Euroseas Ltd (ESEA) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Euroseas conference call on the first quarter 2009 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, and there will be a presentation followed by a question and answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Friday, May 22, 2009.

We now pass the floor to Mr. Paul Lamputas, Vice President of Capital Link, Investor Relations Advisor to Euroseas. Please go ahead, sir.

Thank you very much, and good morning to everyone. This is Paul Lamputas of Capital Link, and we welcome you to the Euroseas first quarter 2009 financial results. Please be reminded the Company announced their results yesterday, May 21, 2009, after the market closed in New York, with a press release that has been publicly distributed. If you have not received this release you may log on to the Euroseas website at Www.Euroseas.gr, and navigate the Investor Relations page, or you can call Capital Link at 212-661-7566, or the Chief Financial Officer of Euroseas, Mr. Tasos Aslidis, and we will be happy to send it to you.

For those of you who want to follow the audio webcast, please log on to your computer to the homepage of Euroseas website, once again Euroseas.gr, where participants of the webcast can download the PDF. Please be kind to note that the slides are user controlled. You must click on the appropriate button on your own, to move to the next slide or to the previous one.

Before passing the floor to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, we 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 is also included in the press release that has been publicly distributed yesterday. I kindly suggest that you take a minute to go through the whole statement and read it.

Without taking any more of your time, I would like to pass the floor to Mr. Aristides Pittas, Chairman and Chief Executive Officer of Euroseas. Please go ahead, Mr. Pittas.

Good morning and thank you for joining Euroseas for our conference call. I am Aristides Pittas, Chairman and CEO of the Company. Together with me today is Tasos Aslidis, our CFO. The purpose of today's call is to discuss the first quarter and year-ended March 31, 2009 financial results for Euroseas.

Let us turn to Slide 3, and look at our 2009 First Quarter overview. We will begin with our First Quarter 2009 results which reflects significantly lower revenues compared to the same period in 2008, due to the collapse in the markets. For the first quarter of 2009 we reported total net revenues of $15.3 million, representing a 53% decrease over total net revenues of $33 million approximately during the first quarter of 2008. Our net income was 3.9 million, or $0.13 per share. Excluding the effect of unrealized gain on derivatives, and realized loss on trading securities, amortization of fair value of charters acquired and loss on vessel sales, the net income for the period would have been $2 million or $0.07 per share.

Our conservative strategy and disciplined execution over the last two years, when we avoided investing in dry bulk vessels at historically high prices, focusing instead on investing in [modern] ships, which we employ mostly on the spot market, thus minimizing the residual value and faded risk exposure, and put us in a solid financial position. We have more cash than debt outstanding, and our debt to market value of our fleet is less than 40%.

Although most companies view the common global and shipping market environments as a challenge to their survival, Euroseas sees it as an opportunity for growth. We have no issues whatsoever with it's bankers and only minimal discussions with it's charters, which in Q4 of 2008 lead to extensions of three charters. Management has time to dwell on how it can leverage it's strong balance sheet, to acquire further assets and prices dramatically lower than the recent past. Prices all represent an abundance of potentially very profitable businesses, as well how assets are involved, buying low is the main key to success.

Let's move to Slide 4. Despite the crisis and the consequent growth opportunities, we still believe that involving ourselves this quarter we will leave this quarter with a meaningful dividend, during any stage of the cycle is important for them, to remain satisfied as long term holders of our stock, as my family is. Indeed, we are one of very few companies still paying a dividend.

In this context on May 13th we declared our first quarter 2009 dividend of $0.10 per share, same as last quarter. This dividend is payable on June 17th to shareholders of record on June 5. This is the 15th consecutive quarterly dividend declared since our access to the capital markets in August 2005. It represents a yield of about 7.1% on the basis of our stock price on May 7, 2009.

Let's move to Slide 5 to review recent developments. As announced already, we have partly renewed our dry bulk fleet by purchasing two dry bulk vessels of approximately 11 to 12 years old, the 1997 built Eleni P, and the 1998 built Monica P for about $18 million each, and selling two of our 25-year-old dry bulk vessels, the Nikolaos P and Ioanna P for about 6 million combined. The incremental capital expenditure was about 32 million, out of which 20 million was financed with bank debt.

Had this migration of our fleet taken place a few months ago, it would have required close to 100 million. The Aristides NP and Eleni P have been chartered to December 2009 and May 2010 respectively, at accretive rates, and provides us with substantial additional secured cash flow for the next 12 months. Our other three bulkers continue to operate spot, the Irini does that through the Baumarine spot pool, and the Monica P through the Bulkhandling spot pool, both managed by Klaveness, a major global charter in the dry bulk area, however, the market exposure has been hedged for all three vessels significantly to clear [their phase].

Our container ships are still facing significant challenges in securing accretive employment contracts after the expiration of the present charters, and has proven economical to temporarily lay up an additional two vessels, rather than employ them at unprofitable low levels. Our current fleet is shown on the next slide, Slide 6. As you all know, it consists of five dry bulk vessels, and 10 container ships, and the multi-purpose ship.

Slide 7 reiterates our strategy and priorities, which have remained broadly unchanged throughout the shipping cycle. We will continue using our model to identify rewarding projects within the whole dry space. Our amortization and fleet expansion program is set to advance, taking advantage of our strong cash position, and our debt and equity raising capabilities. The depressed market presents excellent opportunities to buy younger ships, as asset values have fallen, and thus capital appreciation becomes more likely, than the capital destruction we were fearing during the good old days.

Although we have seen an improvement in freight rates, we don't believe this will last long enough to result in another significant spike in asset values very shortly. Besides, the credit markets are still suffering, making it hard for many owners to acquire new buildings, or secondhand vessels. Cost control remains of paramount importance, and becomes even more crucial at times like this.

Despite an increase in our costs due to various exogenous factors, and the rapid doubling of the fleet under Eurobulk's management in 2007 and the first half of 2008, we have since then seen a nicely decreasing trend. We still remain one of the lowest cost operators among the public dry cargo companies. As already discussed, our leverage has been kept at extremely low levels, and has been paid down rapidly during the good times. We have low loan repayments due in the next few years, and consequently a low cash flow breakeven level of around $9,500 per day.

We maintain a good working relationship with all our banks, and have been able to finance our recent acquisitions through two loans from two different banks, at very satisfactory terms. We continue to target debt levels of around 50% for our new acquisitions. Maintenance of a balance between period and spot employment has always been our focus.

As you can see on Slide 9, we have currently covered about 95% of our dry bulk available days for 2009, and 82% for 2010 through timed charters and FFAs, at rates on average above our cash flow breakeven. Barring any unforeseen technical or operational issue, the correlation between FFAs and what we actually achieve in the physical markets will hold.

The FFAs will provide good support for our bulkers. Better we feel than time charters, and it eliminates charters performance and default risk, whilst also providing flexibility in trading the vessels, and also the ability reverse positions easily in a changing market. The only drawbacks of such an instrument are the increased margins that may be required in a rising market, which will affect short-term liquidity, which however is not a problem for us, and the volatility it creates to the quarterly earnings, as the FFAs are valued at a mark-to-market basis accounting-wise.

Turning to Slide 9, you can see that 65% of our container available days for 2009, and about 30% of our container available days for 2010 are covered via time charters. We will continue to seek to obtain some period of coverage for vessels coming open, but this may not be possible currently at the rates above operating costs, and as I previously mentioned, it may prove more economical to lay up some of them. As mentioned we have already laid up the Jonathan P, DESPINA P, and Artemis. Laid up vessels will be closely monitored by our manager, so as to be in a position to return to service quickly when markets pick up.

Let us now move to Slide 11. For just a very brief overview of the market, as I am sure most of you do your own detailed analysis. As you can see on Slide 11, global GDP growth for 2009 has been revised downwards by the IMF, from about 0.5% expected just three months ago to minus 1.3%, significant continued economic weakness and prolonged recessions in many developed economies, including the US, Eurozone, and Japan. Some continue to challenge this growth rate is too optimistic whilst others are viewing the current recovery in the stock markets and sentiment as a whole, we believe we have already passed the trough.

Most economies in the IMF are still suggesting that we should expect growth to pick up gradually in 2010, and more strongly in 2011. Dry bulk and containerized trades closely follow GDP developments, and therefore should follow a similar trend. The growth rate in dry bulk trade and number of TUs carried has been declining in 2008, but was still positive overall. For 2009, Clarksons predicts a further drop for growth rates to negative 4% in dry bulk trade on a tons basis, and negative 3% growth in containerized trade. One would reasonably expect that as GDP rises from 2010 onwards, and eventually reaches 2006-2007 levels, trade growth should also return to those levels as well.

Please turn to Slide 12. Against this demand background, we should look at ship supply. The current delivery schedule for dry bulk vessels in 2009 and 2010 stands at 15 and 23% respectively, with the Capesize vessels however dominating it. This does not take into account though, all of the cancellations, slippage, and scrapping of older vessels. It is very difficult to quantify how much of this order quota will not actually get delivered, but it is logical to assume, that nearly all of the vessels over 25-years-old, about 13% of the fleet, and many over 20, another 13% of the fleet, will be scrapped rather than undergo a further special or intermediate survey, unless of course the dry bulk market improves significantly further.

Please turn to Slide 13. The container ship order book is similar to the dry bulk. The delivery schedule for 2009 and 2010 stands at around 15% for 2009, and 13% for 2010. Again, just as in supply with dry bulk vessels, the large vessels dominate the order book, while the smaller vessels' order book is more in line with expected trade growth. Here as well, the order book will not all be delivered. Cancellations and scrapping will affect the balance, although to a lesser extent than in bulkers, as most container ships are all in established yards, where it is more difficult to cancel, and the fleet is much younger, which will thus result in more lay-ups than scrapping.

Please turn to Slide 14. All of the above point towards a difficult 2009. Supply is expected to outpace demand as trade growth essentially comes to a standstill, and the world fleet grows at a rapid pace, despite the corrective effects of delivery, cancellations, delays, and scrapping. In Q1 of 2009 though, in the dry bulk space, we see a strong recovery in rates, driven primarily by the significant increase in China's imported iron ore appetite, as important, oil became cheaper than the domestically produced iron ore, but also by boat congestion, and the decision of some to avoid the Gulf of Aiden, due to piracy.

Will we witness a recovery later in 2009 and starting in 2010? We believe we may, if demand picks up as a result of the world economics growing again, and if the supply growth is constrained. This may be achieved as scrapings should continue unabated, and if cancellations and delays of about half the current order book materialize. It is however hard to quantify what the number will turn out to be, but there are many analysts that believe that this will happen, marking the beginning of a market recovery.

I will now pass the floor to our CFO, Tasos Aslidis, to take you through our financials in a bit more detail.

Thank you very much Aristides, and good morning ladies and gentlemen. We will now provide you with a brief overview of our financial results for the first quarter of 2009, in a similar format to what we did in the past presentations. Let's move to Slide 16. This slide shows our financial highlights for the first quarter ending March 31, 2009, and compares it with the same period of 2008.

I will repeat here some of the figures the Aristides gave at the beginning of the presentation; however before I begin, I would like to mention that as reported in yesterday's press release, it is important to note that there is a change in our accounting principle and estimates, beginning with the first quarter of 2009, we changed our accounting policy of dry-docking costs from the deferral method, under which we amortized our dry-docking costs over the period between dry-dockings, to the direct expense method, under which we expensed all dry-docking costs as incurred.

We believe that the direct expense method is preferable, as it eliminates a significant amount of time and subjectivity involved, in determining which costs and activities relates to drydocking, qualify for the deferral methods. Our financials include both the originally reported figures under the deferral method, and the 'as adjusted' figures under the direct expense method for all past periods. I will be mainly referring to the 'as adjusted' figures for my comparisons on these slides.

In the First Quarter of 2009, we had net revenues of 15.3 million, a decrease of about 53% over the 32.8 million we had in the first quarter of 2008. We showed a net profit of 3.9 million for the quarter. The results for the first quarter of 2009 include 1.5 million of unrealized gain on derivatives and investments, as compared to no such gain included on investments for the same period in 2008.

Our GAAP earnings per share were $0.13 per share basic and diluted, compared to earnings of $0.45 per share basic and diluted on an 'as adjusted' basis for the same period of 2008. Excluding the effect of unrealized gain on derivatives and realized loss on trading securities, amortization of the fair value of charters acquired and loss on vessel sales, the net income for the period would have been 2 million or $0.07 per share basic and diluted, compared to $0.38 per share on an 'as adjusted' basis for the same period of last year.

Adjusted EBITDA for the first quarter 2009 was $6.2 million, a 67% decrease for the 18.7 million achieved during the first quarter of 2008, again on an 'as adjusted' basis. As Aristides mentioned earlier, we declared a $0.10 per share dividend based on the results of the quarter. Although this dividend is lower than the dividend we declared for the same period in 2008, this is the same with the dividend we declared in the previous quarter.

Let's now move to Slide 17. This slide shows our fleet performance for the first quarter of 2009, and compares it with the same period of last year. As Aristides mentioned earlier, the container ship market is very challenging these days. Ships have a hard time getting a charter after completion of their current charters, and as a result, we have temporarily laid up three of our container ships.

To give a better picture of our fleet deployment and performance, this quarter we have broken down the fleet utilization rate into it's two components, commercial and operational. So during the first quarter of 2009, we had a 93.6 commercial fleet utilization rate and 98.9 operational utilization rate, compared to 99.4 and 99.9 respectively for the same period of 2008. In the first quarter of 2009, we operated an average of 15.7 vessels, earning an average time charter equivalent rate of $12,684 per day per vessel, a decrease compared to the $25,723 per day we earned for the same period in 2008.

Our total operating expenses in the first quarter of 2009 were $5,971 per ship day, compared to $6,347 per ship day for the same period of 2008, a noticeable reduction. I would like to conclude this overview of our financial statistics, by drawing your attention as always to our daily cash flow breakeven level per vessel per day, as shown in the last line of this table. For the first quarter of 2009, we had an average daily cash flow breakeven of approximately $8,465 per day per vessel. I should mention that this figure does not give guidance to our interest income, which was significant in 2009. In fact our interest income was higher than our interest expense, and if included, it would reduce the first quarter breakeven levels by about $300 per vessel per day.

Let's now move to Slide 18. This slide picks up on the point I made earlier about cash flow breakeven level. It makes a rough estimate of our cash flow breakeven level for the next 12 months. This is an important number to have in mind, as we try to navigate through the challenging markets we expect ahead of us.

Let's start with one of our components of the breakeven rate, the loan repayments. Our current repayment schedule shown on the left part of the slide, indicates that we have to repay about 13.3 million in 2009, which is about 12.3 million less than what we paid in 2008. This drop results in $2,100 per vessel per day reduction in our cash flow breakeven requirement. After making estimates for the other elements of the breakeven level, as you can see on the table on the right part of the slide, we have an overall estimate for 2009, or for the next 12 months I should say, of about $9,500 per vessel per day on a full year operational basis. Again, we do not give any credit to interest income that we might have over the next 12 months.

Let me conclude my remarks with a couple of highlights from our balance sheet and for that let's turn to Slide 19. As of March 31, 2009, we had unrestricted cash of about 56 million, and also restricted cash of about 8.6 million. Our debt including current portion was about 63 million, resulting in a debt-to-capitalization ratio of about 20%.

Given our low debt levels, it is not surprising that we satisfy all of our debt covenants. After the two vessel sales and two vessel purchases during the quarter, and their respective bank financing, we have on a pro forma basis unrestricted cash of $66 million, and debt of 73 million, and also restricted cash of 8.6 million. Again, more cash than debt.

This brings me to the last point I would like to make, and the same one that Aristides made at the conclusion of his remarks, about what we call our fire power. These are the funds that we have available for further growth. We estimate we can comfortably reallocate 40 million to 50 million of our cash for further expansion, which obviously coupled with conventional bank financing, would increase further our purchasing power.

Before I pass the floor back to Aristides, I would like to reiterate what he said, that we believe we face a unique investment opportunity in front of us over the next two years, both in terms of attractiveness and size, and that is why we are trying to build our strategy to take advantage of it.

And with this I would like to pass the floor back to our CEO and Chairman, Mr. Aristides Pittas.

Thank you, Tasos. I would like to open the floor for remarks, after you see the last slide 20, which shows how bank charter rates and charter rates in general have fallen dramatically, from both dry bulk vessels and containers, creating this very difficult environment for shipping, but concluding on a more positive note, that at least there is one good thing out of that, and that is that prices of ships, have really returned down to levels which are low. Dry bulk vessels, a little bit higher than the historical level, but still container ship prices at the all-time low.

So I would like to open the floor for questions.

Thank you very much, sir. We will now begin the question and answer session. (Operator Instructions). From Oppenheimer your first question comes from Scott Burk. Please ask your question.

Good morning. How are you?

Good morning, Scott.

Hi.

I had a couple questions. First I wanted to get some more details on your fire power, specifically when you plan to deploy it. You have talked about kind of over the next couple of years buying additional vessels. Can we expect to see anything like that this summer, or are you thinking maybe later this year that you would buy some vessels which would be additive to your earnings and EBITDA profile?

Scott, the general strategy is that we will be investing throughout that period. That is the plan. We are looking into deals right now. We think the dry bulk prices have gone a little bit too high, and they might be softer in the summer, if we do see that, you might see us doing something there.

We are still looking at the container sector where there is a lot of depression amongst the container players, and as I said in my closing remarks, the price of container ships has reached an all-time low, and that at some point, will also trigger perhaps an acquisition there, so I don't want to be more specific, because I really don't know. It depends on how the markets develop, but the plan is to acquire ships through this low of the cycle.

Okay. And then I wanted to ask about the depreciation. Can you give us some details on what the actual assumption changes were for scrap price and useful life for your container ships, and kind of give us some guidance for depreciation, just a total amount for the next several quarters?

We have reduced the scrap price from $300 per ton to $250, and our container ships were being depreciated over 25 years, that was not in-line with what other container companies were doing with container ships, and with the intent and use of our ships, so we are depreciating our containers over 30 years.

And what kind of numbers does that give you, in terms of run rate for the next several quarters?

I think the figure that we have this quarter should be repeated over the next quarter, slightly higher because one of our vessels was bought late in the quarter, so a couple of hundred thousand dollars more than what we reported for Q1 should be the running figure.

Okay. I wanted to ask about the vessels that you have on lay up. You have got three of your container ships on lay up right now, and we have got two more that are coming off their charters as you show in your chart here. What are the plans for those, is it going to expect those will lay up as well, or is the charter market a little bit, look a little better for them because they are a little younger?

It depends a little bit on how the market will develop. One of them comes open in July, and I think the other one in September, so we do have a little bit of time to see how the market develops. I would think that certainly the ship coming out in September will be rechartered at a lower level, but will be rechartered, because it is a craned vessel and a relatively smaller vessel.

We see that geared ships and smaller ships are easier to employ. We have rechartered our KUO HSIUNG, which is also a smaller geared vessel, when that charter ended. So there is a bit more requirement for those ships at levels which are slightly better than laying them up, so I can't tell you right now exactly what will happen with the two coming out of charter, but I would suspect that the second one definitely gets rechartered.

The other one, it is a gearless level, it is a 1,700 TEU ship, our chartering guys are actually leaving, have actually left today for a trip to the Far East to visit the various potential charters, discuss possibilities, so I can give you some more feedback in a couple of weeks.

Okay, all right, that is helpful. Thanks.

Thank you.

Thank you, sir. And now from Maxim Group you have a question from Charles Rupinski. Please ask your question, sir.

Good afternoon. How are you?

Good. How are you?

Good. Thank you. Just wanted to follow-up a little bit, a quick question more on the acquisition front, because it sounds like you guys have some real great opportunities potentially. Are you thinking about anything, in terms of on the acquisitions of buying charter free versus with a charter, and if you do buy charter free vessels, particularly on the dry bulk side, do you have any sort of philosophy of how you would employ the charter for new acquisitions? Would you go short-term, and maybe fixed later, because it sounds like that the inquiries out there were kind of, they really weren't there that much for the dry bulk for longer term charters, and maybe that might be changing a little bit? Just want to get your color or your views.

Yes, well firstly as I said, we will wait at least a month or so, before we do something in the dry bulk fleet, in the dry bulk sector because we feel that charter rates and prices have gone up, and we want to see if that is going to be something that is going to be sustained or not, so I can't really tell you, we are not buying a ship today.

Right.

Which I could tell you what I would do, if I was to buy a ship today though, I would go for a longer charter, and to the good levels that we are seeing today. The charter levels that we are seeing today, are levels that really make, give you good returns for ships that you have brought at these prices. I don't want to tell you more, because I really don't know.

I mean, we evaluate all types of projects all of the time, and we consider about spot and period employment, in conjunction to what our book is at any point in time, so right now as you know, we have covered 2009, and the bigger part of 2010, 82% already for the dry bulk fleet, so we could be a little bit more spot oriented if we buy something in the summer, and the market is low.

Okay, great. That is interesting. And just one follow-up question is on the container side, assuming that you do find something compelling in the container market, is there any sort of limit ass to how large a ship or vessel you would buy on the container side, just given the fleet profile and your expectations of the market?

There is no limit in what we could do, however, we do think that the larger ships are going to suffer more than the smaller ships, and the smaller ships are more versatile always, and there are more charters to talk to, and more people to employ them, so I would doubt that we would be buying something which is big.

However, if an opportunity comes around and a charter is willing to pay us a good level for five years, and we think the ship is so cheap that we can't resist it, we will do it. As I mentioned repeatedly, our decisions are really based on our cash flow models, and what gives the highest return to our shareholders, to our equity holders, in each particular project, so you should look at us as a book of shipping projects.

Okay, great. Well thank you very much for the color.

Thanks.

Thank you. And now from FBR Capital Markets, you have a question from Robert MacKenzie. Please ask your question.

Good morning, guys, this is Doug Garber filling in for Rob McKenzie.

Hi, Doug.

My first question is on the feeder contract. I was curious if that one on a daily cost is actually cash flow positive or negative, and you are just trying to not lose more in the opportunity cost of laying it up?

The cost of laying a ship up is anything between $1,000 and $1,500 per day. The operating costs of a container ship is around $5,000 let's say, a little bit more than that. So if you fix a ship at $4,000, it is nearly equivalent to what you get if you lay it up, so that is really the threshold, and we wouldn't really be doing much at lower rates than that. There are risks involved in both, when you trade a ship, there can be a damage on the ship, there can be operational hazards, there can be off highs, there are risks in the cash flow that you can make. When you have a ship laid up, it might prove more difficult to reactivate it at some specific point in time, however, we do have a force of a few people where we have laid up all of our ships, who go on board the ships regularly, and try and check that they are maintained as much as we can, so that they can be reactivated quickly.

Great. Thank you, and my second question is on the dividend language. You guys say as far as practically possible. I was hoping to get a little bit more color there, in terms of is there a target cash pay out ratio you guys are looking for?

No. There isn't any specific target. We have a lot of retained earnings, because when the markets were good, we were not paying out the full earnings, so there is a lot of earnings, and obviously, there is a lot of cash in the Company, so I would think that the dividend will be continued, but this is a decision that the Board doesn't need to take every quarter when it convenes.

I think that we have shown that we really want to pay these dividends out, I think we would meet a fantastic opportunity to buy something, and be in need of the cash to do it, in order not to pay out dividends, but I think in a few years time, people will say this Company has been paying dividends throughout the cycles, and is there to do that, so I doubt that this policy will change.

Okay, great. And does that mean you guys would pay out more than cash in a quarter, and use the cash you have accumulated over the last few years to pay that dividend?

We might.

Okay. Very helpful. Thank you, guys. I will turn it back.

Thank you.

(Operator Instructions). As there are no further questions at this time, we now pass the floor back to Aristides Pittas for closing remarks.

Thank you ladies and gentlemen for attending our conference call. We will talk to you again in our next conference call in about three months time. Thank you.

And with many thanks to all our speakers today, that does conclude our conference. Thank you for participating, and you may now disconnect. Thank you very much, gentlemen.