Euroseas Ltd (ESEA) 2020 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas conference call on the first-quarter 2020 financial results. We have with us today, Mr. Pittas, Chairman and Chief Executive Officer; and Mr. Aslidis, Chief Financial Officer of the company. (Operator Instructions)

I must advise you that this conference is being recorded today, Wednesday, May 27, 2020. Please be reminded that the company announced its results with a press release that has been publicly distributed.

Before passing the floor to Mr. Pittas, I would like to remind everyone that, in today's presentation and conference call, Euroseas will be making forward-looking statements. These statements are within the meaning of the federal securities laws.

Statements in today's conference call that are not historical facts, including, among other things: the expected financial performance of Euroseas' business; Euroseas' ability to pursue growth opportunities; Euroseas' expectations or objectives regarding future and market charter rate expectations; and in particular, the effects of COVID-19 on the financial condition and operations of Euroseas and the container industry in general, may be forward-looking statements as such -- as defined in Section 21E of the Securities Exchange Act of 1934 as amended.

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 forward-looking statements, and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it.

And I would now like the floor -- pass the floor over to Mr. Pittas. Thank you, sir. Please go ahead.

Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me is Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the three-month period ended March 31, 2020.

Let's now turn to slide 3 to see our income statement highlights. For the first quarter, total net revenues were $15.4 million; net income was $2 million; and net income attributable to common shareholders after $160,000 dividend on Series B preferred shares was $1.8 million or $0.32 gain per share basic and diluted. Adjusted net income attributable to common shareholders for the period was $1 million or $0.17 per share basic and diluted. Adjusted EBITDA was $4.1 million. Tasos will give (technical difficulty) the presentation.

Please turn to slide 4 for details of some of our recent developments. During the second half of 2019, the company acquired eight vessels in total with an average age of 12.5 years and total capacity of 25,600 TEU, thus increasing the fleet by more than 70% in number of vessels and more than 100% in terms of total TEU capacity.

In addition to the various routine operations, there were two noteworthy events related to our fleeting so far in 2020. First, we sold the motor vessel Manolis P for scrap with targeted delivery period in the first half of April 2020. Unfortunately, the sale was not completed due to the closure of the scrapyards related to COVID-19 lockdowns. We are in dispute with the buyers over the sale, which is being dealt through arbitration in London. The vessel will, however, be sold for scrap when the scrapyards reopen, probably to a new buyer.

Secondly, as already reported in January 2020, the motor vessel EM Oinousses suffered an engine room fire, luckily with no effect to our crew. This has been temporarily repaired and we have decided to scrap the vessel a few months earlier than initially envisioned as soon as scrapyards reopen in order to avoid costly repairs.

The COVID-19 pandemic has come center stage in the world scene since March 2020 with economic effects influencing world trade and demand for shipping. This slowdown is expected to result in reduced charter rates and earnings in the remaining of 2020. In that respect, we have started discussions with our banks to defer some of our 2020 loan repayments to ensure that we have sufficient liquidity in the near term. Tasos will provide you more information later on.

Please turn to slide 5, where you can see our current fleet profile after the latest additions. We now have 19 vessels, which include 14 feeder containerships and 5 intermediate container carriers with 661,000 deadweight tons and 51,000 TEU capacity of average -- weighted average age by TEU of 16.5 years. As mentioned earlier, Manolis P and EM Oinousses are in the process of being scrapped as soon as scrapyards open.

Please turn to slide 6 for our chartering operations and drydockings highlights. Up to now, we have been able to renew most of the charters that expired over the first months of the year at rates generally a little bit lower than their last charters and without facing idle times, except the Akinada Bridge, the Ninos, and the Hydra, which each faced about 15 days of idling. Only the EM Spetses, which opened up early May, has not yet found new employment.

I will not go through the complete list of new charters achieved, but you can see them all on slide 6.

Slide 7 shows our vessel employment in graphical form as well. As of May 25, we have about 57% coverage for the remainder of 2020 based on the minimum durations.

Please turn to slide 8. Over the last five years, our operational fleet utilization has been in excess of 98.9%. Euroseas has an outstanding safety and environmental record, but at the same time, the company is managing to keep costs low despite running an older fleet than the other listed companies. For the first quarter of 2020, operational fleet utilization was 96.2%. Practically, all the drop is attributed to the fire on the Oinousses.

The commercial fleet utilization rate in the first quarter of 2020 was 99%. The graph on the page compares daily cost, excluding drydockings since 2011 with our peers. Overall, our costs achieved are among the lowest of the public shipping companies.

Let's turn to slide 10 to discuss the containership market highlights of the first quarter. Time charter rates in the first quarter for feeder and intermediate size vessels ranging from 1,000 to 5,600 TEU vessels drew a negative picture as shown by the ConTex index. The 1,700 to 4,200 TEU sizes fell at about 10%. The bigger ships also fell, but a bit less. April and May figures are even lower, and the number of idling vessels is rising.

According to Clarksons, the 1,700 TEU geared vessel fell from an average of $8,500 in Q4 to $7,770 in Q1, and currently stands at $6,200. The 2,500 TEU geared vessel fell from an average of $10,130 in Q4 to $9,370 in Q1, and currently stands at around $7,500 per day. Whilst the 4,400 TEU gearless vessel fell from an average of $13,800 in Q4 to $12,900 in Q1, and currently stands at $8,250.

Average secondhand prices for older than 20-year-old vessels remained around their, now dropping though, scrap prices. However, for younger vessels of about 5 to 15 years old, there was a drop circa 15%. The inactive container ship fleet surged to a record of 524 vessels, totaling 2.6 million TEU as of May 11, according to a recent TradeWinds article. This includes idle due to scrubber retrofitting, which of course is mostly larger vessels and is about 700,000 TEU total.

Scrapping remained at the same levels as the latter part of 2019, which is very low for the current market. Only about 40,000 TEU are scrapped in 2020 so far. Due to the lockdown of scrapyards worldwide vessels can't be scrapped currently, and any quoted prices are 20%, 25% lower than the previous prices. The fleet has grown by 0.6% in 2020 so far without, of course, accounting for idle vessels, reactivations, or idling.

Please turn to slide 11. Due to COVID-19, the IMF projected world GDP growth in 2020 is revised downwards from 3.3% positive growth to minus 3% with reduction stemming from the USA, China, India, and the ASEAN-5 economies mostly.

India was also reduced this quarter from 5.8% the IMF predicted three months earlier to 1.9% growth predicted today. For 2021, global GDP growth rebounds to 5.8% as per the IMF as still the base case scenario is for a rapid global recovery. Major global economies are expected to rebound strongly in 2021 with the US and the Eurozone rebounding by 4.7%, India by 7.4%, and China by 9.2%.

In terms of demand for containerized trade, demand measured in TEU per mile is expected by Clarksons to have a sharp drop at minus 10.3% in 2020. While a high growth rate of 8.9% is expected to return in 2021, owing to the rise of the global economy.

It should be noted, the rate and growth projections currently made will probably be revised as COVID-19 develops but also due to the uncertainty of the geopolitical situation. Therefore, market development projections are even harder than usually to make.

Please turn to slide 12 to review the containership age profile and orderbook delivery schedule. As you can see on the containership age profile chart on the left side of the slide, we have a young fleet with a mere 6% of ships being over 20 years old only. This, however, is concentrated in the smaller size classes where we operate.

On the right side, the chart shows the delivery schedule of the current containership orderbook, which is expressed as a percentage of the fleet. The circled figures for the years 2017 to 2019 shows the actual fleet growth after taking into account scrapping, cancellations, and slippages. Whilst the red circle figures for 2020 to 2022, show the orderbook before any scrapping and slippages.

Currently, the containership orderbook stands at 10% of the fleet, a figure which is the lowest observed in more than 20 years. This low level of orderbook provides a source of optimism for a quick recovery of the rates if trade demand recovers as supply-side pressures will be at minimal levels.

Please turn now to slide 13, where we discuss our outlook summary. The disruption of economic activity and seaborne trade caused by the unprecedented worldwide lockdown, as well as the still evolving pandemic render any forecast a very ambitious exercise surrounded with a high degree of uncertainty.

As discussed, initial estimates from Clarksons to quantify the effects of the pandemic on containerized trade indicate a sharp drop in demand in 2020 of 10%, followed by a sharp recovery in 2021 of 9%, similar to the way economies reacted during the 2008-2009 financial crisis. Therefore, we expect a very weak 2020 and a strongly strengthening 2021 and 2022.

Hoping to have been through the toughest part of the pandemic's effect in the first half of 2020, we still might not expect to see any significant gains during the summer, but markets could see meaningful improvements by year end.

For the following few months it will be difficult to charter vessels that are redelivered by their charterers and the owners. The best hope is to extend, if possible, with existing charterers for whatever periods are available at somewhat lower rates in order to avoid idling. The orderbook, as a percentage of the fleet, is the lowest of the last 20 plus years, indicating limited supply growth over the next two, three years.

Still a significant percentage of it is to be delivered in 2020, though some of it will spill into 2021, plus the return of quite a few vessels, mainly larger ones, that are in shipyards retrofitting scrubbers will dampen the effect of any market recovery as the effects of COVID-19, hopefully, retreat towards the latter part of the year.

The orderbook for 2021 onwards is luckily quite low. And since owners do not yet know what the optimal fuel for the not-too-distant future will be, they are reluctant to place new orders. So the second half of 2021 and the whole of 2022 may prove to be boom periods if global demand picks up as generally expected.

Let's turn to slide 14. The left side of the slide shows the evolution of the one-year time charter rates for containers of 2,500 TEU since 2000. Since the financial crisis of 2008, rates stayed rather depressed with three spikes within the $5,500 to $15,000 per day range. Currently, we see charter rates hovering at $7,500 per day.

The right-hand side of the slide shows vessel values in relation to historical prices since 2011. As you can see, container ship values are still below the median historical values, and of course, significantly lower than historical average levels as well.

And with that, I will now pass the floor to our CFO, Tasos Aslidis, to go over our financial highlights.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will take the next four slides to give you an overview of our financial results for the first quarter of 2020 and compare them with the same period of 2019.

With that, let's look first at slide 16. For the first quarter of 2020, the company reported total net revenues of $15.4 million, representing an 85% increase over total net revenues of $8.3 million during the first quarter of last year. The main reason for this revenue increase was the number of vessels we operated, 19, in 2020 as compared to 11 in 2019.

The company reported a net income for the period of $2 million and a net income attributable to common shareholders of $1.8 million as compared to a net loss of $0.02 million and a net loss attributable to common shareholders of $0.49 million for the first quarter of 2019. The results for the first quarter of 2020 also include $0.8 million of amortization of below market time charters acquired.

Depreciation expenses for the first quarter of 2020 amounted to $1.7 million, compared to $0.8 million for the same period of 2019 due to the increased number of vessels we operated.

In the first quarter of 2020, none of our vessels underwent drydocking. While in the same period of last year, we had one vessel completing a special survey with a drydock with a cost of $0.7 million.

Interest and other financing costs for the first quarter of 2020 amounted to $1.3 million compared to $0.7 million in the first quarter of 2019. This increase is due to the increased amount of debt we carried in the current period compared to last year and is partly offset by the lower Libor rates we had to pay this year, again, as compared to the previous year.

Adjusted EBITDA for the first quarter of 2020 was $4.1 million, compared to $1.5 million achieved in the first quarter of 2019, representing a 179% change -- increase. Again, mostly driven by the higher number of vessels we operated.

Basic and diluted earnings per share for the first quarter of 2020 were $0.32, calculated on 5.58 million basic and diluted weighted average number of shares outstanding compared to basic and diluted loss per share of $0.32 for the first quarter of 2019, calculated on 1.54 million basic and diluted weighted average number of shares outstanding.

Excluding the effect on the income attributable to common shareholders of the unrealized gains from derivatives and the amortization of below-market charters acquired, the adjusted earnings per share for the quarter ended March 31, 2020 would have been $0.17 compared to an adjusted loss of $0.33 for the first quarter of 2019. Usually, security analysts do not include the above items in their published estimates of earnings per share.

Let's now turn to slide 17 to review our fleet performance for the first quarter of 2020 and, again, compare it to the same period of last year.

Let's first look at our fleet utilization rates. As usual, we have broken down our fleet utilization rate in commercial and operational. As you can see in the slide, for the first quarter of 2020 we reported a 98.9% commercial utilization rate and a 96.2% operational utilization rate as compared to a 99.4% commercial and a 100% operational utilization rate for the same period of 2019.

I would like to remind you here that our utilization rate calculation does not include vessels in scheduled drydock, scheduled repairs or in lay-up, if there is any, during the reported periods.

As I mentioned earlier, in the first quarter of 2020 we operated 19 vessels, which had an average time charter equivalent rate of $9,615 per vessel per day, compared to a time charter equivalent rate of $9,088 per vessel per day for the same period of 2019, a period that we operated 11 vessels on average.

Total operating expenses, including management fees and general and administrative expenses, but excluding drydock costs, were $5,881 per vessel per day for the first quarter of 2020 compared to $6,223 per vessel per day for the same period of last year.

Let's look now at the bottom of the table to our daily cash flow breakeven levels presented here on a per vessel per day basis. For the first quarter of 2020, we reported an operating cash flow breakeven level, including loan repayments, but before any balloon repayments, of $8,518 per vessel per day as compared to $8,800 per vessel per day for the first quarter of 2019.

Let's now move to slide 18 to review our debt profile. This slide shows, on the right-hand side, our cash flow breakeven expectation for the next 12-months. And on the left side, we can see our scheduled debt repayments over the next several years.

As you can see from the chart on the left, almost 30% of our loan repayments this year, about $5 million, are due to a related party that under certain conditions the company can repay them in shares. In 2021, we have to repay $19.2 million for balloon payment for a loan that covers nine of our vessels. And in 2022, there is also a $1.7 million balloon repayment related to one of our vessels. Finally, in 2023, we have to make three balloon payments of nearly $30 million for the remaining nine of our vessels.

A regular loan repayment, if I may say so, the dark part of the bar shown in the chart, are scheduled to decline every year over the next four years. Expressed in dollars per vessel per day, our loan repayments over the next 12-months amount to $1,700 and contributing that to our cash flow breakeven level.

Looking now at the right part of the slide, in the table there, and by making assumptions for the remaining components of our cash flow breakeven level, that is operating expenses, G&A expenses, interest, drydock, and the cash payment of our preferred stock dividend, we come up with our cash flow breakeven level for the next 12-months, which amounts to about $8,780 per vessel per day.

As Aristides mentioned earlier, due to the extreme circumstances introduced by COVID-19 pandemic, we're in discussions with our banks to defer some of the loan repayments due in 2020. We're also in discussions with our preferred equity holders to pay -- to possibly pay the dividend in 2020 in shares, in kind. We expect that these accommodations, when formalized, will reduce in half or more of the cash requirements of our loan repayments and preferred share dividend payments, bringing down our breakeven level to around or just below $8,000 per vessel per day.

Let's turn now to slide 19. This slide provides some highlights from our balance sheet. As of March 31, 2020, we had cash and other assets of $13.6 million and the book value of our vessel was about $113 million, giving us total assets -- total book value of our assets for approximately $126 million.

On the liability side, we had an outstanding bank and other debt of about $87 million, preferred equity of about $8 million, and other liabilities of $9.5 million, thus leaving us with a book value of about $22 million.

If we adjusted the book value of our -- with the market value of our vessels, based on internal estimates, we can calculate the net asset value of our fleet of about $26 million or $4.7 per share. With recent share price trading range of between $2 and $3 per share, this level represents a significant discount to the book value -- to the book and net asset value of the company and potentially represents a good investment for our shareholders.

And with that, I would like to turn the floor back to Aristides to manage the remaining of the call.

Yes. Tasos, thank you. I am now opening the floor for any questions you may have.

(Operator Instructions) Tate Sullivan, Maxim Group.

Hi Tate.

Hello. Just a first question on the ship -- the current term contracts for your fleet. When you indicate in your ship list -- and the reason for the question, to set expectations for this current quarter and the next. When you indicate, for instance, the term contract -- current term contracts ends in May, is it usually at the end of the month? Or it can vary, is it sometimes middle of the month or at the beginning of the month for all your term contracts, please?

It varies, Tate. It could be any time during the month. We try to be -- to round things and we report the month rather than any specific date.

Okay. And then your earlier comments on the scrapyards, can you give more background on where usually your containerships may get scrapped? And are the yards in the process of opening? Or where are they, in general, or more background on the regional diversification of where they're closed and where maybe they may be open faster, please?

Yes, 90% of the ships that are scrapped are scrapped in India, Pakistan, and Bangladesh. These are the three areas where -- which have the biggest scrapping and pay the most. You can scrap a ship in Turkey or in a few other places, but you get much less money for that.

Both of our ships are positioned in the United Arabs location there. And therefore, the most probable places for them to be scrapped are either Pakistan or India. These countries have locked down the scrap yards for nearly -- for over a month now. And -- but there are discussions of these scrapyards opening up very soon.

In fact, in Pakistan, they say that they can open -- that the yards are open; however, there is no way to repatriate your crew yet. So practically, you cannot sell a vessel for sale -- for scrap because you cannot take your crew off. But we hope that things will improve within the next few weeks, couple of weeks, and the ships will be sold within this quarter, within Q2.

Oh, within 2Q. Okay. Thank you very much. Have a good rest of the day.

Thanks, Tate.

Poe Fratt, NOBLE Capital Market.

Hi. Good morning, Aristides. Good morning, Tasos. Can you highlight on the -- whether there's going to be potentially any insurance recovery for the fire in the engine room? And then secondly, can you just highlight the scrap value that you're looking for? It looked like you got a deposit on the Manolis P of about $1.1 million. Can you just highlight any additional cash that you potentially are looking at with scrapping the Manolis P and then also the Oinousses?

Yes. On the Manolis P, as you say correctly, we had $1.1 million deposit, which we now have put in an escrow account subject to the developments in the arbitration procedure. Scrap prices are being quoted 20%, 25% below where they were before the crisis. Although, this is somehow artificial because if you look at steel and scrap prices globally, they haven't dropped, they have -- they might even be increasing. But because of the scrapyards having been closed for so long, the scrap brokers are now asking -- paying a lower price. We will see how that will develop.

The Manolis will be sold at a price of maybe -- anything between $300 and $380, let's say, dollars per ton, I would say, which is just a little bit less than what we had agreed previously. But let's say, around $1.5 million -- around $2.5 million maybe. And the Oinousses will be sold something like $3.5 million to $4 million, I would probably estimate right now.

And of course, we are going to get fully covered from the insurance for all the damage that we suffered. So that cost will be recovered fully minus $100,000 of deductible maybe.

And would you be able to quantify the damage that was incurred from the fire?

I wouldn't like to do that right now. This is a process we are in with the insurers. But it really doesn't matter too much because what we recover is what we expense.

Okay. Great. So it'll cover the cash cost.

Yes.

And then Tasos, can you talk about the below market time charter amortization? And will we see that in the second quarter? Or for how long should we see that?

We should see it in the second quarter too, but at a declining rate. So I'll be happy to provide some information for you that relates primarily to the ships that we bought back in November that came with some charter that were then below market. And as you know, when you acquire such a charter, you have to make the appropriate accounting adjustments. But I think that they would be going down over the next couple of quarters, let's say, linearly, it was about 600,000 this time around.

Great. And then could you highlight how much you're looking for as far as the deferral of amortization in 2020?

I think, as I mentioned, we expect to see something close to $800 per vessel per day, which I think should amount to, I think, nearly $4.5 million to $5 million.

And Tasos, as you noticed on slide 18 that your -- the next 12-month's budget numbers are based on 19 vessels.

Yes.

Should -- is there a linear association if we based it on 17 vessels? Or any adjustments that you could highlight for us that are based on what your --?

They would -- most of the numbers would be the same. The G&A will increase by about $100. And the preferred dividend might increase by about $30 if it remains in cash. If it is converted in [peak], it will not affect the cash flow breakeven.

The only effect I see here, that could be the G&A, that might increase $100, because the loan repayments, they would be proportionally -- almost proportion, depends on the specific vessels reduced. Because when you sell a ship, you might have to repay part of the outstanding debt.

Great. And then it looks like drydock activity was pretty low in the first quarter and you're budgeting higher numbers. Could you just give us some timing on maybe the second-quarter drydocking activity, or for the rest of the year?

I believe we have one drydock next quarter. Although to be to be certain, I would like to check and get back to you on that.

We have a couple of ships that are due for a special survey, one in Q3 and one in Q4. We will decide if we're going to pass those special surveys, they are amongst the elder of our vessels. And we will decide if we're going to pass those special surveys or not depending on how the market has -- will be fairing at the time.

If the markets are very poor, we will not spend the money to pass the special surveys. If the markets are recovering and we can see that we will recover the money for the special survey within a year's time after we pass it, we will pass those special surveys.

And Aristides, would you mind mentioning the names of the vessels that are looking at the third- and fourth-quarter special surveys?

It's the Ninos, I think, and the Athens.

Great. Thank you so much.

Thank you, Poe.

Thank you.

(Operator Instructions) There are no further questions at this time. Mr. Pittas, please continue.

Thank you all for participating in our call this quarter. And we will see you in three months' time again, and discuss the Q2 developments and, hopefully, the retraction of the COVID-19 worldwide.

Thank you, all.

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