EuroDry Ltd.
Q1 2019 Earnings Call Transcript

Published: 24 May 2019

[Operator:]

Thank you for standing by, ladies and gentlemen and welcome to the EuroDry Ltd. call on the first quarter 2019 financial results. We have with us Mr. Aristides Pittas, Chairman and Chief Executive Officer and Mr. Tasos Aslidis, Chief Financial Officer of the company. At this time, all participants are in listen-only mode. [Operator Instructions]. I must advise you that this conference is being recorded today. Statements in this presentation may be forward-looking statements within the meaning of federal securities laws. The matters discussed herein that are forward-looking statements are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to potential risks and uncertainties including, but not limited to, the need to manage our growth and integrate additional capital, acquire additional vessels, volatility in the drybulk shipping business and vessel charter rates, our ability to obtain sufficient capital, the volatility of our stock price and other risks and factors. Forward-looking statements made during this presentation speak only as of the date on which they are made and Eurodry does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this presentation. Because forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on any forward-looking statements. All written or oral forward-looking statements by Eurodry or persons acting on its behalf are qualified by these cautionary statements. This presentation also contains historical data about the drybulk trade, the drybulk and the drybulk. These figures have been compiled by the company based on available data from a variety of sources like broker reports and various industry publications or represent company's own estimates. The Company exercised reasonable care and judgment in preparing these estimates, however the estimates provided herein may not match information from other sources. This presentation shall not constitute an offer to sell or the solicitation of an offer to buy securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful under the securities laws of such jurisdiction. Now I would like to pass the floor to Mr. Pittas. Please go ahead, sir.

[Aristides Pittas:]

Good morning ladies and gentlemen and thank you all for joining us today for our scheduled conference call. Together with me is Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the first quarter period ended March 31, 2019. As a reminder, I would like to mention that in May 2018, Euroseas contributed to EuroDry, its drybulk fleet of six vessels, one Ultramax and two Kamsarmax vessels built between 2016 and 2018 and three Japanese-built Panamax vessels built between 2000 and 2004. EuroDry was spun off from Euroseas on May 30, 2018. Since the spin-off, EuroDry has bought an additional Panamax bulk. Comparisons in the following presentation to periods of last year refer to the drybulk fleet existing at the time for the periods presented. Please turn to slide three. Our income statement highlights are shown here. For the first quarter of 2019, we reported total net revenues of $5.8 million, adjusted EBITDA of $2.5 million and net income attributable to common shareholders of $0.4 million. Basic and diluted earnings per share attributable to common shareholders for the first quarter of 2019 was $0.18 per share. An average of seven vessels were owned and operated during the first quarter of 2019, earnings an average time charter equivalent rate of $9,472 per day. The company declared its fourth preferred share dividend of $0.5 million, which was paid partly in-kind $0.1 million by issuing additional Series B Preferred Shares and partly in cash $0.4 million. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in the presentation. Please turn to slide four for our chartering, operational and sale and purchase highlights. During the first quarter of 2019, the drybulk markets continued its declining trend of the fourth quarter of last year as they were affected by trade uncertainties and iron ore supply disruptions. Charter rates reached a bottom in February but they have since then recovered to their levels in the beginning of the year. For our fleet, this decline was significantly mitigated due to our physical and FFA contracts we put in place at the beginning of the quarter that partly insulated us from the depressed markets. In particular, Pantelis was fixed for a trip of about 30 days at $5,500 per day, thereafter fixed for a trip of about 55 days at $9,850 per day. The Tasos was fixed for a trip of about 30 days at $7,750 per day, thereafter it was fixed for a trip of about 60 days at $12,250 per day plus $225,000 ballast bonus which should result in about $7,000 to $7,500 per day time charter equivalent and thereafter it was fixed for another trip of about 75 days at $6,900 per day. The Starlight was fixed with earliest redelivery July and latest October 2019 at $9,000 per day for the first 40 days and thereafter 100% of the BPI for time charter index. In the first quarter of 2019, we had FFA short exposure of 40 days per month at $11,950 per day which resulted in a profit of about $600,000. Going forward, we have hedged 270 days in Q3 at a rate of approximately $11,128 per day and similarly 270 days in Q4 at a rate of approximately $11,361 per day. Please note that quoted average prices are gross before deducting commissions and clearing expenses which are roughly in the range of $55 per contract-day. Please also note that there are size, route and other important differences between FFA contracts and physical charters, notwithstanding the need to post cash security margin if the market changes against the contracts entered into. In our case, if the market increases. There were no dry-dockings or repairs for this quarter. However, for second quarter, we do expect to drydock MV Starlight. Please turn to slide five for the synopsis of the EuroDry fleet as of today. Including the Starlight, Eurodry comprises of seven drybulk vessels with a cargo carrying capacity of 528,000 deadweight tons and with a fleet average age of 10.6 years. Slide six shows the employment schedule. As you can see, coverage for the remainder of 2019 including Baltic Panamax Index and FFA contracts stands at about 78%. Having secured the two Kamsarmax's until Q1 2020 on profitable rates, we are pursuing the strategy of employing the remaining five of our vessels on short term contracts or index-linked contracts or pools. As discussed previously, we have practically hedged three of these vessels for the remainder of 2019 at slightly above $11,000 per day via the FFAs. Our market exposure for the rest of 2019 is currently therefore practically just two vessels. But in 2020, we are wide-open in expectation of market improvements. In the following slide, we synopsize our outlook into the drybulk market. Let's turn to slide eight. The IMF projected world GDP growth in 2019 is revised downwards from 3.5% in the previous quarter to 3.3% with reductions stemming for mostly all of the big economies except China, which was revised marginally upwards to 6.3%. It seems the IMF believes China's stimulus will work. The U.S. is down by 0.2% to 2.3%. The Eurozone down by 0.3% to 1.3%. India down 0.2% to 7.3%. And Brazil down the most by 0.4% to 2.1%. For 2020, global GDP growth rebounds to 3.6% after the IMF, which is however lower than their expectation in the previous quarter by 0.1%. U.S. slightly, Japan significantly and China just marginally are expected to decline a bit relative to the IMF 2019 expectations but all other major players are expected to slightly improve. Looking on the drybulk trade, according to Clarkson, the trade in 2019 is now projected to grow by 2.4%, down from the 3.1% expected in the previous quarter estimate. A major reason for this decline being the Vale mining incident, of course. In 2020, Clarkson expects a recovery of the growth rate to 3.2%. Please turn to slide nine to review the drybulk delivery schedule. Currently, the orderbook stands at 5.4% for 2019, 4.2% for 2020 and just 1% for 2021. This is comparatively very low, near the lowest levels of the last 20 years. Please note that due to slippage, cancellations and scrapping, the overall fleet growth during the next two years over the course of 2021, unless a significant number of new orders is placed for 2021 delivery, should be extremely small. Please turn to page 10 where we summarize our outlook on the drybulk market. We believe that the recent market slow down is due to short term factors and that in the medium and long term, the fundamental supply/demand balance is supportive of an improving market. Mainly due to the Vale incident, the rates for capsize vessels dropped below OpEx levels in February however a strong improvement recently has brought them back to around $12,000 per day. Panamax and Supras were much less affected by the Vale disaster and dropped much less before increasing again to about $10,000 per day and $9,000 per day respectively. The recent accident in Vale's iron ore mine in Brazil will reduce Brazilian iron ore exports between 50 to 70 million tons annually until the mines come back to operation. Vale had recently announced the return of about 30 million tons of iron ore exports back in the market. However the local authorities for a second time ordered the temporary seizure of the mines. The lost quantities can only be partially replaced by increasing production across other mines in the world Low orderbook levels and reduced vessel availability for an unavoidable downtime to implement solutions required for compliance with emissions and ballast water treatment regulation and possible slowdown of the average speed of the fleet would limit fleet growth and allow any trade recovery to translate to higher charter rates. Taking all these facts into account, our analysis for 2019, 2020 and 2021 shows a slightly improving supply/demand balance which would suggest a strong second half 2019, considering the weak environment in Q1 and an even stronger 2020. Also for 2021, the current fundamentals look very promising as the orderbook stands only at 1% of the projected fleet. Longer term, iron ore trading volume growth is at risk due to the lack of further mining production investments in both Australia and Brazil, the two major producers. Coal imports, despite the longer term concerns due to the overall desire to reduce coal use, are still expected to further grow in 2019 and 2020 as electricity demand growth remains robust. Grain trade is also expected to do better in 2019 than 2018, especially if the most desired trade agreement between China and U.S. is ever reached. Finally, environmental regulations coming into effect as of 2020 are the wild card which may or may not create a tighter market and which are adding uncertainty into the future. Let's turn to slide 11. The left side of the slide shows the evolution of one-year time charter of Panamax drybulk vessels since 2001. Even though drybulk vessel rates bounced back from the all-time lows in 2016, we are still below historical levels even subtracting the super cycle. The median rate for 2001 to 2018 is at about $13,300 per day. The right hand side of the slide shows the vessel values in relation to 10-years historical prices. Of course, drybulk prices have moved above all-time low values that were established at the beginning of 2016, but the average price of 10-year old Panamaxes is $18 million and they are significantly lower than that. With a stabilizing and even improving freight rate environment, we would expect asset values to improve as well. I will now pass the floor over to our CFO, Tasos Aslidis, to go over our financial highlights.

[Tasos Aslidis:]

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will take you over now our financial highlights for the first quarter of 2019. And for that, please turn to page 13. For the first quarter of this year, we reported total net revenues of $5.8 million, representing a 25% increase over total net revenues of $4.6 million during the first quarter of 2018 and this increase was mainly due to the increased average number of vessels we operate. We reported net income for the period of $0.9 million and net income attributable to common shareholders of $0.4 million as compared to net loss and net loss attributable to common shareholders of $1.4 million for the same period of last year. The difference between net income and net income attributable to common shareholders is the preferred dividends of $0.5 million that we declared on our Series B preferred shares during the first quarter of this year. This preferred dividend was paid part in-kind $0.1 million by issuing additional Series B preferred shares and partly in cash the remaining $0.4 million. Interest and other financing costs, including interest income for the first quarter of 2019 amounted to $0.9 million compared to $0.4 million for the same period of 2018. Interest during the first quarter of 2019 was higher due to higher debt and higher LIBOR that we paid during the period as compared again to last year. Depreciation expenses for the first quarter of 2019 increased $1.6 million compared to $1.2 million for the same period of 2018, again as a result of the increased average number of vessels we operate. Increased general and administrative expenses reflect mainly the operation of the company as a separate public company following the completion of the spin-off that Aristides mentioned at the beginning of the presentation. Adjusted EBITDA for the first quarter of 2019 was $2.5 million compared to $0.1 million achieved during the first quarter of 2018. Excluding the effect from the earnings attributable to common shareholders unrealized gain in derivatives, the adjusted loss attributable to common shareholders for the quarter ended March 31, 2019 would have been $0.21 per share basic and diluted compared to an adjusted loss of $0.69 basic and diluted for the same period of last year. Now can you please kindly turn to slide 14. In this slide, we will review our fleet performance during the first quarter of this year and compare to the same period of the previous year. Our utilization rate is, as usual, broken down into commercial and operational components. We set a 100% commercial utilization rate for the quarter and 99.7% operational utilization rate, compared to again 100% commercial and 99.7% operational utilization rate for the same period for 2018. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled repairs or drydocks, if such events took place during the period. In the first quarter of this year, we operated seven vessels with an average time charter equivalent rate of $9,472 per vessel per day compared to five vessels in the same period of 2018, which go at $11,116 per vessel per day. Total operating expenses, including management fees and general and administrative expenses but excluding drydocking costs, increased by 12% during the first quarter of this year compared to the same period of 2018. As always, we want to emphasize that cost control remains a key component of our plan. Let's now look at the bottom of this table to our daily cash flow breakeven levels presented here on a per vessel per day basis. For the first quarter of 2019, we reported an operating cash flow breakeven level, including loan repayments and the cash portion of the preferred dividend, but before any balloon payments, was $11,557 per vessel per day, as compared to $13,623 per vessel per day as we said during the first quarter of 2018. Let's now turn to slide 15. This slide shows, on that right hand side, an estimate of our cash flow breakeven level for the next 12 months. And on the left side, we show our scheduled debt repayments including scheduled balloon repayments over the next five years. The chart shows our debt profile before and after the refinancing of the balloon payment of Eirini of $4 million which was scheduled to be paid in the second quarter and we recently completed this refinance. We can see in the chart, that there is balloon payments coming up before 2021. Expressed in dollars per vessel per day, our loan principal repayments over the next 12 months amount to about $2,850 per vessel per day contribution to our cash flow breakeven level. If we make similar assumptions for the rest of the components of our cash flow breakeven and make assumptions for operating expenses, general and administrative expenses, interest, drydocking costs, et cetera, all of which on a per vessel per day basis, we can project that we would have approximately a cash flow breakeven level over the next 12 months of $12,350 per vessel per day. You can see that table on the right part of the slide. Lastly, let's now turn to slide 16. In this slide, we will review highlights from our balance sheet. The left side of this slide shows a snapshot of the company's capital structure on the left part. On the right, we list our unrestricted cash flow of $9.4 million, the restricted cash and other liquid assets of $4.4 million as well as other assets of about $4 million. Including our vessels at book value, our total asset at the end of the first quarter of 2019, it stood at about $127 million. Of that, the book value of our vessels was $109 million which is within 5% of the market price. Moving down to our liabilities. Our bank debt amount is about $61 million which is roughly 50% of our total assets while our preferred equity outstanding is about $20 million or about 15% of our total assets. Other liabilities about $3 million or 2% of our assets. Therefore, the numbers result in a net book value of about $43 million or about $19 per share. In closing, I would like to mention that again this figure, our current stock price of $7.5 per share, represents a significant discount to the intrinsic value of the company. With that, I would like to pass the floor back to our Chairman and CEO, Aristides, to continue the call.

[Aristides Pittas:]

Thank you, Tasos. I would like to the floor out for any questions we may have.

[Operator:]

[Operator Instructions]. We will now take our first question. Please go ahead. Your line is now open.

[Tate Sullivan:]

Hello. This is Tate Sullivan from Maxim Group. Thank you for taking my question. First question on cash flow on slide 15. Just to confirm, you said there are no more balloon payments due for the rest of 2019. Is that correct?

[Tasos Aslidis:]

Yes. This is Tasos. That is correct. We don't have any balloons coming due into the remaining of this year and 2020. The next balloon payment would be in 2021.

[Tate Sullivan:]

2021. And then, it was a great cash flow quarter in the first quarter of 2019 with about cash flow from operations of close to $7 million. Is that probably the high for the year, just based on timing of collecting receivables? Or can you give any details into outlook for cash flow from operations or capital expenditure needs?

[Tasos Aslidis:]

Yes. I think it was more due to collecting of receivables. Other than that, it was an average quarter because as you point out, the average earnings were lower than that same period of last year.

[Tate Sullivan:]

Okay. Understood.

[Tasos Aslidis:]

It was also the lack of any drydocking expense.

[Tate Sullivan:]

Okay. Good point. And on that note, on the drydocking that you expect in 2Q, what are the usual expenses related to that period that it will be drydocked?

[Tasos Aslidis:]

A typical cost for drydocking one of our vessels, one of our Panamaxes which are built between 2000 and 2004 is around $800,000 per drydock.

[Tate Sullivan:]

Okay. Great.

[Aristides Pittas:]

And we expect one drydock in Q2 and one in Q3 this year.

[Tate Sullivan:]

Okay. And while we are talking touching base to an impact of the recent tender of China and U.S. trade negotiations, has that come up in your negotiations with customers for future contracts at all? And what are specific examples of how that has impacted your fleet, please, if you can discuss?

[Aristides Pittas:]

We haven't had any direct impact from that. While we get the impact from the cargo flows generally as a market. There is nothing particular in our trading. For example, die to the grain tariffs, we tend to get less business out of over the U.S. for grains and more out of Argentina, Brazil, Latin America generally. But the overall sentiment is negative through these trade wars affects general sentiment. The general sentiment drives market.

[Tate Sullivan:]

Great. Absolutely. Well, thank you for that and have a great rest of the year. Thank you for all the detail..

[Aristides Pittas:]

Thank you very much.

[Tasos Aslidis:]

Thank you.

[Operator:]

Thank you. We will now take our next question. Please go ahead. Your line is now open.

[Poe Fratt:]

Yes. Hi. Poe Fratt from Noble Capital Markets. Good morning.

[Aristides Pittas:]

Hi Poe.

[Poe Fratt:]

I would just on the Starlight, it looks like it's up to 20 days as far as what you budgeting for downtime for the drydock?

[Aristides Pittas:]

Yes. I think that's about right, I believe.

[Poe Fratt:]

And then the third quarter, can you specify which vessels are going to be in drydock and also like amount of time?

[Aristides Pittas:]

The Eirini and again about 20 to 25 days.

[Poe Fratt:]

Okay. Great. And then when you look at the Pantelis and the Tasos right now, it looks like they are open at the end of this month. Can you give us an idea of sort of the current market for those two vessels? And then also the rationale for not doing any FFAs for the second quarter, but then loading them on for third and fourth?

[Aristides Pittas:]

Yes. We do have the FFAs on the second quarter. We still have them. I think just that I didn't mention them as we were talking. But yes, we do have FFAs there for the second the quarter as well and at around $11,000. So that's an omission. But they are there. And right now, the levels that we are seeing for vessels like Tasos and Pantelis is around $10,000, hopefully up to $10,000.

[Poe Fratt:]

Great. That's helpful. And I did miss the second quarter FFA. So is that have you layered on to 270 or was it closer to the --?

[Aristides Pittas:]

It was 270 days. And it's our omission, it's not in the presentation, yes.

[Poe Fratt:]

Great. That's helpful. And then in Tasos, when you look at the refinancing of the reneg debt, it looks like you may paydown part of the debt then push out the maturity. Can you sort of give us what exactly happened there?

[Tasos Aslidis:]

So it was essentially direct refinancing of the amount. In part, we might have gotten slightly more, like almost $50,000 more. So it was just pushed out and of course the refinance debt is also amortized. So that's why you see the new balloon being lower than the original balloon.

[Poe Fratt:]

Okay. So I can put the difference as what will be amortized over the -- so I assume it was pushed out for three years then?

[Tasos Aslidis:]

Yes. Exactly three years. You can see from the chart. It's from about 44 million. The new balloon is $2.1 million. So the difference, roughly $1.9 million, was amortized equally over the next three years. It will be over the next three years.

[Poe Fratt:]

Yes. And any change in the LIBOR spread or any other structural changes to that?

[Tasos Aslidis:]

I think the LIBOR spread was marginally better but they would run around the same.

[Aristides Pittas:]

Okay. It's 2.7%.

[Tasos Aslidis:]

Yes. 2.7%. I wasn't sure.

[Poe Fratt:]

[indiscernible]. Great. Okay. Thank you so much. Actually one last one, if you wouldn't mind. Given what happened over the first quarter, has the tone of the M&A market changed at all? Or any comment on what you are seeing as far as potential expansion opportunities?

[Aristides Pittas:]

I think things have been this quiet during the quarter on that front. Everybody is still in wait-and-see mode to see how things develop. One, because of the trade wars, but second also because of the IMO changes and the fuel issues. So people dealing with these things more than looking actively at M&A at this stage. At least, that's what we see ourselves.

[Poe Fratt:]

Great. Thank you so much.

[Aristides Pittas:]

Thank you.

[Tasos Aslidis:]

Thank you Poe.

[Operator:]

Thank you. [Operator Instructions].

[Aristides Pittas:]

I think there is no more questions.

[Operator:]

There are no questions at this time.

[Aristides Pittas:]

Okay. So then I would like to thank everybody that was listening in and we will talk to you again in three months time with our Q2 results. Thank you.

[Tasos Aslidis:]

Thanks everybody.

[Operator:]

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