Hello, and welcome to the Stainless Tankers earnings call. My name is Richard Taylor, and I will be the moderator for today's event. Please note that this conference is being recorded. You will have the opportunity to ask questions at the end of the presentation through the orange ask question button on the right bottom corner of the player. I will now hand you over to your host, Alex Karakassis, CEO, to begin today's conference. Thank you.
Thank you, Richard, and hello, and welcome to everybody to our second results call for the 3rd quarter. The 3rd quarter is really the 1st quarter in our short existence that is representative of the earnings capacity of our business, as we had the entire fleet of 7 vessels in our full ownership during the period. The performance during the quarter is very much in line with what we presented to you and what we told you and guided you to last time in the previous call. As market rates have remained stable throughout the period in the sort of the spot rates were in the sort of $19,000-$20,000 range. They had softened in the 2nd quarter from the previous 6 month period, but remained at a very healthy level nonetheless, throughout the entire summer.
Importantly, though, we see momentum again heading into the 4th quarter and spot rates are re-accelerating. And that's a very encouraging sign for us. And that is driven, we believe by them continuing strong fundamentals especially on the supply side for this particular segment. Within this context, and this market backdrop, we felt it an opportunity time to take advantage of an acquisition opportunity for two additional vessels, which we think is going to be a very attractive transaction for Stainless Tankers ASA. I'll talk about that in a second. The one point I wanted to leave you with, though, upfront is, it is a transaction that does not require additional equity from our end. From day one, it is value-enhancing and accretive to our earnings, and our cash flow.
All of that without adding any material risk to our business. We think the additional risk we're taking here is very manageable. So then, in terms of dividend, we are proposing to pay $0.16 a share, which amounts to $2.16 million for our company. That will be approved, as last time, in a meeting of our shareholders in an EGM that is scheduled now for the 23rd of November, and we aim to pay it by the end of the month. The outlook remains and continues to remain very positive for 2024.
Not just because we see the earnings momentum carrying over into the new year, and I mean, when I say the earnings the market rates, and the TC momentum carrying over into the new year, but also, as we outlined last time, our break-even rates drop materially as we are halving, effectively, the debt repayments for our existing 7 vessels, starting with next year. So we look into 2024 with a lot of optimism. On this next slide, we wanted to show you more visually the performance of the WOMAR J19 pool, and you see very clearly in the blue line, the re-acceleration I was just talking about for the 4th quarter.
We believe, and WOMAR believes that the average for the entire quarter will be approximately $22,000 a day, give or take a couple of hundred dollars, but it will be approximately at that range, which is, you know, quite a bit higher than what we saw over the summer period. Where, you know, WOMAR has a very attractive COA profile, which really supports that outlook, but not just for Q4, but into the new year as well. That makes us look forward to a very good market also starting in 2024. Five of our ships, of the seven vessels, are now in the WOMAR pool. Two remain on time charters.
I should point out of these 5 vessels, 2 vessels were still in the Stainless pool during [audio distortion] for parts of October. But they are now in the WOMAR pool, and in that pool, these vessels did not perform as strongly as the WOMAR pool. WOMAR is outperforming, but nevertheless we believe our results for the 4th quarter will be very healthy and around that level. The two remaining ships that are on time charter, one of them will actually expire or end at the end of this month. So that will that vessel will go under WOMAR management, and the other one is in March of next year. And the two new vessels which I'll talk about in a second, they already trade in that WOMAR pool. Going to the next slide.
Quickly touching upon the supply fundamentals, and if you look at this chart and you compare it to what we had shown you in our previous call, it looks pretty much unchanged. The order book as a percentage of the global fleet is around the same level. The fundamentals are still healthy, and there's very little or virtually no ordering in the J19 category, because, you know, yard capacity is limited and prices are still very high. You will see in this chart also that in 2023, rather low scrapping activity, which is not a surprise, given how strong the market is.
But it's worth pointing out for the entire stainless steel vessel category, the vessels that are over 25 years old as a percentage of the fleet are actually higher than the current order book of new buildings. So that means, you know, going forward over the next 2-3 years, for the stainless steel category, we don't really see any fleet growth or any meaningful fleet growth. And then that is one side of the supply fundamentals here. The dislocations that we saw as a result of the war in Ukraine, they remain in place.
That was a step change that happened at the time that reset global trading patterns, and we don't see that changing anytime soon, even if, as we all hope that conflict will be resolved quickly. Therefore, the supply side is we believe extremely supportive, with perhaps the one or the biggest risk that we see is the swing tonnage from the CPP market. That's more difficult to predict, and it depends, of course, on the health of that particular market. But from the purely chemical tanker perspective on chemical tanker market, we think the fundamentals will be good over the next 2-3 years. Going to the next slide, I'll talk about the new vessel acquisition.
So here we're talking about 2 2005-built Japanese built stainless steel chemical tankers. We're buying those, or we have agreed and signed yesterday evening to buy those at a total price of $27 million for which we are raising additional debt through our existing facility through an upsized tranche of the same amount. We're aiming to close on these 2 vessels next week already. As I mentioned, they're in the WOMAR pool, and from day one, they will be earning those, you know, 22,000 rates that WOMAR is delivering at the moment from day one. These ships are in, despite their age, they're in very, very good condition. I'd like to point that out.
They have just completed their fourth interim surveys, one of them in July of this year, the other one very recently in October. You see the pictures here. They have not just passed their CAP ONE certification and look in fantastic condition. They also have been retrofitted with certain ESDs that we have on our fleet as well: Schneekluth ducts, propeller boss cap fins, the high-performance paint that you can see here nicely. Importantly, they're performing on a CII rating. They're performing at the B level. If we take the entire non-eco vessel category of chemical tankers, we are easily in the top 20% of performance.
So despite their age, they are excellent vessels, and we believe if you look at this purchase price, also at an excellent price that we negotiated and we feel is very attractive. I will now hand over to Erol, our CFO, to walk you through the financial impact of this acquisition, as well as to talk about, more generally, the earnings performance that we've had in the 3rd quarter.
Thank you, Alex. Yes, as already stated by Alex, we are certainly excited about this transaction and opportunity to acquire the vessels, namely because the transaction is accretive to both EPS and cash flow expectations from the outset, based on our current rate outlook. Looking at the figures at the top left, I would like to guide you to our expected increase to LTV by fully funding this transaction. The transaction will be fully funded by an increase to our existing loan facility of $27 million. This would bring our using VesselsValue.com as an indicator, this would bring our LTV upon closing just under 58%.
On the table in the bottom left, we have also laid out our immediate accretion expectations from a cash flow perspective, based on our current outlook, already detailed by Alex, for the fourth quarter of $22,000 per day. Here we see the vessels bringing in net revenue just shy of $2 million, just within the month and a half of immediate earnings. Importantly, we've also provided a guide to our top-down operating break-even estimates over the next year and beyond. Importantly, we see the operating break-even estimates increasing just under $900 a day from the existing fleet to with the addition of the two vessels, increasing to just over $14,400 per day in the future.
So this gets to our point that while we see immediate accretion from a cash and EPS perspective, we think there's this is taking, you know, measured risk that, that we feel is well within our control, as we're still able to bring our levered operating breakeven to a manageable rate well below $15,000 a day, in the current context of seeing rates above $22,000 a day in the 4th quarter, and, and feeling rates will continue to remain strong, as Alex had already detailed. With this, we are also in the beginning phases of setting out our OpEx budgets for next year, and while we do not have these budgets yet finalized, we are pleased with the conversations that are currently underway. So we feel we're making good headway on bringing costs further down as we look into 2024.
Turning to page nine. For the 3rd quarter, the company produced net revenue of $11.3 million and net income of $1.9 million, resulting in a net income margin of 16.8%. Reiterating Alex's comments earlier, these rates were achieved in rate levels that were largely in line with the prior quarter, as our vessels in the pools achieved a net TC rate of $19,280 per day, and our vessels on TC achieved $14,883 per day. Again, for our net pool vessels, this is a contribution of ships that were both with our prior pool, as well as the ships that had already transferred over into the WOMAR pool for the 3rd quarter.
This also marks the 1st quarter in which we had the vessels fully under our management for the entire quarter, and on this basis, we achieved a healthy utilization rate of 99.2%. Looking at liquidity, we finished the 3rd quarter with $3.6 million of cash and cash equivalents. Finally, restating Alex's earlier points made on the call, we're proposing a dividend based on these results of $2.16 million, an increase from our Q2 dividend of $0.125 per share, an increase to $0.16 per share. With that, I would like to turn it over to Richard, so that we may conclude our pre-prepared notes and turn it over for questions.
Thank you, Erol. And just as a reminder, if you'd like to ask a question or make a contribution on today's call, please send your questions through the ask question button on the right bottom corner of the player. Okay, our first question comes from Bjorn Thorsten. How will the new environmental regulation, like carbon intensity indicator, CII, and fit for 55 ETS Fuel EU, affect STST in the coming years? And what is the company's strategy regarding complying or adopting to these new environmental regulations?
Yeah, thank you. Let me, Richard, let me take this question. So, we, as a company, and I'm flicking back here, perhaps also to the new vessels, where we point out the CI, the CII and EEXI rating of the new vessels. Our fleet is performing on average at around the B level. That means we are well within the range of performance and from what we've seen in the B category for our vessel category, we're performing within the top 20% of the existing non-eco fleet. Not talking about the more modern vessels, where obviously the more recent vessels have the eco designs are more efficient.
But if you take the older fleet, say, up until 2014, 15, we're well within the top 20% category. With a B rating and a projected B rating, we don't see any issues with the Carbon Intensity Indicator over the next few years. And with the ESDs that we've installed, we think we will continue to achieve that, or at least a C rating, which doesn't cause any issues. On the EEXI side, our main engines have been derated earlier this year by about 10% in order to comply.
And potentially, if there is a requirement to derate them further in 2025-2026, if regulations get tightened further, then even then, if we derate the engines by another 10%, we will still be within, comfortably, I should say, within the range of performance that we need to meet the requirements from our commercial managers. So we feel overall that we are, you know, really well-positioned for at least the next 2-3 years in terms of the coming regulations.
Thank you, Alex. The next question, question two, is from Hans Tangen. How were you affected by the restrictions in the Panama Canal?
Well, I'll speak from my understanding of the impact of the Panama Canal. Obviously, our commercial managers, WOMAR now in particular, are the ones who deal with this. So we don't have a l et's say we're not as close to that situation, but we understand, you know, rates in the Atlantic have been positively affected by this event. You know, but just simply another event that takes some capacity out of the market. That's had a positive impact.
Okay, question three is from Nick Lennane. Up to what age do you think you are comfortable operating the ships you own?
Well, as we've also mentioned in the past, 25 years is the useful life that we assume right now in everything we do. But as I mentioned earlier in the presentation, there's also a number of vessels that are trading beyond the age of 25. It is a matter of, you know, the stainless steel tanks give you that advantage. You don't have the same issues that you may have with coated tanks, where you have a very large CapEx events coming right around the 20-25 year age level. So it's a matter of the market, and you know, technically speaking, we think these vessels can trade beyond 25 years, maybe 27, 28 years.
Depends on the circumstances.
Okay, the next question is from Eivind Kolsgard. Could you elaborate on how you determine the dividend? For this quarter, the declared dividend is greater than free cash flow, both with and without working capital adjustments.
Erol, is that a question perhaps for you?
Sure. Yeah, it's a good question. I think, you know, first and foremost, this reiterates, if you recall from the 2nd quarter presentation, we took in over roughly $2 million of purchase price discounts by taking delivery of the vessels beyond when the original delivery date was set. And so as part of those discounts, we were able to save considerable cash. We paid down a partial portion of that during the 2nd quarter, and we've now been able to pay the remaining portion of that here. What I will also say is, from a cash flow perspective, it's, you know, we do generate slightly different cash flow than just simple net income.
But yeah, we, we looked at that closely, and, and I think the second part to reiterate is taking optimism for our rate guidance. So two important things are beginning to happen that we had originally discussed in Q2. One of our vessels has, that is on TC, has already now gone to spot, so that was a vessel coming off a TC, the legacy time charter, that was in the $15,000 per day environment. Now, as we enter into Q4, is now entering, you know, into the $19,000-$20,000+ rates that we're projecting. And then we'll also have a second vessel that will come off during the 4th quarter.
So as we take confidence from that, the cash accretion that we're beginning to see from the 2 vessels, we felt we had certainly the room to be able to increase the dividend, as part of Q3.
Okay, question five. Has the upsizing of the debt led to any changes in the covenants?
I'll take this one, too. So it has not led to any change in the, in the covenants. We maintain a very good relationship with our, with, with our lending institution. Just to reiterate, that's when we pay a dividend, we have to ensure that we're keeping our pro forma post-dividend LTV percentage below 60%, and we also have to demonstrate that we're keeping liquidity in the form of unrestricted cash above $250,000 per vessel, plus net trade payables. Now, with the addition of two ships, that would just mean the, the unrestricted cash portion increases by $500,000, based on those two additional vessels. But no change to sort of the, the structure of how our covenant compliance works.
Okay, question six is from Dasha Iskova. You mentioned previously that you were looking to dry dock two of your vessels next year. How much do dry dockings typically cost at 15, 17.5, and 20 years?
Yeah, I'll take this one. So yes, we have 2 vessels scheduled for dry dock next year. They are the Orchid Madeira and the Orchid Sylt. One of them is due to be dry docked for the third special survey, i.e., 15 years of age, in February of next year, and the other one, again, for the third special survey, 2 months later, in April of next year. We're budgeting, we're estimating approximately $1.3 million for each event. The third special survey involves, you know, CAP One certification, which is required by our charterer, so that increases the cost.
It also means vessels that are older than 15 years with every survey, I should say, special and intermediate survey, will have to be dry docked, and the scope of work that happens at these dry docking events is quite similar. We are assuming, generally speaking, approximately sort of $1.3 million for each dry docking event.
Okay, question seven from Evan Kolsgard. In light of the recent transaction, how should we view the relationship between Tufton and STST going forward? Should we expect more of Tufton's vessels to be dropped down?
I'll take that as well. No, this one, this is a very unique set of circumstances here, where we had on the one hand, the capacity to upsize the loan, which we have used with this transaction. On the other hand, there were these 2 vessels that we think are very suitable for what we need because they are in very good condition. They have gotten all the ESG retrofits, and importantly, literally just completed their special surveys and are ready to be employed in this very attractive market in top condition. Having been already and being already right now in the WOMAR pool, so earning spot rates.
So it is a very particular unique event, I would say, that also fits within what we have witnessed over the year. So I'd like to point out, you know, we had a strong 4th quarter last year in the market. We had a strong 1st quarter, and the market softened, and also not just on the rate side, first, initially the rates, but then subsequently the values of the ships. So values came down a bit.
And then, you know, we have, you know, vessels here that, where the sellers, for reasons that have nothing to do with the with the particular ship or the market, also want to sell these 2 vessels, and we have agreed a transaction, which is, you know, avoids any of the typical transaction costs and commissions, and that benefits us, in this case. And we're getting a very attractive price, and we have a facility that that we can do this with in this positive market, in a market that is reaccelerating. So we do think we're picking the ideal time here after this sort of softening that we saw over the summer. It's just all the stars are aligning here, and that's why we're doing this transaction.
We don't plan to do any more of this. This was a, I would say, a one-off event, and that really, we thought from many aspects, made a lot of sense for us, so that's why we did it. But this is, and importantly, and I want to focus on that, when we raised the capital, we made a commitment to our investors. And the commitment was, even though we said, you know, we don't necessarily have a plan to expand, however, if a specific opportunity comes up, we will take it. The commitment was, we will not raise additional equity on dilutive terms, which we're not doing here. We will not use existing cash flow to buy ships instead of paying dividend.
Again, these vessels are delivering a cash flow from day one to us, and it doesn't change our future strategy, with to i.e., to make this a limited live vehicle, which will be liquidated in a 3- 5 year period of time to take advantage of this particular cycle. And again, for these vessels, we intend to hold them until sometime in 2026, and disposing them again. We will, of course, reassess that at the time, depending on what the circumstances are. So we don't have a fixed plan on when they should be sold, but they fit nicely into that strategy. So we think in all aspects, this is a transaction that makes sense and an opportunity we should take advantage of.
Okay, question 8: Considering the vessel acquisitions, will the strategy of selling the vessels in 3-4 years remain unchanged, and are you looking at further acquisitions?
I think I just covered exactly that question as well.
Question number nine: What did Stainless Tankers pay for the seven first ships, in comparison to the new ships?
Alex, would you?
Yeah.
Yeah, go for it.
Yeah. So, looking back, originally, we had paid on. [And] w e took discounts to account for the time charters that were on for three, for three of our vessels. And on that adjusted basis, we paid a purchase price of $123.4 million for the 7 ships. This comes to an average of $17.6 million per ship, and remember, at the time, they had an average age of just over 15 years. By comparison, we're buying 2 ships now that have an average age just over 18 years, and we're paying a purchase price of $13.5 million per vessel.
Importantly, I see another question that's coming later, Richard, but there were no related party transaction fees whatsoever paid to any affiliated party whatsoever, and so on a net basis, this transaction really, this is what gets us excited about this transaction. Maybe speaking a little bit more to that, you know, you saw the pace of transactions, S&P market was pretty active in Q1 as rates were really strong and picking up. We saw very good momentum follow our transaction, and then throughout, call it the spring/summer lull, transactions really quieted down, and it was in this environment where there was sort of an increase in uncertainty from a whole host of macro environment factors over the past, I would say, really 2- 3 months.
It was in this really rather uncertain period where you saw an absence of sales, certainly not at the same pace at the beginning of the period. And so we think from those, the combination of those two events, you'll see, you know, buying ships that are on average 3 years older, but paying over $4 million less. We really like this trade-off. And then I think it enhances or really just shows how, how good we did on the trade. Alex, is there anything you might want to add to that?
No, no, thanks. I think that covers it.
Okay, question number 10: Following up on the dry docking question, what do you think is the effective lifespan of these ships?
I think I covered this earlier, at least 25, possibly a few years more. I think that remains the case for these vessels. Maybe at this point, I can point out, you know, the vessels are all in excellent condition. You see it from the pictures here. I mean, these ships have been very well taken care of, and they are not inferior to any of the other vessels in the market of that age, to the contrary.
Okay, question 11: How many vessels operate in the WOMAR pool currently?
We believe it's in the low 30s. I can't give you the exact number, but it is, right now, my understanding is it's almost as big as the Hansa Tankers pool, which is, I think the Hansa Tankers pool, last time I checked, was in the 36-37 vessel range. WOMAR is a very close second, globally.
Okay, question 12 from Erik Lind: On the new vessel acquisitions, what would be the average required TC rate over the remaining useful life to meet your return requirements, and what is this unlevered return requirement?
Erol, maybe you want to outline the average 3 year break even that we've calculated.
Yeah. So we don't have a sort of required unlevered IRR for this investment, but what I would certainly guide to is we've been showing projections, and as we think internally for 2024 and beyond, we run our sort of base case rate outlook, if you will, at $20,000 per day. And we see that based on our levered breakevens, which, you know, we showed earlier in the presentation, I believe it was slide 8. The levered breakevens for the fleet, inclusive of the two vessels, are still below $14,500 per day. And on that basis, we're projecting, you know, over 20% dividend cash yields on an annualized basis over the next 2-3 years.
Now, that's obviously, you know, very much rate dependent, but we are seeing as we're entering into the winter market, our Q4 outlook is certainly above $20,000 per day. So I wouldn't say that there's one set magic number. I think the way we look at it is, and it continues to evolve, but our thinking is we have a levered break even that is manageable. A midst a very strong rate that is producing significantly stronger free cash flow, and it's in that environment, provided that environment and outlook remains, we look to be able to, as we get into 2024, on a measured pace, increase the dividend to those achieved targets. And so I think we're well on our way.
Okay, question 13: Were any commissions paid to related parties as a result of the 2 ship acquisitions?
Yeah, I think we addressed that.
No, absolutely.
Thank you.
Absolutely not. This is, and I'd like to point out at this point, for anyone, if you look at current market rates, and comparable transactions, this is an excellent price that we're getting that is creating value. They're in the money from day one.
Alex, is that a, Alex, if you give me a thumbs up, is that the fire alarm there? Okay, so I'll handle the next questions. Richard, I think, you know, that, that's just a..
Sure
... unfortunate, uncontrolled thing out of our, out of our control more than all this.
Okay, going on to question 14: You mentioned your COA profile are supportive of TCE rates. What is the current average duration of your COAs, and what TCE rate do you expect from those COAs on average?
Yeah, it's a very good question, and thank you for that, Nick. So our COAs, it's an astute point. You know, WOMAR, this is one of the benefits of being with a leading pool, who sort of has global coverage for us. WOMAR's J19s, cargo is king, and so, you know, having that access to the WOMAR pool has been very beneficial. The pool's currently, you know, latest projections are we have coverage through May of around 30% of available, pool fleet days, and that's at an average rate of roughly $23,000 per day.
I think it's really you've seen that strength play out in WOMAR's numbers to date, and, you know, you see that separation chart that we showed earlier, how WOMAR has been consistently outperforming the 1 year TC as just an indication of a benchmark guide using third-party data. And, you know, we're certainly excited about the outlook there again. So just to restate those points, 30% coverage through May 2024, at $23,000 per day. There are still renewals now beginning to take shape again, so, you know, we'll look to hopefully give a better update as well, in the coming months, but it's good for now.
Yeah, if I may just add now, that the fire alarm has passed. Just onto, I wanted to expand just slightly on the last point that Erol made. Of course, we are not the pool operator, so we can't speak for WOMAR, but this is our understanding. We are in the middle of renewal season again, and renewals for the, let's call it the latter part then of next year, renewals that are happening now are very strong as well and happening at similar rates to the, as Erol mentioned, $23+, $23.5 levels. So we don't see, the reason I'm saying that, we don't see any weakening from that side as well.
Okay, question 15, Bjorn Arthursen: How fierce is the competition from new eco ships, and how many, in percentage terms, eco ships are operating in your segment?
Well, I'm not sure I can answer the second part or the first part really as an expert here, as we are not managing the pool or involved in the fixture of voyages ourselves, but the feedback we do hear from our pool operator, which has, you know, WOMAR has a number of age categories within the pool, and they all trade as equals. So there's no real difference in the vessels that are being used. I mean, there's even a vessel in the pool that is over 20 years old, and there's absolutely, from what we hear and what the discussions we've had, no impact in terms of the charterers rejecting the ship just because it's 20 years old and wanting a younger ship.
So that is actually one of the factors that gave us additional confidence in taking on these 2 ships, which are on average 18 years old. We really don't see any real impact. Where you, of course, see the benefit if you are an owner of eco, more modern tonnage, is that you will have a slightly better pool point rating for your ships in the pool, and you benefit a little from that because the ships are simply more efficient and for the same kind of cargoes and the same voyages, deliver a somewhat better TC on that voyage and hence deserve to earn a little bit more. But in terms of the commercial viability of the ships, no impact.
Okay, there are no further questions, so I'll now hand over to Alex and Erol for some closing words.
Thank you, Richard. I think we've given you quite a bit of background information. Thank you for all the very good questions that allowed us to elaborate on some of the points we wanted to make. I just wanted to say we are available. You can reach us via email if you have any further questions. We're here to be as transparent as we can. Thank you very much.
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