EuroDry Ltd.
Q4 2019 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the EuroDry Conference Call on the Fourth 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 a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]I must advise you the call is being recorded today, Thursday, the 13th of February, 2020. Please be reminded 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’s presentation and conference call, EuroDry will be making forward-looking statements. These statements are within the meaning of the federal securities laws.Matters discussed may be 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 2 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.I’d now like to hand the floor over to Mr. Pittas. Thank you, 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 year-end and quarter ended December 31, 2019.Please turn to Slide 3. Our income statement highlights us on here. For the fourth quarter 2019, we reported total net revenues of $7.6 million, adjusted EBITDA of $3.8 million, and net income attributable to common shareholders of $1.3 million. Basic and diluted earnings per share attributable to common shareholders for the fourth quarter of 2019 was $0.45 per share. An average of seven vessels were owned and operated during the fourth quarter of 2019.Earning an average time charter equivalent rate of $12,439 per day. The company declares its first cash dividend of $0.4 million on Series B preferred shares and adjusted net income attributable to common shareholders was $980,000 or $0.43 per share basic and diluted.Please turn to Slide 4 for our chartering operations and sales and purchase highlights of the quarter. The Pantelis was fixed during this falling market for a trip of about 20, 25 days at $6,000 per day, and then extended another $6,050 per day. The actual time charter equivalents were $5,150 per day and $4,400 respectively due to ballasting.Xenia was extended for about a year at 101% of the BPI5 time charter route index with a floor of $11,000 per day. The fourth quarter of 2019, we opened up an FFA heads by selling in October exposure of 90 days equivalents to the open days of one Panamax ship at $14,550. We closed this hedge in November with a net profit of about $112,000 which is equivalent to about $1,200 daily on one Panamax ship earnings for the whole of the fourth quarter.Please turn to Slide 5 as there were no drydockings or repairs during this quarter. There you can see the snapshot of our fleet which is comprised of the seven drybulk vessels of the average age of 11.6 years of the cargo carrying capacity of 528,000 dead weight. Slide 6 shows the employment schedule.As you can see our effective covenants as of February 1, 2020 stands only at about 18% in 2020. It excludes this 18% exclude ships on index charters which are open to market fluctuations but have secured the employment except motor vessel Xenia which as I already said has upside exposure, but the floor was $11,000 a day.Turning to Slide 7 for the market highlights for the fourth quarter of 2019. During the fourth quarter, the drybulk market experienced a decline in rates which in some cases exceeded the 20% drop compared to third quarter rates. This decline in the rates was not fully reflected in the net revenues in time charter equivalent rates of the fourth quarter of 2019 due to the fact that certain vessels were employed on the longer term time charters fixed in prior periods and certain vessels were fixed at favorable rates during the third quarter of 2019, running through the fourth quarter of 2018.However, the market continued declining during January and February of 2020. As on the top of trade uncertainties, which by December 2019 seems to be subsiding, new concerns were added regarding the effects of the coronavirus epidemic on the world growth. The positive byproducts of these uncertainties in the marketplace is the limited number of new orders placed and the declining order book as a percentage of the fleet. Thus, we continue to believe that drybulk markets could offer significant opportunities for sizable returns in the medium term once those hopefully short-term headwinds subside.Please turn to Slide 9. The IMF projected World GDP growth in 2020 inch down to 3.3% from 3.4% in the previous quarter, that still is 0.4% higher than the actual growth we have in 2019. The IMF prediction for the Chinese GDP growth was an increase of 6% from 5.8% previously, however this was just before the coronavirus issue arose, which analysts predict will have a dampening effect on the Chinese growth of 0.5% on a yearly basis and about 2% on Q1 growth.For the advanced economies, the revision to U.S. growth for 2020 reflects a slightly less strong performance of 2% compared to 2.1% in the previous quarter. Similarly, predictions for Eurozone are expected at 1.3% just a bit lower than the 1.4% expected in October. Indian growth has been lowered to 5.8% and 7%, then Brazilian growth is now expected a 2.2% a slow uplift from 2% previously.For 2021, the IMF predicts a healthy global growth of 3.4%. For the U.S., it expects it to scale back a little bit to 1.7% growth. Growth in the Euro area is expected to stay the same at 1.4% in 2021, whereas the focus for the major countries of the rest of the world is expected to be slightly higher in 2021 than 2020 except for Japan and China with slight reductions expected.Looking on the drybulk trade, according to Clarkson, projected growth in 2020 is estimated at 2.5% and 2.3% in 2021respectively, which are more than double the growth though of 2019, which was estimated at 1.1%. Let's turn to Slide 10. The drybulk order book is close to its lowest point in over two decades with a biggest part of that due to be delivered within this year.As owners are not sure of what were the since nobody knows yet which type of fuel will prevail, and therefore what type of engine to install on the new ship, we expect just a low number of orders to be placed within the year. This sets the stage for constrained fleet growth for at least the next couple of years given also that it takes about one and a half to two years for the vessel to be delivered once it has been opened.If demand issues such as trade rules and the coronavirus are overcome, we foresee a couple of good years for our market, which has been burdened throughout the past decade by the oversupplies. Please turn to Page 11 where we summarize our drybulk market outlook.Since the beginning of 2019, we see that rates for the Capesize vessels moved from below OpEx levels in the first quarter to year highs of about 40,000 daily in the third quarter. Panamaxes and Supramaxes were much less affected by the valid disaster and dropped much less before increasing again also to multi-year highs of $18,000 a day and $15,000 a day respectively by September, drop in low by about 50% since then and even further in Q1 2020.The accident in Vale’s iron ore mine in Brazil was initially estimated to reduce Brazilian iron ore exports by 90 million tons annually until mines come back to operation. However, a big part of the capacity has come back earlier than expected giving this increase in the rates. Brazilian iron ore exports, the driver of the cape markets recovered from being 30% lower than a year-ago in the first half of 2019 to being 15% lower than a year-ago currently and still improving.2020 started with new uncertainties as we said before, introduced by the coronavirus epidemic, its effects on world growth and seaborne trade are yet to be fully assessed, but certainly will significantly affect Q1 negatively. For the whole of 2020, our supply demand analysis shows a marginally balanced market, which would suggest generally an impressive market.Positive or negative short-term incidents and disruptions, such as the coronavirus, the effects of the introduction of cleaner fuels, other environmental regulations that may come can move the markets one way or the other. Our analysis indicates that 2021 should be a very promising year with higher demand than supply growth expected amidst a very low thing. For the main commodities that our ships transport, our longer-term views as follows. 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 expected to further grow in 2020 and probably the next couple of years as well following and about 10% rise in Chinese coal imports since 2009, as electricity demands worldwide growth remains robust.Grain trade is also expected to rebound this year following a much desired trade agreement between China and U.S. and continue growing as the world population continues to grow and standards of living increase. Please turn to Slide 12. The left side of the slide shows the evolution of one-year time charter rates of Panamax drybulk vessels since 2000.Even though drybulk vessel rates bounce back from the all-time lows in 2016 to just above the median level by Q3 2019, we’re again below these levels. The right hand side of the slide shows vessel values of 10-year old Panamaxes 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 both the median and the average price of 10-year old Panamaxes are still significantly higher.Whilst currently we seem, we see some further pressure on values. If the market stabilizes and we see an improvement for rate environment as expected, we would also expect asset values to improve as well. In the capital markets, we continue to pursue opportunities to merge with other fleets to grow the company thus providing a platform for consolidation. At the same time, we’re pursuing initiatives to increase rate visibility amongst investors. We believe that such increased visibility with investors will help reduce the significant discount to the NAV of stock traders, thus offering additional sight to our shareholders and new investors alike.And with that, I will pass the floor over to our CFO, Tasos Aslidis to go over our financial highlights in more detail.

[Anastasios Aslidis:]

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will take you over now on financial result highlights for the fourth quarter and 12 months of 2018 and 2019. For that, let's turn to Page 14. For the fourth quarter, we reported total net revenues of $7.6 million representing an 8.8% increase for the total net revenue of $7 million during the fourth quarter of 2018 and that increase was the result of the increased average number of vessels that we operated in the fourth quarter of this year.The company reported net income for the period of $1.4 million and net income attributable to common shareholders of $1.03 million, as compared to net income of $0.8 million and net income attributable to common shareholders of $0.6 million for the same period of 2018. Depreciation expenses for the fourth quarter of 2019 amounted to $1.6 million compared to $1.5 million for the same period of last year. Interest and other financial costs for the fourth quarter of 2019 amounted to $0.8 million compared to $1.1 million for the same period of 2018. Interest during the fourth quarter of 2019 was lower with lower debt and lower LIBOR rates during the period as compared to last year.Adjusted EBITDA for the fourth quarter of 2019 was $3.8 million compared to $3.5 million achieved in the fourth quarter of 2018. Basic and diluted earnings per share attributable to common shareholders for the fourth quarter of 2018 were $0.5 calculated on 2,261,000 basic and diluted weighted average number of shares outstanding compared to basic and diluted earnings of $0.25 for the fourth quarter of last year.Excluding the effects on earnings attributable to common shareholders for the quarter of the unrealized loss of gain and derivatives, the adjusted earnings per share attributable to common shareholders for the quarter ended December 31, 2018 which has been $0.43 basic and diluted compared to adjusted earnings of $0.32 basic and $0.31 diluted for the same quarter of 2018. Usually security analysts do not include the above items, the unrealized earnings or losses in the published estimates of earnings per share.Let's now look at the right part of the slide and review the figures for the full-year 2018 and 2019. For 2019, we reported total net revenues of $27.2 million representing an 11% increase of our total net revenues of $24.5 million during last year and that being a result of the increase in average number of vessels, we operated partly offset by the lower time charterequivalent rate of vessels done. The company reported net income for the year of $0.02 million and a net loss attributable to common shareholders was $1.9 million as compared to net income of $1.1 million, the net income attributable to common shareholders of $0.6 million for last year.Vessel operating expenses were $10.8 million for 2019 as compared to $9.2 million for the same period for last year, mainly due to the increase, the average higher number of vessel charter rate. Depreciation expense for 2019 was $6.5 million compared to $5.4 million during 2018 while interest and other financing costs for this year for 2019 amounted to $3.5 million compared to $2.9 million for 2018.This increase is due to the higher average debt outstanding during last year as compared to the year before. For 2019, two of our vessels underwent special survey and 12 vessels underwent intermediate survey for a total cost of $1.7 million as compared to two vessels undergoing special survey again one vessel undergoing intermediate survey in 2018 for total cost of $1.5 million.Adjusted EBITDA for 2019 was $10.3 million compared to $9.4 million for 2018. Basic and diluted loss per share attributable to common shareholders for 2019 was $0.85 calculated 2,261,000 basic and diluted weighted average number of shares outstanding, compared to earnings of $0.25 per share basic and diluted for 2018.Excluding the effect on the loss attributable to common shareholders of the unrealized gain or loss of derivatives, the adjusted loss per share attributable to common shareholders for 2019 which have been $0.69 as compared to adjusted earnings of $0.25 basic and diluted for 2018.Let's now turn to Slide 15. In this slide, we will review our fleet performance for the quarter and full-year 2019 and compare them to the same period of the previous year. Again, let's start with our fourth quarter numbers. Our utilization rate is usual, is broken down into commercial and operational and in this period fourth quarter 2019 were both 100% compared to 100% commercial and 99.6% operational utilization rate for the respective quarter of 2018.I would like to remind you here that our utilization rate calculation does not include vessels scheduled drydock, scheduled repairs or lay application and these events taking place during the period. On average, we operated seven vessels during the quarter and time charter equivalent rate of $12,439 per day, compared to $12,513 per day that were in the fourth quarter of 2018 a period during which we operated 6.35 vessels.Total daily operating expenses, vessel operating expenses including management fees, general and administrative expenses but excluding drydocking costs average $5,965 per vessel per day during the fourth quarter of 2019 as compared to $5,707 per vessel per day for the same quarter of last year. Total daily vessel operating expenses including management fees and G&A expenses increased 0.7% for the fourth quarter of 2019 compared to the same period of last year, the increase is primarily due to the timing of certain expenses over the quarters.As we will see shortly, the year, the full-year of that expenses were lower compared to the year before. As always, we want to emphasize control remains a key component of our strategy, a big competitive advantage that we have, operating in the markets. If we move further down to this table at the bottom of it, we can see the cash flow breakeven rate that we have for the year, which for the fourth quarter of 2019, was $9,665 per vessel per day, compared to $10,663 for the fourth quarter of 2018.Moving now on the right side of the slide. It’s our 12 month figures, again here we had 100% commercial utilization rate in 2019 and 99.4% operational utilization rates compared to 100% commercial and 99.6% operational utilization rates for the corresponding for 2019. In 2019, we operated during the full-year seven vessels compared to an average of 5.5 during 2018.Our vessels in 2019 have an another time charter equivalent rate of $11,190 per day, compared to $12,484 per vessel per day that we earned in 2018. Total daily operating vessel operating expenses including management fees and general, administrative expenses but again excluding drydocking costs average $5,869 per vessel per day in 2019 compared to $6,313 per vessel per day in 2018, a reduction of about 10%. The cash flow breakeven rates levels for the year is about $10,828 compared to $11,820 for 2018, a $1,000 reduction for both the quarter and the year.Let's now turn to Slide 16. And we will be reviewing Slide 16, our debt profile. In this slide, you can see the loan repayments for the remaining life of our loans, as well as our balloon payments in the left part of the slide in the graph. As of December 31, 2019 EuroDry had an outstanding bank debt of $56.9 million with an average margin of about 3%. Making assumption of LIBOR rate being down 2%, our cost of senior debt which has been around 5%. If we included the dividend cost of our preferred equity of 9.25%, the average blended cost of our non-equity financing which have been about 5.9% as of December 31, 2019.I'd like to remind you again here in June 2019, we prepaid approximately $4.3 million for our Series B preferred shares, if a reduction on dividend rate from 12%, down to 9.25% until January 2021 is set to increase to 14%. The remaining outstanding amount of our Series B preferred shares as of the end of last year was 15.4 million. In 2021, as you can see from the chart, we set a balloon payment of $6.6 million which corresponds with three vessels followed by one balloon payment of $2.2 million for one vessel in 2020.These balloon payments are less than the stock price of the respective vessel and we anticipate that will have no issues with finance, finances went. We have additional payments in 2023 and 2025, which are sufficient in the future to (inaudible) now.Our loan repayments on a per vessel per day basis contributes about $2,700 for day vessel operated level, you can see that figure at the bottom line of the table to the right part of the slide.We will make assumptions for the remaining items that make up our cash flow breakeven rate, operating expenses, general and administrative expenses, drydocking, interest et cetera we come up with an overall cash flow breakeven level for the next 12 months approximately $10,950 per vessel. This now move to Slide 17, where you can see some highlights from our balance sheet.This is a simplified version of our balance sheet where we saw the main groupings of our assets and our liabilities. On the asset side, we have of course the value for vessels, from here the book value of about $105.5 million and cash and other assets for about $12.2 million. The total assets amounting to about $117.7 million, on the liability side we have bad debt as I mentioned in the previous slide of $56.9 million, which approximately represents 48% of the book value for our assets, also is preferred equity of $15.4 million, which approximately accounts for another 13% of our book assets while we kept other liabilities standing at $4.7 million, which amount approximately 4% of our total assets.Those leave our net book value of around $41 million or close to 17.76%, as of the end of last year, the market value for our fleet was very close to its book value, which meant that our book value per share approximated our net asset value per share. It is worth observing here with sales of $1 million and the value of each of our vessels that is $7 million change in the value of our fleet, which result in a $3.00 percent change in our NAV per share. As Aristides mentioned earlier, since the beginning of this year, the drybulk market has been relatively weak with all indications pointing asset values being 5% to 10% lower than figures.Such declining values will translate to NAV that very likely being in the range of $13 to $15 per share. The recent price trading range of our set was just below or just around $6 per share, this presents a very significant discount to the value of our company and should that gap narrows, that would present significant appreciation for our shareholders. And with that, let me pass the floor back to Aristides to conclude the call.

[Aristides Pittas:]

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

[Operator:]

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

[Tate Sullivan:]

Hi, thank you. Tate Sullivan from Maxim Group. If you can, and I know a short-term consideration, but can you expand on potential outcomes or short-term outcomes for the two contracts that come due or the term contracts that are expiring this month given the current environment. Can you -- have you had conversations or can you give any more comments on potential outcomes in the short-term for those two ships, please?

[Aristides Pittas:]

Yes, these two ships were on short-term charters will probably continue trading on short-term. We are negotiating right now fixing one of the vessels for another 20, 25 days at charter rates of magnitude of between $2,500 and $3,000 and this is the current market in this Pacific at this point. We could get something slightly higher if we opted to do a much longer voyage but with these rates, we rather do smaller voyages less than a month waiting to see some kinds of recovery in the market.

[Tate Sullivan:]

Great, thank you for that. And then I noticed that in your prepared remarks in the presentation, you talked about iron ore trading volume growth that at risk, does that offset the reduction in or the limited growth and supply of ships or why did you put that in your outlook? And what can we look of that risk?

[Aristides Pittas:]

We just note also that Clarkson that is generally suggesting relatively low demand growth rate going with lower than the historical of the last 10 years. And we're trying to see what are the reasons for that and because iron ore is one of the major commodities that is transported, we looked into what is being built as new mining opportunities and things like that and much is not being built. So it explains a little bit why the growth in drybulk demand is probably estimated to be lower than what it has been over the last decade or so.What counteracts that lower demand, of course is the much lower supply of vessels and the fact that we don't see new orders being placed.

[Tate Sullivan:]

Okay, thank you for that detail on the ships and that comment. Have a good rest of the day.

[Aristides Pittas:]

Thanks Tate.

[Operator:]

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

[Poe Fratt:]

Hi, good morning, Tasos. This is Poe Fratt from Noble Capital Markets. Good morning, Aristides.

[Aristides Pittas:]

Good morning.

[Poe Fratt:]

Can you just highlight a little bit maybe just would cost push your scene it looks like your budget for next 12 months on taxes just slightly higher than it was in 2019, if you could just comment on that would be helpful.

[Aristides Pittas:]

In terms of the OpEx costs, I think I think we're expecting to see around $5,100 per vessel per day for the OpEx. And that compares, it’s in the same order of magnitude, I think it's just about 2% higher than the actual for 2.5% higher than the actual for 2019, which is the ballpark of our expected interest, the vessels, especially some of our vessels that are in their teens value little more. I think is the same level that we saw in fourth quarter 2018. I don't think we can repeat significantly bigger projection for budgets. It is very similar to 2019 levels.

[Anastasios Aslidis:]

Poe and I think it’s fair to say that we are completing our analysis of the OpEx of 2019 to evaluate where we can perhaps make some savings and try to go below this initially budgeted level. So we hope that we will end-up with an increase of less than the 2.5% and we're taking measures to see if we can do that. But we'd rather keep to the original budgetas it is right now and do better.

[Poe Fratt:]

Yes, understood better to have a positive surprise and a negative one, right. And I apologize, I get onto call a little late, so I'm not sure if you addressed this. But can you talk about IMO 2020 in the context of how it’s impacted you, your company, and whether it's what's been the biggest surprise or the biggest issue for you and then secondly, whether it's changed your view towards whether you think that you should be doing anything towards the end of this year, maybe next year, as far asmaking the investment in scrubbers, has anything changed?

[Aristides Pittas:]

Well, what has happened is that we saw a very big spread initially between high sulfur fuel oil and low sulfur fuel oil in excess of 350 the first phase. But this has been the narrowing and now it’s below 200 and seems as if it's going to go even lower, we think the spread is going to become even lower. So yes of course, our cost of fuel increased, it didn't increased very much because we've had generally lowering in the cost of oil. So didn't increased tremendously to what it was for the bigger part of 2019. But it has slightly increased by maybe $100 or so.But for sure that the guys that have scrubbers have taken advantage of the difference in the cost at least the ones that do support business because the ones that do time charter business said that the improvement with the charters and but the spread is narrowing and we think that it may end up being lower than $150. For a big ship, I think that would still make sense to install the scrubbers but vessels up to Panamax that we have, I'm not sure that this investment will ever make sense. But we will wait and see what happens and how the price differential develops in order to take final decision, nothing, no scrubber is at this point is being considered.The other thing that we saw is because of the issues with both the scrubber and the coronavirus creating a lot of issues with shipyards in China, where mostly people go for drydockings, we see that the yards are full and they’re working at very slow rates. And the two ships that we had earmarked for drydock within Q1, we have obtained the extension for their drydocking and we may need to obtain a further extension from class as there are delays there.So I think these are the two things that we've seen regarding this transition into the new oil, of course there has been delays as well in times that you stay waiting for oil, for bunkers and how longer earlier you have to request them that is mainly charter approves and charter problem and as we’re time charter doesn't really influence us.

[Poe Fratt:]

Great, thank you. And then can you comment on what you're seeing out there as far as just maybe any potential acquisitions, any assets, has it changed over the last month or so as far as just availability of tonnage that might be attractive or can you just comment on what you're seeing out there as far as acquisition activity?

[Aristides Pittas:]

Yes, this is something that we have been monitoring. We've always said that we have two ways of growth. One is organically our sales is slowly and quietly, the other is through some kind of joint venture. We don't have anything to report around the joint venture at this stage although we’re always looking and discussing opportunities, but nothing that is yet to be discussed and reviewed.But also we have been looking at maybe buying one more vessel, if we see prices drop because of what's happening. We might proceed with one more acquisition. But there are no real sellers of good vessels in the market, people are trying to keep the vessels they have and I think all the sellers expects that the current market is temporary and things will improve. So bid and ask prices of ships are quite far apart at this point in time and that's why we see very, very little activity on the sell and purchase.

[Poe Fratt:]

Okay, great. And then just on the preferred, Tasos you mentioned that it's pushes your cost of debt upward by about 90 basis points or so, in advance of the step-up in the rate next year, has any changing thinking on that as far as just either trying to partially pay down or trying to retire it entirely?

[Anastasios Aslidis:]

Hi, this is our objective or target is to find ways to either partially or fully retire. If we follow the reviews, the model that we applied in 2018 even partial repayment could allow us to reduce the rate and we can lever up a bit our fleet, we have some capacity of levering up our existing fleet and rising several million dollars to reduce it meaningfully. So that is the fallback position and we’re little more accurate to find (inaudible) financing.

[Poe Fratt:]

I think in the last call, you mentioned that you had about $4 million to $5 million of “dry powder” from a standpoint of secured lending, is that still the case, Tasos?

[Anastasios Aslidis:]

That is actually the case of dropping of the vessel values, lightly dropping, but probably was chipped up a bit. But I would expect to have between 4 million or 5 million of levering capacity, it depends on how you level the conventional bank debt that is probably what I just said. But if you look at the sale leaseback opportunities of levering the fleets, you might be able to fully repay the reserves.

[Poe Fratt:]

Great, thank you so much for the comments.

[Anastasios Aslidis:]

You're welcome.

[Operator:]

Thank you very much. [Operator Instructions] Thank you. There are no further questions at this time. Pittas?

[Aristides Pittas:]

Thank you all for participating in our call today. We will be with you in three months time to discuss the results of Q1. Thank you.

[Anastasios Aslidis:]

Thanks everybody.

[Operator:]

Thank you very much. That does conclude the conference for today. Thank you for participating. You may now disconnect.