Earnings Call: Q3 2020

Nov 12, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Third 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. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. Please be reminded that the company announces its results with a press release that has been publicly distributed. Before passing the floor to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, EuroDry will be making forward looking statements. These statements are within the meaning of the federal securities laws. Matters discussed may be forward looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide 2 of the webcast presentation, which has the full forward looking statement and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it. And I would now like to pass the floor over to Mr. Plitas. 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, Chief Financial Officer. The purpose of today's call is to discuss our financial results for the Q3 9 month period ended September 30, 2020. Please turn to slide 3. Our income statement highlights are shown here. For the Q3 of 2020, we reported total net revenues of $6,800,000 and net income of $500,000 adjusted EBITDA of $2,800,000 and adjusted net income attributable to the common shareholders of $100,000 or $0.05 per share. During the Q3 of 2020, EuroDry benefited from gradually improving charter markets as a result of the reopening of most economies after the pandemic related lockdowns. Since the beginning of October and during early November, the market rates have given up some of the gains, but they remain at such factory levels given the increased economic uncertainty due to the 2nd wave of the pandemic and renewed economic lockdowns, especially in Europe. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our chartering and operational highlights. MV for a period time charter at 99% of the Baltic Panamax Index for the 74,000 deadweight ton vessel, average four time charter route, with a minimum duration till April 1, 2021 and the maximum duration of August 15, 2021. The Starlight was fixed in direct continuation of the previous charter at 98.5 of the BPI 74 average 40C index with minimum duration till August 15, 2021 and maximum duration of January 15, 2022. The overall revenues these 2 vessels received in Q3 and will receive in Q4 after taking into account the FFA are actually fixed through the previously sold FFA contracts at an average rate of $11,000 per day. Additionally, we have sold FSAs for 30 days in Q1 2021 at a rate of $9,500 per day, providing a month's worth of cover overall for 1 vessel. There were no dry dockings or repairs for the Q3. Please turn to Slide 5 for a summary of EuroDry's current fleet. As you can see, it is comprised of 7 drybulk vessels with a fleet average age of 18.8 years and cargo carrying capacity of about 530 1,000 deadweight tons. Slide 6 shows the vessel employment schedule. As you can see, effective coverage as of October 26, 2020 for the remainder of 2020 stood at about 42% in terms of minimum fixed rate contracts, including the vessels that are covered by FFAs. This figure excludes ships on Nintex charters, which are open to market fluctuations, even though they might be secured having secure employment. Turn to slide 7, where we will go over the market highlights for the Q3 of 2020. The Q3 marked an improved performance with the drybulk market recovering strongly from the very challenging Q2 after the ending of the lockdowns. However, following the 2nd wave of the pandemic and renewed lockdowns, we expect that the drybulk markets will be affected in the near term by the state of the world economies as influenced by the COVID-nineteen pandemic. In the medium term, we are encouraged by the expected improvement in the markets once the pandemic is brought under control, if not otherwise, certainly by the introduction of the vaccines. Pot rates for Panamaxes averaged $12,300 a day in Q3, but currently have retreated to around $9,250 per day. 1 year time charter rates averaged at close to $12,000 per day, yes, but now hover around $10,300 per day. Please turn to Slide 9. As a result of the pandemic, the economic and trade world environment dramatically declined at the beginning of 2020. Initial estimates of its effect were extremely painful, but the last two quarters, the IMF has been gradually increasing its GDP estimates. The IMF projected world GDP growth in 20 has been revised upwards from minus 4.9% in the previous quarter July to minus 4.4 percent now. Among the developed and developing economies, China is the only big economy expected to post positive growth within 2020. In fact, China's return to growth seems stronger than expected previously with signs of a more rapid recovery in the 3rd quarter suggesting 1.9% GDP growth compared to 1% GDP growth in the previous quarter. The U. S. Economic growth is projected at minus 4.3%, while the Eurozone is expected to need a steeper road to recovery with GDP growth expected for 2020 at minus 8.3%. All remaining important economies are now expected to contract as is clearly evident in this slide, albeit at lower rates than those expected the quarter ago, except for India, where staggering contraction of 10.3% is expected. In 2021, global growth according to the IMF is projected to return to growth recovering from the decline in 2020 of minus 5.4 percent to a positive 5.2% growth rate. In this context, the U. S. Is expected to grow by 3.1 percent, while the Eurozone's area growth is expected to be around 5.2%, and China's a very strong 8.2%. Similarly, all other developed economies are projected to show a strong recovery. Looking at the drybulk trade growth according to Clarkson, projected growth in 2020 is now estimated at a negative 3.3%, while the 2021 forecast suggests that the drybulk trade is set to grow at a solid 5% rate. Please turn to Slide 10. The order book as a percentage of total fleet up until November 2020 stands at 6.3%, which is the lowest level seen in the last 20 plus years. The principal reason for the poor performance of dry bulk shipping during the last decade has been the high number of deliveries, which easily outpaced the growth of the trade for the greater part of the last decade. With a relatively small current order book and normal demand expectations for the coming years, a fundamentally supported rebound in the drybulk market should be expected in the near future. Also bearing in mind that it takes about 1.5 to 2 years for a vessel to be delivered once it is contracted. Please turn to Slide 11 to review the drybulk delivery schedule. For 2020 deliveries, the order book is still dominated by large vessels. According to Clarkson, fleet growth in 2020 will be around 4.3% taking into account scrapping and other fleet changes that have taken place to date. For 2021, the order book is estimated at only 3.8%. If one accounts for scrapping and slippage, actual fleet growth will be very low. The order book for 2022 beyond is currently only 1.1%, which would imply that through scrapping and slippage, we could see a shrinking fleet that year provided that not too many new orders are placed for 2022 delivery. Please turn to Slide 12, where we summarize our outlook on the drybulk market. The unknown duration of the pandemic and its financial consequences render any type of modeling very difficult. Our base case scenario calls for the recent surge in COVID-nineteen cases in the Northern Hemisphere to negatively affect the market through the fast first half of twenty twenty one. But aided by the progress recently achieved in vaccines, we expect the second half of the year to be very strong. Current year to date trade decline estimates and full year 2020 projections will likely be revised upwards to those discussed before and the charter rates have been higher since May June 2020 than what the estimated supply and demand balance implies. COVID-nineteen related delays in ports have also likely taken more ships out of the market for more days than estimated, thus reducing the effective vessel supply. In parallel, the ordering of new ships is expected to be contained in the midst of the above demands uncertainty, but most importantly on the lack of clarity of the fuel of the future, as not knowing the optimal shift for even 5 years out makes the placing of any new orders speculative and risky. As already discussed, we are looking forward to a promising 20 21 amidst the low order book and a vis a demand rebound. We are hopeful for further easing of the trade tensions between China and the U. S. And likely to additional economic stimuluses worldwide. Thus, the supply demand balance over 2021 and 2022 will likely provide a foundation for charter rates, though remaining volatile to on average at least maintain the recent levels or probably improve further. Please turn to Slide 13. The left side of the slide shows the evolution of 1 year time charter rates of Panamax drybulk vessels since 2000. And as of October 30, 2020, the 1 year time charter rate for Panamax with carrying capacity of 75,000 deadweight stood at around 10,300 and $75 per day. As you can see on the right hand side of the slide, the current price of a 10 year old Panamax vessel is around $13,800,000 In the last 2, 3 years, dry bulk prices have been gradually increasing towards historical average prices above the all time low values that were established at the beginning of 2016, but have still not reached those levels. With the freight rate environment close to the median rate, we would expect asset values to increase closer to their median as well. In view of this, we try to position ourselves to benefit from the developments and we continuously evaluate opportunities for investments in vessels or pursue combination with other fleets, especially focusing on using our status as a public company, which can perhaps provide a consolidation platform. To help achieve these goals, we are also focused on efforts to improve our capital structure by reducing our capital costs and create additional liquidity. Let me now pass the floor over to our CFO, Tasos Aslidis to go over our financial highlights in more detail. Thank you very much, Aristides. Good morning from me as well ladies and gentlemen. I will now take you through our financial results highlights for the 3 9 month periods of 2020. For that, let's turn to Slide 15. The Q3 of 2020, we reported total net revenues of $6,800,000 amounting to a 11.3% decrease as compared to total net revenues of $7,700,000 that we achieved during the Q3 of last year. Our net revenues decreased by almost €900,000 due to lower charter churn compared to the same period of last year. The company reported net income for this period of €500,000 and net income attributable to common shareholders of €100,000 as compared to net loss of €400,000 dollars and net loss attributable to common shareholders of $800,000 for the Q3 of 2019. Interest and other financing costs for the Q3 of this year amounted to 600,000 dollars compared to $800,000 for the same period of last year. Our interest expenses during the Q3 of 2020 were lower due to the lower average outstanding debt and also the decreased LIBOR rates that our loans experienced as compared always to the same period of 2019. Depreciation expenses for the Q3 of 2020 amounted to about $1,700,000 compared to $1,600,000 for the same period of 2019. Again, for the quarter ended September 30, 2020, the company recognized a small loss on the interest rate swaps and a $200,000 realized loss on FFA contracts as compared to a loss in derivatives of 600,000 for the same period of 2019, comprising of €500,000 on loss of FSA contracts and $100,000 on loss on 1 interest rate swap that we said last year. Adjusted EBITDA for the Q3 of 2020 was $2,800,000 and that compares to $2,200,000 we achieved during the Q3 of 2019. Basic and diluted earnings per share attributable to common shareholders for the Q1 of 2020 was $0.06 calculated on approximately 2,300,000 based on diluted weighted average number of social spending compared to a basic diluted loss per share of $0.35 for the Q3 of 2019. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized loss of payment derivatives, the adjusted earnings per share attributable to common shareholders for this Q1 of 2020 would have been $0.05 compared to a loss of $0.26 per share, basically diluted for the same period of last year. Usually, secured channel do not include the above items in the published estimates of earnings per share. Please now hit on the second half of the slide to discuss the 9 month results for the year. For the first five months of 2020, we reported total net revenues of $15,900,000 representing a 19.1 percent decline over total net revenues of $19,600,000 that we said during the 1st 9 months of 2019, again the result of lower time charter rates, our vessels turned during the corresponding periods. The company reported net loss for the 1st 9 months of this year of 5,600,000 dollars and net loss attributable to common shareholders of $6,700,000 as compared to a net loss of 1,400,000 dollars and a net loss attributable to common shareholders of $2,900,000 for the 1st 9 months of 2019. Interest and other financing costs for the 1st 9 months of 2020 amounted to $1,900,000 compared to 2,700,000 for the same period of last year. Again, this decrease is due to the lower average levels of debt outstanding and lower LIBOR rates that we experienced during this year's time off period. Depreciation expenses for the 1st 9 months of 2020 were $4,900,000 compared to $4,800,000 during the same period of last year. And for the 1st 9 months of 2020, we recognized a $500,000 loss on 3 interest rate swaps and a $300,000 loss on FFA contracts as compared to a gain on derivatives of $300,000 for the same period of last year, which comprised of $600,000 gain on FSAs and $300,000 loss on interest rate swaps. Adjusted EBITDA for the 1st 9 months of 2020 was $1,800,000 compared to $6,500,000 achieved during the first 9 months of 2019. Basic and diluted loss per share attributable to common shareholders for the 9 month period of this year was $2.97 calculated on 2,300,000 shares basically diluted compared to $1.31 based on diluted loss per share for the 1st 9 months of last year. Again, excluding the effect on the loss attributable to common shareholders for the 1st 9 months of the year of the unrealized loss and derivatives, the adjusted loss per share attributable to common shareholders for the 1st 9 months of this year would have been $2.7 compared to a loss of $1.13 per share, basically diluted for the same period of 2019. Turning now to Slide 16 to review our fleet performance. We will start our review by looking first at our fleet utilization rates. As usual, our fleet utilization rate is broken down into commercial and operational. During the Q3 of this year, our commercial utilization rate was 100%, while our operational utilization rate was 98.9% compared to 100% commercial and 99.5% operational for the Q1 of last year. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled write ups or scheduled repair if such events occurred during the period. On Novgorod, 7 vessels were owned and operated during the Q3 of this year, turning time charter equivalent rate of $11,873 per vessel per day compared to $12,088 per vessel per day during the Q3 of 2019, during which we also operated the same 7 vessels. Our total daily vessel operating expenses, including management fees, general and administrative expenses, but excluding the idle cost, averaged $6,307 per vessel per day during the Q3 of this year compared to $5,007.22 per vessel per day during the Q3 of 2019. If we move further down in this table, we can see the cash flow breakeven rate that we had during this past quarter, which takes into account drydocking expenses and cash interest expense, loan repayments and preferred dividends if paid in cash. For the Q3 of this year, our daily cash flow breakeven rate was about $9,846 per vessel per day compared to $10,845 per vessel per day that we paid during the Q3 of 2019. Let's now look on the right part of the slide to review our 9 month figures. During the 9 month period of 2020, our commercial utilization rate was again 100% and our operational utilization rate was 99.6% compared to 100% commercial and 99.2 percent operational for the corresponding period of the previous year. During this 9 month period of 2020, we own and operated 7 vessels and we earn a time charter equivalent rate of $8,927 per vessel per day compared to $10,750 per vessel per day that we earned during the 9 months the 3rd 9 months of 2019, the period during which we operated against 7 vessels. Our total daily operating expenses for the 9 month period, including management fees, G and A and but excluding drydocking costs amounted to $6,195 per vessel per day compared to $5,839 per vessel per day during the corresponding 9 months of 2019. Again, at the bottom of the table, we can see our breakeven rate for the period. Our cash flow breakeven rate was $10,863 per vessel per day in 2020 compared to $12,308 per vessel per day for the same period in the 1st 9 months of last year. Let's now move to Slide 17 to review our debt profile. In this slide, on the top part, you can see our loan repayments as well as our balloon repayments. And on the bottom of the slide, we can see the projection of our cash flow breakeven level for the following 12 months. As of September 30, 2020, we paid an outstanding bank debt of about $52,000,000 In 2021, as you can see from the chart, we have to make a balloon payment of about $8,000,000 dollars which is collateralized by 3 of our Panamaxes. And we have also a balloon payment of $2,100,000 to make in 2022, which is collateralized by our remaining Panamax vessel. These balloon payments are below the scrap price of the respective vessels and we anticipate that we will have no issues refinancing them when due. With that, you can see from the chart additional volume payments coming in related years in 2023 2025. I would like to make a quick note on the cost of our funding. The average margin of our debt, as you can see on the comment on the right part of the slide, is about 3%. And assuming the LIBOR rate of 0.5% on the top of it, our cost of senior debt would be around 3.5%. This will include the cost of the dividend that we pay to our preferred equity, which we pay in kind we had option to pay in kind until January 2021. The other blended cost of our non equity funding would have been around 5% as of the end of the last quarter. Our loan repayments over the next 12 months, expressed on a per vessel per day basis, amount to about $2,381 and will make up contribution to our daily cash flow breakeven level, and you can see that on the chart of the bottom part of the slide. If we make assumptions for the remaining items, we make up our cash flow breakeven rate like our operating expenses, our G and A expenses, drydocking interest, etcetera, we come up with an overall cash flow breakeven level per vessel per day that we expect over the next 12 months of approximately $9,850 Let's move now to Slide 18, where we can see some highlights from our balance sheet. This is really a, you can say, high level snapshot of our assets and liabilities. For the asset side, 1st, we can see that we have of the cash and other current assets about $7,100,000 First, the book value of our vessels is amount to about 101,000,000 making our total book assets to about 118,000,000. On the liability side, we set as of the end of last quarter bank debt of about $52,000,000 which approximately represents 48% of the book value of our assets. Also, we had preferred equity outstanding of about $16,000,000 dollars which accounts for another 15% of our book assets and other liabilities of about 4,300,000 dollars accounting roughly for about 4% of our assets. This leaves us with a net book value of about $35,000,000 $35,500,000 which amounts to about $15.4 percent. If we replace the book value of our vessels with our market value, which we estimate to be about 10% below the targeted book value, we can calculate our net asset value to be over $10 per share. Clearly, if our shares stay below that level, we present an investment with significant appreciation opportunity. And with that, I will pass the floor back to our Chairman and CEO, Aristides to continue the call. Thank you, Tasos. I can now open the floor for any questions that we may have. Your first question comes from the line of Tate Sullivan from Maxim Group. Please ask your question. Thank you for the background. And one thing that jumped out was the extensions on, I think it was 5 of your 7 vessels to the contract timing. Can you give some feedback you get from customers? I mean, what keeps them from committing to longer terms when you have those contract extensions? I mean, if there's limited fleet growth next year and end of lockdowns, maybe should they start to have urgency? Or can you give some comments on the feedback? Yes. Firstly, the other vessels in our fleet, the 2 2000 build ships are ships that are not really favored by operators that want to have a period business. So these we are trading on the spot market and we expect to continue to trade them in the spot market. The remaining vessels theoretically we could fix for longer periods. The medium made ships, the 204 to 205 built Panamaxes could be fixed for up to a year. We see these kind of charters happening. For the younger ships, the under 5 years old, there exists a market for 1, 2 years. It never goes for longer really on this type of ships. And we could consider ourselves fixing them for a year at a specific rate when we feel that the rate is good because right now we've seen the correction in the charter rates and because we think that 2021 at least from the Q3, maybe even from the Q2, we will see improved charter rates. We prefer to keep shorter term durations at today's levels. Great. Thank you. And that tails with my next question for 20 21. You mentioned rates, I think you said around 10,400 today versus a breakeven of 9,850 a day. What were you I thought you commented next year, you see average rates settling. Did you say closer to where your rates were in 3Q 'twenty? Or can you review that comment, Yes. I mean, it's a volatile period. As you've seen, rates have moved this year from 6,000 up to 13,000 maybe even 14 on the spot market. So it's been very volatile. We think that the first part of 2021 because of the pandemic will and the lockdowns that follow will not be a strong half. Certainly, the Q1, now the Q2 will depend a little bit on how the pandemic develops and of course on if there are what happens with trade wars and all that stuff. But we do expect that starting either in the second or the third quarter, we will see a higher rate. The average for the year, we expect it to be higher than what it is, what was the average of this year. It could be closer to the Q3 rate. It could be around the Q4 rate. It's very difficult to say honestly and make a better estimate. Okay. Well, thank you for those comments. Thanks, Tate. Wendy, great. Thank you. Your next question comes from the line of Ho Fad from Noble Capital Markets. Please ask your question. Hello. I just wanted to clarify Aristides, if you could just clarify your strategy on you're facing a little bit of weakness year term. You look at softness in the first half and probably certainly in the Q1 just of 2021 just because of seasonality. But you're using FFAs, but could you have covered more of the fleet with FFAs looking into the Q1? Because right now, you only have 90 days of the fleet covered. And I was just wondering sort of what your strategy is. Do you think you'll layer on more FX days as the year ends? Or is that sort of you're going to just play the market from there? Very honestly, Paul, our intention was to get more cover if we saw FFAs at $10,000 a day. So we would have taken more cover if we saw that. We didn't feel very comfortable in taking more cover at levels below our actual all cost breakeven cost. So we were hoping that we would see them go up to 10,000 again in which case we would take some additional cover. We haven't seen that Q1 is trading right now at under $8,000 a day. We wouldn't do something at this level. But if there is a new peak that we see within November or early December, which is possible and we see levels of turning to those levels, we will indeed get some more FFA coverage. Yes, you've been opportunistic just based on what you see. What can you clarify the if you said it, I missed it. But on the 42% of days that are covered in 2,000 the Q4, Does that include the FFAs that are in place? Or does that exclude them? And then if you could also offer potentially a rate that's associated with those, with that contract cover of 42%? Yes. I mean, it is included. This 42% includes the 2 vessels that will make 11,000 because they are covered through the FFAs and it includes the Exenia, Kamsarmax, which is covered at 11,000 because it's a guaranteed floor. So it includes those 3 vessels really and some part of the Tasos and the Pantelis whose charters expire now and we have not extended yet. So that is an average of $10,000 for those 2 as well. So I would say that our average is slightly below 11% for the 42% that is covered and the remaining is really open. Okay. And you do have that floor on the Zenia at 11,000 and 2. So is that included in there? Or is it Yes, that is included. Yes, that is included there. Okay, great. And then when you look at the contract then on the Zenia, that does it appears to expire at the end of the year. Can you sort of give us a flavor whether you'll be able to, you think, keep that floor in place or whether there'll be a different structure in that contract? No. This vessel will end its charter and we are due to pass the special survey of that ship. We could pass it in January, but we've decided that we will pass it immediately after after completion of this current charter. And we will see how we will employ the ship afterwards. It doesn't have an employment. Okay. So that would be one special survey that you're looking at. Any other surveys? No. This is the only vessel that we will we need to pass through a survey in the coming quarter. And I think and Tasha, if you have the figures correct me, but I think that we have nothing in Q1. I believe, sure, that we don't have anything else in Q1. Great. And Tassos, if we could just double check, it looks like the cost structure is pretty stable looking forward. It's bounced around quarter to quarter a little bit. It looked like it was a little bit, at least from a G and A standpoint, down in the Q3. Would are there any major changes? It doesn't sound like it, but I just wanted to double check any major changes on the OpEx side looking at 2021? No, I don't think we can I don't expect that we have any major structural changes on the OpEx side? We should see OpEx at a similar level to this year, but just 1%, 1.5% higher, but no major changes. And I think you alluded to it on the balloon payment that's due in 2021, you're thinking about that. Are you actually with your banks on that loan payment and potentially extending that out? That payment will be later in the next year. So we are not for that specific payment, not in any discussions yet. But I mean, I think $8,000,000 is more than half or about half of the scrap price of those vessels, which are not even near scrap price anyway. So I don't expect any problems to finance that at the current levels. At the current levels, we might be able to get a little more if we want to. Great. Thank you so much. Thank you, Paul. Thank you, Paul. Thank you. I'd now like to hand the conference back to the CEO, Mr. Aristides Pittas. Please continue, sir. Well, I think this concludes our session of today. Thank you all for listening in and we'll talk together again in February when we come out with our results for 2020. Thank you. Thanks everybody for attending. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.