Euroseas Ltd (ESEA) 2011 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen. Welcome to the Euroseas conference call on the first-quarter 2011 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. There will be a presentation followed by a question-and-answer session (Operator Instructions). I must advise you that this conference call is being recorded on Friday, May 20, 2011.

Please be reminded that the Company announced their results after the market closed yesterday with a press release that has been publicly distributed. If you have not received the press release, you may look onto the Euroseas website at www.Euroseas.tr and navigate to the Investor Relations page; or you can call Capital, Inc. at 212-661-7566; or the Chief Financial Officer of Euroseas, Mr. Tasos Aslidis, and they will be happy to send it to you.

For those of you who want to follow the audio webcast, please log onto your computer to the home page of the Euroseas website as I mentioned, www.Euroseas.tr. Once again, the participants of the webcast can download the PDF from the website. Kindly note that the slides are user-controlled.

Before passing the floor to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, Euroseas will be making forward-looking statements. These matters 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 certain expectations not being realized.

I kindly draw your attention to slide number two of the webcast presentation, which has the four forward-looking statements and the same statement was also included in the press release. 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 now 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. Together with me today is Tasos Aslidis, our CFO. The purpose of today's call is to discuss the results for the three-month period ended March 31, 2011. Let us turn to slide three and a review of 2011 first-quarter results.

For the first quarter, we reported total net revenues of $14.2 million. Net loss for the period was $0.6 million or $0.02 per share loss, basic and diluted. Excluding the effect of unrealized gains and unrealized losses on derivatives, and the realized loss on rating securities, and amortization of the fair value of charters acquired, the loss for the period would have been $1.3 million or $0.04 loss per share.

Adjusted EBITDA for the first quarter of 2011 was $3.7 million. The results for the first quarter of 2011 reflect the lower level of the charter markets compared to the same quarter of last year, and also the high number of vessels operated. Also, our results were positively influenced by gains on our interest rate and FFA derivative contracts.

We are pleased to have recently announced that our Board decided to increase our quarterly dividend to $0.07 per share for the first quarter of 2011. Recent developments for the Company include the drydocking of three more vessels in the first quarter of 2011, which were completed. And when you factor in the 10 drydockings of 2010, all but three ships were drydocked in the last 15 months.

Our containership fleet has started and is expected to continue benefiting from the increasing containership charter rates, as the charters were (inaudible) [by 11] vessels have been already renewed at levels on average about 69% higher than the previous charters, and eight more renewals, including two of the previous four vessels, are expected to be renewed during the rest of 2011. As we believe the containership market will continue strengthening in 2012, our renewed strategies to pursue charters with an average duration of not more than a year.

Our Euromar joint venture also started contributing to our results with the charters of [two of the six] container ships renewed at higher levels.

Let's move to slide four to discuss the Euroseas market position. During the first quarter of 2011, we continued executing our strategy of positioning Euroseas to benefit from the market trends. Our cautious approach toward the drybulk markets that led to having full coverage of our drybulk fleet with charters that run well into 2012, appears to have been justified from the market weakness during the first quarter of 2011.

And like the drybulk sector that's experiencing a heavy supply of new buildings, which is keeping the rates weak despite strong demand from the Far East, containership [feeders] don't have the same newbuilding supply problems. As mentioned in the previous slide, we believe that the containership market will continue to strengthen into 2012, and if this scenario plays out, Euroseas stands to substantially benefit.

Our strong balance sheet continues to position Euroseas in a favorable position for investment opportunities in both the drybulk and containership sectors, supported by excellent relationships with our lenders, a strong cash position, and our debt to market value of our fleet below 40%.

We continue focusing on identifying accretive investment opportunities. We believe the stronger rates in the containers sector in the near-term will support a higher values for the vessels we are currently seeing without reducing investment returns. Declining drybulk values might also present us with attractive opportunities for investment in the not-too-distant future.

In addition to the $25 million earmarked for future investments, we still have about $10 million to invest through Euromar. Euromar has invested about $90 million already in six modern [feeder] container ships, and has about an equal amount of equity available for further investments. We believe the contribution of Euromar to our bottom line will become more significant as time goes by.

In planning our expansion and growth, we are not neglecting the cost side of our operations, which is one of our competitive advantages. We believe that we continue to maintain one of the lowest operating cost structures amongst the public shipping companies.

Please turn to slide five. Our comfortable balance sheet enables (inaudible) to continue paying meaningful dividends to shareholders, even though we are still at the low end of the market cycle. Increasing container charter rates have not filtered down yet to the bigger part of our fleet. In this context, we declared a quarterly dividend of $0.07 per share for the first quarter of 2011, payable on June 10, 2011 to shareholders of record on June 1, 2011.

This is the 21st consecutive quarter with a dividend declared since we accessed the capital markets in August 2005. It represents an annual yield of about 6% on the basis of our stock price on May 18, and a 17% increase from the dividend paid last quarter. Our current fleet is shown on slide six and consists of the five drybulk vessels (inaudible) container ships and with (inaudible) [ships].

On the following slide, slide seven, we list the Euromar fleet of six modern container vessels.

Let us move to slide nine for just a brief overview of the market. The latest [IMF] predictions points to a 4.4% world GDP growth in 2011 and 4.5% in 2012, the same as the previous quarter. The estimate for the US, where growth is expected to decelerate from 3% that was projected in January, to 2.8%, is still a healthy rate. The global drybulk and container rates closely follow GDP developments. To the extent that future GDP growth is going to be dependent more on developing countries than the developed ones, one may expect drybulk trade to grow at a slightly faster pace than historically for similar GDP growth rates.

For containers, it is the opposite, but we still expect container rates to be growing at 50% faster pace than drybulk. [Plasos] is still predicting a 6% drybulk trade growth in 2011 despite the events in Japan and Australia. For container [ice] trade, a growth of 9.7%, just slightly lower from the earlier 10% prediction.

Let's turn slide 10. Against this demand background, we have to also look at ship supplies. The current delivery schedule for drybulk vessels in 2011 stand at 25% for 2011 alone. This does not take into account cancellations, slippage and scrapping. It is very difficult to quantify how much of the order book will finally get delivered in 2011 and 2012, but it is going to be much less, possibly around [60%], as seems to be the current (inaudible) of the value of forecasters. And it is in sync with the 38% slippage observed in 2010 and the actual amount of drybulk tonnage delivered during the first three months of 2011.

Please note, though, on the left-hand side, the percentage of the fleet that is older than 20 years. It is an impressive 21%, which will no doubt help the fleet rebalance by being scrapped quickly if rates drop further and stay low for sufficient periods of time.

Please turn to slide 11. The containership order book is about half of that of drybulk and much lower than what it has been historically. The recently placed orders are nearly all for bigger ships and will be delivered in 2013 onward. If further significant new orders are not placed, the market should be in a position to absorb. The delivery schedule for 2011 stand at around 11.7%. Just as in the supply of drybulk vessels, the large vessels dominate the order book, while the smaller ships, where we are active, are more in line with expected trade growth.

Cancellations, slippage, conversions, and scrapping will affect the balance. We expect slippage to be significantly less, though, this year than the 40% of last year.

Let's turn to slide 12 to briefly summarize how our demand and supply analysis balance out (inaudible) in the drybulk and containership markets.

On the drybulk market, we expect a low market environment in 2011 and 2012, driven by the excess number of deliveries. Far too many deliveries need to be canceled or postponed, and those drybulk trade to growth significantly faster pace than envisaged in order to balance the market. This solution will eventually come through scrapping, which we expect to pick up further during the next 18 months. Its effect should be felt around that time.

For the containership market, the outlook is much more positive than the drybulk. Supply growth is expected to be moderate and containerized trade is returning to pre-crisis levels of 8% to 10%. Supply growth in the container market is mainly in the larger-sized segment. The smaller feeder size ships in which we operate have a small order book. In addition, slow-steaming has and is still becoming a bigger positive factor as fuel prices remain high. We expect charter rates to continue to increase in 2011, although at a lower pace than in 2010.

Let's turn to slide 14 to discuss our drybulk employment situation in a bit more detail.

Our drybulk fleet is covered for the remainder of 2011 either by physical charters [OBL FFA] contracts. We expect to see little influence in our earnings from the developments in this market. A zero-cost [collar] FFA contract, which essentially provides for earnings within $16,500 and $23,500 a day, for a standard [Baltic] Panamax, is essentially providing downward cover for Monica P, which is trading in the (inaudible) spot pool. For 2012, we also have 50% coverage at an average of about $16,000 a day, with ships opening up gradually over time.

Please turn to slide 15. As far as our container ships are concerned, we currently have 60% covered for 2011. We believe we will continue to capitalize on the strengthening of the containership market, as we expect most of the ships coming open this year will be at chartered at higher levels. Our belief feels that the market has at least two more years of upward potential. It is far too difficult to forecast for longer periods, as so many things may happen.

We will, therefore, generally be renewing expiring charters for periods of up to a year. Over the next few quarters, we expect to see a significant contribution to our earnings via our container fleet in 2011 and beyond.

Please turn to slide 16. Through Eurobulk, our manager, we have been able to reduce our daily costs in both 2009 and 2010. The graph in the chart compares our daily costs, excluding only drydocks, with our peers. You can clearly see the downward trend of our daily costs as compared with increasing trends of our public peers.

Overall costs achieved are amongst the lowest of the public shipping companies. We are very proud of this performance, especially as it is in conjunction with the operation of fleet utilization in excess of 98.5% over the last five years, a level similar to that of our peers, despite the fact that the average age of our fleet is higher than most of the other listed companies.

Our Q1 costs are slightly [up on] last year as per our budget though, mainly reflecting dollar weakness and increased [payor loop] and other provision costs. We would expect the others of our peers to also show similar increases.

Let's turn to the next slide. This slide shows the expectation of our cash flow breakeven -- no, sorry -- let's turn to the final slide of my presentation before Tasos kicks in.

This slide shows the correlation of time charter rates for Panamax drybulk ships and container ships [1,700 BU] ships over the last decade. Earnings for container ships were moving in parallel with earnings for Panamax ships up to [2008 -- 2006], with a slight exception of the peak in 2004, which was the prelude of the supersizer that happened in the drybulk sector in 2006.

Since 2006 to 2010, drybulk has obviously outperformed strongly the containership market. But the two markets seem to be converging again. Drybulk charter rates are declining; containership and charter rates are improving. This exceptional performance of the drybulk fleet was mainly due to the Chinese boom.

We now see on the right-hand side of this slide that prices have also been correcting to match what's happening on the charter base. Drybulk values have been falling, and we now are very close to the historical average values for drybulk ships, while container ships values have been increasing and we are now very close to the historical average values for container ships. These are both levels at which we feel comfortable in investing at, and we expect to be continuing rolling out fleet by buying ships in these sectors. However, at present, we still prefer the container sector, which is in an upward momentum rather than the drybulk sector.

If drybulk prices fall more, then you could see us buying drybulk again. If container prices increase substantially more, then you could see us stopping buying container ships. Right now, we believe in the container sector for the next two years, and we have positioned our Company in such a way as to be able to take advantage of these expectations that we have.

And with that, I will pass the floor over to Tasos to take you through our financials.

Thanks, Aristides. Good morning, ladies and gentlemen. I will provide you with a brief overview of our financial results for the first quarter ended March 31, 2011 in a similar format that we did in previous presentations.

19 shows our first-quarter results in comparison to the same period of 2010. I'll repeat here some of the figures that Aristides gave at the beginning of the presentation. In the first quarter of 2011, we reported net revenues [of] $14.2 million, representing a 3.2% increase over total net revenues of $13.8 million during the first quarter of last year.

We reported losses for the period of [$0.6 million] as compared to a net loss of $3 million for the first quarter of 2010. The basic and diluted loss per share for the first quarter of 2011 was $0.02 per share compared to basic and diluted loss of $0.10 per share for the first quarter of 2010.

The results for the first quarter of 2011 include $0.5 million net unrealized gain on derivatives and trading securities, compared to $0.7 million unrealized gain on the same -- for the same period of 2010. And also includes a $0.2 million realized loss on derivatives versus a $4.7 million realized loss for the same period of 2010.

Excluding the effect on the earnings for the quarter of the unrealized gain and realized loss from derivatives, unrealized loss on trading securities, and amortization of the fair value of time charter contracts acquired, the loss per share for the quarter ended March 31, 2011 would have been $0.04 basic and diluted, compared to earnings for the previous-year quarter of $0.01 per share basic and diluted.

Adjusted EBITDA for the first quarter of 2011 was $3.7 million, about a 25% decrease from the $5 million we achieved in the first quarter of last year. As Aristides mentioned earlier, we declared a quarterly dividend of $0.07 per share for the first quarter of 2011. That represents a 40% increase over the same period in 2010 and a 17% increase over the dividend we gave last quarter. This dividend is payable on June 10 of 2011 to shareholders of record on June 1. This is, I would like to say, the 23rd consecutive quarter of dividend we declared since we accessed the public markets.

Let's now move to slide 20. This slide shows our fleet's performance for the first quarter of 2011 and compares it with the same period of last year. We have broken down our fleet utilization rate into commercial and operational. Thus, during the first quarter of 2011, we reported a [98%] commercial utilization rate and a 99.5% operational utilization rate compared to 100% commercial and [99.9%] operational for the first quarter of last year. This utilization rate does not include vessels in lay-up or scheduled for repairs during the reported periods.

The first quarter of 2011, we operated another [16] ships, [pending a] time charter equivalent rate of about [$11,088] per vessel per day, a decrease compared to the time charter equivalent rate we said during the same period of last year.

Again, in the first quarter of 2011, our 16 vessels had operating expenses on average of $5,938 per vessel per day compared to [$5,296] per vessel per day for the same quarter in 2010. This increase mainly reflects the two of our vessels that were laid up during the first quarter of last year are now operating, and were operating during the first quarter, thus incurring higher day costs; but of course, are now contributing to our revenues as well. Also the weakness of the US dollar compared to the same period of last year increased certain of our operating expenses.

I would like to draw your attention to the bottom of this table to our daily cash flow breakeven level expressed on a dollar per day per vessel basis. We reported in the first quarter of 2011 a daily cash flow operating level, which includes loan repayments of approximately $9,339 per vessel per day compared to approximately $8,700 per vessel per day in the same period of 2010.

Let's now move to slide 21. This slide shows the expectation of our cash flow breakeven level over the next 12 months, including again our debt repayments and also this slide shows our debt repayment profile. Let's start with us.

As you can see from the chart on the left part of the slide, in 2011, we had relatively low level of debt repayments, the same or similar to what we said in the previous [three] years. In 2011, we are scheduled to make a total repayment, including balloon repayments, of $13.5 million, which results in about $2,300 per vessel per day contribution to our cash flow breakeven levels.

After making appropriate assumptions for the other elements of the cash flow breakeven, like the operating costs, general and administration costs, et cetera, you can see on the right-side of this slide that we've made that our cash flow breakeven level for the next 12 months is expected to be around $9,800 per vessel per day on a fully operational basis.

I would like to remind you that these figures do not give any credit to any interest we might collect over the next 12 months, which hopefully, will reduce the breakeven level.

I'll conclude my remarks, as always, by proceeding to slide 22 and giving you some highlights from our balance sheet. As of March 31, 2011, we had unrestricted cash of about $34 million and restricted cash of another $6 million.

Our debt, including the current portion of it, was about $85 million, resulting in a debt to capitalization ratio of about 28%. As a result of this, we are in full compliance of our debt covenants. Our loan to fleet ratio is below 40%. We estimate that we can comfortably allocate between $30 million and $35 million of our cash for further expansion for weeks. After allowing for the remaining commitment of $10 million to our joint venture with Euromar, we'll be able to designate about [$20 million to $25 million] for additional investments over and above what we can do through Euromar, which translates to us being able to acquire approximately one or two additional ships.

With that, I would like to pass the floor back to our CEO, Aristides Pittas.

Thank you, Tasco. While I will leave the next slide open, this slide summarizes our strategy and growth, I would like to open the floor for any questions you might have.

(Operator Instructions). Justin Yagerman, Deutsche Bank.

This is Josh Katzeff for Justin. I guess just to start off, you guys were active early, as soon as you started that -- the JV with Euromar and in 2010, making acquisitions on the container sector. But it's kind of -- it's been quiet recently. Can you talk about what you're seeing in the market and maybe why we haven't seen any more recent acquisitions?

Well, what we were doing is really evaluating the market. We have not stopped being interested in container ships or dry-bulk ships. It's just that the right opportunity had not appeared up to now. I believe that we will be active again quite soon.

Is that because the (inaudible) are too high or too wide?

I think there were too few sellers of quality secondhand ships and what was in the market was not of the quality that we particularly like. A few more ships have appeared, so I hope that we will be moving ahead sooner rather than later with further investments.

Got it. And with regard to dry-bulk acquisitions, I guess, how much lower do you think asset prices need to really go before the investments become more compelling?

As I said during the presentation, I think prices are around average historical prices. We want some and we think that we might see them at 20% below the current levels.

And just one more question before I turn it over. I guess you have one year time charter rates in your slide at kind of roughly $10,000 a day for the 1,700 [TE new] ships. Is that kind of what you're estimating you'll be able to recharter some of, I guess, the near-term maturities?

Yes, maybe even a little bit higher than that.

Got it. I thank you for your time this morning.

Thank you.

Michael Webber, Wells Fargo.

I just wanted to touch quickly on Euromar. You guys have been involved in this for quite a while now. Has there been any thought put into potentially extending that JV or potentially increasing its size, as you get a little more opportunity [in] the container ships markets?

There has been some discussion and thoughts about it, but nothing has actually happened yet. We still have about $90 million to invest. But the relationship is going ahead very, very smoothly and I think all parties would like to do something more. So the capacity, I think, is there definitely from the [BE] firms and if we see good opportunities, that could well be.

Got you. Can you remind us on what the timeframe is like in terms of when you need to make that decision?

Well, the current agreement is provided investments will be made within two years. That we started off in March last year, so we still can do investments within this year. But there is nothing really precluding us from finishing earlier and doing something bigger now or earlier or whatever -- or extending it; it's a very, very comfortable relationship.

Fair enough. That makes sense. Touching on dry-bulk a little bit and you mentioned [a little bit] previously you could see 20% to 25% more [down side] in dry-bulk asset values. And you've obviously got a fair amount of exposure coming up in that space. Is there any thought of potentially shedding some of those dry-bulk assets here, considering you think you could be selling them a little bit higher here than you would be in a couple of years? And maybe kind of reforming your fleet a little bit closer to the trough in a couple of years?

That is definitely a thought. That is the thought that we are having maybe replacing our older ships with some younger ones. Now that the difference in price between the younger and an elder one is much, much smaller than before. As we did in 2009, when we bought three 10-year-old ships and sold our 20-year-old ships -- a similar story can easily happen.

Okay. All right. That makes sense. One last one -- this is more of just kind of housekeeping -- I don't know -- I don't believe you mentioned it yet, but your drydock schedule for the rest of the year? You guys had done most of your vessels, I believe, in the last 12 to 18 months, but do you have any remaining for the rest of the year?

We have two more vessels scheduled to be drydocked in the remainder of the year. One in the second quarter and one in the third.

Great. All right. That's very helpful. Thank you for the time, guys.

(Operator Instructions). There are no further questions, gentlemen. I'll pass the floor back to yourselves for any closing comments. Thank you.

Well, ladies and gentlemen, thank you very much for listening to us this quarter. We will be back in three months' time with Q2 results. Thank you very much. Bye bye.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you all for participating. You may now disconnect.