Michael Jolliffe - Chairman Ifigeneia Sakellari - Finance Officer Harry Vafias - President, CEO and CFO

Samuel Schaefer - Global Value Investment David Sachs - Hocky Management Company George Berman - IFS Securities

Welcome to StealthGas First Quarter Results 2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Jolliffe. Please go ahead, sir.

Good morning, everyone and welcome to our first quarter 2017 earnings conference call. This is Michael Jolliffe, the Board Chairman of StealthGas. And joining me on the call today is our CEO, Mr. Harry Vafias, the CEO of StealthGas; and our Finance Officer, Ms. Fenia Sakellari, who will shortly cover our financial review for the period examined. 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 this presentation, I shall be grateful. It is noted that risks are further disclosed in StealthGas' filings with the Securities and Exchange Commission. I would also like to note that all amounts quoted, unless otherwise clarified, are implicitly stated in United States dollars. Slide 3 summarizes our key highlights for the first quarter of 2017. It could be said that this first quarter of the year was quite satisfactory compared to the conditions prevailing in the last couple of years. In spite of oil prices sliding again, we witnessed a slight increase in freight rates and stronger demand, mostly driven by seasonal factors. Our company took advantage of this momentum. And we managed to achieve an operation utilization for the quarter of -- sorry, I lost my pace when the fan went off. Then we took advantage of this momentum. We managed to achieve an operational utilization for the quarter of 97.3% which is our highest recorded utilization since the first quarter of 2014 when market fundamentals were very different. Another sign of this period's higher demand which leveraged our performance, was the fact that compared to the previous quarter, we managed to decrease our commercial off hire days by almost 56%. In this environment which at least for the period examined, showed some positive signs, our strong earnings visibility continues as we have about 70% of our fleet secured for the remainder of 2017, with a total of U.S. $170 million in contracted revenues. In terms of our financial performance, our revenue for the first quarter of '17 came at $38 million, an increase of $1.5 million compared to the first quarter of '16. Overall, this quarter, we achieved satisfactory profitability margins and therefore, our adjusted EBITDA measure amounted to $15.4 million. As for our leverage and cash position, our gearing was further reduced from 40% at the end of 2016 to 39%, while we managed to keep a healthy cash balance of $50 million in spite of capital expenditure payments for our last 4 new building deliveries. Slide #4 provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 56 operating vessels, we have 13 of these on bareboat, 31 on time charters and 12 in the spot market. During the previous quarter, we successfully managed to conclude 19 new charters and charter extensions. And therefore this quarter, our chartering activity was comparatively subdued. In the past 3 months, we formed 2 new charter agreements, extended 1 charter, committed 1 vessel of new a series of consecutive spot voyages, while extended 2 contracts of consecutive spot voyages both for a period of almost a year. As for our recent 22,000 semi-ref new building, the Eco Frost which was delivered on May 22, we're pleased to announce that she is already employed on her first spot voyage. Our earnings visibility is currently in the order of $170 million. We have a strong period coverage which currently stands at 86%, while our average coverage for 2017 is about 70%. With regard to our fleet geography, presented in Slide 5, 53% of our fleet trades in the Middle and Far East; about 30% in Europe; 8% in America; 5% in Australia; and 3% in Africa. In comparison to our fleet composition presented in the previous quarter, we had no significant changes in our trade pattern. Moving on to Slide 6. I will provide you with an analysis of our remaining capital expenditure program. Following our first 22,000 semi-ref delivery, we have another 3 of these innovative vessels delivering, the latest being in April 2018. Looking at the table on the left-hand side, our remaining CapEx, excluding any related advances paid to date, is in the order of $104 million. At the bottom of the table, we provide you with the detailed breakdown of our remaining capital expenditure as to advances and final payment for our future deliveries. In relation to the financing of this capital expenditure which presented in the right graph from a total contract value of $156 million, $52 million are advances paid to date. $97.5 million is company-based case financing scenario as per committed loan amounts, leaving us with an additional required equity of $6.7 million. I will now turn the call over to Fenia Sakellari for our financial performance discussion during the first quarter 2017. And later, I will discuss the market and industry outlook. Fenia?

Thank you, Mr. Jolliffe and good morning to everyone. High season of demand, coupled with a slight increase in market rates, leveraged our performance in the first quarter of '17, allowing us to move back in satisfactory levels of revenue profitability margins. Let us move on to Slide 7, where we see the income statement for the first quarter of '17 against the same period over the previous year. Voyage revenues came at $38 million, a record number for our company, increased compared to the first quarter of '16 by $1.5 million. This increase is mostly attributed to the higher utilization of our fleet as our operational utilization exceeded 97%. Voyage costs amounted to $3.6 million, marking a 10% decrease compared to Q1 '16. The key driver of voyage cost reduction was the lower number of vessels operating in the spot market. As this quarter, we had 8 vessels in spot market against 10 vessels during the same period of last year. Net revenues, that is revenues after deducting voyage cost, came at $34.4 million, corresponding to a gross profit margin of 91%. Running cost of $14.9 million increased by 2.6% compared to the same period of last year, as we had one of our product tankers coming off bareboats in the beginning of '17, significantly adding to our cost as the tanker's OpEx is quite higher than that of an LPG. Excluding this event, a dividing OpEx by time charter and spot days which [build] [ph] our OpEx cost, we see that this daily average actually declined by 2.7% compared to the first quarter of '16. With regards to drydocking costs, this amounted to approximately $700,000, given 2 scheduled drydocking taking place in the quarter, same number of drydockings that took place during the same period last year. Our EBITDA for this quarter of the year came at $15.4 million, marking a noticeable improvement as our EBITDA for the same period of last year was in the order of $14 million. Interest and finance cost marked an increase of approximately $250,000, mostly as a result of an increase in LIBOR rates. With an adjusted net income of $2 million, our earnings per share for the first quarter was 5%. Slide 8 demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational utilization for Q1 '17 was in the order of 97.3%, marking the best operational utilization achieved in the last 3 years. High demand and a slight improvement in market rates were translated to a stronger adjusted time charter equivalent of about 8,200, marking a 5% increase against the same period of last year. Looking at our balance sheet in Slide 9. In 2016, we managed to preserve a good liquidity of $50 million in cash in spite the $15.6 million of advanced payments we had to pay this quarter in relation to the 22,000 semi-ref deliveries. Focusing on the equity and liability side, our gearing still remains low and was further reduced compared to the previous quarter at 39%. Compared to 12 months '16, our leverage actually decreased by $10 million as a result of our principal repayment schedule. Overall, we're pleased to follow a sensible and stable loan repayment plan which allows to preserve our debt at moderate levels. Slide 10 presents, on a daily basis, the evolution of our breakeven against our average time charter equivalent. What we noted this first quarter of the year is that obvious increase of our average TCE and a stabilization of our breakeven at satisfactory levels. Looking briefly at the fleet contribution analysis in the bottom left. Period employment contracts are our company's strongest revenue stream. And therefore, our TCE fleet coverage is quite high. In contrast with the previous quarters, however, where spot market revenues were weak, this quarter we see a healthier balance between revenue generation from spot activity and vessels engaged in the spot market. I will now hand you over to our CEO, Harry Vafias, who will discuss market and company outlook.

Let us now proceed to the market update in Slide 11. In 2016, Seaborne LPG trade totaled 91 million tons, while LPG traded via LPG vessels having a share of 73%. Production of LPG is dominantly in the U.S. and the Middle East. U.S. export volume, most of which are directed to Asia, are the key drivers of LPG trade growth. Many Asian players have signed long term supply dues with U.S. producers. Asian destinations, mainly Japan, China and South Korea, even Singapore made up around 40% of U.S. LPG exports in 2016. In the Middle East and with the lifting of sanctions, countries like Iran have raised LPG trade. Iran currently accounts of 17% of LPG trade in the area and this is expected to grow to 40% by 2020. China is estimated to be the major demand pull of the LPG market towards 2020, but we see also other markets where LPG demand is rising, such as Japan, India and South Korea. The reason behind China's demand growth is increasing the use of propane in existing and upcoming PDH plants as well as the country's substitutional way from fuel sources with high carbon emission in rural areas. In India, the government support for LPG consumption by infrastructure projects, as well as financial support to low-income households has been boosting LPG demand. In terms of petrochemical gases, this accounted for 15% of LPG trade volumes in 2016. Petchems are increasingly gaining share in Seaborne trade and are expected to add vessel demand growth both via volumes and distances. Focusing on our segment fundamentals in Slide 12, we see that during Q1 '17, rates demonstrated an upward trend, still not sufficient though to compensate for the decline noted in the past couple of years. We believe that the stronger demand for LPG has led to a steady but slow increase in rates in the past quarters. However, pulled oil prices do not assist rates to pick up so as to leverage earnings. West offshore, as was mentioned above, the pressure in spot market has shown signs of periodical tightening and better rates through the last quarter. This is a consequence primarily of a reduction of vessels trading in the area, combined with seasonal factors. On the TC side, the market continues to move slowly in owner's favor. Charters are slowly realizing that the TC market is unlikely to fall any time soon, so we have seen some charters taking long term cover where they can find willing owners. The spot market in Asia continues to tick along at a decent pace, mostly driven by petchem cargoes. Freight levels are on an average reasonably for owners, at least compared to the last 3 years. And that might be one of the reasons that the increase seems to have taken a breather. In terms of scrapping, activity's clear that the age distribution of the small LPG fleet favors scrapping. Since the beginning of '17, we have seen the demolition of 3 ships. Compared to 2016, where we have 5 vessel scrapped throughout the year, it seems that scrapping in our segment is accelerating. As for published orders, there are 8 ships that is only 2.2% of the total fleet to be delivered in the period of 2017, 2018. And no other orders from 2018 onwards have limited yard space. In combination with quite low rates in our market do not support new investments in the medium term. Share performance on Slide 13. The performance of our stock is presented along with selected gas carrier peer group. During the interval examine, we shall be following OPEC’s output cut agreement in November and oil price increases stabilization close to $50 per barrel which positively affected energy-related stocks. During the past couple of months, however, it seems that investor sentiments reflect the worry due to the low compliance by several OPEC members on output reduction leading to an oil price decline. We noticed during this period that with an oil price of close to $55, gas stock price exceeded $4. A fact that shows a strong effect of oil on our company stock's performance. Slide 14, we're showing different scenarios on the company's performance for the remaining of '17 up to the first half of 2018 -- with different scenarios were created by some existing fixed charters, plus vessel open days on the spot market, assuming no new charters upon expiration. The revenues were calculated using an estimated spot rate based on current market and in individual utilization rates for each vessel. This forecast includes the four 22,000 semi-ref new buildings, but we will take delivery during this interval, for which we have used very conservative assumptions. We can see throughout the quarter examined that the hypothetical $500 increase in spot daily rates will significantly leverage our earnings. This exercise is to show our company's and markets potential should rates mark further increases. Proceeding to Slide 15, we can see some valuation market list of StealthGas against comparable companies. All 3 group companies trade at a discount or close to NAV. While in most cases, asset values exceed current enterprise values. As evident, our company trades at a greater discount than its peers in terms of NAV, despite sales [indiscernible] with less gearing than its peers and market-leading share of the pressurized market. We believe that low share price, combined with solid company fundamentals, such as healthy capital structure, make a good investment opportunity for medium term investors. Concluding our presentation on Slide 16. We summarize all the reasons why we think StealthGas is a good investment and present the market factors that will assist in the near future of segment's improvement. Our belief that our company's based on the evidence from the ongoing performance where we strive to maintain a solid capital structure, container cost and the quality of our vessels, while always being ready to grasp the fullest, even the slightest market improvement when this arises. At this stage, our Chairman, Mr. Jolliffe, will summarize our concluding remarks for the period examined.

Our performance during the first quarter of 2017 leaves us cautiously optimistic for the future. Our company taking advantage of our well-chartered position and the significant reduction in idle days, manage to achieve record revenues and high operational utilization, thus improving on profitability margins. It must be taken into consideration though that as is customary, the first quarter is driven mostly by seasonal demand with weaker quarters anticipated to follow. Nevertheless, we believe that the low order book of our segment and the further stabilization in oil prices have the potential to reinforce improvements in our market fundamentals. Our strategy for the periods to follow is to take delivery and integrate it into our fleet, the remaining 22,000 cbm semi-ref new vessels, acknowledging that this segment has been facing challenges for quite some time now. But most importantly, our commitment towards our company, our investors is to continuing outperform our peers, leveraging on our solid financial and market-leading position in our segment. Over the years, we have proven that we don't run our business based on day-to-day stock movements. What we continue to do is focus our own business on what drives value creation which is profitable growth, minimizing risk and delivering strong returns. 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 very much, indeed.

[Operator Instructions]. We'll now take our first question which comes from Sam Schaefer of Global Value Research.

Just wanted a comment on the operational utilization of 97.3%. It's great to see that move back up. Do you believe this is a front-runner of rates improving in the short term?

We're very happy with that number. As discussed over the call, we haven't seen such a number since Q1 '14. So it's been 3 years to see such high utilization. I think, yes, we're going to, we're going to -- I think the fundamentals are showing some better times ahead. I think the summer as always, we'll be slightly softer. But from autumn onwards, I think it's going to continue strengthening.

Great. And then it seems that we chartered out, I think, 6 of our older 15-plus year vessels in the last quarter which is great to see. But there does appear to be 4 ships that are in that age are still sitting idle. Can you talk about, in the current environment, how we think about our older vessels and chartering them out versus scrapping them?

Yes, one small clarification. They're not sitting idle. They're trading in the spot market.

Okay. Can you still discuss how we feel about the economics of those older vessels in the current environment and the possibility of scrapping any of them?

Yes. Of course, as always, when we have ships that have been sitting idle for a long time and they are old vessels and they need to pass special surveys and the company to spend money on them, we sit with the Board and we discuss what's the best possible solution. Obviously, to give you a real example, last year, we were discussing with the Board the scrapping of a '92 built ship which is actually our oldest vessel. We decided to scrap the vessel. And 3 months later, before we have the chance to scrap her, the Board decided that wasn't the best solution. The best solution would be to keep the ship and pass fifth special survey. And indeed it proved to be a fantastic decision because not only did we fix the ship at a very profitable charter, but she's a debt-free ship, so whatever profit she makes goes straight to the bottom line. So now with the market strengthening again, if we can sell some of these older vessels, not for scrap but for further trading which will fetch us a much higher price, yes, we'll do it. Scrapping is, obviously, the last solution.

Interesting. And then with only just under $6 million left on the remaining CapEx for our newbuilds, we do have a large portion of cash as you referenced. Is the company thinking of starting to buy back stock again as we're trading such a large discount to NAV? Or what are the uses of cash? How is the company thinking about that?

Yes, I mean, we just had 1 good quarter. I think we shouldn't get ahead of ourselves. But you know, we've always been pro dividend and pro share buyback. We've done many of those things before. But obviously when we're still taking delivery of very expensive ships, in a weak market, we should keep the cash for potentially dangerous valuations. So in the short term, there's nothing to be done with the cash. The cash has to be kept for a rainy day. But if, obviously, we're right and from Q3 onwards we see a further strengthening in the market, then obviously, it's something to be discussed in Q1 '18.

[Operator Instructions]. We'll now move to our next question which comes from David Sachs of Hocky Capital.

A question regarding the SRs. If you could just give us a rough idea of what trading rates are for those -- that vessel? And what the operating expenses are to look at real-time operating model for that business? And then if you can articulate a little bit about what your investment case is for the 4 vessels as they come on and your vision for that component of StealthGas' portfolio?

Yes. David, as you can understand, we have 4 ships in order. And then just the 1 has been delivered on Monday. So it's not like that we've been trading them for a long time. Anyway, the current market for this ship is in the region $12,000 to $15,000 a day, about, depending on position and how many approvals they have. And the running cost again, we're talking about brand new ships obviously, would be in the region of $6,000, around that figure.

Okay. And then in terms of your -- the thesis behind the decision to make the investment into the 4 vessels, how do you see that transitioning or playing out with the current core fleet? How do you envision them working together in terms of creating incremental growth opportunities for StealthGas in terms of gathering more revenue with customer relationships, et cetera? Just trying to understand the business plan for -- and whether it still makes sense to be -- to have those 4 SRs as they come in?

David, as you understand and you know better than us, that the decision was made when the price of oil was $100 a barrel and those specific ships were making $32,000 a day. But in any case, the point is that we made a decision to enter this market cautiously. We went to the best possible yard, quality wise, to build them. We build them with the best possible specifications in order to be in great appeal to the important charters of this specific subsegment. Now, again for us, there is no particular strategy, meaning that we prefer one strategy over the other. We will try to make as much money as we can. The market is very weak as we discussed for these vessels. There are too many ships unfortunately. We hope you're going to see some scrapings. We hope you're going to see some order cancellations. We hope you're going to see some postponements, delivery postponements, i.e., delays. But everything is on the table. Our commercial department which is very savvy is discussing everything, spot voyages, consecutive voyages, period charters, combination of the small ships with the big ships to offer better services to oil majors. All of these things are on the table. But I think it's a bit too early because, as I said, we just have 1 ship. And we just got delivery 6 days ago. So it's a bit too early. I think we'll have more to say in the next quarter.

Okay. Good luck with that component of the strategy. And then lastly, you kind of -- to me, it's a very important point and you mentioned it in the slides. But the coastal LPG order books down to, for your vessel classes, roughly 1% of fleet for the next 2 years then 0 after that. Can you talk at all about the health of the yard, the ability to either want to or participate in future building? Or is this market dormant, if you will, for the next number of years as we see scrappage increasing, as we see environmental compliance costs increasing. The size of the active fleet will diminish. And based on the current order book and the prospects of future order book, we're going to have significantly declining supply base into what you would describe as a growing demand outlook and then add the petchems on top of that.

Again, David, you are right. This is one of the few segments in shipping generally that the order book is so small. We're very happy and excited about that. We don't expect many orders. We don't even expect a few orders, but you never know. The yards, in general, don't want to build these ships. They're too complicated and too small and they don't leave a big margin, a big profit margin to the yards. So they are the least-preferred ships. The Chinese yards that are very hungry are not building them anyway. So yes, unless the market really explodes, I don't see a flurry of new orders happening.

And from an environmental compliance perspective, does the industry need to spend significant money across their portfolios to update the fleets to meet emissions, sulfur emissions or ballast water emissions issues?

Not really. Water ballast, you can do it with $300,000 to $400,000 per ship. In emissions, you have the choice to do nothing and burn gas oil which is more expensive or install a scrubber which is really expensive. And thus, it's only -- it only makes sense if it's only a modern ship, you would never put a scrubber on the 15-year-old ship or older.

But given the current rate environment, it doesn't seem like anybody's going to be flushed with cash to invest in their existing fleets. You would be, seemingly be advantaged on a relative basis?

Correct. But again, it's all relative. As you see in 1 quarter, the market has changed drastically. And that's the nice thing about shipping. In 1 quarter, you might be losing a lot of money. And you'll be ready to throw in the towel. And many shareholders, long term shareholders of ours sold their holdings. And now suddenly in 1 quarter difference, we see stronger rates, much more demand especially for the older ships which is extremely, extremely surprising. And we're extremely happy for that. And our off-hire time went down by 50% which is a huge, huge difference. So as I said, I don't want to be overexcited. We're entering in a softer summer period anyway. But we're slightly optimistic and positive for September onwards. Let's see what happens.

And last question. So you talked about in the presentation 20% of the fleet being 20 years of age or older. Talking about burning higher cost gas, the possibility putting on scrubbers or things like that, these are major capital investments that probably aren't going to be made on those older vessels. So realistically, to see significant change in existing capacity in the industry, are we looking at 1 to 2 years as these decisions get made 3 to 4 years? And if the industry would have reduced overall capacity by 5%, let's say, in the next 2 years, what do you think that would do to the pricing backdrop?

It works the other way around. If the market firms -- a lot of these older ships will never go for scrap. And these -- we go back to the rates we saw 1 year ago, then obviously, you see a much bigger scrapping rates. Because I told you, these new regulations, in the end of the day, are not your expenses for the small ships. With $350,000, you can have a water ballast system and you are fine with all the regulations. About the emissions, as I'd tell you, you don't need to install anything. You can just burn gasoline. So if the market continues to firm, you're going to see less scrapping and more of these old ships will be there. And if the market weakens again, the positive thing is we're going to see an increased amount of scrapping as we saw in Q1 this year.

But these ships are, at today's rates, are making -- if they're operating well, $1,000 a day, so $350,000 a year, you'd have to make a $350,000 investment on a 23 or 24-year-old chip to keep it going, it's useful life can only be another year or 2, that's a difficult decision to make at...

David, as you know, I cannot speak about others. When there are company that have just 1 or 2 ships, these 2 ships are their life. So if they can reinvest what they made and continue trading and think that the market will firm, they'll do it. If you have 20 ships and these old ships are just a big headache for you, you will probably scrap them. But again, I can only speak about us and not about our competitors.

[Operator Instructions]. We'll now take our next question which comes from George Berman of IFS Securities.

Quick question, you are carrying 4 crude oil tankers, product tankers on your -- in your company. What are your plans for those?

Good question, George. The prices of tankers have fallen by 20%, 30% over the last 12 months. So it's not the time to sell now. We're going to be booking losses if we sell them. So we're going to keep them, try to make as much money as we can. And when there's a rebound on the tanker side, we're going to probably either fix them or sell them and make some money into StealthGas.

So you are joining in currently on the spot market?

No, all our tankers are on period.

Okay, good. The older ships in your fleet, I take it that you've depreciated them down to, basically, 0 value on your balance sheet. So if you were to sell them or sell them for scrap, there'd be gains taken, right?

No, these ships are depreciated down to 30 years. Fortunately or unfortunately, we don't have any ships being 30 years of age. So all of the ships carry some value. So if we scrap them, most probably, we're going to be booking a loss. The idea is not to scrap them, the market has picked up, so that the idea is to trade them. And if we can sell them for further trading at a premium to scrap, then this is something to be discussed at the board level.

Okay, good. And then essentially, over the last 3, 4 years, we've always been looking for an additional demand and pick up for the LPG market. What has kept that from actually happening?

As we discussed, it's all in our slides. We have seen increasing demand from the majority of the importing nations. We have seen the economy getting steadier, we're seeing less ships, a very small order book. All these things are very positive. As I said before, we don't want to be too overexcited. But when you see charters taking on a period, 15 and 17-year-old ships, this is a very positive signal, I think.

Okay, so with all this going all away, finally, rates may be going all the way as well in the future here.

This is shipping, George. You know it better than me. It's always cycles, down cycle, up cycle. I'm sure that the worst is behind us. Now what is in front of us, it's only a guess. But the signals are positive.

[Operator Instructions]. At current, we seem to have no further questions.

We would like to thank you all for joining us at our conference call today and for your interest and trust in our company. And we look forward to having you again with us at our next conference call for our second quarter 2017 results in August. Thank you very much.

Thank you, guys.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.