EuroDry Ltd (EDRY) 2020 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry conference call on the second-quarter 2020 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 that this conference is being recorded today. 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 such expectations 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. And I would now like to pass the floor over to Mr. Pittas. Thank you, sir. Please go ahead.

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 second-quarter and six-month period ended June 30, 2020.

Please turn to slide 3. Our income statement highlights are shown here. The second quarter of 2020, we reported total net revenues of $4 million, a net loss of $3.8 million, adjusted EBITDA of minus $1.3 million and adjusted net income attributable to the common shareholders of minus $3.9 million. Adjusted basic and diluted earnings per share attributable to common shareholders for the second quarter of 2020 were minus $1.73 per share.

These were the worst results we have posted since spinning off our dry fleet from Euroseas in mid-2018. This was due to the terrible charter market coupled with the fact that two of our vessels had to complete a special survey during this quarter. The improving market coupled with the fact that no more drydockings are due during the year should lead to a reversal of fortunes in Q3. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in the presentation.

Please turn to slide 4 for our chartering, operations, and sale and purchase highlights. Motor vessel Pantelis was fixed for a trip of about 55 to 65 days at around $7,000 per day during Q2. Thereafter, a few days ago, it was fixed for a trip of about 45 to 100 days at $10,850 per day or $11,500 per day, depending on the loading area.

Similarly, motor vessel Tasos was fixed for a trip for about 80 to 100 days at $6,875 per day, which net of the ballasting leg translates to $5,785 per day at the beginning of Q2. Thereafter, it was fixed in early July for a period of 90 to 100 days at $9,000 a day.

During the second quarter, we sold 180 days in third- and fourth-quarter FFA contacts at an average of $10,000 per day, practically fixing one of our 2004 built vessels which are on index-based charters at $10,000 a day.

In early July, we fixed another 180 days at $12,000 a day, thus practically fixing our seconds mid-2000 built vessel, which is also an index-based charter at that level. Therefore, we have on average fully covered these two vessels at $11,000 per day for Q3 and Q4.

Regarding the dry dockings and the repairs of the second quarter, two our motor vessels, M/V Pantelis and M/V Tasos, the two eldest vessels in our fleet, completed their fourth special survey in drydock. Motor vessel Pantelis also installed a water ballast water treatment plant as well. The total cost of these drydocks booked in Q2 was about $1.5 million excluding the cost of the water ballast. No more drydockings are scheduled for 2020.

Looking on to our financial highlights, first, we agreed to defer Q3 and Q4 installments of our three Panamaxes facility and include them to the respective balloon payments.

Second, we agreed with our preferred shareholders to introduce the option from April 1, 2020, to January 29, 2021, for the company to pay the preferred dividend in-kind by issuing new preferred shares. If paid in-kind, the dividend cost would increase by 1% and that is what our Board elected to do for Q2.

Please turn to slide 5 to see a current snapshot of our EuroDry's fleet. It's comprised of seven drybulk vessels with a fleet average age of 11.8 years and a cargo carrying capacity of 530,000 deadweight approximately.

Slide 6 shows the vessel employment schedule. As you can see, effective coverage as of August 5, 2020, for the remainder of 2020 stands at about 70% in terms of minimum fixed rate contracts, including the vessels covered by FFAs. This figure excludes ships on index charters, which are open to market fluctuations even though they may have secured employment.

Turn to slide 7, where we will go over the market highlights for the second quarter of 2020. During the second quarter of 2020, the drybulk market experienced the effects of the COVID-19 pandemic and lockdown of the main economies resulting in decreased cargo volumes transported and significant declines in charter rates.

During the second half of June, the market has started recovering in line with the reopening of the major economies with the rates returning to the level seen in the beginning of the year. Therefore, we expect this reversal of fortunes in Q3 as I mentioned.

Spot rates for Panamaxes currently stand at around $9,500 per day. The one-year time charter rate is higher to approximately $11,500 per day, indicating that the market participants expect a further recovery within the next few months.

Please turn to slide 9. As a result of the pandemic, the economic and trade world environment has dramatically and negatively changed in 2020. In [safer] predictions the IMF projected world GDP growth in 2020 to contract sharply at 3% per annum. But in an extraordinary revision in June, it revised this prospect lower to a negative 4.9%.

Among the developed economies, China's performance is now projected to improve by 1% from negative 1.2% estimated in April by the IMF. All the remaining important economies are now expected to contract; the US by 8%, the Eurozone by 10.2%, et cetera, as you can see in this slide.

For 2021 and according to IMF estimates, the global economy is poised to experience a significant recovery of 5.4%. In this premise, the growth forecast in the US is 4.5%, while in the Euro area, it is expected to be around 6%. Similarly, all other economies are projected to show strong recoveries.

To a big extent drybulk trade growth follows the pattern of GDP growth. According to Clarksons, projected growth in 2020 is now estimated at negative 4.1% while the 2021 forecast suggests the growth of the drybulk freight of 5.5%.

Please turn to slide 10. For 2020 deliveries, the order book, which is dominated by large vessels, currently stands at 6.3%. Clarksons estimates the scrapping and slippage will eventually result in a fleet growth of around 3%.

For 2021, the order book is estimated at 3.4%, with softer scrapings and slippage and will result in fleet growth of about 1%. The order book for 2022 is currently only 0.9% which would imply that our scrapping and slippage, we could see a shrinking fleet that year if just a few new orders are placed with 2022 deliveries.

Please turn to page 11, the order book as a percentage of total fleet up until July 2020, stands at 7.5%, which equals the lowest level seen in the last 20-plus years. The root cause for the poor performance of drybulk shipping during the last decade has been the high number of deliveries, which easily outpaced the growth of the freight.

After the [shouldering] level of contracting activity in 2008, which peaked at about 80% of the existing fleet, 80, the number of new orders has fallen to very low levels. With a relatively small order book and realistic demand expectations for the coming years, a fundamentally supported rebound in the drybulk market should be expected in the near future. Also, bearing in mind it takes about 1 1/2 to 2 years for a vessel to be delivered once it is contracted.

Please turn to page 12, where we summarize our drybulk outlook. The unknown duration of the pandemic and its financial consequences render any predictions quite unreliable.

In addition to the freight development uncertainties, we are facing significant operational risks and difficulties. Port lockdowns have affected our ability to change crew onboard our vessels. We have taken relevant measures to ensure our crew members' and shore employees' health and safety, despite the ongoing hurdles and travel restrictions imposed by lockdowns around the world.

Initial estimates from Clarksons to quantify the effects of the coronavirus pandemic on drybulk trade indicated a drop in demand in 2020 followed by a sharp recovery in 2021 similar to the way economies reacted during the 2009 financial crisis. Most recent estimates from Clarksons indicate further deterioration in demand for 2020, as I already said, of 4.1% against a 3% fleet growth. This imbalance is not supported by the recently increasing market rates.

If current rates remain unchanged, it would be an indication that demand is running higher than expected and we could be positively surprised in the remaining part of the year.

New ship orders are expected to be contained in the midst of the above demand uncertainty, and also the lack of clarity of the fuel of the future. Not knowing the optimal ships for even five years out makes the placing of any new order that might require 20-plus years to pay off very speculative and risky.

In this environment, 2021 seems to be shaping up as a promising year amidst a low orderbook, a V shaped demand rebound and expectations of easing of the trade tensions between China and the US.

Please turn to slide 13. The left side of the slide shows the evolution of one year time charter rates of Panamax drybulk vessels since 2000. After the drybulk vessel rates bounced back from the unsustainable all-time lows of 2016, COVID-19 seems to be prompting us to revisit them. However, since June rates have been increasing and, as of now, we are closing in on the historical median rate of about $13,000 per day, a rate that if achieved would certainly imply significant profits for EuroDry.

As you can see on the right-hand side of the slide, the current price of a 10-year-old Panamax vessel is around $13 million. In the last two, three years, drybulk prices had been gradually increasing towards historical average prices, above the all-time low values that were established at the beginning of 2016 but had still not reached those levels.

After the outbreak of COVID-19, mid-age vessels values corrected by about 10% to 15%. With a stabilizing and even improving freight rate environment, we would expect asset values to start increasing as well.

In view of the above, we try to position ourselves to benefit from the developments. And we continuously evaluate opportunities for investments in vessels or pursue combinations without the fleet, especially focusing on using of status as a public company, which can perhaps provide a consolidation platform.

Let me now 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 now take you through our financial result highlights for the 3- and 6-month periods ended June 30, 2020.

For that, let's turn to page 15. The second quarter of 2020, we reported total net revenues of $4 million, representing a 35.6% decrease over total net revenues of $6.2 million which we achieved during the second quarter of 2019. And as Aristides mentioned, that was the result of the lower time-charter rates that our vessels earned affected by the pandemic during the first half of the year.

The company reported net loss for the period of $3.8 million; net loss attributable to common shareholders of $4.2 million as compared to net loss attributable to common shareholders of $1.8 million and $2.6 million, respectively, for the same period of 2019.

Interest and other financing costs for the second quarter for 2020 amounted to $0.6 million compared $0.9 million for the same period of last year. Interest expenses during the second quarter of 2020 were lower due to the lower average outstanding debt and the decreased LIBOR rates our loans get paid during the period as compared against again to the last year.

Depreciation expenses for the second quarter of 2020 amounted to about $1.6 million and remain essentially unchanged compared to the same period of last year. The results for the second quarter of 2020 include a $0.2 million unrealized loss on three interest rate swap contracts, a $0.1 million unrealized loss on a forward freight agreement contract as compared to $0.2 million of unrealized loss on interest rate swaps, and a $0.9 million of unrealized loss on FFA contracts during the second quarter of 2019.

Adjusted EBITDA for the second quarter of 2020 was negative $1.3 million compared to positive $1.8 million achieved during the same period the second quarter of 2019.

Basic and diluted loss per share attributable to common shareholders for the second quarter of 2020 was $1.86 calculated on about (technical difficulty) [2.3] million basic and diluted weighted average number of shares outstanding compared to basic and diluted loss per share of $1.14 for the second quarter of 2019 calculated on approximately 2.2 million shares basic and diluted outstanding.

Excluding the effect on the loss attributable to common shareholders for the quarter, with the unrealized loss in derivatives, the adjusted loss attributable to common shareholders for the quarter ended June 30, 2020, would have been $1.73 basic and diluted compared to an adjusted loss of $0.65 basic and diluted for the same period of last year. Usually, security analysts do not include the above items in their published estimates of earnings per share.

For the first half of 2020, the company reported total net revenues of $9.1 million, representing a 24.1% decrease over total net revenues of $12 million during the first half 2019, which as I mentioned earlier, was the result of the lower time charter rates our vessels earned during the first half of this year.

The company reported net loss for the period of $6.1 million and net loss attributable to common shareholders of $6.9 million as compared to net loss of $0.9 million and net loss attributable to common shareholders of $2.2 million for the first half of 2019.

Interest and other financing costs for the first half of 2020 amounted to $1.2 million compared to $1.9 million for the same period last year. This decrease is due to the lower average outstanding debt and the decreased LIBOR rates of our loans in this period as compared to the same one last year.

Depreciation expenses for the first half of 2020 were approximately $3.3 million compared to $3.2 million during the same period of 2019, a small increase mainly due to the increase in the cost base of certain vessels due to the recent installation of ballast water management systems.

Adjusted EBITDA for the first half of 2020 was negative $1 million compared to a positive $4.3 million achieved during the first half of 2019. Basic and diluted loss per share attributable to common shareholders for the first half of 2020 was $3.03 calculated on approximately 2.3 million basic and diluted weighted average number of shares outstanding compared to a similar loss of $0.96 for the first half of 2019.

Excluding the effect from the loss attributable to common shareholders for the first half of 2020 [of] the unrealized loss on derivatives, the adjusted loss to common shareholders for the six-months period ended June 30, 2020, would have been $2.76 compared to $0.87 for the same period of last year.

Please now turn to slide 16 to review our fleet performance. We'll start our review by looking first at our fleet utilization rates. As usual, our fleet utilization rate is broken down into commercial and operational. During the second quarter of this year, our commercial utilization rate was 100%, while our operational utilization rate was 99.9% compared to 99.9% commercial and 98.3% operational for the second quarter of last year.

I would like to remind you here that our utilization rate calculation does not include vessels in scheduled drydocks or scheduled repairs if such events took place during the period.

On average, seven vessels were owned and operated during the second quarter of 2020, earning an average time charter equivalent rate of $7,297 per vessel per day compared to $10,724 per vessel per day earned during the second quarter of 2019 during which we also operated seven vessels.

Our total daily vessel operating expenses, including management fees, general, and administration expenses, but excluding drydocking costs, averaged $6,131 per vessel per day during the second quarter of this year compared to $5,948 per vessel per day during the second quarter of 2019.

If we move further down in this table at the bottom of it, we can see the cash flow breakeven rate that we had during the second quarter, a number which takes into account drydocking expenses, cash interest expense, loan repayments and preferred dividend payments paid in cash. For the second quarter of 2020 then, our daily cash flow breakeven rate was about $11,836 per vessel per day compared to $12,569 per vessel per day for the second quarter of 2019.

Let's now look at the same figures for our first half. During the first half of 2020, our commercial utilization [rate was 100%] and the operational utilization rate was also 100% compared to 99.9% commercial and 99% operational for the same period the first half of last year.

Again we had an average seven vessels owned and operated and an average time charter equivalent rate of $7,390 per vessel per day compared to $10,078 per vessel per day during the same period of last year, again, during which we operated seven vessels.

Our total daily operating expenses including management fees, G&As, but excluding drydocking cost for the six-month period amounted $6,093 per vessel per day compared to $5,898 per vessel per day during the first half of 2019.

At the bottom of the table again on the right side here, our cash flow breakeven rate was $11,489 per vessel per day in the first half of 2020 compared to $12,110 per vessel per day for the same period of the first half of last year.

Let me move now to slide 17 and review with you our debt profile. In this slide, on the left part, you can see our loan repayments as well as our balloon repayments. And on the right part of the slide, we can see the projection of our cash flow breakeven level for the following 12 months.

As of June 30, 2020, EuroDry had an outstanding bank debt of about $53.4 million. The entire year of 2020, we have made total loan repayments of about $5 million after the deferment of certain installments to the respective loan balloons as Aristides mentioned earlier.

In 2021, as you can see from the chart, we had a balloon payment of $8 million due, which is supported by our three Panamax vessels, followed by a balloon payment of $2.1 million in 2022 supported by our remaining Panamax vessels. These balloon payments are below the scrap price of the respective four vessels, even today's relatively low scrap prices. And we anticipate that we'd have no issues financing them when due. Here as we can see additional (technical difficulty) 2023 and 2025.

A quick note from me on the cost of our funds. We have an average margin in our debt of about 3% and, assuming a LIBOR rate of 0.5% on the top of it, our cost of senior debt would be around 3.5%. If we included the cost of the dividend of our preferred equity, which is 10.25% since we paid it in [time] until January 2021, the average blended cost of our non-equity financing would have been around 5% as of the end of the second quarter.

Our loan repayments for the next 12 months, expressed on a per vessel per day basis, contributed about $2,100 for daily cash flow breakeven level, as you can see at the bottom of the table in the right part of the slide.

If we make assumptions for the remaining items that make up our cash flow breakeven rate, like our operating expenses, our general and administrative expenses, drydocking interest, et cetera, we come up with an overall cash flow breakeven level per vessel per day for the next 12 months of approximately $9,580.

If you move to slide 18, where we can see some highlights from our balance sheet. This is indeed a simplified version of it, where we can see the main [grouping] of our assets and liabilities.

On the asset side first, we have cash and other current assets of about $6.8 million. And of course, our vessels, which as of June 30, 2020, have a book value of about $102.5 million, bringing our total book assets to about $109 million.

On the liability side, we have bank debt of about $53.4 million, which approximately represents 49% of the book value of our assets. Also, we had a preferred equity outstanding of about $15.8 million, which accounts for another 14% of our book assets and other liabilities of about $5.3 million accounting for about 5% for us. These figures leave our net book value at around $35 million or approximately $15 per share.

If we now take into consideration the market value for our vessels instead of the book, it's about 10% lower. Our net asset value per share would be in the range of $10 to $11. Plus, the recent trading range of our shares of around $5 represents a significant discount to the intrinsic value of the company.

And with that, I will pass the floor back to our Chairman and CEO, Aristides, to continue the call.

Thank you, Tasos. I would like now -- want to open the floor for any discussion that we may have, any questions.

(Operator Instructions) Tate Sullivan, Maxim Group.

Can you talk about today and you noted in your press release that your ability to extend the maturity for the debt due in 2020. Has your conversation with your lenders changed in the last six months or can you just give some context to those conversations, please?

Yes, as we said, we did extend the maturities of the installments that were due in Q3 and Q4 with one bank that had financed three vessels and that was extended till the end of 2021 along with the balloon. So, this is one refinancing that we did.

And the other important thing that we did was that we agreed with our preferred holders to be able to pay them in-kind rather in cash, the coupons that are due within this year and up till January 2021. So, these are the two developments that we can report today that has actually happened.

Okay. Thank you. And it sounds like your lenders are flexible with that, and (inaudible) you already did that, extended the maturities. Thank you. Well, I'm going back to the operating environment 2Q and I know it's improved meaningfully since then. Is there any ability to cut any of your operating costs in this kind of environment if the volatility continues?

Well, first of all, I think that the costs might have slightly increased because of the pandemic and the operational issues that we have been facing in regards to calling at ports and changing crew and sending spares and all that stuff. But it's very slight. We have been able to keep that under control and expect to continue to do so whilst definitely safeguarding our crew.

But the market has indeed improved quite substantially. And Q3, as I said, is expected to be a much better quarter than Q2. Charter rates have increased very significantly. And we've been able to fix up seats either through FFAs or directly at the rates that are even profitable.

Following up on that -- thank you -- like you mentioned rates closing in at about $13,000 a day. Can you get any comments -- I may have missed -- on the quarter-to-date average rig rates so far? Can you give any [comment]?

I want to say that the quarter-to-date average rates are around $11,000 overall. So, it's significantly higher than the previous quarter which was, I think, around $7,000.

Great. Thank you. And I think -- and you did mention some water ballast equipment work from 2Q '20. Is some of that extending into 3Q '20? Are there any expected drydock expenses in 3Q?

No, we don't expect any drydockings or any water ballast expenses in Q3 nor Q4.

Well, great. Thank you. That's all the follow-ups I had. Thank you.

Thanks, Tate. Thank you.

Poe Fratt, NOBLE Capital Markets.

Yes, good morning.

Hi, Poe.

Hi, good morning. I was hoping to get some color on what assets under are not currently encumbered or what your potential borrowing power would be on any of the unsecured assets right now?

And also looking in the context of your strategy of trying to either retire or restructure the preferred with a step up in the dividend [late] next year. I know it's not cash, but still, it picks at a pretty high rate. And I was just wondering if we're looking at that or we're more focused on refinancing the debt that's coming up next year?

Yes, we are discussing about refinancing existing debt at this stage, but we have nothing to report yet. But we are confident that things will move along quite nicely. And we are equally confident that we will be able to find an agreement with our current preferred equity holders, who have been supporting the company up to now to somehow minimize the effects of this increase in the coupons that we are to see in 2021. Nothing to report yet. But discussing all these possibilities, obviously.

Great and any comment on just your borrowing capacity right now on any assets that are unencumbered or unsecured?

All the assets are currently encumbered. But the amount of leverage on them is not huge. And we might be able to somehow increase that if needed.

Selected vessels are almost at 40%. At least one vessel which is one of our new vessels is at 40% loan value now. So, that vessel, Poe, it has room to increase debt and refinance.

Yeah, I think in previous calls, you might have highlighted that you have close to $10 million in under-levered assets or borrowing capacity. Is that still accurate? Or can you just comment on what your -- if you were to lever up to 55%, what availability you might have there as far as borrowing capacity?

I think we might be able to increase our borrowings by $5 million to $6 million, Poe, by increasing the leverage on existing vessels or restructuring the loan that is to expire in 2021. We don't need any of that looking forward for the upcoming six months, because charter rates have improved. And we've secured, as I said previously to Tate, and have secured charters covering 70% of our open days for the remainder of the year.

So, we don't need something imminently, and we will not be needing it. But obviously, towards the end of the year, we will have further strengthened the balance sheet.

We have managed, as you can see on slide 17, to reduce our cash flow breakeven from almost $11,000 down to $9,600, which was the result of the actions that Aristides mentioned. And the fact is we don't have drybulkings coming in the next 12 months. So, cash flow-wise at the current rate, we are cash flow positive. We expect to be cash flow positive.

Yes, and understood that 900 of that improvement is the picking of the preferred, right? The one thing, Tasos, if you could talk about, since you mentioned the breakeven costs. In the second quarter 2020, you had $916 per day of interest expense. And your forward-looking number on the next page incorporates or indicates that you're looking for $730 a day of interest expense. Is there a non-cash component that lowers that or are -- what are your assumptions on that looking forward interest rate calculation?

The historical number includes a period with significantly higher LIBOR at the beginning of this year. I think the forward-looking LIBOR is very low. And that is one of the reasons for the reduced interest expenses. And of course, some debt has been repaid. So, there's a smaller balance. We think there is supply.

Okay. And it looks like you've done a good job on keeping costs fairly low and looks like they're going to be stable over the next 12 months according to that slide too, right.

Looks right. Yeah.

Great. And then earlier this week, there was some unusual trading activity in your stock pricing. I'm not sure you can, but any color on what you think was happening that day.

There is absolutely no color on what was (inaudible). This is the same thing I explained to whoever asked, Nasdaq included. But there was no event or there is nothing from the company that could have created the type of outburst in activity.

Great. I thought so. I just had to ask. Thank you.

You are welcome. Thank you very much. Do we have another question?

There are no further questions at this time. Please continue.

Well, thank you very much for being with us for the results of Q2. And we'll be with you again in three months' time to discuss hopefully much better results than what we had this quarter. Thank you very much.

Thanks, everybody.

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