EuroDry Ltd.
Q2 2019 Earnings Call Transcript

Published: 11 Aug 2019

[Operator:]

Thank you for standing by, ladies and gentlemen. And welcome to the EuroDry Conference Call on the Second Quarter 2019 Financial Results. We have with us today, Mr. Pittas, Chairman and Chief Executive Officer; and Mr. Aslidis, Chief Financial Officer of the company. At this time, all participants are in listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions]I must advise you that this conference is being recorded today, Friday the 9th of August, 2019. Please do remind that the company announced its results with the press release that has been publicly distributed.Before passing the floor to Mr. Pittas, I would like to remind everyone that in today presentation and conference call EuroDry will be making forward-looking statements. These statements are within the meaning of the federal securities laws.Matters discussed maybe forward-looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized.I kindly draw your attention to slide two of the webcast presentation, which has the full forward-looking statements and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it.And I would now like to pass the floor over to Mr. Pittas. Thank you, sir. Please go ahead.

[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 six-month period and second quarter ended June 30, 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 ‘18 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 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 second quarter of 2019, we reported total net revenues of $6.2 million, adjusted EBITDA of $1.8 million and net income of negative minus $1.8 million.The company declared it second preferred shares dividend of $0.6 million on Series B preferred shares and the $0.2 million preferred deemed dividend, and therefore, net income attributable to common shareholders was negative $2.6 million.Therefore, basic and diluted earnings per share attributable to common shareholders for the second quarter of 2019 was minus $1.14 per share, an average of seven vessels were owned and operated during the second quarter of 2019, earnings an average time charter equivalent rate of $10,724 per day.Turning to slide four for the market highlights for the second quarter of 2019. During the second quarter the drybulk markets started recovering with the spot market reaching multiyear highs by the month of July.Along with the investments of certain short-term factors like the opening of iron ore mines in Brazil, the improvement has also been the result of limited supply growth due to the low order book coupled with reduced vessel availability as a percentage of the fleet prepares to comply with the lowest sulfur emission requirements.We are optimistic about the near- and medium-term prospects of the market, as fleet growth is expected to remain constrained. The main uncertainty is related to the continuation in extent of the trade tensions mainly between the U.S. and China.Please turn to slide five for our chartering and operational highlights. The Pantelis was fixed for a trip of about 50 days to 60 days at $9,500 per day, and thereafter, just recently rechartered for about 100 days at $11,500 per day.The Starlight was extended for a period until September 2020, January 2021 at 100% of the four times charter BPI average index.Finally, the Tasos was fixed for a trip of about 60 days at $14,400 per day plus $440,000 balance bonus, which translate to roughly $10,500 per day time charter equivalent rate.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. In the second quarter of 2019, our FFA short exposure was for 90 days per month at $11,261 per day, which resulted in a profit of about $460,000.At the beginning of Q3, we saw the market rising and decided to close our hedges for Q3 and Q4, resulting in a loss of about $5,000. Overall, therefore, our FFA coverage produced a net profit of about $550,000.In reference to drydockings, Starlight was completed in the second quarter of 2019 in about 35 days at a cost of approximately $1.4 million, including the ballast water treatment plant. In addition, the Eirini entered the drydock in July and is expected to return to service around mid-August.Please turn to slide six for the synopsis of the EuroDry fleet as of today. EuroDry comprises of seven drybulk vessels with a cargo carrying capacity of 529,000-deadweight and the fleet average age of around 10.5 years.Slide seven shows the employment schedule. As you can see, coverage for the remainder of 2019 as of September 1st including index charters and pool employments stands at about 62%, over at 34% without taking into account the index-linked charters and the pool employment.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 even pools in anticipation of a still improving market. In the following slides, we synopsize our outlook into the drybulk market.Let’s turn to slide nine. The IMF projected world GDP growth in 2019 is revised downwards from 3.3% in the previous quarter to 3.2% now. Among the developed economies China second quarter suggest a weakening activity of 6.2%, compared to 6.3% in the previous quarter. For the advanced economies a revision to U.S. growth in 2019 reflects stronger than anticipated performance of 2.6%, compared to 2.3% in the previous quarter.Though the IMF boosted its growth forecast for the United States, it scaled back predictions for Eurozone expected stay -- to stay the same as before at 1.3%, while India is down from 7.3% to 7% and Brazil is expected to slow the most from 2.1% to 2.8%. For 2020, the IMF predicts stronger growth of 3.5%, while for the U.S. is expected to be lower than 2019 at 1.9%.Growth in the Euro area is expected to be 0.1 percentage higher than the previous quarter and 0.3% higher than the 2019 forecast. Whereas the forecast for 2020 reflects a strengthening India, Brazil and Russia relative to 2019, whilst China could slow a bit to just 6% from 6.2% forecasted for 2019 and 6.1% projected for 2020 in IMF previous quarter forecast.Looking on the drybulk trade, according to Clarkson, the trade in 2019 was projected to grow by 1.3%, down from the 2.4% expected in the previous quarter estimates. However, after the most recent reintroduction of 13 million tons Vale iron ore into the market, this figure is expected to increase again to around 2% to 2.5%. In 2020 and according to Clarkson forecast again the trade rate set to grow at 3.1% rate.Please turn to slide 10 to review the drybulk delivery schedule. Currently, the order book stands at 5.7% for 2019, 5.4% for 2020 and just 1.8% for 2021. This is comparatively very low, near the lowest levels of the last 20 years. Also note that due to slippage, cancellations and scrapping, the overall fleet growth during the next two years but also 2021 unless a significant number of new orders is placed should be very small.Please turn to page 11 where we summarize our outlook on the drybulk market. Since the beginning of 2019, we see that rates for the capsize vessels dropped below OpEx levels. However, a strong improvement followed which peaked in July at around $32,000 per day and has since then corrected to about $24,000 per day.The Panamax and Supras were less affected by the Vale disaster and dropped much less before peaking to about $17,000 per day and $11,000 per day, respectively, in mid July. These sizes have also corrected to lesser extent though and current rates however close to 15,000 for the Panamax and around 11,000 for the Supras.The accident in Vale’s iron ore mine in Brazil was estimated to reduce Brazilian iron ore exports by 90 million tons annually until mines came back in operation. However, it seems that the big bulk of the capacity will come back pretty soon.The Brazilian Government already announced the return of about $30 million tons of iron ore exports back in the market and hinted that more is to come very soon. The lost quantities can only be partially replaced by increasing production across other mines in the world.Our analysis for 2019, ‘20 and ‘21 shows marginal balance, which would suggest a strong second half 2019, considering the weak environment in Q1 and a flat 2020. For 2021, the current fundamentals look very promising as the order book stands only at 1.8% 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.Also coal imports, despite the longer term concerns due to the overall desire to reduce coal use, are expected to further grow in 2019, as electricity demand growth remains robust. Grain trade is expected to rebound if we manage to have an agreement between China and the U.S., so this is something we have to monitor closely.Finally, the environmental regulations coming into effect as of 2020 are the wild card whose exact effect and the demand improvement is difficult to quantify, but could be very substantial.Next please turn to slide 12. The left side of the slide shows the evolution of one-year time charter for 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 Supras cycles.The right hand side of the slide shows the vessel values in relation to 10-year historical prices. Of course, drybulk prices have moved above all-time low values that were established at the beginning of 2016, but the medium price of 10-year old Panamaxes is about $17 million and we are still significantly lower than that at around $13 million.With a stabilizing and even improving freight rate environment, we would expect asset values to improve as well. We are therefore carefully evaluating various opportunities and also to deploy the funds and investment capacity we have available in terms of acquiring new vessels, renewing our fleet and exploring merger possibilities with other fleets in accretive transactions.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 as ladies and gentlemen. I will take you over now our financial results highlights for the second quarter and first half of 2019.For that, please turn to page 14. For the second quarter of this year, we reported total net revenues of $6.2 million, representing a 1% increase over total net revenues of $6.1 million during the second quarter of 2018. This was mainly the result of the increased average number of vessels that we operated, partly offset, but they increased the average spend charter equivalent rate of vessels here in the second quarter.We reported net loss for the period of $1.8 million and net loss attributable to common shareholders of $2.6 million, as compared to net income of $0.5 million and net income attributable to common shareholders of $0.4 million for the same period for 2018, respectively.The net loss attributable to common shareholder includes a $0.6 million cost and dividend payable to the preferred shareholders and deemed dividend of $0.2 million due to the partial redemption of our preferred shares and that relates to the origination of cost of the securities.The results for the second quarter of 2019 also include a $0.2 million of unrealized losses on an interest rate swap contract and a $0.9 million of unrealized loss on a forward freight agreement contracts.Adjusted EBITDA for the second quarter of 2019 was $1.8 million, compared to $2.4 million achieved during the second quarter of 2018. Basic and diluted loss per share attributable to the common shareholders for the second quarter of 2019 was $1.13 per share calculated on $2.2 million basic and diluted weighted average number of shares outstanding, compared to $17 -- to earnings of $0.17 per share for the second quarter of 2018.Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized gain or loss in derivatives and the deemed preferred dividend the adjusting loss attributable to common shareholders ended -- for the quarter ended June 30, 2019, would have been $065 per share basic and diluted, compared to adjusted earnings of $0.16 per share basic and diluted for the quarter ended June 30, 2018.For the first half of this year, we reported total net revenues of $12 million, represented a 12% increase of total net revenues of $10.7 million during the first half of 2018. We reported net loss for the period of $0.9 million, a net loss attributable to common shareholders of $2.4 million, as compared to net income and net loss attributable to common shareholders of $1.3 million and $1.4 million for the same period of 2018.The net loss attributable to common shareholders includes a $1 million of cash and in kind dividend payable to the preferred shareholders and deemed dividend of $0.2 million due to the partial redemption of our preferred shares that I explained earlier. The results for the first half of 2019 also include a $0.2 million of unrealized loss on derivatives.Adjusted EBITDA for the first half of 2019 was $4.3 million, compared to $2.1 million achieved during the first half of last year. Basic and diluted loss per share attributable to common shareholders for the first half of 2019 was $0.96 calculated again on 2.2 million basic and diluted weighted average number of shares outstanding, compared to $0.64 per share loss for the first half of 2018 calculated again on 2.2 million shares.Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized loss or gain on derivatives and deemed preferred dividend the adjusted loss attributable to the common shareholders for the six-month period ended June 30, 2019 would have been $0.87 per share basic and diluted, compared to adjusted loss of $0.69 per share basic and diluted for the same period of last year.Let’s now turn to slide 15. In this slide, we’ll review our fleet performance for the second quarter of 2019 and compare it to the same period of the previous year. Our utilization rate is as usual, broken down into the commercial and operational components. In the first -- in the second three months of 2019, we hit a 99.9% commercial utilization rate and in ‘18, 98.3% operational utilization rate, compared to 100% for both for the corresponding period since 2018. I want to remind you here that our utilization rate calculation does not include vessels that were in scheduled drydocks or repairs, if any such event occurred during the reporting period.In the second quarter of this year, we operated seven vessels with an average time charter equivalent rate of $10,724 per vessel per day, compared to 5.6 vessels in the same period of 2018, which aim and average $12,069 per vessel per day.Total day operating expenses, including management fees, G&A expenses, but excluding drydocking costs, other $5,948 per vessel per day during the second quarter of this year, as compared to $6,726 per vessel per day for the same quarter of 2018.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 second quarter of 2019, we reported an operating cash flow breakeven level, including loan and payments, and the cash portion of our preferred dividend of $11,780 per vessel per day, as compared to $12,334 per vessel per day that we had during the second quarter of 2018.Let’s now turn to slide 16. This slide shows on the 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 actually before and after the recently financing of the balloon payment of Eirini. As we see in the chart after the financing of the -- aforementioned balloon payment, we have no balloon payments coming up in 2019 and 2020, with the first one cut being in 2021.We believe that we have a competitive debt cost for the size of our company, with the average senior debt margins standing at around 3%, which assuming a LIBOR at around 2.5% would translate to an all-in cost for our senior debt of about 5.5%. If we include the cost of our preferred equity the overall cost of our structured financing would be close to 6.3%.I would like to note that we have recently redeemed about $4.3 million of our Series B preferred shares in exchange of a decrease in the quarterly dividend rate to 9.25% from 12% until January 2021 where now rate was still increased to 14%. The remaining amount of Series B preferred shares is about $15 million and that represents about 12% of our debt and preferred equity funding.Expressed in dollars per day, our loan principal payments over the next 12 months amount to about $2,850 per vessel per day contribution to our cash flow breakeven level. Our preferred dividend payments contribute another $550 per vessel per day.If we make similar assumptions for the rest of the components of our cash flow breakeven that is the operation expenses, the general and administrative expenses, interest, drydocking, et cetera, all of which expressed in a per vessel per day basis, we can project that we have approximately a cash flow breakeven level over the next 12 months of about $11,700 per vessel per day. You can see that on the table on the right part of the slide.And with this, I would like to pass the floor back to our Chairman and CEO, Aristides, to continue the call.

[Aristides Pittas:]

Thank you, Tasos. Let me open up the floor for any questions we may have.

[Operator:]

Thank you. [Operator Instructions] Your first question today comes from the line of Tate Sullivan from Maxim Group. Please go ahead. Your line is open.

[Tate Sullivan:]

Hi. Thank you. First reviewing the downtime in the quarter for the Starlight, did they end up being a bit longer than you forecasted or within budget or what were some on it, were there any unexpected costs related to that please?

[Aristides Pittas:]

No. We budgeted five days less to be honest on that drydock. But the weather was not helping so things got a little bit delayed. The ballast water installation ended up being a little bit more costly than expected. But other than that the end result was about $1.4 million in 35 days.

[Tate Sullivan:]

Okay. Thank you. And looking at -- is the other ship scheduled to go in drydock this current quarter that are undergoing a similar process to what the Starlight did and do you expect similar costs?

[Aristides Pittas:]

It is, but we expect the cost to be lower at $1 million to $1.1 million.

[Tasos Aslidis:]

$1.1 million.

[Aristides Pittas:]

$1.1 million and the duration to be less than 30 days.

[Tate Sullivan:]

Is that due to been a smaller ship or different shipyard or what other factors?

[Aristides Pittas:]

It has an easier ballast water treatment plant installation because the way the machinery was laid out, it was much easier to do. Other than that the ships are quite similar ships. But this one required a little bit less work than the other.

[Tate Sullivan:]

Okay. Thank you for that detail.

[Aristides Pittas:]

Sure. Anything else?

[Operator:]

Thank you. Thank you, sir. There are no further questions, I’ll hand back to you for closing remarks.

[Aristides Pittas:]

Thank you very much for listening into us. We’ll back in November with our Q3 results. Thank you.

[Tasos Aslidis:]

Thanks, everybody.

[Operator:]

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