Earnings Call: Q4 2019

Feb 13, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the EuroDry Conference Call on the 4th Quarter 2019 Financial Results. We have with us today Mr. Peters, Kevin 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 the call is being recorded today, Thursday, February 13, 2020. Before passing the floor to Mr. Peters, 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 some expected not being realized. I'll 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. I would now like to hand the floor over to Mr. Peters. Thank you. Please go ahead, sir. 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 year end quarter ended December 31, 2019. Please turn to Slide 3. Our income statement highlights are shown here. For the Q4 of 2019, we reported total net revenues of $7,600,000 adjusted EBITDA of 3,800,000 and net income attributable to common shareholders of $1,030,000 Basic and diluted earnings per share attributable to common shareholders for the Q4 of 2019 was $0.45 per share. An average of 7 vessels were owned and operated during the Q4 of 2019, earning an average time charter equivalent rate of $12,439 per day. The company declared its forecast dividend of $400,000 on Series B Preferred Shares, and adjusted net income attributable to common shareholders was 980,000 dollars or $0.43 per share basic and diluted. Please turn to Slide 4 for our chartering operations and sale and purchase highlights of the quarter. The Pantelis was fixed during this falling market for a trip of about 20, 25 days at $6,000 per day and then extended at another $3,650 per day. The actual time charter equivalents were $5,150 per day and $4,400 respectively due to ballasting. Vicenia was extended for about a year at 101% of the BPI 5 time charter route index with a floor low of $11,000 per day. In the Q4 of 2019, we opened up an FFA hedge by selling in October exposure of 90 days equivalent to the open days of 1 Panamax ship at 14,550. We closed this hedge in November with a net profit of about $112,000 which is the equivalent to about $1200 daily on 1 Anamax ship earnings for the whole of the 4th quarter. Please turn to Slide 5 as there were no dry dockings or repairs during this quarter. There you can see the snapshot of our fleet, which is comprised of the 7 drybulk vessels of the average age of 11.6 years and the cargo carrying capacity of 528,000 deadweight approximately. Slide 6 shows the employment schedule. As you can see, our effective coverage as of February 1, 2020 stands only at about 18% in 2020. This 18% excludes ships on index charters, which are open to market fluctuations, but have secured employment, except Motor Vessel Xenia, which as I already said, has upside exposure but the floor is at $11,000 a day. Turning to Slide 7 for the market highlights for the Q4 of 2019. During the Q4, the drybulk market experienced a decline in rates, which in some cases exceeded a 20% drop compared to 3rd quarter's rates. This decline in rates was not fully reflected in the net revenues and time charter equivalent rates of the Q4 of 2019 due to the fact that certain vessels were employed under longer term time charters, fixed in prior periods and certain vessels were fixed at favorable rates during the Q3 of 2019 running through the Q4 of 2019. However, the market continued declining during January February of 2020, as on the top of trade uncertainties, which by December 2019 seemed to be subsiding, new concerns were added regarding the effects of the coronavirus epidemic on the world growth and trade. The positive byproduct of these uncertainties in the marketplace is the limited number of new orders placed and the declining order book as a percentage of the fleet. Thus, we continue to believe that drybulk markets could offer significant opportunities for sizable returns in the medium term once those hopefully short term headwinds subside. Please turn to Slide 9. The IMF projected world GDP growth in 2020 is down to 3.3% from 3.4% in the previous quarter, but still is 0.4% higher than the actual growth we had in 2019. The IMF's prediction for the Chinese GDP growth was an increase of 6 percent from 5.8% previously. However, this was just before the coronavirus issue arose, which analysts predict will have a damping effect on the Chinese growth of 0.5% on a yearly basis and above 2% on Q1 growth. For the advanced economies, the revision to U. S. Growth for 2020 reflects a slightly less strong performance of 2% compared to 2.1% in the previous quarter. Similarly, predictions for Eurozone are expected at 1.3%, just a bit lower than the 1.4% expected in October. Indian growth has been lowered to 5.8% from 7%, but Brazilian growth is now expected by 2.2%, a slow uplift from 2% previously. For 2021, the IMF predicts a healthy global growth of 3.4%. For the U. S, it expects it to scale back a little bit to 1.7% growth. Growth in the euro area is expected to stay the same at 1.4% in 2021, whereas the forecast for the major countries of the rest of the world is expected to be slightly higher in 2021 than 2020, except for Japan and China, where a slight reduction is expected. Looking on the tribal trade, according to Clarksons, projected growth in 2020 is estimated at 2.5% and 2.3% in 2021, respectively, which are more than double the growth though of 2019, which was estimated at 1.1%. Let's turn to Slide 10. The drybulk order book is close to its lowest point in over 2 decades, with the biggest part of that due to be delivered within this year. As owners are not sure of what to order since nobody knows yet which type of fuel will prevail and therefore what type of engine to install on the new ship, we expect just a low number of orders to be placed within the year. This sets the stage for constrained fleet growth for at least the next couple of years, given also that it takes about 1.5 to 2 years for the vessel to be delivered once it has been ordered. If demand issues such as trade wars and the coronavirus are overcome, we foresee a couple of good years for our market, which has been burdened throughout the past decade by the oversupply issues. Please turn to Page 11, where we summarize our drybulk market outlook. Since the beginning of 2019, we see that rates for the Capesize vessels moved from below OpEx levels in the Q1 to multi year highs of above 40,000 daily in the Q3. Panamaxes and Supramaxes were much less affected by the Vale disaster and dropped much less before increasing again also to multi year highs of $18,000 a day and $15,000 a day respectively by September, dropping though by about 50% since then and even further in Q1 2020. The accident in Vale's iron ore mine in Brazil was initially estimated to reduce Brazilian iron ore exports by 90,000,000 tons annually until mines come back to operation. However, a big part of the capacity has come back earlier than expected, triggering this increase in the rates. Brazilian iron ore exports, the driver of the Cape market, recovered from being 30% lower than a year ago in the first half of twenty nineteen to being 15% lower than a year ago currently and still improving. 2020 started with new uncertainties, as we said before, introduced by the coronavirus epidemic. Its effects on world growth and seed on trade are yet to be fully assessed, but certainly will significantly affect Q1 negatively. For the whole of 2020, our supply demand analysis shows a marginally balanced market, which would suggest a generally an impressive market. Positive or negative short term incidents and disruptions, such as the coronavirus, the effects of the introduction of cleaner fuels, other environmental regulations that may come, can move the markets one way or the other. Our analysis indicates that 2021 should be a very promising year with higher demand than supply growth expected amidst a very low order book. For the main commodities that our ships transport, our longer term view is as follows: iron ore trading volume growth is at risk due to the lack of further mining production investments in both Australia and Brazil, the 2 major producers. Coal imports, despite the longer term concerns due to the overall desire to reduce coal use, are expected to further grow in 2020 and probably the next couple of years as well, following an about 10% rise in Chinese coal imports in 2009 as electricity demands worldwide growth remains robust. Grain trade is also expected to rebound this year following a much desired trade agreement between China and U. S. And continue growing as the world population continues to grow on standards of living improve. Eastern Slide 12. The left side of the slide shows the evolution of 1 year time charter rates of Panamax drybulk vessels since 2000. Even though drybulk vessel rates bounced back from the all time lows in 20 16 to just above the median level by Q3 2019, we are again below these levels. The right hand side of the slide shows vessel values of 10 year old Panamaxes in relation to 10 year historical prices. Of course, drybulk prices have moved above all time low values that were established at the beginning of 2016, but both the median and the average price of 10 year old Panamaxes are still significantly higher. Whilst currently we see some further pressure on values, if the market stabilizes and we see an improving freight rate environment as expected, we would also expect asset values to improve as well. In the capital markets, we continue to pursue opportunities to merge with other fleets to grow the company, thus providing a platform for consolidation. At the same time, we are pursuing initiatives to increase EuroDry's visibility amongst investors. We believe that such increased visibility with investors will help reduce the significant discount to the NAV, our stock trader, thus offering additional upside to our shareholders and new investors alike. And with that, I will 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 take you over now our financial results highlights for the Q4 12 months of 2018 2019. For that, let's turn to Page 14. For the Q4, we reported total net revenues of 7,600,000 dollars representing an 8.8% increase over total net revenues of $7,000,000 during the Q4 of 2018, and that increase was a result of the increased average number of vessels that we operated in the Q4 of this year. The company reported net income for the period of €1,400,000 and net income attributable to common shareholders of $1,030,000 as compared to net income of $800,000 and net income attributable to common shareholders of $600,000 for the same period of 2018. Depreciation expenses for the Q4 of 2019 amounted to $1,600,000 compared to $1,500,000 for the same period of last year. Interest and other financing costs for the Q4 of 2019 amounted to 800,000 compared to 1,100,000 for the same period of 2019. Inverse during the Q4 of 2019 was lower due to lower debt and lower LIBOR rates during the period as compared to last year. Adjusted EBITDA for the Q4 of 2019 was $3,800,000 compared to $3,500,000 achieved in the Q4 of 2018. Basic and diluted earnings per share attributable to common shareholders for the Q4 of 2019 were $0.5 calculated, dollars 2,261,000 basic and diluted weighted average number of shares outstanding compared to basic and diluted earnings of 0.25 dollars for the Q4 of last year. Excluding the effects on the earnings attributable to common shareholders for the quarter of the unrealized loss of gain on derivatives, the adjusted earnings percent attributable to common shareholders for the quarter ended December 30, 2019, which have been $0.43 basic and diluted compared to adjusted earnings of $0.32 basic and $0.31 diluted for the same quarter of 2018. Usually, security analysts will include the above items, the unrealized earnings or losses and the published estimates of earnings per share. Let's now look at the right part of the slide and review the figures for the full year 2018 and 2018. For 2019, we reported total net revenues of $27,200,000 representing an 11% increase over total net revenues of $24,500,000 during last year, and that being a result of the increased average number of vessels we operated, partly offset by the lower term charter equivalent rate of our vessels forward. The company reported net income for the year of 200,000 and a net loss attributable to common shareholders of 1,900,000 as compared to net income of 1,100,000 and net income attributable to common shareholders of 600,000 for last year. Pension operating expenses were €10,800,000 for 2019 as compared to €9,200,000 for the same period for last year, mainly due to the increase to the average higher number of vessels operating. Depreciation expense for 2019 were $6,500,000 compared to $5,400,000 during 2018, while interest and other financing costs for this year for 2019 amounted to $3,500,000 compared to $2,900,000 for 2018. This increase is due to the higher average debt outstanding during last year as compared to the year before. In 2019, 2 of our vessels underwent special survey and 12 vessels underwent intermediate survey for a total cost of $1,700,000 as compared to 2 vessels undergoing special survey and again, 1 vessel undergoing intermediate survey in 2018 for a total cost of $1,500,000 Adjusted EBITDA for 2019 was $10,300,000 dollars compared to $9,400,000 for 20.18. Basic and diluted loss per share attributable to common shareholders for 2018 was $0.85 calculated on $2,261,000 basic and diluted weighted average lender shares outstanding compared to earnings of $0.25 per share basic and diluted for 2019. Excluding the effect on the loss attributable to common shareholders of the unrealized gain or loss of derivatives, the adjusted loss per share attributable to common shareholders for 2019 would have been $0.69 as compared to adjusted earnings of $0.25 basic and diluted for 2018. Let's now turn to Slide 15. In this slide, we review our fleet performance for the quarter and full year 2019 and compare them to the same periods of the previous year. Again, let's start with our 4th quarter numbers. Our utilization rate, as usual, is broken down into commercial and operational. And in this period, Q4 2019, we're both 100% compared to 100% commercial and 99.6 percent operational utilization rate for the respective quarter, the 4th of 2018. I would like to remind you here that our declaration rate escalation does not include vessels in scheduled drydock, scheduled returns or lay up in case any of these events have taken place during the period. On average, we operated 7 vessels during the quarter, a known and time charter equivalent rate of $12,439 per day compared to $12,513 per day that we had in the Q4 of 2018, the period during which we operated 6.35 vessels. Total daily operating expenses, vessel operating expenses, including management fees, general and administrative expenses, but excluding drydocking costs, averaged $5,955 per vessel per day during the Q4 of 2019 as compared to $5,707 per vessel per day for the same quarter of last year. Total daily industrial operating expenses, including management fees and G and A expenses, increased 2.7% for the Q4 of 2019 compared to the same period of last year, and the increase is primarily due to the timing of certain expenses over the quarters. As we will see shortly, the year the full year operating expenses were lower compared to the year before. As always, we want to emphasize that Cospagnoli remains a key component of our strategy, and it's a big competitive advantage that we have in operating in the markets. If we move further down to this table at the bottom of it, we can see the cash flow breakeven rate that we have for the year, which for the Q4 of 2019 was $9,665 per vessel per day compared to $10,663 for the Q4 of 2018. Looking now on the right side of the slide at our 12 month figures. In this year, we had 100 percent commercial utilization rate in 2019 and 99.4% operational utilization rate compared to 100% commercial and 99.6 percent operational utilization rate for the corresponding for the qualification 2018. In 2019, we operated during the full year 7 vessels compared to an average of 5.5 during 2019. Our vessels in 2019 earned the NASDAQ charter equivalent rate of $11,190 per day compared to $12,484 per vessel per day that we earned in 2018. Total daily operational operating expenses, including management fees and general and administrative expenses, but again excluding the higher operating costs, averaged $5,869 per vessel per day in 2019 compared to $6,313 per vessel per day in 2018, a reduction of about 10% or nearly less than 10%. The cash flow breakeven rates levels for the year is about $10,820 compared to $11,820 for 2018, a $1,000 reduction for both the quarter and the year. Let's now turn to Slide 16. And we'll review in Slide 16 our debt profile. In this slide, you can see the loan repayments for the remaining life of our loans as well as our balloon repayments on the left part of the slide of the graph. As of December 31, 2019, EuroDry had an outstanding bank debt of $56,900,000 with an average margin of about 3%. Net income of the LIBOR rate being around 2%, our cost of senior debt which has been around 5%. It included the dividend cost of our preferred equity of 9.25%, the average blended cost of our non equity financing would have been about 5.9% as of December 31, 2019. I would like to remind you again here that in June 2019, we prepaid approximately $4,300,000 of our Series B preferred shares in exchange of a quarterly reduction in our dividend rate from 12% down to 9.25% until January 2021, when it is set to increase to 14%. The remaining outstanding amount of our CDP preferred shares as of the end of last year was $15,400,000 In 2021, as you can see from the chart, we have a balloon payment of $6,600,000 due, which corresponds to 3 vessels, followed by 1 balloon payment of $2,200,000 for 1 vessel in 2022. These balloon payments are less than the scrap up price of the respective vessels, and we anticipate that we will have more issues refinancing them well due. We have additional payments in 2023 2025, which are sufficient in the future to worry about them now. Our loan repayments on a per vessel per day basis contribute about $2,700 to our daily cash flow breakeven level. You can see that figure at the bottom line of the table to the right part of the slide. If we make assumptions for the remaining items that make up our cash flow breakeven rate, like operating expenses, general and administrative expenses, dry docking, interest, etcetera, will come up with an overall cash flow breakeven level for the next 12 months of approximately $10,950 per vessel per day. Let's now move to Slide 17, where you can see some highlights from our balance sheet. This is a simplified version of our balance sheet where we show the main groupings of our assets and our liabilities. On the asset side, we have, of course, the value of our vessels, shown here at the book value of about 805,500,000 and cash and other assets for about $12,200,000 The total assets amounting to about $117,700,000 dollars On the liability side, we said bank debt, as I mentioned in the previous slide, was $56,900,000 which approximately represents 48% of the book value for our assets. Also, we see the preferred equity of $15,400,000 which approximately accounts for another 13% of our book assets, while we have other liabilities standing at $4,700,000 which amount approximately 4% to our total assets. Gross leave our net book value at around €41,000,000 or close to $17.7 per share. As of the end of last year, the market value for our fleet was very close to its book value, which meant that our book value per share approximated our net asset value per share. It's worth observing here that a change of 1,000,000 dollars in the value of fixed power vessels, that is a $7,000,000 change in the value of our fleet, which result in a $3 per share change in our NAV per share. As Aristides mentioned earlier, since the beginning of this year, the drybulk margin has been relatively weak with all indications pointing to asset values being 5% to 10% lower than DRF figures. Such a decline in values would translate to NAV per share, very likely being in the range of $13 to $15 per household. Still, the recent price trading rates of our share of just below or just around $6 per share represents a very significant discount to the value of our company. And should that gap narrows, that would present significant appreciation for our shareholders. And with that, let me pass the floor back to Aristides to conclude the call. Thank you, Tarso. Let me open up the floor for any questions that you may have. Thank you very much. Thank you very much. We will now take our first question. Your line is open. Please go ahead. Hi, thank you. Tate Sullivan from Maxim Group. If you can and I know a short term consideration, but can you expand on potential outcomes or short term outcomes for the 2 contracts that come due or the term contracts that are expiring this month, given the current environment? Can you I mean, have you had conversations? Or can you give any more comments on potential outcomes in the short term for those 2 ships, please? Yes. These 2 ships, which are on short term charters, will probably continue trading on short term. We are negotiating right now fixing one of the vessels for another 20, 20 5 days at charter rates of the magnitude of between $2,500,000 $3,000 And this is the current market in the Pacific at this point. We could get something slightly higher if we opted to do a much longer voyage, but we want with these rates, we'd rather do smaller voyages less than a month waiting to see some kind of recovery in the market. Great. Thank you for that. And then I noticed in your prepared remarks and presentation, you talked about iron ore trading volume growth at risk. Does that offset the reduction in or the limited growth in supply of ships? Or why did you put that in your outlook? And what can what could offset that risk? We just note also that Clarksons is generally suggesting a relatively low demand growth rate going forward, lower than the historical of the last 10 years. And we're trying to see what are the reasons for that. And because iron ore is one of the major commodities that is transported, We looked into what is being built as new mining opportunities and things like that and much is not being built. So it explains a little bit why the growth in drybulk demand is probably estimated to be lower than what it has been over the last decade or so. What counteracts that lower demand, of course, is the much lower supply of vessels and the fact that we don't see new orders being placed. Have a good rest of the day. Thank you. Thank you very much. We will now take our next question. Your line is open. Please go ahead. Hi, good morning, Tethys. This is Poe Fratt from Noble Capital Markets. Good morning. Can you just highlight a little bit maybe just what cost push you're seeing? It looks like your budget for the next 12 months on OpEx is just slightly higher than it was in 20 19. If you could just comment on that, that would be helpful. In terms of the balance on the OpEx costs, I think we're expecting to see around $5,100 per vessel per day for the OpEx, And that compares it's on the same order of magnitude. I think it's just about 2% higher than the actual for 2.5% higher than the actual for 2019, which is in the ballpark of our expected increase. The vessels, especially some of our vessels that are in their teams, driving a little more. I think it's the same level that we show in the Q4 of 2018. I don't think we'll have a significantly bigger projection for our budget, but it's very similar to 2019 leverage. And I think it's fair Paul, and I think it's fair to say that we are completing other analysis of the OpEx of 2019 to evaluate where we can perhaps make some savings and try to go below this initially budgeted level. So we hope that we will end up with an increase of less than the 2.5%, and we are taking measures to see if we can do that. But we'd rather keep to the original budget as it is right now and do better. Yes. Understood. Better to have a positive surprise than a negative one, right? Yes. And I apologize. I got on this call a little late, so I'm not sure if you addressed this. But can you talk about IMO 2020 in the context of how it's impacted you, your company, and whether it's what's been the biggest surprise or the biggest issue for you. And then secondly, whether it's changed your view towards whether you think that you should be doing anything towards the end of this year, maybe year as far as making the investment in scrubbers. Has anything changed? Well, what has happened is that we saw a very big spread initially between high sulfur fuel oil and low sulfur fuel oil in excess of 300, 350,000 the first day. But this has been narrowing and now is below $200,000,000 and seems as if it's going to go even lower. We think it's the spread is going to become even lower. So yes, of course, our cost of fuel increased. It didn't increase very much because we had generally a lowering in the cost of oil. So it didn't increase tremendously to what it was for the bigger part of 2019, but it is slightly increased by maybe $100 or so. But for sure, the guys that have scrubbers have taken advantage of the difference in the cost, at least the ones that do spot business because the ones that do time charter business share that improvement with their charters. But the spread is narrowing, and we think that it may end up being lower than $150 For a big ship, I think that would still make sense to install a scrubber. But for vessels up to Panamax that we have, I'm not sure that this investment will ever make sense. But we will wait and see what happens and how the price differential develops in order to take a final decision. Nothing no scrubber is at this point being considered. The other thing that we saw is because of the issues with both the scrubber and the coronavirus creating a lot of issues with shipyards in China, where mostly people go for dry dockings. We see that the yards are full and they are working at very slow rates. And the 2 ships that we had earmarked for dry dock within Q1, we have obtained extension for the dry docking and we may need to obtain a further extension from class as there are delays there. So I think these are the two things that we've seen regarding this transition into the new oil. Of course, there's been delays as well in times that you stay waiting for oil for bunkers and how long earlier you have to request them. But that is mainly a charterless approach and as we charterless problem and as we are time chartered, it doesn't really influence us. Great. Thank you. And then can you comment on what you're seeing out there as far as just maybe any potential acquisitions, any assets that has it changed over the last month or so as far as just availability of tonnage that might be attractive? Or can you just comment on what you're seeing out there as far as acquisition activity? Yes. This is something that we have been monitoring. We've always said that we have 2 ways of growth. One is organically ourselves slowly and quietly. The other is through some kind of joint venture. We don't have anything to report joint venture at this stage, although we are always looking and discussing opportunities, but nothing that is yet to be discussed and revealed. But also, we have been looking at maybe buying 1 more vessel. If we see prices drop because of what is happening, we might proceed with 1 more acquisition. But there are no real sellers of good vessels in the market. People are trying to keep the vessels they have, and I think all the sellers expect that the current market is temporary and things will improve. So big the NASK prices for ships are quite far apart at this point in time, and that's why we see very, very little activity on the sale and purchase market. Okay, great. And then just on the preferred, Tassos, you mentioned that it pushes your cost of debt upward by about 90 basis points or so. In advance of the step up in the rate next year, what's has any have you seen changing thinking on that as far as just either trying to partially pay it down or trying to retire entirely? Yes. This is our objective. Our target is to find ways to either partially or fully retire. If we follow the previous the model that we applied in 2018, even a partial repayment would allow us to reduce the rate and we can lever up a bit our fleet. We have some capacity of levering up our existing fleet and raising several So that is the full best position, and we are a little more active into finding alternative means of financing it. I think on the last call, you mentioned that you had about $4,000,000 to $5,000,000 of dry powder from a standpoint of secured money. Is that still the case, Tancis? That is roughly the case. Obviously, with the dropping of the vessel values, the slightly dropping, but probably was chipped up a bit. But I would expect to have between $4,000,000 or $5,000,000 of re levering capacity and it depends on how you re lever. If you re lever relever. If you relever the conventional bank debt, it's probably what I just said. But if you look at the sale leaseback opportunities of relevering the fleet, you might be able to fully repay the preferred. Great. Thank you so much for the color. You're welcome. Thank you very much. Thank you all for participating in our call today. We will be with you in 3 months' time to discuss the results of Q1. Thank you. Thanks, everybody. Thank you very much. That does conclude the conference for today. Thanks for participating. You may all disconnect. Thanks, Steve.