EuroDry Ltd (EDRY) 2019 Q4 法說會逐字稿

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.

(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 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, 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 some expectance not being realized.

I kindly draw your attention to Slide 2 of the webcast presentation, which has the full forward-looking statement 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 would now like to hand the floor over to Mr. Pittas. Thank you. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me, Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the year and quarter ended December 31, 2019.

Please turn to Slide 3. Our income statement highlights are shown here. For the fourth quarter of 2019, we reported total net revenues of $7.6 million, adjusted EBITDA of $3.8 million and net income attributable to common shareholders of $1.03 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 7 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 declared its spot 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 sale 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 with another trip of $6,050 per day. The actual time charter equivalent was $5,150 per day and $4,400, respectively, due to ballasting.

The Xenia was extended for about a year at 101% of the BPI 5 time charter route index with a floor of $11,000 per day.

In the fourth quarter of 2019, we opened up an FFA hedge by selling in October exposure of 90 days equivalent to the open days of 1 Panamax ship at $14,550. We closed this hedge in November with a net profit of about $112,000 (sic) [$115,000], which is equivalent to about $1,200 daily on 1 Panamax ship earnings for the whole of the fourth quarter.

Please turn to Slide 5. As there were no dry dockings or repairs during this quarter.

There, you can see the snapshot of our fleet, which is comprised of the 7 dry bulk vessels of the average age of 11.6 years with cargo carrying capacity of 528,000 dead weight approximately.

Slide 6 shows the employment schedule. As you can see, our effective coverage as of February 1, 2020, stands only at about 18% in 2020. It excludes -- this 18% excludes ships on index charters, which are open to market fluctuations, but have secured employment, except motor vessel, Xenia, which, as I already said, has upside exposure with the floor at $11,000 a day.

Turning to Slide 7 for the market highlights for the fourth quarter of 2019. During the fourth quarter, the dry bulk market experienced a decline in rates, which, in some cases, exceeded 20% drop compared to third quarter rates. This decline in rates was not fully reflected in the net revenues and time charter equivalent rates of the fourth quarter of 2019 due to the fact that certain vessels were employed under 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 2019.

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 and trade.

The positive by-product 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 dry bulk 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 inched down to 3.3% from 3.4% in the previous quarter, but still is 0.4% higher than the actual growth we had in 2019. The IMF's 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 damping 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% from 7%, but Brazilian growth is now expected at 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 forecast for the major countries of the Rest of the World is expected to be slightly higher in 2021 to 2020, except for Japan and China where a slight reduction is expected.

Looking on the dry bulk trade. According to Clarksons, projected growth in 2020 is estimated at 2.5% and 2.3% in '21, respectively, which are more than double the growth, though, of 2019, which was estimated at 1.1%.

Let's turn to Slide 10. The dry bulk order book is close to its lowest point in over 2 decades, with the biggest part of that due to be delivered within this year. As owners are not sure of what to order since nobody knows yet which type of fuel will prevail and, therefore, what type of engine to install on a 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 1.5 to 2 years for the vessel to be delivered once it has been ordered.

If demand issues such as trade wars and the coronavirus are overcome, we foresee a couple of good years of our market, which has been burdened throughout the past decade by the oversupply issues.

Please turn to Page 11 where we summarize our dry bulk 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 multiyear highs of about 40,000 daily in the third quarter.

Panamaxes and Supramaxes were much less affected by the Vale disaster and dropped much less before increasing again also to multiyear highs of $18,000 a day and $15,000 a day, respectively, by September, dropping, though, 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 tonnes annually until mines come back to operation. However, a big part of the capacity has come back earlier than expected, triggering this increase in the rates.

Brazilian iron ore exports, the driver of the Cape market, 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. It's 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 a generally unimpressive 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 order book.

For the main commodities that our ships transport, our longer term view is 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 2 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 an about 10% rise in Chinese coal imports in 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 improve.

Please turn to Slide 12. The left side of the slide shows the evolution of 1-year time charter rates of Panamax dry bulk vessels since 2000. Even though dry bulk vessel rates bounced back from the all-time lows in 2016 to just above the median level by Q3 2019, we are 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, dry bulk 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 see some further pressure on values, if the market stabilizes and we see an improving freight 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 are pursuing initiatives to increase EuroDry's visibility amongst investors. We believe that such increased visibility with investors will help reduce the significant discount to the NAV our stock trades at, thus offering additional upside 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.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will take you over now our financial results 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 over total net revenues 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.

Index during the fourth quarter of 2019 was lower due to 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 2019 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 effect on the earnings attributable to common shareholders for the quarter of the unrealized loss or gain on derivatives, the adjusted earnings per share attributable to common shareholders for the quarter ended December 31, 2019, would have 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 their 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 increased average number of vessels we operated, partly offset by the lower time charter equivalent rate our vessels earned.

The company reported net income for the year of $0.02 million and a net loss attributable to common shareholders of $1.9 million as compared to net income of $1.1 million and 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 to the average higher number of vessels operating.

Depreciation expense for 2019 were $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 (sic) [$3.7 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.

In 2019, 2 of our vessels underwent special survey and 1 vessel underwent intermediate survey for a total cost of $1.7 million as compared to 2 vessels undergoing special survey and again 1 vessel undergoing intermediate survey in 2018 for a 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 on 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 on derivatives, the adjusted loss per share attributable to common shareholders for 2019 would 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'll review our fleet performance for the quarter and full year 2019 and compare them to the same periods of the previous year. Again, let's start with our fourth quarter numbers. Our utilization rate, as usual, is broken down into commercial and operational. And in this period, the fourth quarter 2019, were both 100% compared to 100% commercial and 99.6% operational utilization rate for the respective quarter, the fourth of 2018.

I would like to remind you here because utilization rate calculation does not include vessels in scheduled dry dock, scheduled repairs or lay-up in case any of these events have taken place during the period.

On average, we operated 7 vessels during the quarter and earned a time charter equivalent rate of $12,439 per day compared to $12,513 per day during 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 dry docking cost, averaged $5,955 per vessel per day during the fourth quarter of 2019 as compared to $5,797 per vessel per day for the same quarter of last year.

Total daily vessel operating expenses, including management fees and G&A expenses, increased 2.7% in the fourth -- for the fourth quarter of 2019 compared to the same period of last year and the increase is primarily due to the timing of certain expenses over the quarters. As we will see shortly, the year -- the full year operating expenses were lower compared to the year before.

As always, we want to emphasize that cost control remains a key component of our strategy. It is a big competitive advantage that we have in 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.

Looking now on the right side of the slide is our 12-month figures. Again here, we had 100% commercial utilization rate in 2019 and 99.4% operational utilization rate compared to 100% commercial and 99.6% operational utilization rates for the corresponding 12-month utilization in 2018.

In 2019, we operated, during the full year, 7 vessels compared to an average of 5.5 (sic) [5.7] during 2018. Our vessels in 2019 earned an average 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 and administration expenses, but again excluding dry docking cost, averaged $5,869 per vessel per day in 2019 compared to $6,313 per vessel per day in 2018, a reduction of about 10% -- only less than 10%.

The cash flow breakeven rates leverage for the year is about $10,828 compared to $11,820 for 2018, $1,000 reduction for both the quarter and the year.

Let's now turn to Slide 16, and we'll review in 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 repayments on the left part of the slide with a graph.

As of December 31, 2019, EuroDry had an outstanding bank debt of $56.9 million with an average margin of about 3%. Making an assumption of the LIBOR rate being 2%, our cost of senior debt would be around 5%. If we include the dividend cost of our preferred equity of 9.25%, the average blended cost of our non-equity financing would have been about 5.9% as of December 31, 2019.

I would like to remind you again here that in June 2019, we prepaid approximately $4.3 million of our Series B preferred shares in exchange of a quarterly -- reduction in our dividend rate from 12% down to 9.25% until January 2021 when it 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 have a balloon payment of $6.6 million due, which corresponds to 3 vessels, followed by 1 balloon payment of $2.2 million (sic) [$2.1 million] for 1 vessel in 2022. This balloon payments are less than the scrap price of the respective vessels, and we anticipate that we'll have no issues with financing them when due. We have additional payments in 2023 and 2025, which are sufficient in the future to go ahead and buy them now.

Our loan repayments on a vessel per day basis contribute about $2,700 to our daily cash flow breakeven level. You can see that figure at the bottom line of the table to the right part of the slide.

If we make assumptions for the remaining items that make up our cash flow breakeven rate, like operating expenses, general and administrative expenses, dry docking, interest, et cetera, we come up with an overall cash flow breakeven level for the next 12 months of approximately $10,950 per vessel per day.

Let's 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 show the main groupings of our assets and our liabilities.

On the asset side, we have, of course, the value of our vessels, shown here is their book value of about $105.5 million and cash and other assets of about $12.2 million. The total assets amounting to about $117.7 million.

On the liability side, we have bank debt, as I mentioned in the previous slide, of $56.9 million, which approximately represents 48% of the book value of our assets. Also, we have preferred equity of $15.4 million, which approximately accounts for another 13% of our book assets, while we have other liabilities standing at $4.7 million, which amounts approximately 4% of our total assets.

Those leave our net book value at around $41 million or close to $0.177 per share. As of the end of last year, the market value of 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's worth observing here that a change of $1 million in the value of each of our vessels, that is a $7 million change in the value of our fleet, would result in a $3 per share 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 to asset values being 5%, 10% lower than year end figures. Such a decline in values would translate to an NAV per share very likely being in the range of $13 to $15 for our stock.

The recent price trading range of our shares of just below -- just around $6 per share represents 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.

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

(Operator Instructions) We will now take our first question.

I'm 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 2 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 2 ships, please?

Yes, these 2 ships, which are short-term charters, will probably continue trading on short term. We are negotiating right now, fixing 1 of the vessels for another 20, 25 days at charter rates in the -- of the magnitude of between $2,500 and $3,000. And this is the current market in the Pacific at this point. We could get something slightly higher if we opted to do a much longer voyage, but we want -- with these rates, we'd rather do smaller voyages, less than a month, waiting to see some kind of recovery in the market.

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

We just note also that Clarksons is generally suggesting relatively low demand growth rate going forward, 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 dry bulk 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.

We will now take our next question.

This is Poe Fratt from NOBLE Capital Markets. The -- can you just highlight a little bit, maybe just what cost push you're seeing? It looks like your budget for the next 12 months on OpEx is just slightly higher than it was in 2019. If you could just comment on that, that would be helpful.

In terms of the OpEx costs, I think we're expecting to see around $5,100 per vessel per day for the OpEx. And that compares -- it's on 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 in the ballpark of our expected increase as the vessels, especially some of our vessels that are in their teens require a little more. I think it's the same level that we saw in the fourth quarter of 2018. I don't think that we have a big -- significantly bigger projection for our budget, but it's very similar to 2019 levels.

And I think it's fair to -- 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 are taking measures to see if we can do that. But we'd rather keep to the original budget as it is right now and do better rather than worse.

Yes. Understood. Better to have a positive surprise than a negative one, right?

Yes.

And I apologize I got on to this 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 or maybe next year as far as making the investment in scrubbers? Has anything changed?

Well, what has happened is that we saw a very big spread initially between high sulphur fuel oil and low sulphur fuel oil in excess of $300, $350 in the first days. But this has been narrowing and now is below $200 and seems as if it's going to go even lower. We think it's -- the spread is going to become even lower. So yes, of course, our cost of fuel increased. It didn't increase very much because we had generally a lowering in the cost of oil. So it didn't increase tremendously to what it was for the bigger part of 2019, but it is slightly increased by maybe $100 or so. But for sure, the guys that have scrubbers have taken advantage of the difference in the cost, at least the ones that do spot business because the ones that do time charter business share that improvement with the charterers. 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 a scrubber. But for 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 a final decision. Nothing -- no scrubber is at this point 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 dry dockings, we see that the yards are full and they are working at very slow rates. And the 2 ships that we had earmarked for dry dock within Q1, we have obtained extension for their dry docking, and we may need to obtain a further extension from class as there are delays there.

So I think these are the 2 things that we've seen regarding this transition into the new oil. Of course, there's been delays as well in times that you stay waiting for oil, for bunkers and how long earlier you have to request them, but that is mainly a charterer's approach and as we -- a charterer's problem and as we are time charters, it doesn't really influence us.

Great. And then can you comment on what you're seeing out there as far as just maybe any potential acquisitions, any assets that -- 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?

Yes, this is something that we have been monitoring. We've always said that we have 2 ways of growth. One is organically ourselves, 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 are always looking and discussing opportunities, but nothing that is yet to be discussed and revealed. But also, we have been looking at maybe buying 1 more vessel.

If we see prices drop because of what is happening, we might proceed with 1 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 expect that the current market is temporary and things will improve.

So bid and ask prices for ships are quite far apart at this point in time, and that's why we see very, very little activity on the sale and purchase market.

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

Yes. Well, this is our objective. Our target is to find ways to either partially or fully retire it. If we follow the previous -- the model that we applied in 2018, even a partial repayment would 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 raising several million dollars to reduce it meaningfully. So that is the fallback position, and we are a little more active into finding alternative means of financing it.

I think on 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?

That is roughly the case. Obviously, with the dropping of the vessel values, the slightly dropping, that probably was chipped up a bit. But I would expect to have between $4 million or $5 million of relevering capacity. It depends on how you relever. If you relever, your conventional bank debt is probably what I just said. But if you look at the sale leaseback opportunities of relevering the fleet, you might be able to fully repay the preferred.

(Operator Instructions) There are no further questions at this stage. Please continue.

Thank you all for participating in our call today. We will be with you in 3 months' time to discuss the results of Q1. Thank you.

Thanks, everybody.

Thank you very much. That does conclude the conference for today. Thank you for participating, you may all disconnect.