Harry Vafias - President & CEO Fenia Sakellaris - CFO Michael Jolliffe - Chairman

Patrick Sheffield - Beach Point Capital Jeff Geygan - Global Value Investment Corp

Good day and welcome to the StealthGas Second Quarter 2016 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Jolliffe, Chairman of the Board. Please go ahead Sir.

Thank you. Good morning, ladies and gentlemen, and thank you for dialing into our second quarter 2016 earnings presentation and webcast. I am Michael Jolliffe, the Board Chairman of StealthGas and joining me on the call today is Harry Vafias, the Chief Executive Officer of our company and our Finance Officer, Fenia Sakellaris, who will discuss our company's financial performance. Before, we commence our presentation, I would like for all of you to be reminded that we will 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 of the presentation. It's noted that risks are further disclosed in StealthGas' filing with the Securities and Exchange Commission. I would also like you to note that all amounts quoted, unless otherwise clarified, are implicitly stated in United States dollars. So let us move on to Slide 3, so as to summarize our company's key highlights for the second quarter of '16. It is acknowledged that our bottom line results were not that satisfactory. This quarter rates in our segment showed no significant signs of improvement and broader seaborne trade of LPG was affected by the narrowing of price arbitrage opportunities. In addition to this, our performance was affected by the cost of four scheduled drydockings and a grounding incident on one of our LPG vessels. Therefore, revenue loss due to technical off hires, coupled with increase to our operating cost mostly due to extraordinary events led to our company marking an income loss this past quarter. Nevertheless, we concluded the new building LPG delivery program for 2016 with the addition of our latest LPG new build, the Eco Dominator, at the end of June 2016. In addition to this and given our fleet expansion, we achieved year-over-year increase in vessel calendar days of 15%, while we managed to close the quarter with an operational utilization of 91%. We continued our conservative chartering strategy, maintaining as customary strong earnings visibility of close to U.S. dollars of $180 million and managed to reduce further our average fleet age to 9.1 years with more than 75% of our fleet being below 15 years of age. Proceeding to our financial highlights, in quarter two '16, we recorded revenues of $35.7 million, an increase of approximately 10% compared to quarter two '15, whilst our EBITDA amounted to $12 million. In terms of our leverage and cash position, we still maintain a low gearing of about 41% with the net debt to assets ratio as low as 34% as our cash is about $72 million. In terms of capital expenditure, our remaining CapEx plan includes solely the four 22,000 semi-refs to be delivered in 2017 for which and as previously announced, we have secured financing at competitive terms. Briefly commenting on our stock repurchase plan in quarter two '16, and given tough market conditions, we strategically decided to reduce spending for stock repurchases so as to preserve company cash. Please go to Slide Number 4; this slide provides an analysis of our fleet employment. In terms of charter types out of a fleet of 54 owned vessels and as of August 2016, we had 14 of these ships on bareboat, 26 on time charters and 14 in the spot market. The only two vessels that have chartered in by our company are also sublet on time charters. As customary to our conservative chartering strategy and in spite of very hard market conditions, we managed to increase our earnings visibility through new contracts and contract extensions for the remainder of 2016 to 70% and preserve our secured revenue balance in the order of about $180 million. One side of our investment plan success and in the extension our company's capabilities, is that 100% of our 12 new building LPG vessels delivered in 2015 and 2016 are on period charters, while a satisfactory percentages of our vessels above 15 years of age is also fixed on a period contract basis. Of course as freight rates still remain at very low levels, market conditions do not permit the negotiation of very long term contracts and therefore our activity in the spot market still remains higher than customary. In terms of new employment contracts, since our quarter one '16 results announcement in May, we concluded five new period charters varying from three to six months duration and three time charter extensions varying from one year to six months. I will now pass the floor to our Chief Executive Officer, Harry Vafias, who will discuss our fleet geography and CapEx plan.

Thank you, Michael and good morning, everyone. With regard to our fleet geography in Slide 5, 54% of the fleet trades in the middle and Far East, 30% in Europe, 7% in South America and 6% in Australia and finally 3% in Africa. In comparison to our fleet composition presented in the previous quarter, we had one vessel relocating from the Far East to Europe and two vessels commencing trade in Africa, which according to our view is an upcoming market for the shortfall LPG trade. Slide 6 demonstrates our fleet development and any sale and purchase activity. As to date, our company owns 54 ships. In June '16 we took delivery of our new Eco 7,200 cbm vessel named Eco Dominator. This was our last schedule delivery for '16 and we have now plenty of time to prepare for the delivery of our last 422K semi-ref ships in 2017 pushing our fully owned fleet to 58 vessels by the end of next year. Slide 7 provides you with an analysis of our remaining capital expenditure program scheduled to take place up to the end of '17. For 2017 and as stated above, we expect to take delivery of the four new Eco 22,000 cbm semi-ref ships, which will allowed to our fleet of small element of verification as we aim to prepare customer, a wide spectrum of services. Looking at the table on the left hand side, our remaining CapEx excluding any related advances paid to date is in the order of about $162 million. At the bottom of the table, we provide you with a detailed breakdown of our remaining capital expenditure as to advances and final payments for our future deliveries. In relation to the financing of this capital expenditure, which is presented in the right graph, from a total contract value of $208 million, $47 million are advances already paid, $140 million is committed bank debt, a portion of which is still subject to definitive documentation living us with an equity injection of close to $22 million. I’ll now turn it over to Mrs. Fenia Sakellaris for the financial performance discussion during Q2 '16 results and later I’ll discuss the market and industry outlook.

Thank you, Harry. Good morning to everyone. The second quarter of '16 did not generate anticipated revenues nor profitability as market rates still have not shown signs of improvement, nor oil prices have shown any sign of real stabilization or meaningful increase. Let us move on to Slide 8, where we see the income statement for the second quarter of '16 against the same period of the previous year. Our voyage revenues came at $35.7 million marking a 10% increase, compared to the same period of '15 mainly due to the net addition of seven new Eco LPG vessels. On a year-on-year basis, rates on virtually all segments of our markets have marked a decline, a fact which undermines our earnings potential. Adding to this in Q2 '16, we faced higher than usual high revenue loss due to the drydocking of four vessels, three of which are under time charter contracts, as well as the grounding incident of one of our LPG vessels, which unfortunately reduced its voyage days for this quarter by a whole month. Voyage costs amounted to $3.6 million, marking a 6% decrease compared to Q2 '15. The key driver of voyage cost reduction was a decline of oil prices. It is noted that bankers account on average to about 35% of our voyage expenses. Net revenues, that is revenues after deducting voyage costs, came at $32.1 million. Running costs under $15.2 million increased by 33% compared to the same period of last year, given the net addition of seven vessels, plus two vessels coming [off their book] in a quite significant cost to repair our LPG vessel following the ground incident, cost of which will be paid back by the insurers in the fourth quarter of the year. With regards to the drydocking costs, these amounted to approximately $1.5 million, given the unusual coincidence of four scheduled drydockings taken place during the same quarter, while only one drydocking had taken place during the same period of last year. Overall for the remainder of '16, we have scheduled an additional three drydockings that will take place until the end of the year. Our EBITDA for this first quarter of the year came at $11.7 million, quite low figure attributed to the reasons explained above. Interest and finance costs marked an increase of approximately $1.2 million as a result of the increase in our leverage in order to finance our CapEx plan. With a net loss of close to $1.5 million, our earnings per share for the second quarter of '16 was minus $0.04 while for the six months of '16, out net loss is close to $900,000, which gives us an EPS of minus $0.02. Slide 9 demonstrates our performance indicators for the period examined. As mentioned earlier, on or due to a higher unusual technical off hiring in Q2 '16, our fleet utilization was reduced to 97.6% from almost 100% in the same quarter of last quarter. Our operational utilization was somewhat higher than in Q2 '15 in the order of 91% in spite of the soft market we are facing. Focusing on the average daily results, our adjusted time charter equivalent is lowered by 1.5% period-on-period, indicating that the market is still not picking up. Looking at our adjusted operating expense this quarter and compared to Q2 '15, we see an increase of 3.5%, which we attribute to the two vessels coming off bareboat and extraordinary technical events faced this quarter. Looking at our balance sheet in Slide 10, in the first six months of this year, we did not see any significant change in our asset base with our vessel's net value increasing by $25 million, following the delivery of two Eco LPG vessels. In addition to these and compared to the end of the year '15, we marked a cost reduction mainly as a result of our capital expenditure program. Focusing on the equity and liability side, our gearing still remains low in the order of 40% while our net debt ratio lies in the order of 34%. During Q2 '16, we realized the drawdown of about $17 million in order to finance our final newbuilding delivery for this year. Overall, we're pleased to follow a sensible and stable new payment schedule, which allows us to preserve our debt at moderate levels in spite of capital expansion. In Q3 '16 and Q4 '16, we have scheduled principal repayments in the order of 5% of our current outstanding debt. Moreover, we successfully received bank commitment for the financing of a $25 million balloon payment due in Q3 '16 at competitive terms. Slide 11 presents on a daily basis the evolution of our breakeven against our average time charter equivalent. It is clear that our average PCE is affected by the trend of the market that of declining rates. With regards to our daily breakeven, which follows a rather stable trend in the past quarters, the slight increase marked in Q2 '16 is attributed to the rise of our operating costs and the drydocking charges incurred for reasons explained before. Looking briefly at the fleet contribution analysis in the bottom left, our company strongest revenue stream is our time charters, while the weakness of the market is evident in the spot activity. We charge a low contribution to our time charter equivalent earnings. I will now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.

Let us proceed now with Slide 12. Demand and overall growth of the LPG trade still stands strong with the largest component of consumption being the residential commercial segment and is forecasted to remain strong in the years to come. In terms of import and export activity, [indiscernible] channel will play the leading role in terms of imports while U.S. LPG exports are expected to persist well into the next decade. What you've noticed in the LPG market in the past few months is a narrowing of propane and butane price arbitrage opportunities, mostly attributed to a reduction in U.S. shale drilling, given the uncertainty that prevails in the oil markets. This is affecting our market, but mostly the larger [guys] ships. Focusing on our segment as evident, the pressurized market continues its depressed state during the second quarter. [indiscernible] both Northwest Europe and Mediterranean Black Sea were negatively affected by an oversupply of tonnage and we continued closure of the arbitrage on LPG exports out of the U.S. to Europe mentioned earlier on. In Asia, the freights continue to be very depressed, but there are signs that the overhang of tonnage is shrinking and that we are gradually moving towards a more balanced market, which is needed in order for the freight market to improve. Slide 13l we see the evolution of small LPG charter rates. As evident by the table presented, the small LPG segment has experienced declining rates during the past year with the exception of the 7,500 cubic meter segment in which rates have remained fairly steady. Compared to 2Q '15, rates have still marked a slight decline, indicating that the market remains at the bottom of its cycle. It's however important to note that compared to the prevailing rates in the broader shipping segment, our market is far more stable and therefore more secure. In terms of scrapping in our market, even though the distribution of the small LPG Fleet favors scrapping, since the beginning of the year, we only noted three ships being scrapped. The strong point in our segment is the limited order book for the years to come. As for published orders in the years to come, we have four vessels to be delivered until the end of '16 and less than 3% of the total fleet on delivery in the periods '17, '18. Compared to the other markets as that of the VLGCs where we had 32 vessels delivered in the first six months of '16 on to a base of 200 ships and a further 12% is anticipated fleet growth rate for '17. It can be argued again that the small LPG segment depicts elements that could lead to a market correction in the near future. I'll now continue to discuss further the company's outlook commencing with our share performance for the last three months in Slide 14. The performance of our stock is presented along with selected gas carriage peer group. It's worth mentioning that throughout '15 virtually all stocks of our peer group exhibited a strong correlation to oil price movements. However, it's noticeable in the past quarter of '16, that companies with medium to large gas ships, the share prices are no longer correlated that much to oil and they demonstrate a sharper decline. Focusing on StealthGas, we know that during the interval examined, our stock value has increased by about 4%, mostly affected by the oil price fluctuations. Proceeding to Slide 15, we're showing different scenarios on the company's performance for '17. The different scenarios were created based on our existing fixed charter, plus assumed number of open vessel for which we assume an average TCE as per each category presented. We estimate that hypothetical $1,000 increase in spot daily rates will lead to approximately $9 million contribution to our annual EBITDA. It's noted that this forecast excludes the four 22K semi-refs to be delivered within 2017. On Slide 16, we can see some valuation multiples of StealthGas against comparable companies. All peer group companies trade at discount to NAV, while asset values exceed current enterprise values. As evident, our company trades at a greater discount than its peers in terms of NAV, but has a clear and safe capital structure with less gearing than its peers, in spite of the heavy expansion plan that took place over the last couple of years. We believe that low share price combined with a solid company fundamentals, such as healthy capital structure make a good investment opportunity for medium term investors. Concluding our presentation with Slide 17, we summarize all the reasons why we feel StealthGas is a good investment and present the market factors that with an improvement would allow our company to express profitability to its fullest potential. We base this belief to our capital structure and solid management, both in terms of chartering our operations and our consistency in maintaining top quality vessels, striving to provide top quality services to our customers. At this stage, our Board Chairman, Mr. Jolliffe, will summarize our concluding remarks for the period examined.

During the second quarter of 2016, freight rates in our segment remained very weak, continuing to bounce along the bottom. As evident from the previous quarter, our market is presently at a breakeven level with suppressed profitability. We continue to operate in an extremely difficult market environment with however, a small order book that should exist the segment to balance itself. Unfortunately, there is limited scrapping activity that therefore does not reduce the numbers of vessels in the water. As for our company's performance this quarter, it was affected by extraordinary events, resulting in high off hire and thus revenue loss. Nevertheless, we managed to increase our fleet utilization for 2016 by almost 10% and keep our secured revenues in the order of $180 million in spite of bad market conditions. We feel confident as to our fleet and most importantly, our realized capital expansion is a 100% of our new building deliveries in 2015 and 2016 are currently on period charters, providing steady cash flows. In addition, we follow a sensible capital management, maintaining our gearing at moderate levels. As per our cash management this quarter, we strategically decided to cut back on our stock repurchase in order to preserve our cash in this turbulent environment. We look forward to monitor the broader market and our company's performance in the next couple of quarters as we have no new deliveries up until quarter one 2017. We have now reached the end of our presentation and we would like to open the floor for your questions. So operator, please open the floor. Thank you.

Thank you, sir. [Operator Instructions] We can take our first question. It comes from Patrick Sheffield of Beach Point Capital. Your line is open sir. Please go ahead.

Hi guys. Thanks for taking my questions.

Hi Patrick.

Hey. First one, is I noticed looking at Slide 15, the EBITDA sensitivity at different time charter rates. The numbers have come down by about $10 million versus the same presentation slide from the first quarter and I’m wondering why that is.

It’s very obvious. The answer, Patrick, is the more the market weakness persists, the more conservative we should become, right? I don’t think it’s very sensible to add, to expect very high numbers. And therefore, every quarter, if the market remains bad, we lower the range. And on top of that, don’t forget that this includes the vessels that are fixed. Therefore, if every quarter we fix lower rates, these are translated into lower EBITDA, right?

Right. So I guess, why I was confused is the way the chart is shown, it gives us certain time charter equivalent rate range. So I thought -- I guess, using the same exact rate range, the numbers came down by $10 million. Is that because...

Yes, because we excluded the four semi-refs, where in the previous quarter, they included the four semi-refs. So that’s another reason.

Okay. That makes sense.

I think in the bottom of the page, it says, forecast excludes the four new builds.

Yes. I see that now. So the EBITDA from the four might have been around $10 million or…

It was. These were the starships up to three, four months ago. They’re not anymore. So yes.

Okay. And just related question on the semi-refs. What does the rate environment look like with those...

We don’t have the ships yet. So we don’t have like, fresh our own experience. But today, for a more than ship of that size, I would say that the period rates are low to mid teens. And we have estimated high teens. So what is that is 20% down, 25% down.

Right. They’re not immune from all the pain that we're seeing.

No. But frankly we don’t have them anymore. We don’t have them now. So we’re in inverted commas, “immune" until they deliver and the average delivery date is mid-'17. So we have 10 months, let’s say, on average.

Got you. Okay. And then you guys mentioned that in the quarter, that you had four drydockings and a grounding incident.

Yes.

And I was just wondering how much of an EBITDA impact that those factors have in the second quarter?

I don't have this information, but these were scheduled drydockings. So that was not a surprise. The surprise was the grounding obviously. It was one of our highest earning ships. So that a bit hurt from an EBITDA point of view. But obviously, it was a one-off.

Yes, yes like a month.

So the vessel is now repaired and fixed. We’re going to get all the repair money back. I would guess, off my head and without any guarantee, of course, because I don’t have information, I would guess about $1.5 million.

Okay. And then you guys also mentioned that you should get something back from insurance in the fourth quarter.

Correct. Correct. Yes.

How much would that be?

I don’t want to say. Because as you know, these things are not 100% clear. You have to -- adjust. You have to prove all your expenses and the damages and so on and then you have to -- you take a percentage of that minus the deductibles. So I wouldn’t like to say a number until the calculations and math with insurance company is finalized. I wouldn’t want to say a number to you and then like three months later, get half of that. You know what I mean.

Yes I know, I understand but...

I prefer to leave it open and when it happens, and when it happens, we announce that, look, we got X amount back from the insurance company.

Yes. Okay. But if it cost you $1.5 million in EBITDA, it's certainly like you're going to get more than that back from the insurance? Is that correct?

It’s not $1.5 million because we don’t have insurance for the off-hire. You get insurance for the repairs, not the lost EBITDA.

Right, okay.

So it’s not $1.5 million. The $1.5 million is the lost EBITDA. We’re talking about the repairs. What money we paid to repair the ships.

Understood.

Which is far less than $1.5 million.

Exactly. Okay. That's all I wanted to know. Okay. Great. And then just from a cash flow standpoint, you guys have some balloon payment, I believe coming in September of $25.5 million. And I was wondering if you had any plans to refinance that or if that was going to be cash…

Fenia read about it. I don’t know if you heard it. She was very specific. This was already been refinanced.

Okay. Great. She -- I apologize she was being a bit quick. I was trying...

Yes, yes. It was one of the specific things she mentioned that was a balloon pending and it was already refinanced a couple of months ago.

Okay. Great.

So that’s not pending anymore.

Great. And then just from a broader market outlook, you made some commentary, but in previous years, there’s -- I think is there a seasonal pick up in the fourth quarter. Is there any…

Every year -- every year there was a small pickup in the winter and some small softening in the summer, but after the oil price collapsed, this nice winter bonus didn’t happen. So I don’t know about this winter is a bit early to guess. I guess we have to wait for October, November to see if we’re going to see a pickup or not. Depends also how harsh the winter is.

Okay. I got you.

We’re still in the middle of the summer. So I don’t want to make a prediction.

Okay. And apologies if you already mentioned it, but any reactions or impressions from the third quarter from what we’ve seen through August? Or is it more the same, or...

No. I would say -- I would say following the same trend.

Okay. Okay. Great, thanks Harry. I appreciate it.

Thank you, Patrick.

Thank you. We've no further questions at present. [Operator Instructions] Thank you. We have our next question actually. It comes from Jeff Geygan of Global Value Investment Corp. Your line is open. Please go ahead. Excuse me, sir. That particular participant actually signals star one again. And I'll be able to queue his question. Apologies. Please go ahead, sir.

Yes. Thank you for taking my call. Harry, I'm curious what your cost of debt is and if you could use the recent $25 million refi as an illustration of that?

The cost of debt, what do you mean of the recent refinancing order, or the average cost of debt on our whole debt?

Actually both would be ideal.

Well, these are in 20-F. These are in 20-F Jeff. I don’t have it in front of me. You can easily find out.

Happen to know what cost that $25 million was?

We have not announced that publicly, but it will be in our 20-F as well.

I see. Then [humor] me and tell me what your cost-to-debt was from your 20-F?

I don’t have my 20-F Jeff. It's very easy for you I guess to find out if you want.

Fair enough. I guess it begs a further question you've suspended your stock purchase at the present time. I am a little bit surprised given how cheap your shares trade relative to NAV or book. I'm little surprised by that?

That's a Board decision. We had a special discussion just for that today and because we see what is happening around us, I guess we have to protect the company as much as we can. We still have four very expensive new buildings to pay for. Next year as you know, all the delivery installments are with cash. We are starting to burn cash to pay for our debt amortization. So I think it's a prudent thing to do. I agree that is very cheap and we have discussed that before and that's why we have spent up to now all this money through buy back stock. But I think the health of the company is above the share repurchase program.

Yes, I would agree and I think that's fair. Although, within net cash due of $20 million and roughly cash and restricted of $90 million, it still leaves you fair amount of liquidity. Again I'm surprised that with the potential return on the equity investment you might not take advantage of this one?

Yes, but if the market falls by another 10% and we don’t find new period charters for the ships that are coming open in Q1 through in Q2 '17, what will happen then Jeff?

Very good. Given the -- it appears that your peers are trading pretty cheaply, are there acquisition opportunities for someone else or for you?

For us no, because they're still trading some of them at least above NAV or have too much debt or have zero equity in them, some of them again, not all of them of course and don’t forget the majority of our peers are VLGC players that are currently for those that have not -- for those that don’t have their ships on period, burning cash at an extremely fast rate. So as discussed before, we're very conservative. We want to have low debt. Acquiring a company like that might be strategically good for the future, but I think it would destroy us financially in the short term.

Fair enough. I was thinking more the other way around, maybe there being opportunity for the benefit of all shareholders to consider liquidating or selling StealthGas at premium to where we have traded for last couple of years.

I don’t think someone has approached us to do that.

All right. I appreciate…

If somebody does, it will be put to the Board as these are all major decisions I guess.

Thank you. Good luck. I appreciate it's a challenging environment for you.

Thank you, Jeff.

Thank you. We have no further questions at this point, but as a final reminder today, [Operator Instructions] Thank you.

I think everyone is happy. So we'd like to thank you 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 for our Q3 results in November. Thank you very much.

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