How best to take you through that without going into sort of – if you take a look at the spot rates, we have seen some pretty strong pictures. We have heard 175 reported for a short-term charter, which is a new record, all-time record in the LNG. But what’s been particularly interesting is we have seen the first forward multi-year commitment of somewhere in the mid-90s for a ship. And all of that gives us a lot of positive feeling in reaffirming what we thought going back to even our IPO that we would be seeing, we would be disappointed to see rates less than the mid-80s. So, the sentiment is good on the short term, and we are beginning to see the forward ships start to lock in commitments, multi-year commitments. So, I am feeling pretty good about that. I like the timing of late this year, early next year, because it matches very well with the delivery schedule of the ships and their ultimate use for our target audience, which for us is LNG projects and LNG project users. And those projects typically come online, sort of commit to the tonnage a couple of years before they come online. So, it works out quite well for us. So, I think that’s the best I can do in sort of over a phone on a call like this.

Chris Combe - JP Morgan

Now, that’s very clear. And then –

Peter Livanos

If you want more on the supply demand, I would point you towards any number of very confident brokers in the industry who are really crunching some very detailed numbers on that.

Chris Combe - JP Morgan

Okay. That’s clear. So, my follow-up, could you give us some sense in terms of what the – if you were to exercise dual options for the new builds, what’s your value look like today and how that might compare to the acquisition prices we saw for the existing order book?

Peter Livanos

A little bit apples to oranges, because as we look at those two options, we very much feel that we have a flexibility with the shipyard to tailor those ships around any number of different requirements that may be coming up and that may potentially alter the size slightly with specifications slightly. So, we would like to think that we could achieve attractive steel values and have the flexibility with the yard to tailor make those ships to the projects that we would end up committing them to.

Operator

(Operator Instructions) We will now take our next question from Herman Hildan of Platou Markets. Please go ahead sir.

Herman Hildan - Platou Markets

Good afternoon gentlemen. I just have a quick question. On a fully invested basis, the current share price provides – call it free cash flow yield of about 14%, 15%. Now, could you shed some more light on your dividend strategy going forward except in addition to the fourth quarter?

Phillip Radzwill

Sure. I think the way we are thinking about the dividend is it will likely be quite aggressive on paying out our cash flow. So going forward I think what we have said is the payout ratio over the period of time between now and the full fleet basis is something around 50%. But, keep in mind that we are paying out all of our cash flow at the moment. So, it kind of averages out there nicely but we are looking to be sort of be a pretty aggressive dividend payer going forward.

Herman Hildan - Platou Markets

Just as a follow-up question on that as well. Is it interesting for you to raise equity to declare the options at the current share price?

Phillip Radzwill

No.

Herman Hildan - Platou Markets

Okay.

Henrik Bjerregaard

Well, I want to point out to declare the options we don’t need to raise the equity. We actually are in a position where we can even with our aggressive dividend policy we can actually work with the cash flow and the cash position we have on to at least early 2014.

Peter Livanos

That’s a good point, Henrik.

Herman Hildan - Platou Markets

Okay. Basically, you can still declare the options without raising more equity?

Peter Livanos

That’s correct.

Herman Hildan - Platou Markets

With that, would you be comfortable about having four unconstructed vessels or would you like to secure some of the employed vessels before you potentially secure or take to declare the options?

Peter Livanos

As long as we can see returns – follow the returns that we have been able to generate to date we would commit the ships. The comfortable level or non-comfortable level of having two or four uncovered ships is probably a not necessarily the guiding light here or the strategy is more along the lines of putting these ships into the right end users hands and that would basically governs the timing and governs the investment decisions.

Herman Hildan - Platou Markets

Okay. Thank you very much.

Operator

We will now take our next question from Martin Korsvold of Pareto Securities. Please go ahead sir.

Martin Korsvold - Pareto Securities

Hi, just one question for you. Are you considering going down the NLP route at the moment?

Phillip Radziwill

We continue to evaluate the NLP structure. We think it’s a structure that could have value and if it’s clear that it will create the best value for the shareholders, it’s something that we will consider shelling [ph].

Martin Korsvold - Pareto Securities

Okay. Thanks.

Operator

(Operator Instructions) As we have no more questions in the queue that will conclude today’s question-and-answer session. I would now like to turn the call back to Mr. Livanos for any additional or closing remarks. Thank you.

Peter Livanos

Well, thank you all for joining us on the call today. We appreciate it very much. Thank you.

Operator

That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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