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Edited Transcript of GASS earnings conference call or presentation 21-Nov-19 4:00pm GMT

Q3 2019 StealthGas Inc Earnings Call

Kifisia Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of StealthGas Inc earnings conference call or presentation Thursday, November 21, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fenia Sakellaris

StealthGas Inc. - Finance Officer

* Harry N. Vafias

StealthGas Inc. - President, CEO, CFO & Non-Independent Director

* Michael Gordon Jolliffe

StealthGas Inc. - Independent Chairman of the Board

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Conference Call Participants

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* Chadd Tribo

Jefferies LLC, Research Division - Equity Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the StealthGas Third Quarter and 9 Months Financial Operating Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 21st of November 2019.

I'd now like to hand the conference over to first speaker today, Mr. Michael Jolliffe, the Chairman of StealthGas. Thank you. Please go ahead, sir.

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Michael Gordon Jolliffe, StealthGas Inc. - Independent Chairman of the Board [2]

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Thank you very much, indeed. Well, good morning, everyone, and welcome to our Third Quarter 2019 Earnings Conference Call and Webcast.

This is Michael Jolliffe, the Board Chairman of StealthGas. And with me on the call is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris, who will later on discuss our financial performance.

Before we commence our presentation, I would like to remind you 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. Risks are further disclosed in StealthGas filings with the Securities and Exchange Commission. I would also like to point out that all amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars.

Slide 3 summarizes the key highlights of the third quarter of the year that we released today. Although, the third quarter was soft in terms of seasonal aspects, and even though the weak swap market in Asia persisted, we managed to achieve an outstanding operational utilization of 98%. Therefore, our revenues increase within the limits of market conditions. In spite of our efficient operational approach, the weak spot earnings hindered our profitability once more. In addition, this quarter, we also incurred heavy one-off charges, mostly of a general and administrative nature. Nevertheless, the signs of our segment's improvement are more evident than ever given charters have become more eager in concluding longer period contracts at rates favorable to owners.

In this environment, we managed to increase our period coverage for the remainder of 2019 to 88%, and position ourselves strongly for 2020 as well.

Concerning our sale and purchase activity, we finalized the sale of yet another middle aged, small LPG vessel, the Gas Ethereal, which was sold for further trading at a very good price when compared to a similar-sized new building.

Looking briefly at our financial performance highlights. Our voyage revenues came in at $36.6 million, a decrease of $6 million compared to the same period of last year due to the net reduction of our average-owned fleet by 9 vessels.

It is interesting to raise two important points though. Firstly, and in spite of our revenue contraction due to our fleet decline, our daily time charter equivalent is rising. Compared to the third quarter of 2018, our daily time charter equivalent increased by about $400. Secondly, on a percentage basis, our operating cost base declined more substantially than our voyage revenues. Our adjusted EBITDA at $14.7 million was lower than expected due to softer spot net revenues.

Looking at our financial structure, we continue to deleverage at a strong pace. Our debt to assets now stands in the order of 39%, and we still maintain a strong cash position of almost $66 million.

Last but not least, based on our further stock repurchase program despite the very low trading volume, we have purchased to date almost 415,000 of our company's shares for an aggregate consideration of about $1.4 million.

Slide #4 provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 43 operating vessels, excluding our joint venture vessels, we have 11 of these on bareboat, 27 on time charters and 5 in the spot market.

During the last 3 months, and in spite of a tough Asian market, we concluded 13 new charters and charter extensions, all at improved rates. We now have 88% of our fleet days secured for the remainder of 2019 and 53% for 2020. It is optimistic to note that since our last announcement, our secured employment for 2020 strengthened by 18%, and that our average period charter duration increased to 14 months.

Our contracted revenues are in the order of $138 million with about $92 million, thus secured up to the end of 2020. About $33 million for 2021 and 2022, and around $13 million from 2022 up to the end of 2029. As evident, our secured employment, particularly in the short term, remains strong.

In Slide 5, I would like to provide a brief summary of our recent strategy concerning our sale and purchase activity and our joint venture. As mentioned earlier, on September 27, 2019, we concluded with the sale of the Gas Ethereal, the 2006-built, 5,000 cubic meter pressurized LPG vessel. As evident from the table presented, we sold a 13-year-old vessel at $10.9 million gross price, but a similar-sized new building is valued at between $20 million to $21 million.

With regard to our joint venture activity, 4 out of 5 of our joint venture vessels are on the time charter contracts.

In terms of our fleet geography, present in Slide 6, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels excluding our joint venture vessels as of November 11, 2019. Currently, 46% of our LPG fleet trades in Europe, about 36% in the middle to the Far East, 8% in Africa and 10% in America. In the third quarter of 2019 and compared to our previous quarter, there were no significant changes in our trading profile.

I will now turn the call over to Fenia Sakellaris for our financial performance. Thank you.

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Fenia Sakellaris, StealthGas Inc. - Finance Officer [3]

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Thank you, Mr. Jolliffe, and good morning to everyone. I will continue the presentation focusing on our financial performance for the third quarter of 2019. This quarter, we managed to significantly enhance our fleet utilization. However, as the spot market in Asia was weak in terms of rates, this improvement was not reflected in our profitability. In addition, this quarter results were burdened by one-off general and administrative costs.

Let us move on to Slide 7, where we see the income statement for the third quarter of '19 against the same period of the previous year. Voyage revenues came in at $36.6 million, marking a $6 million decrease compared to the same period of last year. This contraction in revenues were expected due to the strategic reduction of our average owned fleet by 9 vessel, 1 less charter-in vessel and relatively low revenue stemming from the spot market.

Voyage costs amounted to $5 million, marking a 15% decrease compared to Q3 '18 as a result of spot days reduction by 21%. We need to note that compared to the second quarter of '19, our voyage costs were higher due to commercial of high decline in conjunction with higher fuel prices. Based on all of the above, our net revenues for the period were $31.6 million.

Running costs at $12.3 million, marked about 21% decrease compared to Q3 '18. This decrease in cost was mostly due to our average owned fleet reduction by 9 vessels and the receipt of an insurance claim credited to our OpEx. It's quite positive to note that the decline of our OpEx was as a percentage far higher than our revenue reduction due to our fleet decline.

General and administrative costs, for which we usually do not incur heavy charges, increased compared to the same period of last year mostly due to a $300,000 one-off charge pertaining to illegal claim, along with the $200,000 stock-based compensation charge, this plan ended in August. We incurred this quarter $0.5 million of nonrecurring G&A cost.

Based on all of these, our adjusted EBITDA is in the order of $14.7 million. Interest and finance cost mark close to $1 million decrease, mainly attributed to the lowering of our debt, LIBOR decrease and several loan margin reductions we managed to agree during the past month.

Concerning the net profits from our joint venture, our loss is solely attributed on the balancing of the Eco Nebula, for which we incurred heavy costs as the repositioning voyage lasted in excess of 1 month with associated cost of around $1 million.

Based on all of the points analyzed above, we ended the third quarter of the year with an adjusted net income of about $400,000, corresponding to an adjusted earnings per share of $0.01.

Slide 8 demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational utilization for Q3 '19 was in the order of 98%, which marks a very strong performance. In terms of our adjusted time charter equivalent, we noticed a rise on a quarterly basis by about $450, which is an outcome of improved time charter rates.

Indeed, when analyzing the evolution of our voyage revenue breakdown, we noticed a gradual but promising rise of our time charter revenues expected to strengthen even further following the conclusion of our new charters. Spot revenues, although stronger, are not sufficient to compensate for the related voyage costs incurred, and therefore, produces a satisfactory spot time charter equivalent.

Looking at our balance sheet on Slide 9. Our strong liquidity continues as our unrestricted cash base around $66 million and including restricted cash, our liquidity is close to $80 million. Our gearing is in the order of 40%. In terms of net debt ratio, we stand about 32%, a very healthy ratio.

Slide 10 gives a more detailed analysis of our loan balance reduction as well as our loan interest costs in the quarters ahead. Based on our scheduled principal repayment, we will reduce our leverage by around $40 million per year. We have no balloon refinancing due in 2020, with minimal refinancing obligations of around $30 million in 2021. We also expect a strong reduction of loan interest costs in the quarters ahead. Assuming no change in LIBOR rate, we anticipate, by the end of 2020, our loan interest cost to reduce by another $1 million.

I will now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [4]

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Let's proceed on Slide 11. Global LPG trade looks promising. As going forward, LPG demand, particularly in Asia, is bound to increase. As per research done by DNB, LPG demand for the top 4 Asian importers, Japan, Korea, China and India will increase during the period from this year until 2021 with a compounded annual growth of 8%.

The new PDH plants coming online in China and South Korea will mostly drive this demand. Overall, it's estimated that worldwide demand from PDH plants will increase in the coming years. Focusing on Europe, propane demand will increase due to the new PDH plants planned to be operational within the next 3 years in Poland, Turkey and Belgium. So broader demand side is bound to stand strong.

Looking on the supply side, following the 25% tariff on U.S. LPG that was levied in August '18, China's LPG imports from the U.S. gradually declined. From importing 40% of U.S. LPG volumes in '17, Chinese LPG imports fell to 9% in the first half of 2018, 5% in the second half of '18, down to 1% in the first half of '19. In spite of this decline, the share of U.S. exports heading to Northeast Asia has remained steady at about 50%. Meaning that in practice, trade patterns altered without affecting broader trading volumes.

On Slide 12, we see that during Q3 '19, rates for small LPG shares remain almost flat both in East and West, the western spot market experienced relatively normal summer, but the first part of the fall was very quiet due to several refineries in Northwest Europe being down for an extended maintenance period in preparation for the IMO fuel switch over. This resulted in a weak September, October period. But the market has since then improved again. And now going forward, we expect to see a normal winter market with overall firm rates.

On the time charter side, there has been some activity, but generally, demand has been relatively soft. There is, however, a fine balance of demand and supply in this market, and doesn't take more than a few fixtures to keep the scale in favor of the owners. We believe this is about to happen as we've seen a few vessels getting fixed lately, and there's more to be done, especially renewals by the end of the year, beginning of next year.

On the eastern side, the spot market remained uninteresting and unusually quite during the summer and early fall. Very low activity on the petchem side meant that there was no chance for the LPG volumes to be sufficient enough for the owners to avoid idle time.

Rates were very soft, especially through the summer months. The past few weeks have, however, given the owner some room for optimism. The new petchem JV between PETRONAS and Aramco in Malaysia has finally started, and the first pressurized cargoes has been loaded. This plant is expected to provide significant employment for the pressurized fleet. In addition to this, a new refinery in Brunei have just now started the production. We'll be pushing out regular LPG cargoes for the pressurized market. Both very welcome additions for the owners trading in Asia and has already improved the sentiment and the freight rates.

On the period side, the summer was quiet and charters found themselves in no need to take coverage considering the ample spot availability. We are, however, seeing a lot more activity in the last month, which is both as a result of an improving spot market in addition to the fact there is a lot of contract renewals starting from the beginning of January, and several charters are looking for time charter coverage against their product contracts. Time charter levels have gone from softening until recent to now stable to firming trend.

With regards to scrapping, a small LPG pressurized segment has a substantially old tonnage. 26% of the fleet is currently above 20 years of age. And therefore, we expect an acceleration of recycling in the upcoming years.

Since the beginning of '19, we have recorded the demolition of 1 small pressurized vessel. As per published orders, there are 15 vessels, that is 4.4% of the total fleet to be delivered in the end of 2021, probably the smallest order book of any ship category. The smaller gas carrier fleet has approximately 90 vessels above 20 years of age. The current order book of 15 ships is not large enough to offset the older tonnage expected to be recycled in the period ahead, especially when water ballast must be fitted, and we also have the IMO 2020 emission laws coming into force next year.

I will now continue on Slide 13, discussing the company's outlook, commencing with our share performance over the past 11 months. The performance of our stock is presented along with the selected gas carriers peer group and the price of oil. In terms of correlation with oil prices, which we have -- which have remained relatively stable during the past couple of months, we see that all stocks in the group follow a broad coalition with oil prices.

With regards to events affecting energy-related stocks, we need to know that the breakthrough in the U.S.-China trade war has remained out of reach for some time, and this situation seems to be weighing on investors, thus affecting our segment.

In Slide 14, we're showing various scenarios for the company's performance for 2020. The different scenarios were created based on the existing fixed charters plus vessels open on the spot market and assuming no new charters upon the expiration of a fixed vessel. As evident, different spot rates incremental is assumed for the small LPGs, the 2 semi-refs that are coming open and 1 Aframax that is also opening between Q1 and Q2 2020.

In comparison to our previous forecast, we lowered the estimated daily average spot revenues for the LPGs to be even more conservative and account for higher expected fuel costs. In addition, we adjusted upwards our dry docking and water balanced cost estimates for 2020.

Based on this realistic forecast, we see that the $2,000 hike in our daily LPG spot rates, in combination with a $6,000 rise for our semi-refs and Aframax, our single Aframax ship will bolster annual EBITDA by $16 million. It's noted that our EBITDA from our JV company is not accounted as earnings from our joint venture, only affect our bottom line.

Slide 15. We see some valuation multiples of StealthGas and cash comparable companies. As evident, our company trades at a greater discount than its peers in terms of NAV. Our market cap is currently close to $138 million, creating a large discrepancy between the values of our assets, which are close to $1 billion. And in essence, investors are valuing us at about $65 million above our cash balance, or in other words, slightly more than 1 of our 22,000 semi-ref ships.

We are confident that the market will correct its view on our company, and that we will soon reach a stage that our market capitalization will be a realistic reflection of our assets, value and growth potential.

Concluding our presentation with Slide 16, we present a brief summary of our company's and market's strong points, placing emphasis on the fact that we operate in a segment with solid fundamentals going forward, in which we enjoy being market leaders with a very strong balance sheet, earnings visibility and a good cash position.

At this stage, Mr. Jolliffe, will summarize our concluding remarks for the period examined.

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Michael Gordon Jolliffe, StealthGas Inc. - Independent Chairman of the Board [5]

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Thank you, Harry. Our performance in the third quarter of the year improved to an optimal level in terms of fleet efficiency as reflected in our operational utilization of 98%. Although we managed to contain our operating costs at moderate levels, the persistently weak earnings stemming from the Asian spot market did not allow us to enjoy a profitable quarter. We feel, however, that should market conditions improve as they seem to have, based on the 13 period charters and charter extensions we managed to conclude during the last couple of months, our profitability will be enhanced.

Indeed, rates for all our newly concluded charters in each of our operating segments are at higher levels. We have 53% of our fleet days secured for 2020, with $138 million of secured revenues for all subsequent periods. Therefore, there is plenty of upside potential.

The intensification of period charter activity during the past couple of months, maybe a positive sign that the market situation is, in fact, turning including in Asia, and we are eager and well positioned to take advantage of this opportunity.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Randy Giveans from Jefferies.

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Chadd Tribo, Jefferies LLC, Research Division - Equity Associate [2]

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This is Chadd Tribo on for Randy. It looks like utilization increased to 98%, which was above our expectation. So now that we're more than halfway through the quarter. What do you expect utilization to be in 4Q?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [3]

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A bit of a difficult question. I would say, the goal would be to be above 95%.

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Chadd Tribo, Jefferies LLC, Research Division - Equity Associate [4]

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Okay. That helps. And then now looking at the 2 vessels you recently purchased by the JV, what was the reason for entering those 2 new asset classes? And then do you think there's any opportunities to acquire some vessels below the 7,000 CBM level?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [5]

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Are you referring to the large vessel and the 11,000 new building?

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Chadd Tribo, Jefferies LLC, Research Division - Equity Associate [6]

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Yes.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [7]

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This -- only one was bought by the JV, the larger ship, the 38,000 cubic meter. The 11,000 new building was bought only by StealthGas.

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Chadd Tribo, Jefferies LLC, Research Division - Equity Associate [8]

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Okay. So can you kind of speak on the reasoning for entering into the larger vessel class through the JV? And do you look to do that in the future? Or do you think that was just kind of an opportunistic thing?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [9]

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Listen, I mean we cannot foresee the future. We saw a ship, which was in extremely good condition for its age. We saw a price, which we thought was a very good value for the age and size of the ship. And we decided to split the risk by buying it through the JV, thus selling the equity contribution with our JV partners.

Up to now, this has proven a very clever decision because already the value is up by a couple of millions since July. And obviously, the rates for the MGCs, if you're following them, is quite up the last 3 to 4 months. The 11,000, because as you know, we are operating in the whole spectrum of pressurized ships. The Board believes that we cannot not be in a specific subsegment of the pressurized market. And we found the opportunity to buy a ship from a top shipyard with top specs of Eco technology at a fair price. And that's why we did it.

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Chadd Tribo, Jefferies LLC, Research Division - Equity Associate [10]

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Okay. So now focusing on share repurchases. It seems like your preferred use of cash has been kind of the secondhand acquisitions as you talked about. So with that, how did you decide on the $1.4 million of share repurchase to date? And then should we expect a greater degree of purchases 4Q 2020 as earnings are expected to improve?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [11]

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The $1.4 million spent on shares has nothing to do with what we want, it's the amount allowed by the rules of the SEC. We will continue buying back stock. I think the Board has approved up to $10 million for us to spend. So we are -- we have spent already 15% of that.

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Chadd Tribo, Jefferies LLC, Research Division - Equity Associate [12]

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Okay. And then my final question. Do you have any updated plans on your 7 vessels that are over the age of 17 years? Could it be sold in the coming quarters? If you can kind of speak to that, that'd be great.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [13]

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Yes. I mean generally speaking, as you have seen in the past, we don't like keeping very old ships for a very long time. We sold a very big amount of old ships last year. Some of these ships are fixed, so if they're fixed and they're earning a good freight, they are not #1 priority to be sold.

If their trading spot, which means they're earning less and are facing idle time, then of course, they're bigger candidates to be sold. Obviously, for the buyers to come and pay good prices, they need to see, first, a better trading environment. So if indeed, Q4 or Q1 proved to be better quarters for the pressurized ships both East and West, I'm sure we will find buyers for a couple of them, yes.

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Operator [14]

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Your next question comes from the line of [Lance Gad] from the [Gad Foundation.]

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Unidentified Analyst, [15]

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Yes. I had a question. What -- could you give us some information as to what we will have to spend to have our ships comply with the 2020 regulations? Could you give us some color there?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [16]

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As -- you mean for the emissions, the new emissions laws?

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Unidentified Analyst, [17]

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Yes, please.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [18]

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Yes. As you know, in order to comply with these regulations, you have a choice of 2 things: One is to fit a scrubber, which, depending on the size of the ship, costs around $2.5 million to $3.5 million per ship; or you can do nothing and just buy a specialized fuel with less sulfur.

The companies that manage big ships that have big consumptions of fuel, a lot of them opt for scrubbers because they can repay the scrubber down quite fast. We have small ships with very small consumptions. Therefore, fitting a scrubber is not -- it doesn't make economic sense.

So except for 1 ship that we have fitted already a scrubber, all the rest of the ships will be buying compliant fuel, and therefore, we don't need to spend anything on top, anything on top to fit any new technology. Don't forget that the majority of our fleet is on time charter or bareboat. Therefore, the cost of buying the compliant fuel is for the charters' account and not StealthGas' account.

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Unidentified Analyst, [19]

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Great. Also, I had one comment about our website. I find it difficult to get the presentation that you're talking about, the number of pages. I don't see how you get that on the website. And I also find it difficult where you use this yellow, a yellow color, it becomes very difficult to read. I'm concerned that it's not particularly investment-friendly.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [20]

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Lance, thank you for that. I have not personally designed the website, as you can understand. But we will look into it and hope to make it more readable for everybody.

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Unidentified Analyst, [21]

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Good. Is there any -- and how do you get the presentation that you've been talking about? I would think that there's no easy way. How do you get it on the website currently?

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [22]

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You go to the tab, which is named Investor Relations and then you see the quarter that we are talking about.

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Unidentified Analyst, [23]

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Right. I get that. I get the press release but I don't get the pages. But anyway, okay.

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [24]

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Thank you, Lance.

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Operator [25]

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(Operator Instructions)

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Harry N. Vafias, StealthGas Inc. - President, CEO, CFO & Non-Independent Director [26]

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I see there are no further questions, so Mr. Jolliffe can give his concluding remarks.

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Operator [27]

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There are no further questions at this time. Please continue.

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Michael Gordon Jolliffe, StealthGas Inc. - Independent Chairman of the Board [28]

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Right. Well, we'd 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 with us again at our next conference call for our fourth quarter results in February. Thank you all very much. Bye-bye.

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Operator [29]

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