Earnings Call: Q2 2020

Aug 6, 2020

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Second Quarter 2020 Financial Results. We have with us today Mr. Pitas, Chairman and Chief Executive Officer and Mr. Asides, 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 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, 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. 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 Q2 6 month period ended June 30, 2020. Please turn to Slide 3. Our income statement highlights are shown here. For the Q2 of 2020, we reported total net revenues of $4,000,000 a net loss of $3,800,000 adjusted EBITDA of minus 1,300,000 and adjusted net income attributable to the common shareholders of minus 3,900,000 adjusted basic and diluted earnings per share attributable to common shareholders for the Q2 of 2020 were minus $1.73 per share. These were the worst results we have posted since spinning off our dry fleet from Euroseas in mid-twenty 18. This was due to the terrible charter market coupled with the fact that 2 of our vessels had to complete a special surveys during this quarter. The improving market coupled with the fact that no more dry dockings are due during the year should lead to a reversal of options in Q3. 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 charter operations and sale and purchase highlights. Motor vessel Padelis was fixed for a trip of about 5 to 65 days at around $7,000 per day during Q2. Thereafter, a few days ago, it was fixed for retreat for about 45 to 100 days at $10,850 per day or $11,500 per day depending on the loading area. Similarly, motor vessel Tasos was fixed for a trip for about 80 to 100 days at $6,875 per day, which net of the ballasting leg translates to $5,785 per day at the beginning of Q2. Thereafter, it was fixed in early July for a period of 90 to 100 days at $9,000 a day. During the Q2, we sold 180 days in 3rd and 4th quarter FFA contract at an average of $10,000 per day, practically fixing 1 of our 2,004 built vessels which are on index based charters at $10,000 a day. In early July, we fixed another 180 days at $12,000 a day, thus practically fixing our 2nd mid-two thousand build vessel, which is also an index based charter at that level. Therefore, we have on average fully covered these two vessels at $11,000 per day for Q3 and Q4. Regarding the dry dockings and the repairs of the 2nd quarter, 2 of our motor vessels, MV Pantelis and MV Tasos, the 2 eldest vessels in our fleet, completed their 4th vessel survey and drydock. Monto vessel Pantelis also installed a water ballast treatment plant as well. The total cost of these dry docks booked in Q2 was about $1,500,000 excluding the cost of the water ballast. No more dry dockings are scheduled for 2020. Looking on to our financial highlights, first, we agreed to defer Q3 and Q4 installments of our 3 Panamaxes facility and include them to the respective balloon payment. 2nd, we agreed with our preferred shareholders from April 1, 2020 to January 29, 2021 for the company to pay the preferred dividend in kind by issuing new preferred shares. If paid in kind, the dividend cost would increase by 1% and that is what our Board elected to do for Q2. Please turn to Slide 5, you see a current snapshot of our EuroDry fleet. It's comprised of 7 drybulk vessels with a fleet average age of 11.8 years and the cargo carrying capacity of 530,000 deadweight approximately. Slide 6 shows the vessel employment schedule. As you can see, effective coverage as of August 5, 2020, for the remainder of 2020 stands at about 70% in terms of minimum fixed rate contracts, including the vessels covered by FFAs. This figure excludes ships on index charters which are open to market fluctuations even though they may have secured employment. Turn to Slide 7 where we will go over the market highlights for the Q2 of 2020. During the Q2 of 2020, the drybulk market experienced the effects of the COVID-nineteen pandemic and lockdown of the main economies resulting in decreased cargo volumes transported and significant declines in charter rates. During the second half of June, the market has started recovering in line with the reopening of the major economies. With rates returning to the level seen in the beginning of the year. Therefore, we expect this reversal of options in Q3, as I mentioned. Spot rates for Panamaxes currently stands at around $9,500 per day. The 1 year time charter rates is higher to approximately $11,500 per day, indicating that the market participants expect a further recovery within the next few months. Please turn to Slide 9. As a result of the pandemic, the economic and trade world environment has dramatically and negatively changed in 2020. In its April predictions, the IMF projected world GDP growth in 2020 to contract sharply at 3% per annum, but in an extraordinary revision in June, it revised the prospects lower to a negative 4.9%. Among the developed economies, China's performance is now projected to improve by 1% from negative 1.2% estimated in April by the IMF. All the remaining important economies are now expected to contract the U. S. By 8%, the Eurozone by 10.2%, etcetera, as you can see in the slide. For 2021 and according to IMF estimates, economy is poised to experience a significant recovery of 5.4%. In this premise, the growth forecast in the U. S. Is 4.5%, while in the euro area it is expected to be around 6%. Similarly, all other economies are projected to show strong recovery. To a big extent, tribal trade growth follows the pattern of GDP growth. According to Clarksons, projected growth in 2020 is now estimated at negative 4.1%, while the 2021 forecast suggests a growth on the drybulk trade of 5.5%. Please turn to Slide 10. For 2020 deliveries, the order book which is dominated by large vessels currently stands at 6.3%. Luxury estimates the scrapping and slippage will eventually result in a fleet growth of around 3%. For 2021, the order book is estimated at 3.4% with softer scrappings and slippage and will result in a fleet growth of about 1%. The order book for 2022 is currently only 0.9%, which would imply that our scrapping and slippage, we could see a shrinking fleet that year. If just a few new orders are placed with 2022 deliveries. Please turn to Page 11. The order book as a percentage of total fleet up until July 2020 stands at 7.5%, which equals the lowest level seen in the last 20 plus years. The root cause 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. After the sobering level of contracting activity in 2,008, which peaked at about 80% of the existing fleet 8.0, the number of new orders has fallen to very low levels. With a relatively small order book and realistic 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 Page 12, where we summarize our drybulk outlook. The unknown duration of the pandemic and its financial consequences render any predictions quite unreliable. In addition to the trade development uncertainties, we are facing significant operational risks and difficulties. World lockdowns have affected our ability to change crew on board our vessels. We have taken relevant measures to ensure our crew members and SOAR employees' health and safety despite the ongoing hurdles and travel restrictions imposed by lockdowns around the world. Initial estimates from Clarksons to quantify the effects of the coronavirus pandemic on drybulk trade indicated a drop in demand in 2020, followed by a sharp recovery in 2021, similar to the way economies reacted during the 2009 financial crisis. Most recent estimates from Clarksons indicate further deterioration in demand for 2020, as I already said, of 4.1% against a 3% fleet growth. This imbalance is not supported by the recently increasing market rates. If current rates remain unchanged, it would be an indication that demand is running higher than expected and we could be positively surprised in the remaining part of the year. New ship orders are expected to be contained in the midst of the above demand uncertainty and also the lack of clarity of the fuel of the future. Not knowing the optimal ships for even 5 years out makes the placing of any new order that might require 20 plus years to pay off very speculative and risky. In this environment, 2021 seems to shaping up as a promising year amidst a low order book as we say demand rebound and expectations for easing of the trade tensions between China and the U. S. Please turn to Slide 13. The left side of the slide shows the evolution of 1 year time charter reach of Panamax drybulk vessels since 2000. After the drybulk vessel rates bounced back from the unsustainable all time lows of 2016, COVID-nineteen seems to be prompting us to revisit them. However, since June, rates have been increasing and as of now, we are closing in on the historical median rate of about $13,000 per day, a rate that if achieved would certainly imply significant profits for Euro30. As you can see on the right hand side of the slide, the current price of the 10 year old Panamax vessel is around $13,000,000 The last 2, 3 years, tribal prices have been gradually increasing towards historical average prices above the all time low values that were established at the beginning of 2016, but had still not reached those levels. After the outbreak of COVID-nineteen, mid aged vessels values corrected by about 10% to 15%. With the stabilizing and even improving trade rate environment, we would expect asset values to start increasing as well. In view of the above, we try to position ourselves to benefit from the developments and we continuously evaluate opportunities for investments in vessels, over SKU combinations with other fleets, especially focusing on using our status as a public company, which can perhaps provide a consolidation platform. 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 6 months periods ended June 30, 2020. For that, let's turn to Page 15. The Q2 of 2020, we reported total net revenues of €4,000,000 representing a 35.6% decrease over total net revenues of €6,200,000 which we achieved during the Q2 of 2019. As Aristides mentioned, that was the result of the lower time charter rates that our vessels earned affected by the pandemic during the first half of the year. The company reported net loss for the period of 3,800,000, net loss attributable to common shareholders of 4,200,000 as compared to net loss applicable to common shareholders of €1,800,000 and €2,600,000 respectively for the same period of 2019. Interest and other financing costs for the Q2 of 2020 amounted to $600,000 compared to $900,000 for the same period of last year. Interest expenses during the Q2 of 2020 were lower due to the lower average outstanding debt and the decreased LIBOR rates our loans had paid during the period as compared against the last year. Depreciation expenses for the Q2 of 2020 amounted to about $1,600,000 and remain essentially unchanged compared to the same period of last year. The results for the Q2 of 2020 include a €200,000 unrealized loss on 3 interest rate swap contracts the $100,000 unrealized loss on a covered trade agreement contract as compared to €200,000 of unrealized loss on interest rate swaps and €900,000 of unrealized loss on S and P 500 during the Q2 of 2019. Adjusted EBITDA for the Q2 of 2020 was negative €1,300,000 compared to a positive €1,800,000 achieved during the same period Q2 2019. Basic and diluted loss per share attributable to common shareholders for the Q2 of 2020 was 1 point $8.6 calculated on about $2,300,000 basic and diluted weighted average number of shares outstanding compared to basic and diluted loss per share of $1.14 for the Q2 of 2019, uprated to an approximately 2,200,000 shares based diluted outtake. Excluding the effect on the loss attributable to common shareholders for the quarter of the unrealized loss and derivatives, the adjusted loss attributable to common shareholders for the quarter ended June 30, 2020, would have been $1.73, basically diluted, compared to an adjusted loss of $0.65 basic and diluted for the same period of last year. Usually, security analysts do not include the above items in their public statements or current circumstances. For the first half of twenty twenty, the company reported total net revenues of €9,100,000 representing a 24.1 percent decrease over total net revenues of $12,000,000 during the first half of twenty nineteen, which as I mentioned earlier was the result of the lower bank charter rates our vessels earned during the first half of this year. The company reported net loss for the period of €6,100,000 net loss attributable to common shareholders of €6,900,000 dollars as compared to net loss of $900,000 and net loss attributable to common shareholders of $2,200,000 for the first half of twenty nineteen. Interest and other financing costs for the first half of twenty twenty amounted to €1,200,000 compared to €1,900,000 for the same period last year. This decrease is due to the lower average outstanding debt the decreased LIBOR rate of our loans in this period as compared to the same ones last year. Depreciation expenses for the first half of twenty twenty were approximately €3,300,000 compared to €3,200,000 during the same period of 2019. The small increase mainly due to the increase in the cost base of vessels due to the recent installation of ballast working components and systems. Adjusted EBITDA for the first half of twenty twenty was negative 1,000,000 compared to a positive €4,300,000 achieved during the first half of twenty nineteen. Basic and diluted loss per share attributable to common shareholders for the first half of twenty twenty was $3.03 calculated on approximately €2,300,000 basic and diluted weighted average number of shares outstanding compared to similarly loss of $0.96 for the first half of twenty nineteen. Excluding the effect on the loss attributable to common shareholders for the first half of twenty 20 of the loss on the unrealized loss on derivatives, the adjusted loss to common shareholders for the 6 month period ended June 30, 2020, would have been $2.76 compared to $0.87 for the same period of last year. Please now turn to Slide 16 to review our fleet performance. We start our view by noting first that our fleet utilization rate. As usual, our fleet utilization rate is broken down into commercial and operational. During the Q2 of this year, our commercial utilization rate was 100%, while our personal utilization rate was 9.9% compared to 9.9% commercial, 98.3 percent operational for the Q2 of last year. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled silos or scheduled repairs if such events took place during the period. In other words, 7 vessels were owned and operated during the Q2 of 2020, earning another time charter equivalent rate of $7,297 per vessel per day compared to $10,724 per vessel per day earned during the Q2 of 2019, during which we also operated 7 vessels. Our total daily vessel operating expenses, including management fees, general and administrative expenses, but excluding the advertising costs, other $6,131 per vessel per day during the Q2 of this year compared to $5,948 per vessel per day during the Q2 of 2018. If we move further down in this table at the bottom of it, we can see the cash flow breakeven rate that we had during the 2nd quarter, a number which takes into account dry docking expenses, cash interest expense, loan repayments and preferred dividend payments paid in cash. For the Q2 of 2020, then our daily cash flow breakeven rate was about $11,836 per vessel per day compared to $12,560 $9 per vessel per day for the Q2 of 2019. Let's now look at the same figures for our first half. During the first half of twenty twenty, our commercial utilization rate and the operational utilization rate was also 100% compared to 99.9 percent commercial and 99% operational for the same period in the first half of last year. Canning had another 7 vessels owned and operated, earning an average time charter equivalent rate $7,309 per vessel per day compared to $10,078 per vessel per day during the same period of last year, again, during which we operated 7 vessels. Our total daily operating expenses, including management fees, G and As, but excluding dilution costs for the 6 month period amounted to $6,093 per vessel per day compared to $5,898 per vessel per day during the first half of twenty eighteen. At the bottom of the table again on the right side here, our breakeven rate, our cash flow breakeven rate was $11,489 per vessel per day in the second half in the first half of twenty twenty compared to $12,110 per vessel per day for the same period in the first half of last year. Let me move now to Slide 17 and review our debt profile. In this slide, on the left part, you can see our loan repayments as well as our balloon repayments. And on the right part of the slide, can see the projection of our cash flow breakeven level for the following 12 months. As of June 30, 2020, EuroDry paid an outstanding bank debt of about €53,400,000 At the time of year of 2020, we have made total loan repayments of about €5,000,000 after the deferment of certain installments to the respective loan balloons as our securities management area. In 2021, as you can see from the chart, we have a balloon payment of kp8 1,000,000, which is supported by our 3 Panamax vessels, followed by balloon payment of €2,100,000 in 2022, supported by our remaining Panamax vessels. And we anticipate that we have no issues financing them when due. Here, as you can see, 2023 2025. A quick note from here on the cost of our guidance. Having we have an average margin in our debt of about 3% and assuming a LIBOR rate of point 5% on the top of it, our cost of senior debt would be around 3.5%. If we included the cost of our of the dividend of our preferred equity, which is 10.25%, since we paid it in time until January 2021. The average blended cost of our non equity funding which have been around 5% as of the end of the Q2. Our loan repayments for the next 12 months expressed on a per vessel per day basis contribute about $2,100 for daily cash flow breakeven level, as you can see at the bottom of the table at the right part of the slide. We will make assumptions for the remaining items that make up our cash flow breakeven rate like our operating expenses, our general and administrative expenses, drydocking, interest, etcetera, we come up with an overall cash flow breakeven level per vessel per day for the next 12 months of approximately €9,05,080. If you move to Slide 18, where we can see some highlights from our balance sheet. This is indeed a simplified version of it, where we can see the main groupings of our assets and liabilities. On the asset side first, we have cash and other current assets of about €6,800,000 And of course, our vessels, which as of June 30, 2020, have a book value of about $102,500,000 raising our total cash flow to about $109,000,000 On the liability side, we have a bank debt of about €53,400,000 which approximately represents 49% of our book value of our assets. Also, we have a preferred equity outstanding of about €15,800,000 which accounts for another 14% of our book assets. Other liabilities of about £5,300,000 accounting for about 5% for us. These figures leave our net book value at around €35,000,000 or approximately $15 per share. We will now turn into consideration the market value of our vessels, except for the group, is about 10% lower, our net asset value per share would be in the range of $10 to $11 Thus, the recent trading rates of our shares of around $5 represent a significant discount to the intrinsic value of the company. With that, I will pass the floor back to our Chairman and CEO, Aristides to continue the call. Thank you, Tasos. I would like now want to open the floor for any discussion that we may have, any questions. Thank Your first question comes from the line of Tate Sullivan from Maxim Group. And can you talk about today, and you noted in your press release that your ability to extend the maturity for the debt due in 2020, has your conversation with your lenders changed in the last 6 months or can you just give some context to those conversations for you? Yes. As we said, we did extend the maturities of the installments that were due in Q3 and Q4 with one bank that had financed 3 vessels that was extended till the end of 2021 along with the balloon. So this is one refinancing that we did. And the other important thing that we did was that we agreed with our preferred holders to be able to pay them in kind rather in cash, the coupons that are due within this year and up till January 2021. So these are the 2 developments that we can report today that has actually happened. Okay. Thank you. And it sounds like your lenders are flexible with that and for having regards that you already did that extent to maturity? Thank you. In this current, I will. I'm going back to the operating environment 2Q, and I know it's improved meaningfully since there. Is there since then, is there any ability to cut any of your operating costs in this kind of environment if the volatility continues? Well, first of all, I think that costs might have slightly increased because of the pandemic and the operational issues that we have been facing in regards to calling at ports and changing crew and all and sending spares and all that stuff. But it's very slight. We have been able to keep that under control and expect to continue to do so whilst definitely safeguarding our crew. But the market has indeed improved quite substantially and Q3, as I said, is expected to be a much better quarter than Q2. Charter rates have increased very significantly and we've been able to fix our ships either through FFAs or directly at rates that are even profitable. You mentioned following up on that, thank you. You mentioned rates closing in at about 13,000 a day. Can you did you give any comments, I may have missed on the quarter to date average of rates so far? Can you give any? I want to say that quarter to date average rates are around $11,000 overall. So it's significantly higher than the previous quarter, which was, I think around 7,000. Great. Thank you. And I think and you did mention some water ballast equipment work from 2Q 'twenty. Is some of that extending into 3Q 'twenty? Or are there any expected drybulk expenses in 3Q? No, we don't expect any dry dockings or any water ballast expenses in Q3 nor Q4. Markets. Please ask your question. Yes. Good morning. Hi. I was hoping to get some Hi. Good morning. I was hoping to get some color on what assets under are not currently encumbered or what your potential borrowing power would be on any of the unsecured assets right now? And also looking in the context of your strategy of trying to either retire or restructure the preferred with the step up in the dividend rate next year. I know it's not cash, but still it picks at a pretty high rate. I was just wondering if we we're looking at that or we're more focused on refinancing the debt that's coming up next year. Yes. We are discussing about refinancing existing debt at this stage, but we have nothing to report yet, but we're confident that things will move along quite nicely. And we are equally confident that we will be able to find an agreement with our current deferred equity holders who have been supporting the company up to now to somehow minimize the effects of this increase in the coupon that we are to see in 2021. Nothing to report yet, but discussing all these possibilities obviously. Great. And any comment on just your borrowing capacity right now on any assets that are unencumbered or unsecured? All the assets are currently encumbered, but the amount of leverage on them is not huge and we might be able to somehow increase that if needed. Yes, selected vessels are almost at 40%, at least 1 vessel, which is one of our new vessels, is at 40% loan to value now. So that vessel point has room to complete better than the guidance. Yes. I think in previous calls, you might have highlighted that you have close to $10,000,000 in under levered assets or borrowing capacity. Is that still accurate? Or can you just comment on what your if you were to lever up to 55%, what available you might have there as far as foreign capacity? I think we might be able to increase our borrowings by $5,000,000 to $6,000,000 or by increasing the leverage on existing vessels or restructuring the loan that is to expire in 2021. We don't need any of that looking forward for the first for the upcoming 6 months because charter rates have improved and we've secured, as I said previously, to date and have secured charters covering 70% of our open days for the remainder of the year. So we don't need something imminently and we will not be needing it. But obviously towards the end of the year, we will have further strengthened the balance sheet. We have managed, as you can see on Slide 17, to reduce our cash flow breakeven from almost 11,000 down to 9,600 with the result of the actions that Steve mentioned and the fact that we don't have drydocking coming in the next 12 months. So cash flow wise, at the current rate, we are cash flow positive. We expect to be cash flow positive. Yes. And I understood that $900,000,000 of that improvement is the picking of the preferred, right? The one thing, pass through, so if you could talk about if you since you mentioned the breakeven costs in the Q2 of 2020, you had $9.16 per day of interest expense. And you're looking forward looking number on the next page incorporates or indicates that you're looking for $7.30 a day of interest expense. Is there a non cash component that lowers that? Or are what are your assumptions on that looking forward interest rate calculation? The historical number includes a period with significantly higher LIBOR at the beginning of this year. I think we're assured the forward looking LIBOR is very low. That is one of the reasons for the reduced interest expenses. Of course, some debt has been repaid, so there is a smaller balance on which the interest looks like. Okay. And it looks like you've done a good job on keeping costs fairly low and looks like they're going to be stable over the next 12 months according to that Slide 2, right? That's correct, yes. Great. And then earlier this week, there was some unusual trading activity in your stock pricing. Can you I'm not sure you can, but any color on what you think was happening that day? There are absolutely no color on what happened. This is what the same thing I explained to whoever else, now that included. But there was no event or there is nothing from the company that could have created that bank of our partnership. That's all I just had to ask. Thank you. Thank you very much. Do we have another question? There are no further questions at this time. Please continue. Well, thank you very much for being with us for the results of Q2, and we'll be with you again in 3 months' time to discuss hopefully much better results than what we had this quarter. Thank you very much. Thanks, everybody. That does conclude our conference for today. Thank you for participating. You may all disconnect.