Earnings Call Transcript - GASS Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the StealthGas Second Quarter 2020 Conference Call. At this time, all participants will be in listen-only mode. After the speaker presentation, there will be a question-and-answer session. I must advise you that this conference is being recorded today, Friday, the 21st of August 2020. I would now like to hand the conference over to your speaker today, Harry N. Vafias, President and CEO. Thank you. Please go ahead.

Harry Vafias, CEO

Good morning, everyone, and welcome to our second quarter six months 2020 earnings conference call. This is Harry Vafias, the CEO of StealthGas; and along with us is our Finance Officer, Mrs. Sakellaris. Before we commence our presentation, I would 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 take a moment to read our disclaimer on slide number 2 of this presentation. Risks are further disclosed in StealthGas’ filings with the Securities and Exchange Commission. I would also like to point out that all our amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars. Slide 3 summarizes the key highlights of our second quarter 2020 results that we released today. In spite of a very difficult and uncertain market due to the COVID-19 dynamic, StealthGas has had an exceptionally good quarter in terms of both revenue and profitability. The key to this success is that we have leveraged the strong market prevailing prior to the pandemic outbreak and had secured almost all of our vessels on period charters, thus avoiding the spot market downturn we saw in the second quarter particularly in Europe. Indeed, our spot exposure committing almost 10% of our voyage days in the spot market was very low. And as all of our spot vessels were trading in Asia, we managed to keep them employed, thus avoiding long periods of downtime. Our operational utilization was as high as 97%. Strong revenue generation along with stable operating costs and very low finance costs were the cornerstones of our second quarter's performance success. Going forward, we have about 71% of our fleet days secured on period charters for the remainder of 2020 with total fleet deployment days also generating approximately $112 million in contracted revenues, undoubtedly providing us with a good shield against those uncertain times. Including the time charter agreements of our joint venture ships, total secured revenues increased to $133 million. In addition to this, and in an attempt to renew our fleet to a small extent, we took the opportunity of investing a portion of the $25 million proceeds from the conclusion of the MGC joint venture vessel financing in acquiring two new small LPG ships. The first vessel, a 2020 built 5,000 cubic meter pressurized LPG ship, was acquired in June 2020, while the second one, which is a 7,500 cubic meter ship newbuilding LPG ship, will be delivered in September 2020. Focusing on our financial performance highlights, our voyage revenues came in at $36.3 million, marking an increase of $2.2 million compared to the same period last year, mainly due to a sharp price increase of almost 20% of our revenue stemming from our time charters along with a reduced presence in the spot market. Our daily time charter equivalent continues to rise. Compared to the first quarter of 2020, our daily time charter equivalent increased by about $1,000, driven by revenue growth in conjunction with a 25% decline in voyage costs. Generating an impressive EBITDA of about $22 million, our net income came in at $8.9 million corresponding to an EPS of $0.23, thus marking the best performance since the first quarter of 2013. Slide number 4 provides an analysis of our fleet employment. In terms of charter types, out of the fleet of 42 operating ships, excluding our eight joint venture vessels, we have nine on bareboat, 25 on time charters, and eight in the spot market. Compared to the previous quarter, we had two 7,500 cubic meter ships, the Gas Husky and the Gas Esco, coming off bareboat. Plus, we have increased our presence in the spot market as market softness due to both the COVID pandemic and the summer period makes charterers elect to take forward positions. In spite of the difficult economic environment since our last announcement, we concluded five new charters and charter extensions. Overall, we have a solid fleet deployment. Our period coverage for the remainder of 2020 is in the order of 71%. Our contracted revenues are in the order of $112 million with about $45 million secured up to the end of 2020. Including our joint ventures, total secured revenues increased to $133 million. With slide 5, we are providing a summary update on our two joint venture performances. With regards to our first established joint venture comprising the majority of small LPG vessels, we currently have two of the five under time charter contracts. Given the soft market conditions, the three vessels in the spot market marked poor performance and consequently did not add significantly to our profitability. Focusing on our second joint venture comprising of three medium gas carriers, these are all under time charter contracts thus producing a steady cash flow. With our newly concluded time charter contracts for two of these MGC vessels, the joint venture structure has 100% period coverage up until April 2021. Proceeding to slide 6, we provide you with a brief summary of our recent sale and purchase activity. In mid-June 2020, we took delivery of a brand-new 5,000 cubic meter pressurized vessel, the Eco Texiana. The vessel was acquired with refinancing already in place and therefore our equity contribution was only $8 million. Up until January 2021, we have two more vessel deliveries: the Eco Alice, a 7,500 cubic meter newbuilding vessel to be delivered in September 2020; and the Eco Blizzard, an 11,000 cubic meter newbuilding vessel to be delivered in January 2021. Financing for these vessels is already committed, and our remaining equity obligation is as low as $7 million. With about $37 million of free cash from StealthGas' balance sheet and additional cash of $11 million from our shareholder stake in our joint ventures, our capital expenditure obligations are fully covered. In terms of our fleet geography on slide 7, our company focuses on regional trade and local distribution of gas and this graph is a snapshot of the positioning of our ships excluding our joint venture vessels as of August 3. Currently, we have 14 of our ships in Europe, an equal number in the Middle East, five vessels in Africa, and five vessels in America. I'll now turn the call to Mrs. Sakellaris for our financial performance.

Fenia Sakellaris, CFO

Thank you, Harry, and good morning to everyone. I will continue the presentation focusing on our financial performance for the second quarter of 2020. Indeed, the quarter was outstanding given the difficult market situation we’re in due to the COVID-19 pandemic. Amidst these unexpected market conditions, StealthGas leveraged its strong fleet deployment, a stable operating cost base, and low debt exposure to produce such good and promising results. This is actually proof of all we have been arguing this past quarter—that we follow a sound strategy that can demonstrate profitability given the correct circumstances. Indeed, the circumstances in the second quarter of 2020 were right for our company, meaning that since the beginning of the quarter, we had secured 86% fleet coverage, thus protecting us from all the market turmoil that took place; plus, we had no spot exposure in Europe. Let us move on to slide 8, where we see the income statement for the second quarter of 2020 against the same period of the previous year. Voyage revenues came in at $36.3 million, marking a $0.2 million increase compared to the same period last year. This increase is attributed to a noticeable rise in our time charter revenue stemming from all of our vessel types, namely small LPGs and 22,000 cubic meter semi-refrigerated tankers, along with limited exposure in the weak spot market, which was weak due to the COVID-19 pandemic. Voyage costs amounted to $2.1 million, marking a 50% decrease compared to Q2 2019 due to a reduction in spot days by 48%. It's noted that the sharp decline in fuel prices from March onwards also assisted with our voyage cost reduction. Based on all of the above, our net revenues for the period were $34.1 million corresponding to a net revenue margin of 94%. Running costs at $11.6 million marked about a 2% decrease compared to Q2 2019, mostly attributed to fewer time charter and spot days due to our fleet contraction. General administrative costs decreased compared to the same period last year by about $400,000, mainly as our stock compensation plan active in the same period of 2018 ended in August 2019. Based on all this, our EBITDA is in the order of $22 million. Interest and finance costs marked a close to $1.7 million decrease, mainly attributed to a decrease in LIBOR and the lowering of our debt. Based on all the points analyzed above, we ended the second quarter of the year with a net income of about $9 million corresponding to an EPS of $0.23. Our EPS result is more than 11 times ahead of Bloomberg consensus, marking the best quarterly performance we have seen over the last seven years. Slide 9 demonstrates our performance indicators for the period examined. As mentioned earlier, our operational utilization for Q2 '20 was in the order of 97%. We achieved strong performance given the tight market conditions. In terms of adjusted time charter equivalent, we noticed a rise on a quarterly basis by about $1,500 daily, mainly due to improved time charter rates. Looking at our balance sheet in slide 10, our free cash is in the order of $36.3 million, increased compared to the first quarter of 2020 by almost $9 million. As mentioned at the beginning of our call, we utilized the $25 million we received from the conclusion of the MGC joint venture vessel financing to acquire two new small LPG vessels and substantially reduced our outstanding payables that had to do with our joint venture arrangements by almost $6 million. Our joint venture structures combined currently have cash in the order of $22 million. Most probably, excess cash in our joint venture arrangements will be divided out to shareholders towards the end of this year, thus adding to our free cash base. Our gearing is in the order of 38%. Based on our scheduled principal repayments, we will reduce our leverage by around $40 million per year. We have no balloon refinancing due in the remainder of 2020, with a minimal balloon obligation of around $30 million in 2021 for which we have already entered into discussions for refinancing. I will now hand you over to our CEO, Harry Vafias, who will discuss market and company outlook.

Harry Vafias, CEO

Proceeding on slide 11. These unprecedented times we are going through make it very difficult to assess our markets for the future. A strong element of uncertainty prevails across the broader LPG space as is the case for global shipping nowadays. The COVID-19 pandemic and the lockdowns that took place in the second quarter of 2020 have had a sharp impact on all sectors of the economy. Focusing on LPG demand and supply across geographical regions, we witnessed a dramatic decline in LPG demand in Europe; therefore, the majority of the refiners in the area scaled back production. Looking at Asia, refinery ramps dropped as well, particularly in the northeast of Asia. However, LPG imports held up fairly well. As for the residential demand for LPG, the COVID-19 pandemic has had mixed impacts. Demand in China scaled back, while LPG consumption in India marked a considerable rise. In the United States, although LPG production has dropped from 2019 levels, volumes are increasing lately, marking a rise of about 12% since May 2020, while exports are showing an upward trend too. Moving to slide 12, we see that during Q2 2020, due to the COVID-19 pandemic outbreak, rates for small LPGs declined, mostly driven by the sharp deterioration of the European LPG market. Demand for larger ships, i.e., 7,500 cubic meters, remained relatively steady, and therefore the rate decline for this segment was negligible. West of Suez, the market was heavily affected by the COVID-19 situation. By mid-April, the list of open ships in Europe reached historical heights; for owners with significant spot and/or COA exposure, it was not a matter of lowering freight rates to secure employment for their ships; there simply were not enough cargoes. This came about as an outcome of extensive lockdowns of economies across Europe, including the lockdown of several European refineries, which suffered heavily from the drop in demand for oil products. The standstill in the market lasted all through to the end of the second quarter. Naturally, because of the non-existent spot market, there was extremely limited time charter activity. It remains to be seen whether a market recovery, perhaps a few months down the line, will stimulate period activity in the region. The eastern market experienced a far better second quarter than Europe. After the COVID-19 situation started to improve in China early in the second quarter and the economy opened up again, we saw a significantly more active spot market. This was primarily driven by the Chinese importers starting to buy petrochemicals again after an extended period of lockdown. In addition, the LPG market remained stable. On the period side, we saw a bit more activity as charters gained more confidence in the market and were willing to take some forward coverage. As mentioned, it remains uncertain whether, heading towards the winter months, our market will recover or whether a potential deterioration of the COVID-19 pandemic situation and newly imposed government restrictions will keep our segment under pressure. Regardless of the current situation driven by global economic conditions, our market-specific fundamentals, such as an aging fleet and low order books, will remain positive and will likely accelerate our market recovery rate once a broader economic environment permits it. The small LPG pressure segment has substantially old tonnage, with 26% of the fleet being over 20 years of age. Hence, we do anticipate an acceleration of demolition in the future. Since the beginning of the year, we have recorded the demolition of one small ship as scrapping has come to a halt in the past few months, mainly due to the COVID-19 lockdowns and the subsequent closing of the demolition yards. As per recent published orders, there are 17 vessels, which is almost 5% of the total fleet, to be delivered up until the end of 2022, a relatively small order book. On slide 13, we discuss our company's outlook commencing with our share performance since the beginning of the year. The performance of our stock is presented alongside selected gas carriers peer group and the price of oil. The global COVID-19 outbreak and imposed lockdown resulted in a fall in demand for petroleum products. However, the easing of lockdowns in May increased the demand for oil, and consequently, oil prices began to rise. These events affected energy-related stocks, which showed a broad correlation with oil price volatility. The stock of StealthGas was less volatile, but prices remained low in the region of $2.5. In slide 14, we outline the key variables that will affect our performance in the quarters ahead. Given the market's turmoil, it's quite difficult to make predictions. We have isolated three key points that may assist our financial performance in the upcoming periods. First, we have quite high period coverage of 71% for the remaining of the year, thus shielding us from any further market volatility we might face. Our spot exposure in Europe, however, is bound to be low as we have only three vessels in the region concluding their period charters up until the end of the year. Secondly, we have all of our 22,000 semi-refrigerated ships on time charters at improved rates, while the majority of our tankers are also in period charters producing solid cash flow. Lastly, particularly importantly, we are under a very low LIBOR rate environment; hence, our finance costs will decrease even further. However, we have 14 vessels concluding their period employment up until the end of the year. As mentioned, the majority of these are situated in Asia, where the market is currently better than in the western region. Moreover, in the two remaining quarters, we have quite a heavy dry docking schedule with nine dry dockings and three water ballast system fittings with a total budget of about $7 million. Therefore, our cost base is quite burdened. The most important and unknown variable, however, is the uncertain market we are in and the evident impact of COVID-19 on the industrial demand for LPG. Concluding our presentation with slide 15, we present a brief summary of our company's and market's strong points and remain confident that once the COVID-19 pandemic eases and our market rebalances, StealthGas is capable of demonstrating an even stronger performance than in the second quarter of 2020. At this stage, I will summarize our concluding remarks for the period examined. In spite of the global turmoil that the COVID-19 pandemic has brought on, StealthGas exerted a very strong performance in the second quarter of 2020, marking the best quarterly result we have seen over the last seven years. The pillars of our success were principally our strong period coverage secured ahead of the imposed lockdowns, our stable operating cost base, and the lowering of our finance costs. Our conservative strategy of striving to secure our fleet on period charters paid off in that we had concluded several period charters at competitive rates prior to the COVID-19 pandemic outbreak. Hence, we were shielded from any market deterioration while at the same time managed to enhance our profitability significantly. We proved that we have a strong fleet, a solid financial position, and an efficient strategy, which instills us with confidence in this uncertain market we are facing. Our performance is also reflected in our share price levels, which we deem an unfair reflection of StealthGas' dynamics. Going forward, we will strategically navigate the tides of this pandemic, pursuing the best course of action in what may prove to be difficult market conditions. We have now reached the end of the presentation. I would like to open the floor for your questions. So, operator, please open the floor.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. And our first question comes from the line of Randy Giveans from Jefferies. Your line is now open. Please ask your question. Thank you.

Randy Giveans, Analyst

Howdy, team StealthGas. How are you doing?

Harry Vafias, CEO

Hi, Randy. Hope you're well.

Randy Giveans, Analyst

Yeah. All good here. Obviously, congrats on a very strong quarter here far exceeding our expectations for earnings. So with that, should we expect the kind of cost savings we've seen in the second quarter to continue? Or do you expect a lot of them to return closer to the first quarter numbers looking at vessel operating expenses, looking at general administrative, interest expense? And then on the revenue side, do you expect similar utilization on rates in the third quarter relative to the second quarter?

Harry Vafias, CEO

To be honest, Randy, it depends on how many ships we're going to try and fix on period; if we are successful in doing so, because as you can understand, operating expenses and costs have a lot to do with whether the ship is trading spot or not. I would feel confident to say that it will be somewhere between Q1 and Q2 if you want my opinion.

Randy Giveans, Analyst

Okay. And then on the interest expense side, is that a fair run rate? Or are you looking at swapping any floating instruments? Or how do you look at interest expenses for the year? Obviously, it hasn't had a...

Harry Vafias, CEO

No, we are not worried. We are not concerned about seeing a rapid increase in LIBOR rates; therefore, we are staying put for now.

Randy Giveans, Analyst

Got it. Okay. And then in the release, you stated you acquired the two vessels from an affiliate. Can you give a little more info on that? The ages? Are they on spot or on contract? What are some of the other terms regarding their pricing?

Harry Vafias, CEO

Yes, I think it's in the release. They're both brand new. One was delivered in June and one is delivering in September. It's under construction as we speak. Both are Japanese-built ships. The first one has a short time charter on it. The second one is not fixed because she hasn't been delivered yet. She's delivering at the end of September.

Randy Giveans, Analyst

And what is the cost of those two vessels per vessel?

Harry Vafias, CEO

I think it's not disclosed, Randy.

Randy Giveans, Analyst

Okay. Can you give us the total cost for both?

Harry Vafias, CEO

I will have to consult my team before providing that information.

Randy Giveans, Analyst

Okay. All right. And then just the last question. Obviously, the share price, right? It's under $3 even after today's pretty good move here. Is there any other tender offer in the near term or maybe continued open market purchases? And also, why purchase two vessels at NAV when you can buy your shares at a 50% discount to NAV? In the press release, you state that the share price is according to you an unfair reflection of StealthGas' dynamics. So can you possibly...

Harry Vafias, CEO

You know the answer to that, Randy. We've been buying stock nonstop as you know over the last three years, both in the open market and through our tender offer a few months ago. StealthGas' strength is its fleet. If you remember, we sold 13 ships, one two years ago. So I think buying two brand-new ships to partly replace those older ships that were sold off is not such a big expansion, especially when we think now is a good time to buy quality assets and wait hopefully for a better market when and if the pandemic is taken care of.

Randy Giveans, Analyst

Got it. And does this kind of substitute for share repurchases? Or is this a complement to that in terms of use of cash going forward?

Harry Vafias, CEO

I think we're going to have more authority to buy more shares when we have a better view of the control of the pandemic. If we see that the vaccine is out and people start getting vaccinated and the cases go down, maybe that will give confidence to the Board to reauthorize us to buy more shares. I don't think we're going to have any authority before we have more clarity on that.

Randy Giveans, Analyst

All right. That’s it from me. Thanks again.

Harry Vafias, CEO

Thank you.

Operator, Operator

Thank you. There are no further questions at this time, sir. Please continue.

Harry Vafias, CEO

We'd like to thank you very much for joining us at our conference call today and for your interest and trust in our company, and we look forward to having you with us again at our next call for our third quarter 2020 results in November. Thank you.

Operator, Operator

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