Euroseas Ltd (ESEA) 2009 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas conference call on the second quarter and six months ended June 30, 2009 financial results. We have with us Mr. Aristides Pittas, Chairman and Chief Executive Officer, and Mr. Tasos Aslides, Chief Financial Officer of the Company.

(Operator Instructions). I must advise you that this conference is being recorded today, Wednesday, August 12, 2009.

We now pass the floor to Mr. Nikolas Bornozis, President of Capital Link, investor relations advisor to Euroseas. Please go ahead, sir.

Thank you very much, and good morning to everyone. This is Nikolas Bornozis of Capital Link, and we welcome you to the Euroseas second quarter 2009 financial results.

Please be reminded that the Company announced their results yesterday, August 11, 2009, after the market closed in New York with a press release that has been publicly distributed. If you have not received the release, you may log on to the Euroseas Website at www.Euroseas.gr and navigate to the Investor Relations page. Or you can call Capital Link at (212) 661-7566, or you can call the Chief Financial Officer of Euroseas, Mr. Tasos Aslides, 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 home page of the Euroseas Website, as I mentioned, www.Euroseas.gr. Once again, the participants of the Webcast can download the PDF from the Website. Please be kind to note that the slides are user-controlled, so 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 number 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 now 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'm Aristides Pittas, Chairman and CEO of the Company. Together with me today is Tasos Aslides, our CFO. The purpose of today's call is to discuss the three- and six-month periods ended June 30, 2009 financial results for Euroseas.

Let us turn to slide 3 and first look at our 2009 second quarter results, which reflect the lower level of the charter markets compared to the same period a year ago. For the second quarter 2009, we reported total net revenues of $14.8 million, representing a 57% decrease over total net revenues during the second quarter of 2008. Net loss for the period was $5.4 million, or $0.18 loss per share basic and diluted. Excluding, however, the effect of unrealized loss on derivatives and realized gain on trading securities and amortization of the fair value of charters acquired, the net income for the period would have been $0.5 million, or $0.02 per share basic and diluted. Adjusted EBITDA was $5.8 million.

For the first half of 2009, we reported total net revenues of $30.2 million, representing a 55% decrease over total net revenues of $67.3 million during the first half of 2008. Net loss for the period was $1.5 million, or $0.05 per share basic and diluted. Again, excluding the effect of unrealized loss of derivatives and realized gain on trading securities and amortization of the fair value of charters acquired, the net income for the period would have been $2.4 million, or $0.08 per share basic and diluted. Adjusted EBITDA for the first half was $12 million.

Let's move to slide 4 to discuss how we have been implementing our strategy to date. We continue using our long-term model to identify rewarding projects within the whole dry space. This indicates today that projects offering long-term IRR returns in excess of 15% are now available across our investment spectrum. The depressed market presents good 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. We have already bought three relatively modern drybulk vessels this year. Our fleet expansion program is set to advance, taking advantage of our strong cash position and our debt and equity rating capabilities.

Cost control remains of paramount importance and becomes even more crucial at times like this. On a per-ship-per-day basis an operating vessel's costs are down 11% for the second quarter 2009 compared to the same period last year. We indeed remain one of the lowest-cost operators among the public dry cargo companies.

We have a very strong balance sheet still. 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 $10,000 per day. Thus, we are able to continue paying significant dividends.

We maintain a good working relationship with all our banks and have been able to finance our recent acquisitions through three loans from three different banks at very satisfactory terms. Our current debt to market value of our fleet is below 50%, and we continue to target debt levels of around 50% for our new acquisitions.

Maintenance of a strategic balance between period and spot employment has always been our focus. We have covered 72% of our fleet capacity for the second half of 2009 and 41% for 2010 through time charters or, in the case of some bulkers, through FFAs. Barring any unforeseen technical or operational issues, the correlation between FFAs and what we actually achieve in the physical market will hold. The use of FFAs has eliminated time charters' performance and default risk whilst also providing flexibility in trading the vessels. They have, however, as expected, created volatility in the quarterly earnings, as the FFAs are valued at the mark-to-market basis accounting-wise, and one should be careful to exclude their effect in order to view actually quarterly earnings.

Let's move to slide 5. Despite the crisis and the consequent growth opportunities, we still believe that rewarding our shareholders quarterly with a meaningful dividend during any stage of the cycle is important for them to remain satisfied, long-term holders of our stock, as my family is. Indeed, we are one of the very few companies still paying a dividend. In this context, on August 4, we declared our second quarter 2009 dividend of $0.10 per share, same as the first quarter of 2009. This dividend is payable September 4 to shareholders of record on August 27. This is the 16th consecutive quarterly dividend declared since our access to the capital markets in August 2005. It represents a yield of about 8% on the basis of our stock price on August 11, 2009.

Slide 6 shows the implementation of our fleet expansion program to date. We have partly renewed our drybulk fleet by purchasing three drybulk vessels - the 1997-built Eleni P, the 1998-built Monica P, for about $18 million each, and the 2000-built Pantelis for $27.5 million. We have sold two of our 25-year-old drybulk vessels, the Nikolaos P and the Ioanna P, for about $6 million combined. The incremental capital expenditure was about $25 million after accounting also for the $33 million provided by three different banks. Their support is evident, since we have been able to finance all three of our vessel purchases this year with about 50% financing. The financing for our latest acquisition, the Pantelis P, is to be completed shortly with a $13-million loan that has been agreed with HSBC.

Please turn to slide 7. We have currently covered about 100% of our drybulk available base for 2009 and 75% for 2010, partly with time charters and partly with FFAs at rates, on average, above our cash flow breakeven. In particular, the Pantelis, the Aristides, and the Eleni P are on time charters until December 2009, January 2010, and May 2010, respectively, at accretive rates and provide us with substantial additional secured cash flow. Our other three bulkers continue to operate spot but are, however, hedged through the FFAs. The Inini and Monica P do that through the Klaveness spot pool, thus improving further the correlation with the FFAs.

Please turn to slide 8. Our containerships are still facing significant challenges in securing accretive employment contracts after the expiration of the present charters. However, we have been able to recharter, although at levels slightly below operating expenses, the two vessels that opened up during the quarter. We still have three vessels opening up in Q3, and it remains to be seen if we will be able to recharter them, thus confirming the signals that the container market for the smaller vessels may have [passed its trough]. You can see that, currently, 57% of our container-available days for 2009 and about 22% of our container-available days for 2010 are covered via time charters. Although we have had some inquiries for small trips on the three laid-up vessels, nothing was interesting enough to warrant their reactivation. The laid-up vessels are closely monitored by our manager so as to be in a position to return to service quickly when markets further pick up.

Our current fleet is shown on slide 9. As you all know, it consists of five drybulk vessels, ten containerships, and a multi-purpose ship.

Let us now move to slide 11 for just a brief overview of the market. This slide gives comparison for one-year time charter rates and second-hand values of ten-year-old Panamax vessels and a 1,700 teu containership dating back to 2000. As you can see, the credit crisis and the general economic meltdown that ensued at the end of 2008 resulted in a huge decline in charter rates, which reached record lows at the end of the year. Asset values have also declined for both segments. The drybulk market has posed a significant recovery since credit markets improved and inventories got depleted, but the container market has failed to improve. Drybulk rates and prices are again slightly above historical averages, but containership rates and prices are at all-time lows.

As you can see in slide 12, global GDP growth for 2009 has been revised slightly downwards by the IMF from about minus 1.3% expected just three months ago to minus 1.4%. This is mainly due to the deterioration of expectations regarding the euro zone and eastern Europe, including Russia. On the other hand, China and the rest of Asia, including Japan, have been revised upwards. There has been a significant upwards revision, though, for 2010, especially in the Far East, with only the US being revised downwards. By 2011, the IMF is suggesting that global GDP growth will be back at the high levels of around 5% seen in 2007.

Drybulk and containerized trade closely follow GDP developments and therefore should follow a similar trend. Growth rate in drybulk and containerized trade declined in 2008 but was still positive overall. For 2009, Clarksons predicts a further drop for growth rates to negative 3.5% in drybulk trade on a tons basis and negative 8.3% growth in containerized trade. One would reasonably expect that, as GDP rises from 2010 onwards and eventually reaches 2006/2007 levels, rate growth should also return to those levels as well.

Please turn to slide 13. Against this demand background, we should look at ship supply. The current delivery schedule for drybulk vessels in 2009 and 2010 stands at 13% and 23%, respectively, with the Capesize vessels, however, dominating it. This does not take into account order cancelations, slippage, and scrapping of older vessels. It is very difficult to quantify how much of this order book will not actually get delivered, but it is going to be very substantial.

Please turn to slide 14. The containership order book is smaller than the drybulk but still large. The delivery schedule for 2009 and 2010 stands at around 11% for 2009 and 13.5% for 2010. Again, just as in supply with drybulk 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. Cancelations and scrapping will affect the balance, although to a lesser extent than in bulkers, as most containerships are orders for established yards, where it is more difficult to cancel, and the fleet is much younger, which will result in less scrapping.

Please turn to slide 15 to summarize our views on the drybulk market. The unexpected strength of the market in the first half of '09 occurred because the Chinese imported huge quantities of raw commodities, especially iron ore. In July alone, they imported over 58 million tons, a 32% increase over July 2008. This increase in imports resulted in increased port congestion, especially in the Chinese ports, which further boosted trade rates. China's imports are expected to continue strong in 2009 and 2010. If the global economy also continues recovering as the IMF suggests, demand for drybulk commodities will grow even further in the coming two years.

The ship supply side remains challenging. During first half '09, we have seen slippage and cancelations, resulting in 35% less deliveries than initially contemplated, and we would expect this trend to continue worsening throughout the next two years. If that passes 50% of the current order book, which is not unlikely, we could easily see a balancing of the supply/demand equation.

One should also remember that this market still has the bulker over the other vessels, which will start turning to the scrap yards again in big numbers if freight rates fall dramatically, as they did in Q1. Only 7 million deadweight tons, 1.6% of the total fleet, out of 103 million deadweight tons, 25% of the total fleet, are vessels over 20 years of age has been scrapped to date.

All in all, we expect significant volatility to prevail in this market over the next few months.

On slide 16, we summarize our current views on the containership market. As demand collapsed after the middle of last year, freight rates, charter rates, and vessel prices all tumbled as well. The big container (inaudible) between Asia and Europe and Asia/US are down 25% and 20%, respectively, in last year. Overall, we estimate that demand for containerized trade has fallen between 10% to 15% this year so far. Container lines are expected to collectively lose $20 billion in 2009.

However, there are some signs that the market may have bottomed out. Percentage of laid-up ships in teu basis peaked at around 12% by end of Q1 and is now around 11%. In some cases, lines have been able to achieve slight freight rate increases. The Shanghai Shipping Exchange Containerized Index rose to [825 from a low of 750] reached in early July. We have to say that we are relatively more optimistic for the vessels below 2,000 teu like ours. The number of such ships being laid up has decreased, and there is more inquiry for them than for larger vessels, most likely due to a better balance between supply and demand. The fleet supply side reflects a significantly lower order book and more scrapping due to the older age profile. And the demand side reflects a relatively increased activity as shipment sizes tend to reduce in periods of austerity, thus favoring smaller vessels. And intraregional trade is faring better compared to trade across the oceans.

If the global economy recovers as predicted by the experts, containership demand will also substantially improve. Charter rates will, of course, trail this global economic recovery, as laid-up vessels and new vessel supply will need to be absorbed prior to their increase. But it will happen. And as soon as this becomes a pattern, vessel prices, which are now at their lowest level ever-- below building costs as well-- they will suddenly increase.

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

Good morning, ladies and gentlemen. We will now provide you with a brief overview of our financial results for the three- and six-month periods ended June 30, 2009 in a similar format to what we did in past presentations.

Turn to slide 18. This slide shows our financial highlights for the second quarter and first half ended June 30, 2009 and compares it with the same periods of 2008. I will repeat here some of the figures that Aristides gave at the beginning of our presentation.

However, before I begin, I would like to mention that, beginning with the first quarter of 2009, we changed our accounting policy of drydocking costs from the deferral method, under which we amortized drydocking costs over the period between drydockings, to the direct expense method, under which we expense all drydocking costs as incurred. Yesterday's press release included both the recently reported figures and the as-adjusted figures for all past periods. For my comparisons in this slide, I will be referring to the as-adjusted figures.

In the second quarter of 2009, first, we hit net revenues of $14.8 million, a decrease of about 57% over the $34.5 million we earned in the same period of 2008.

We reported a net loss for the quarter of $5.4 million. The results for the second quarter of 2009 include a $6.3-million net unrealized loss on derivatives and trading securities as compared to $0.2 million unrealized gain on trading securities for the same period of 2008.

Our GAAP losses per share for the quarter were $0.18, basic and diluted, compared to earnings of $0.51 per share basic and diluted on an as-adjusted basis for the same period of 2008. Excluding the effect of unrealized loss on derivatives and realized gain on trading securities and amortization of the fair value of charters acquired, the net income for the quarter would have been $0.5 million, or $0.02 per share basic and diluted.

Adjusted EBITDA for the second quarter of 2009 was $5.8 million, an almost 72% decrease to $20.7 million achieved during the second quarter of 2008, again on an as-adjusted basis.

As Aristides mentioned earlier, we declared a $0.10 per share quarterly dividend based on the results of the second quarter. Although this dividend is lower than the dividend we declared in the same period of 2008, it is the same as the dividend we declared in the past two quarters.

For the first half of 2009, we had total revenues of $30.2 million, representing about 55% decrease over total net revenues of $67.3 million during the first half of 2008.

We reported a net loss for the period of $1.5 million. The results for the first half of 2009 include a $4.5-million net unrealized loss on derivatives and trading securities as compared to $0.2 million unrealized gain on trading securities for the same period of 2008.

Our GAAP losses per share for the period were $0.05, basic and diluted, compared to earnings of $0.96 per share basic and diluted on an as-adjusted basis for the same period of last year. Excluding the effect, again, of the unrealized loss on derivatives and realized gain on trading securities and amortization of the fair value of charters acquired, the net income for the first half of 2009 would have been $2.4 million, or $0.08 per share basic and diluted.

Adjusted EBITDA for the first half of 2009 was $12 million, an almost 70% decrease from the $39.4 million achieved during the first half of 2008.

Let's now move to slide 19. This slide shows our fleet performance for the second quarter and first half of 2009 and compares it with the same period of last year. Again, as Aristides mentioned earlier, the containership market is very challenging these days. Ships have a hard time getting a charter after completing their current charters, and, as a result, we have temporarily laid up three of our containerships. To give a better picture of our fleet deployment and performance this quarter, we have broken down the fleet utilization rate into commercial and operational.

During the second quarter of 2009, we had a 97.6% commercial fleet utilization rate and a 99.3% operational utilization rate, compared to 100% and 98.8%, respectively, for the same period of 2008. These utilization rates do not include the vessels in lay-up for the period they have been laid up.

In the second quarter of 2009, we operated an average of 16 vessels, earning an average time charter equivalent rate of $13,062 per day per vessel, a decrease compared to $25,918 per day per vessel we earned for the same period of last year.

Our total operating expenses in the second quarter of 2009 were $5,578 per ship day, compared to $6,944 per ship day for the same period of 2008, a noticeable reduction. Part of this reduction is due to the lower cost of the vessels in lay-up, but the majority of it comes from our manager's efforts in cost control program.

I would like to conclude this overview of the second quarter of our financial statistics by drawing your attention to our daily cash flow breakeven level per vessel per day, as shown in the last line of this table. For the second quarter of 2009, we had an average daily cash flow breakeven of approximately $8,078 per vessel per day. I should mention here that this figure does not give credit to our interest income, which was significant during this period. In fact, our interest income for the second quarter of 2009 was almost as much as our interest expense, and, if included, it would reduce the second quarter breakeven levels by about $230 per vessel per day.

Let's now review our fleet statistics for the first half that you can see in the right part of the slide. For the first half of 2009, we had a 95.5% commercial fleet utilization rate and 99.1% operational, compared to 99.7% and 99.4%, respectively, in the same period of 2008. Again, these utilization rates do not include the vessels in lay-up for the period that they have been laid up.

In the first half of 2009, we operated an average of 15.62 vessels, earning an average time charter equivalent rate of $12,875 per vessel per day, a decrease compared to the $25,824 per vessel per day that we earned for the same period of last year.

Our total operating expenses in the first half of 2009 were $5,803 per ship day, compared to $6,649 per ship day for the same period of 2008, again a noticeable reduction.

Our daily cash flow breakeven level per vessel per day, shown in the last line of this table, was approximately $8,300 per vessel per day and, once again, does not include contribution from our interest income, which was higher in the first half of 2009 than our interest expense. And, if included, it would reduce our breakeven levels by $270 per vessel per day.

Let's now move to slide 20. This slide picks up on the point I made earlier about cash flow breakeven levels and makes a rough estimate of our cash flow breakeven level for the next 12 months. This is an important number to keep 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 in the left part of the slide, indicates that we have to repay about $13.3 million, which is about $12 million less than what we paid last year. This drop in repayments results in about $2,000 per vessel per day reduction in our cash flow breakeven requirement for this year. After making estimates for the other elements of the cash flow breakeven level, as you can see on the table on the right part of the slide, we have an overall estimate for the next 12 months of a little more than $10,000 per vessel per day on a fully operational basis. If some of our ships remain in lay-up, this number will be lower. And, again, we do not give any credit to any interest income that we might have over the next 12 months.

As always, let me conclude my remarks with a couple of highlights from our balance sheet, and, for that, let's turn to slide 21. As of June 30, 2009, we had unrestricted cash of about $56 million and also restricted cash of a little more than $12 million.

Our debt, including current portion, was $69.5 million, resulting in a debt to capitalization ratio of about 22%. We are in compliance with all our debt covenants.

After the two vessel sales and the three vessel purchases during the first half of 2009 and the respective bank financings (we expect to complete, as Aristides mentioned, the loan financing for our latest acquisition shortly), we have on a pro forma basis unrestricted cash of about $42 million and debt of a little more than $82 million.

And this brings me to the last point I would like to make, and that is our existing capacity to grow our Company by exploiting market opportunities. We estimate that we can comfortably allocate $25 million or $35 million of our cash for further expansion, which, coupled with conventional bank financing, would provide us with twice as much purchasing power, which, in turn, will allow us to purchase two to three vessels at prices like the ones we bought earlier this year.

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

Thank you, Tasos. Thank you, everybody, for listening to our comments. I now want to open the floor for any questions you may have.

Thank you, Mr. Pittas. (Operator Instructions). Scott Burk, Oppenheimer.

I just had a couple questions; first, on your acquisition strategy. If you look at the chart of prices for drybulk vessels versus containers that you have in your presentation, you can see that containerships have dropped down. Prices are extremely low there. Where are you seeing more attractive acquisition opportunities - in the drybulk side or containership side?

As always, we look at both categories. And our model indicates good results in both-- good returns from both types of investments. The advantage that drybulk still has is that charter rates available today are high enough to give good returns-- to give very good short-term returns as well. The advantages we see in the container sector is that, as soon as the market recovers, there will be significant improvement in the results there. One has to be a bit more patient if he buys containerships than drybulk vessels, but the returns seem to be higher. So I think in the future we will be doing both kind of businesses.

Okay. And what-- You can purchase two to three more ships. What would be next after those three ships? You'd be out of cash. What are the options after that?

Well, the Company can always raise further equity. Valuations at some point will improve, and the Company will be able to raise further debt. The Company is a company that is going to grow, but it's going to grow cautiously and safely. But it will definitely continue growing. And, if we buy containerships, they might be a little bit cheaper than drybulk vessels, so there may be room for more acquisitions in that sector than in the drybulk sector.

Okay. And then, actually, I wanted to ask you about the containerships you have rolling off charter in the near term. You've got a couple that are on charters-- You said during the call that they're actually below operating cost levels. What is the benefit of operating those ships at below cash costs as opposed to just laying them up?

Well, laying up a ship, even if it's in a cold lay-up, as two of our three are, is still a costly business. It costs about $1,500 a day. And then you have some reactivation costs, which depend on how long the vessel will have been laid up. So it sometimes makes sense to operate a ship at slightly below the operating cost level rather than keeping the vessel in lay-up.

Okay. And what--? I guess the other-- So you'd plan on doing that with the other ships that are rolling off? It looks like you have three or four that are going to roll off charter. You just kind of continue on operating those?

Yes. We have just started looking into the market about potentially employing these three ships. And we need to see how that will develop and what kind of charters, if any, we will be able to find. I can't report anything yet on the progress of these efforts. We still have a couple of months to go before they come off charter. But we are already starting to discuss them with various charterers.

Okay. And, Tasos, I had a couple of questions about the noncash items. I just wondered-- First of all, if I heard you correctly, $6.3 million of the $6.8 million derivative losses were unrealized FFA losses. Is that correct?

Yes. I think that includes some interest rate swaps, so it's the net result of the two. We have gains on the interest rate swaps this quarter and loss on the FFAs.

And were there any actually realized losses on the derivatives during the quarter?

Yes. On the FFAs, we needed to pay about $1 million to settle some contracts during the second quarter. And on the interest rate swap, I think we had also a realized (inaudible) of about [$182,000].

Okay. Let's see. Do you have any collateral outflow to cover the unrealized losses? In other words, are you having to put some cash into an account or in escrow or something for the mark-to-market of the FFAs?

We do. We have to restrict some cash for the FFAs. On the top of my head, I think we have some, like, $4.7 million cash collateral for the FFAs, of which $2.3 million, roughly, is called base margin and you have to have there whether you win or lose in the position. And the remaining $2.4 million is for mark-to-market margin requirements.

Okay.

That is reported as part of the restricted cash in the balance sheet in the press release.

Okay. Right. And then, actually, I wanted to ask one final question. Just what are the actual prices that you're seeing right now for, say, five- to ten-year-old feeder containerships, kind of the size that you say you think are starting to become more active?

Well, prices for this type-- for 1,700 teu containerships five years old, I would say, are about-- I said that for a five-year-old containership, I would say that right now prices are between-- are close-- anything between $13 million to $16 million.

$13 million to $16 million? That would be for a slightly older one?

A five-year-old ship, I would say.

Okay. Thank you very much.

Justin Yagerman, Deutsche Bank.

This is [Mike Lever] filling in for Justin. Just a couple follow-up questions; first, around the vessels that are, I guess, laid up and then any potential opportunities there. Have you guys been approached or do you look at vessels, specifically on the containership side there, that are laid up right now as specific acquisition targets? And maybe if you can get into a little bit about what you're seeing from that market specifically.

I didn't quite get (inaudible) the question, Mike. Can you repeat? There is not a very good signal.

Would you look to make an acquisition on a vessel that's currently laid up-- that is not employed or in some other way distressed? And do you get people coming to you looking to potentially buy your vessels that aren't employed right now?

We look at the projects, as I've always been saying. If the price for a laid-up ship is low enough, we would consider that. There are many distressed owners of containerships that are either on charter or not. And we think that there will be opportunities to buy vessels much cheaper than what we have seen even up to now. And we have our eyes open. We're talking to the sellers. We're talking to the bankers. We're talking to people that tend to control these ships other than the owners as well.

Right. You guys have been pretty successful in grabbing 50% term loans to finance just about all of your acquisitions. Is there any sort of--? Are those contingent on there being charters attached to those vessels? Or would there be any difference in your available financing if you were to buy a containership that was currently laid up and had no employment prospects?

I think there, because the price would be low, perhaps we would be able to get similar financing. But, to be honest, the ships that we have been looking at in the container sector-- some of them might come with financing from the banks and will be-- [can't] be deals negotiated together with the sellers and the bankers and might come with an even much higher financing with them. So it's difficult to say.

Okay. That's fair enough. Looking at your cost controls throughout the quarter and the 11% that you said was attributable just to blocking and tackling from your operational group, how much juice is left there? When we look at a per-day rate going forward for the rest of the year, how much low-hanging fruit is there for you guys to bring that number down some more?

I wouldn't expect a substantial drop further than where we are, especially as we see commodities increasing in price and spare parts and all that stuff and especially since-- (Inaudible) is one very important factor, and that really is difficult to predict and the dollar-- the exchange rate as well. So, unless we see significant changes in the dollar, and I don't think we would see significant changes in crew salaries, I would think that we should not expect a significant decrease in operating costs.

All right. And, just finally, kind of a nuts-and-bolts question and a follow-on to one of Scott's. The realized versus unrealized portions of your FFA gains and losses-- maybe you can walk me through. How does that realized portion of your FFA gains and losses flow through your P&L, because if we just take the cumulative figure and strip it out, it's kind of taking away any sort of potential recovery--

All of it is reported in the change in fair value of derivatives in the published income statements. As I mentioned earlier, we had for the quarter $1.029 million realized losses in settling the FFAs and $7.2 million unrealized losses on the FFAs. On the intra-trade derivatives, we had about $600,000 realized gains, and $180,000, roughly, unrealized losses. So these two numbers-- These four numbers are all together reported in change in the fair value of derivatives.

Okay. Right. But when-- if that's being stripped out to get to a normalized number, we're stripping out realized gains and losses as well?

No. We're stripping out unrealized gains and losses. Our adjustment-- The $0.02 we report for the quarter strips out only unrealized losses or gains.

All right. I can just follow up with you offline on that. It's not a big deal. That's just about all I have. Thanks a lot, guys.

Charles Rupinski, Maxim Group.

A lot of my questions have been asked and answered, but I had a couple. When talking about scrapping of the older ships as far as your global view for both the containers and the bulkers, what are you thinking about in terms of scrap yard capacity? Are there enough scrap yards to be able to scrap the volume that needs to be scrapped over the rest of the cycle? Are there new developments or new yards or technologies or anything else that we should think about in terms of the scrap yards being able to sort of have-- being able to take all the old ships and basically recycle them?

I think that there would be a problem if the markets had all deteriorated and collapsed at the same time. If they were to do that, scrap yard capacity will not be enough. But the way things have developed with the drybulk market holding its strength and drybulk vessels not being taken over the last three months to the scrap yards, the scrap yards have been able to accommodate the tankers and the containerships that have been going their way. But, had it all happened together, I'm sure there would have been a problem and concession in the yards, and scrap prices would fall. But the way things have developed, I think the market will be able to cater for them.

Okay. Great. And just one other-- a couple of quick questions on chartering strategy for 2010 and beyond for the uncovered portion of your vessels. Do you intend to sort of keep the same balance of spot, assuming the market is a normal market, versus charter? And are you looking at things potentially as doing profit-sharing deals with charters or optionality or any other derivative-type chartering?

We'll always have our eyes and ears open for deals. But we generally do prefer when we fix time charters to fix at the highest possible level rather than fixing at the lower level with profit sharing. Having said that, that doesn't mean that we will not do it in the future.

Great. And one final question. This is a sort of out-of-the-box question and might show my lack of naval engineering knowledge or anything. But I've heard of at least one shipping company, a private company, that had a converted car carrier that went to drybulk. Is there any potential if you have really distressed container shipping assets that are out there that you're seeing in the market where you would look to do any kind of conversion at all? Or is that something that wouldn't be economically feasible?

This is a project that we have undertaken here to see if we could convert the containers to drybulk vessels. And we haven't got our final result yet. But the indication is that it is too costly to do, especially for the older ships that we have. And because we believe that the container market will recover at some point and, in a couple of years' time, it will definitely be or might be even better paying than drybulk. You never know. To undertake such a project for two years seems too costly. But this process our technical department is in looking at in more detail.

Well, great. Thank you very much for your answers.

[Doug Garber], FBR Capital Markets.

My first question has to do with the IRR returns of about 15%. I was hoping you guys could share some of the assumptions and give us some color on terminal value, appreciation, and kind of what your outer-year day rate assumptions are to get to that 15%.

I'll give you the general principles. We always assume-- run our projects assuming vessel life 'til 25 years old. We assume charter rates after the first two years to be at historical average time charter rates. And the first couple of years, we make our own assumptions about what that will be. And we assume 50% bank financing. These are the major assumptions that we put in our model. And we have always done that and followed that methodology.

Thank you. That's helpful. My next question is on the dividend. In terms of trying to forecast the level of the dividend you guys are going to pay out, are there any metrics that you guys look at in terms of cash payout when you determine how much of a dividend to pay out?

No. What we look at is to pay a decent dividend, anything which yields something between 5% and 15%, let's say, on the stock price where it is. And, if we do not have any other particular needs for funds, we are happy giving out dividends of that level.

All right. Thank you, gentlemen.

(Operator Instructions). As there are no further questions, we now pass the floor back to Mr. Aristides Pittas for closing remarks. Please go ahead, Mr. Pittas.

Thank you all for attending our conference call. And we will be with you again in three months' time. Thanks again. Bye.

That does conclude our conference for today. Many thanks to our speakers, and thank you for participating. You may all now disconnect. There is an Encore replay facility for the call today, details of which can be found on the Website. Thank you for participating. You may now all disconnect.