Euroseas Ltd.
Q1 2018 Earnings Call Transcript

Published: 14 May 2018

[Operator:]

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas Conference Call on the First Quarter 2018 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 a listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today. Please be reminded that the Company announced their results with a 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, Euroseas 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 Number 2 of the webcast presentation which has the full forward-looking statement, and the same statement was also included in the press release. Now, I'd like to pass the floor to Mr. Pittas. 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 three-month period ended March 31, 2018 and our drybulk spin-off. Let's turn to Slide 4 of our presentation for our key 2018 developments to-date. Yesterday on May 7, 2018, we completed our newbuilding program that was started in 2014 by taking delivery of newbuilding motor vessel, Ekaterini; and 82,000 deadweight drybulk vessel that has been already charted to highly reputable European charter for about two years at a gross daily rate of $13,000. And this is expected to contribute approximately $9 million of net revenues during the contract period. We secured a bank loan of about $18.4 million to finance the acquisition of the vessel of which $15.75 million was paid to the yard as the final installment. However, from our perspective, the more significant development during the quarter was our decision to spin-off our drybulk fleet into a separate publicly listed company, EuroDry Ltd. We believe the certain drybulk and containership investment options will give our shareholders the flexibility to adjust the holdings if they show wish between the two sectors. We also anticipate that the creation of sector-focused companies will allow the capital markets to appreciate the value of our companies. Further value can be created if we are successful in our goal of turning our public platforms to consolidate in their respective fields. The EuroDry Ltd. will be a middle range drybulk owner and Euroseas Ltd. will become the only feed of containership public company with a fleet of 11 vessels and are proven workhorses of the sector. We direct to the registrational statement filed by EuroDry for information on the new company, it's www.sec.gov/Archives/edgar/data/1731388/000091957418003321/d7869256_f-1.htm. I repeat, you can find the information of the new company at www.sec.gov/Archives/edgar/data/1731388/000091957418003321/d7869256_f-1.htm. We plan to take advantage of growth opportunities in each of the two sectors to increase the size of each respective company as we believe that they will both be well positioned to do; so both in terms of the capital structure and the contract mix. We expect to complete the spin-off by the end of May 2018. We plan to discuss in more detail the spin-off and the opportunities it may generate in a separate conference call on Monday, May 14, 2018 at 10

[Tasos Aslidis:]

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. Let's turn to Slide 8, and as Aristides brief introduction on a few minutes ago, although our revenues continued to increase in the first quarter of 2018 following the continued improvement in both, drybulk and containership markets, we registered a loss for the first quarter of the year mainly due to the disproportionate number of drydocks we had to pass during the quarter. We expect both sectors to continue to register positive results in the future if the markets maintain the current levels and we expect the company to revert profitability for the remainder of the year. For the first quarter of 2018, we reported total net revenues of $12.9 million representing an 55.9% increase over total net revenues of $8.3 million during the first quarter of 2017. We reported a net loss for the period of $3.2 million and the net loss attributable to common shareholders of $3.7 million as compared to a net loss of $2.2 million, and a net loss attributable to common stakeholders of $2.6 million respectively for the first quarter of last year. In the first quarter of 2018, as Aristides mentioned, three vessels completed the special surveys with drydocks for a total cost of $2.2 million, while in the same period of last year we had only one vessel going through a survey and this was an in-water [ph] survey with a cost of $0.1 million. The results for the first quarter of 2017 also include a $0.5 million gain on the sale of our vessel RT-Duger [ph] compared to the same period of 2018 where we had no gains from vessel sales. The difference between net income and net income attributable to common shareholders of $5.2 million accounts for the dividend we paid to our Series B preferred shareholders in the first quarter of this year. This preferred dividend can be paid out entirely either in cash or in kind, and we have elected to pay it in kind for the last 17 quarters. Basic and diluted loss per share attributable for the first quarter of 2018 were $0.33 compared to basic and diluted loss per share of $0.24 for the first quarter of last year. Excluding the effect on the loss for the quarter of unrealized gain and derivatives, and the realized loss on derivatives, the adjusted loss per share for the quarter ended March 31, 2018, which have been $0.34 per share basic and diluted compared to a loss of $0.29 per share basic and diluted for the first quarter of last year making the same adjustments. Adjusted EBITDA for the first quarter of 2018 was a loss of $0.2 million compared to a gain of $0.2 million achieved for the first quarter of last year. Let's now turn to the next slide, Slide 9; in which slide we provide you with our fleet performance for the three months period ended March 31, 2018, and compared with the same performance over the first quarter of 2017. Let's start with our fleet utilization rates which as always we have broken down into commercial and operational. For the first quarter of this year we reported 98.4% commercial utilization rate and 99.7% operational utilization rate compared to 93.1% commercial and 98.3% operational utilization rate for the same period of 2017. I want to remind this year that our utilization rate circulation does not include vessels in scheduled drydock, scheduled repairs or layup if any during the reporting periods. In the first quarter of this year we operated 17 vessels with another time charter equivalent rate of $9,167 per vessel per day representing a 26% increase compared to the time charter equivalent rate of $7,268 per vessel per day that we achieved during the same period of 2017, a period during which we operated 13.38 vessels [ph]. Total operating expenses including management fees and general and administrative expenses but excluding drydocking costs were $6,756 per vessel per day for the first quarter of this year as compared to $5,675 per vessel per day for the first quarter of 2017, representing approximately a 19% increase, reflecting the different composition of vessels that we had in the two quarters, expenses related to our spin-off, and the timing of certain other expenses. And with that, let me send you back to Aristides to continue our presentation.

[Aristides Pittas:]

Thank you, Tasos. Let's now turn to Slide 11. We are very excited about the opportunity to spin-off the drybulk fleet into separate companies. Over the course of the last 20 years that included our entrance into the public markets as a diversified drybulk and container company, navigating successfully within one of the worst financial crisis in our history with a strong passion for ship operations and using a time-tested approach of focusing on cost control and lower-risk investments. We feel we have adapted well to the changing times and have grown our fleet by sitting the right opportunities without having to resolve to dilutive equity issuances other than a couple of rights issues to existing shareholders, no of course risking bankruptcy as several others. Now with two separate entities we are hopefully looking forward to the next success for our Company. Let's go to Slide 12; as stated in my introduction we are spinning off our six drybulk vessels into a separate company. The fleet will include the following vessels of our current fleet; three newbuildings consisting of two Kamsarmaxes and one Ultramax built according to our specifications. And three high quality Japanese-built Panamaxes all post-2000 built with an average fleet age just under 9 years. The net asset value of the vessels to be spun-off we calculate at about $35 million. Euroseas will continue with the current containership fleet of 11 vessels and will be the only public feeder containership focused company. We believe that the feeder sector is facing favorable demand/supply balance just as the drybulk sector is. The mechanics of the spin-off will be as follows

[Operator:]

[Operator Instructions] Our first question comes from the line of James Jang of Maxim Group.

[James Jang:]

So I just wanted to ask how many of your feeders are geared and how many are gearless?

[Aristides Pittas:]

I think it's about half and half; I believe out of the 11 ships I think actually we have 7 geared ships and 4 gearless.

[James Jang:]

Have you seen more interest on the geared or the gearless?

[Aristides Pittas:]

I think it's a uniform across the board, the interest is quite significant on all smaller vessels.

[James Jang:]

And rates have been moving up steadily; they are above the five-year average which is good. Do you see rates continue to move up and getting to the -- let's say 20 levels that we saw 10 years ago; $15,000 to $20,000 a day?

[Aristides Pittas:]

I think that it's possible that we see it move closer to the 15-year historical average which includes some very good years but also some worst years. So rates for feeders in the area of around $15,000 -- you can't exclude that possibility. But obviously, you know, even at today's rates of $10,000, $11,000, $12,000 maybe but we might see levels which are very profitable for Euroseas.

[Tasos Aslidis:]

And for segments already where historical average, like the 1,700 TEU vessels are very near the historical average.

[James Jang:]

Yes, you have a couple of really nice charters there, above $10,000 or close to $12,000. So it looks like rate trajectory looks good. So going back to the Astoria; how many days off hire was there for the propeller repair?

[Aristides Pittas:]

This is something that happened about 10 days ago and we're still evaluating how long it will take to repair the propeller. We will need to find or manufacture a new blade for the propeller and this may take some time. It's difficult to say at this point how long that will be but it will be something I think in excess of 90 days.

[James Jang:]

So if we assume that it's out of service from -- I guess, the end of April to going into Q3, that will be fair, right?

[Aristides Pittas:]

I think that's a fair estimate at the time being. If we have more clarity we will obviously advise.

[James Jang:]

So now the spin-off of the drybulk fleet it's in place; so what are the plans for expanding the container side? I know you have a love in vessels right now; but you want -- is there a certain number you want to get to in terms of fleet size or are you okay operating 11 fleet vessel; I mean 11 fleet company at this time?

[Aristides Pittas:]

As you know, we have made it public that we want to grow the company and we think it's an opportune time to grow the company through various means; and what we are closely looking at the right now is an opportunity to consolidate with other container owners who wanted to contribute the vessels into Euroseas. So there is significant discussions going on that level, I can't tell you now if something will materialize or not but we are certainly looking to grow the size of the company.

[James Jang:]

And would that be 2018 event that you're aiming for or would that be more into '19?

[Aristides Pittas:]

It could be 2018 event of course, it could be a 2018 event.

[James Jang:]

And also so for -- I'm just going to stick with the container fleet right now.

[Aristides Pittas:]

So it could even be a Q3 event, not as early as that.

[James Jang:]

So on the container side, what's the current drydocking schedule for '18 and '19?

[Aristides Pittas:]

We have one drydock I think scheduled for Q2, and I don't think we have any survey requiring drydock -- any other surveys requiring drydock in 2018. For 2019, I'm not sure but we can brief you after the call.

[James Jang:]

Sure. And are you guys -- with these drydocks are you installing any wastewater treatment or scrubbers or anything or is it just maintenance drydocking?

[Aristides Pittas:]

No, these are the maintenance -- obligatory maintenance drydockings that every vessel has to do every 5 years; take the vessel out of the water and sometimes even every 2.5 years depending on the regulations.

[James Jang:]

So I guess you're not installing scrubbers on your vessels, correct?

[Aristides Pittas:]

No, we're not going to install scrubbers on any of our ships. Scrubbers will be in my view a short-term solution which will not last longer term and unless you have a very big ship consuming huge quantities of fuel, I don't think it really is something that will be done by most operators.

[James Jang:]

So if you do -- so 2020 moves around -- so you guys start burning low sulfur diesel; who bears the cost of that? Do you think charters are going to kind of push those costs to the owners or do you think that you'll be able to pass on those costs to the charters?

[Aristides Pittas:]

I think that 95% of the ships will not have the capacity to earn anything else. So we will all as owners be at the same level. At the end of the day the cost -- the increased cost go to the consumer; take a little bit of adjustment but that's the way the markets work.

[James Jang:]

And on the container side; have there been more increase recently for longer…

[Aristides Pittas:]

I think -- for longer charters you mean, right?

[James Jang:]

Yes. Have they -- because I know you guys like to be shorter term charters. All charters that's an equal longer terms?

[Aristides Pittas:]

Our strategy is to go for one-year charters when we can get charter rates higher than $10,000 a day for our feeder fleet. And sometimes we can get it, sometimes we can't; definitely the durations are becoming more specific, so owners are able to fix for specific periods rather than some vague periods that we were forced to accept during the bad times where we at times fixed charter for 1 to 10 months or things like that, that's past.

[James Jang:]

And now moving on to the drybulk side. Currently there is 7 vessels because the Monica P is still operating until the end of June, this trend [ph] charter, correct?

[Aristides Pittas:]

That is correct.

[James Jang:]

And so once the Monica P is delivered at the end of June what are the plans for expanding that fleet? Like are there any certain segments you're looking to grow into or are you going to just kind of take it case-by-case?

[Aristides Pittas:]

James, I can't really expand on the plans or EuroDry yet because we are still -- we just filed the prospectus to the SEC and we have to wait to be able to talk more about it. I think we will be able to talk more on our drybulk plans as of next Monday when we are going to host a conference call to discuss about EuroDry but right now we're not really allowed to talk a lot about it.

[James Jang:]

That's fair. And -- so we just talked broadly on the drybulk sector. With U.S. China kind of trade-war going on right now; how do you see that playing out? Do you think there is enough, I guess [indiscernible] demand outside of the U.S. to kind of help with the oversupply or do you think if this continues it will be a negative on rates for this year?

[Aristides Pittas:]

I think that on bulk products the trade between the U.S. and China is not that significant to play a huge role. So I'm not really worried about it; I'm worried only if this expands to a much big trade war globally. But where we are right now doesn't really frighten us that much. In fact, you know, even if there is a bigger trade war happening, usually these inefficiencies result in the need for more longer distance shipments rather than optimizing the trade. So that can be good for shipping if the global GDPs or not seriously affected. But inefficiencies it's something that helps shipping.

[James Jang:]

Yes, inefficiency is great fish. And -- so there are few more slides to took up in scrapping for the other vessels but there hasn't been that much in terms of the feeder side. Do you think that that's going accelerate this year or do you think it's going to be pretty much with rates being healthy?

[Tasos Aslidis:]

I think it's a symptom of the lack of building the feeder ships over the last five years. There haven't been newbuild feeders being built or enough feeders being built and that is the reason we are seeing the awkward situation of 1,500 TEU ships earning more than Panamaxes in some cases. There is a lack of these ships and people have scrapped during the bad times the worst ships and they are now even upgrading ships that they didn't think that they would trade. So scrapping will be limited.

[Operator:]

Our next question comes from the line of Tony Kamin of Eastwood Partners.

[Tony Kamin:]

You may not be able to answer this and I note that you've said you were going to do another call in a week or so but I have read the F1 and I noted that there was $28 million in debt on the new -- on EuroDry balance sheet in -- I know you just gotten $18 million from -- on the Ekaterini, so I'm wondering whether that implies that $10 million of further debt will be off the containership side -- will essentially move over to the new company?

[Aristides Pittas:]

I think the debt that follows the vessel show basically the debt that you show on the work which has been filed will be increased by the new debt that we have assumed for the vessel that it was just levered. Mine whatever repayments you have been made to -- that will be no debt transfer between the two, we have a preferred shares that we would -- that would be allocated between the two companies.

[Tony Kamin:]

Okay.

[Aristides Pittas:]

We will really provide more clarity and our company will be allowed by our lawyers to provide a much more clarity on Monday on the conference, on how to balance sheet of Euroseas changes and what goes into EuroDry exactly.

[Tony Kamin:]

I appreciate that. I think it's a great idea, just -- it's obviously a little more clarity would be helpful. If the second question is really -- I'm concerned that we're questioning; have you started efforts to secure sort of public sponsorship for the new EuroDry company as a public company in terms of potentially getting research coverage, market maker coverage, ahead of time, so that the stock doesn't come out and just you know immediately be kind of without orphaned without any real sponsorship we're following?

[Aristides Pittas:]

I think you were said, if there are any questions on EuroDry for the time being, especially this type of questions. Sorry, if that's okay, we can revert on us setting call of this in the near-term in due course.

[Operator:]

Thank you. Our last question comes from the line Paul Fract [ph] of Noble Capital. Please ask your question.

[Unidentified Analyst:]

Good morning. And starting the presentation you stated that the Euro dry and net asset value was in the $35 million range. Do you have a similar number for your Euroseas right now?

[Aristides Pittas:]

I think we estimate that our Euroseas surprised trades, give or take around 40% of our next asset value. So you can infer from that what that translates to for the container apart. And then before you talked about consolidation up opportunities; and I just wanted to clarify that those consolidation opportunities that you were talking about were more in the container side at this point in time. Given you were reluctant to talk about the drive but our Euro, that is the case with working about the containers right now and I want to clarify -- you know, we'd be happy to talk as much as we are allowed to talk about the spinoff but we have to follow the rules and that's why we're trying and we have arranged this now coal on Monday to a little bit better about that company?

[Unidentified Analyst:]

Yes, I guess I wanted to follow-up on just the interested that you're seeing from some private owners as far as combining with the Euroseas-X, the dry bone dividend or distribution. And is this the view where they're looking for liquidity, or a public market value or -- and if you could talk about the capital structure that you want to look forward on the container side; that would be helpful.

[Aristides Pittas:]

I think that the people who we are talking to air share our belief that they container markets are off their bottom and are expected to be doing well within the next few years. So therefore, what we are looking for is ideally companies that have a very similar capital structure to ours because that makes also the combination easier to do.

[Unidentified Analyst:]

And then, I know it would ask before but I didn't -- it didn't sound like there was a clear answers. What is the optimal size whether it's on a deadweight turn or TEU or number of vessels on the container side, is it 20, is it 30 -- I mean, what your goal strategically to expand the fleet?

[Aristides Pittas:]

I think it's not easy to say from an operational point of view, a fleet of 10 vessels you can operate it as efficiently as you can operate the fleet of 50 vessels or 70 vessels as far as costs and chart and commercial operations really go. However, if you are least identity, you should be bigger and I think that is the main driver for growing the company into a very significant size, if we can find other people who want to contribute vessels into the entity. So the advantages of the capital markets are really gained as the size increases because then you can have bigger investors investing in the companies as well.

[Unidentified Analyst:]

Yes, bigger scale makes sense and will there also be a focus on trying to improve the average age profile of the container fleet or are you satisfied that you can actually see consolidation in some of the older feeder containers and that be as attractive as trying to improve the average age.

[Aristides Pittas:]

Really, age for us is not the most crucial thing right, because the other ships are much cheaper and sometimes they earn equal amounts of money as younger ships; so they are good for positions at the certain periods in time. But obviously when you deal with elder ships, you have to make sure that you have good quality ships and that have been built to good specifications and now maintained well. Obviously, one has to renew the fleet and the fleet has to be renewed and at some point you need to scrap your older ships and this is something we will also be doing, renewing the fleet going forward but it's something which is not the top priority at this stage -- the top priority is to benefit from the markets that we expect that we're going to have the next few years, and make significant operational profits.

[Unidentified Analyst:]

Great, thanks for your time and I look forward to the call on Monday.

[Operator:]

Thank you. I'd now like to hand the floor back to Mr. Pittas for his closing remarks.

[Aristides Pittas:]

Thank you all for listening to our earnings call today for Q1 which obviously -- we spent a lot of time discussing the spin-off because it's a very transformational move for our Company, and we hope to have you all on our call on Monday to discuss the evolution of the Company in more detail. Thank you very much.

[Operator:]

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