Earnings Call: Q2 2019

Aug 9, 2019

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Second Quarter 2019 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 I must advise you that this conference is being recorded today, Friday, 9th August, 2019. 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 The purpose of today's call is to discuss our financial results for the 6 month period and Q2 ended June 30, 2019. As a reminder, I would like to mention that in May 2018, Euroseas contributed to EuroDry its drybulk fleet of 6 vessels, 1 Ultramax and 2 Kamsarmax vessels built between 2016 2018 and 3 Japanese built Panamax vessels built between 2,000 and 2,004. EuroDry was spun off from Euroseas on May 30, 2018. Since the spin off, EuroDry bought an additional Panamax bulker. Comparisons in the following presentation to periods of last year refer to the drybulk fleet existing at the time for the periods presented. Please turn to Slide 3. Our income statement highlights are shown here. For the Q2 of 2019, we reported total net revenues of $6,200,000 adjusted EBITDA of $1,800,000 and net income of negative minus $1,800,000 The company declared its second preferred shares dividend of $600,000 on Series B preferred shares and a $200,000 preferred deemed dividend and therefore net income attributable to common shareholders was negative 2,600,000 euros Therefore, basic and diluted earnings per share attributable to common shareholders for the Q2 of 2019 was minus $1.14 per share. An average of 7 vessels were owned and operated during the Q2 of 2019 earning an average time charter equivalent rate of $10,724 per day. Turning to Slide 4 for the market highlights for the Q2 of 2019. During the Q2, the drybulk market started recovering with the spot market reaching multiyear highs by the month of July. Along with the reversal of certain short term factors like the reopening of iron ore mines in Brazil, The involvement has also been the result of limited supply growth due to the low order book coupled with reduced vessel availability as a percentage of the fleet prepares to comply with the lower sulfur emission requirements. We are optimistic about the near and medium term prospects of the market as fleet growth is expected to remain constrained. The main uncertainty is related to the continuation and extent of the trade tensions mainly between the U. S. And China. Please turn to Slide 5 for our chartering and operational highlights. The Pantelis was fixed for a trip of about 50 to 60 days at 9,500 per day and thereafter just recently recharted for about 100 days at $11,500 per day. The Starlight was extended for a period until September 2020, January 2021 at 100% of the 4 time chartered BPI average index. Finally, the Tasos was fixed for a trip of about 60 days at $14,400 per day plus 440,000 ballast bonus, which translates to roughly $10,500 per day time charter equivalent rate. In the Q1 of 2019, we had FFA short exposure of 40 days per month at $11,950 per day, which resulted in a profit of about $100,000 In the Q2 of 2019, our FFA short exposure was for 90 days per month at $11,261 per day, which resulted in a profit of about $460,000 At the beginning of Q3, we saw the market rising and decided to close our hedges for Q3 and Q4, resulting in a loss of about $500,000 Overall, therefore, our FSA coverage produced a net profit of about $550,000 In reference to dry dockings, Starlight was completed in the Q2 of 2019 in about 35 days at the cost of approximately $1,400,000 including the ballast water treatment plant. In addition, the Irene entered the drydock in July and is expected to return to service around mid August. Please turn to Slide 6 for the synopsis of the EuroDry fleet as of today. EuroDry comprises of 7 drybulk vessels with a cargo carrying capacity of 529,000 deadweight and the fleet average age of around 10.5 years. Slide 7 shows the employment schedule. As you can see, coverage for the remainder of 2019 as of September 1, including index charters and pool employments stands at about 62% or at 34% without taking into account the index linked charters and the pool employment. Having secured the 2 Kamsarmaxes until Q1 2020 on profitable rates, we are pursuing the strategy of employing the remaining 5 of our vessels on short term contracts or index linked contracts or even pools in anticipation of a still improving market. In the following slides, we synopsize our outlook into the drybulk market. Let's turn to Slide 9. The IMF projected gold GDP growth in 2019 is revised downwards from 3.3% in the previous quarter to 3.2% now. Among the developed economies, China's 2nd quarter suggests a weakening activity of 6.2% compared to 6.3% in the previous quarter. For the advanced economies, the revision to U. S. Growth in 2019 reflects stronger than anticipated performance of 2.6% compared to 2.3% in the previous quarter. Although the IMF boosted its growth forecast for the United States, it scaled back predictions for Eurozone expected to stay the same as before at 1.3%, while India is down from 7.3% to 7% and Brazil is expected to slow the most from 2.1% to 0.8%. For 2020, the IMF predicts stronger growth of 3.5%, while for the U. S. Is expected to be lower than 2019 at 1.9%. Growth in the euro area is expected to be 0.1 percentage higher than the previous quarter and 0.3% higher than the 2019 forecast, whereas the forecast for 2020 reflects a strengthening India, Brazil and Russia relative to 2019, while China could slow a bit to just 6% from 6.2% forecasted for 2019 and 6.1 projected for 2020 in IMF's previous quarter forecast. Looking on to the drybulk trade, according to Clarkson, the trade in 2019 was projected to grow by 1.3%, down from the 2.4% expected in the previous quarter estimates. However, after the most recent reintroduction of 30,000,000 tons of Vale iron ore into the market, this figure is expected to increase again to around 2% to 2.5%. In 2020 and according to Clarkson Forecast, again, the trade rate is set to grow at a 3.1% rate. Please turn to Slide 10 to review the drybulk delivery schedule. Currently, the order book stands at 5.7 percent for 2019, 5.4% for 2020 and just 1.8% for 2021. This is comparatively very low, near the lowest levels of the last 20 years. Also note that due to slippage, cancellations and scrapping, the overall fleet growth during the next 2 years, but also 2021 unless a significant number of new orders displaced should be very small. Please turn to Page 11, where we summarize our outlook on the drybulk market. Since the beginning of 2019, we see the trades for the Capesize vessels dropped below OpEx levels. However, a strong improvement followed which peaked in July at around $32,000 per day and has since then corrected to about $24,000 per day. The Panamax and Supers were less affected by the Vale disaster and dropped much less before peaking to about $17,000 per day $11,000 per day respectively in mid July. These sizes have also corrected to a lesser extent though and current rates cover close to 15,000 for the Panamax and around 11,000 for the Supras. The accident in Vale's iron ore mine in Brazil was estimated to reduce Brazilian iron ore exports by 90,000,000 tons annually until mines came back to in operation. However, it seems that the big part of the capacity will come back pretty soon. The Brazilian government already announced a return of about 30,000,000 tons of iron ore exports back in the market and hinted that more is to come very soon. The lost quantities can only be partially replaced by increasing production across other mines in the world. Our analysis for 2019, 2020 2021 shows marginal balance, which would suggest a strong second half twenty nineteen considering the weak environment in Q1 and a flat 2020. For 2021, the current fundamentals look very promising as the order book stands only at 1.8% of the projected fleet. Longer term, 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. Also, coal imports, despite the longer term concerns due to the overall desire to reduce coal use are expected to further grow in 2019 as electricity demand growth remains robust. Grain trade is expected to rebound if we manage to have an agreement between China and the U. S. So this is something we have to monitor closely. Finally, the environmental regulations coming into effect as of 2020 are the wildcard whose exact effect on the demand improvement is difficult to quantify, but could be very substantial. Next, please turn to Slide 12. The left side of the slide shows the evolution of 1 year time charter for Panamax drybulk vessels since 2,001. Even though drybulk vessel rates bounced back from the all time lows in 2016, we are still below historical levels, even subtracting the super cycles. The right hand side of the slide shows the vessel values in relation to 10 year historical prices. Of course, dry bulk prices have moved above all time low values that were established at the beginning of 2016, but the medium price of 10 year old Panamaxes is about $17,000,000 and we are still significantly lower than that at around $13,000,000 With a stabilizing and even improving freight rate environment, we would expect asset values to improve as well. We are therefore carefully evaluating various opportunities and options to deploy the funds and investment capacity we have available in terms of acquiring new vessels, renewing our fleet and exploring merger possibilities with other fleets in accretive transactions. I will now pass the floor over to our CFO, Tasos Aslidis to go over the financial highlights. 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 Q2 and first half of twenty nineteen. For that, please turn to Page 14. For the Q2 of this year, we reported total net revenues of $6,200,000 representing a 1% increase of the total net revenues of $6,100,000 during the Q2 of 2018. This was mainly the result of the increased average number of vessels that we operated, partly offset by the increase in the average time charter equivalent rate our vessels share in the 2nd quarter. We reported net loss for the period of $1,800,000 and net loss attributable to common shareholders of $2,600,000 as compared to net income of $500,000 and net income attributable to common shareholders of $400,000 for the same period of 2018 respectively. The net loss attributable to the common shareholders includes a 0.6 $1,000,000 cash and dividend payable to the preferred shareholders and a deemed dividend of 200,000 dollars due to the partial redemption of our preferred shares and that relates to the origination cost of the securities. The results for the Q2 of 2019 also include $200,000 of unrealized losses on an interest rate swap contract and $900,000 of unrealized loss on forward freight agreement contracts. Adjusted EBITDA for the Q2 of 2019 was $1,800,000 compared to $2,400,000 achieved during the Q2 of 2018. Basic and diluted loss per share attributable to common shareholders for the Q2 of 2019 was 1.14 dollars per share calculated on $2,200,000 basic and diluted weighted average number of shares outstanding compared to earnings of $0.17 per share for the Q2 of 2018. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized gain or loss in derivatives and the deemed preferred dividend, the adjusted loss attributable to common shareholders for the quarter ended June 30, 2019 would have been $0.65 per share basic and diluted compared to adjusted earnings of $0.16 per share basic and diluted for the quarter ended June 30, 2019. For the first half of this year, we reported total net revenues of $12,000,000 representing a 12% increase over total net revenues of $10,700,000 during the first half of twenty eighteen. We reported net loss for the period of $900,000 and net loss attributable to common shareholders of $2,400,000 as compared to net income and net loss attributable to common shareholders of $1,300,000 $1,400,000 for the same period of 2018. The net loss attributable to common shareholders includes a $1,000,000 cash and in kind dividend payable to the preferred shareholders and a team dividend of $200,000 due to the partial redemption of our preferred shares that I explained earlier. The results for the first half of twenty nineteen also include $200,000 of unrealized loss on derivatives. Adjusted EBITDA for the first half of twenty nineteen was $4,300,000 compared to $2,100,000 achieved during the first half of last year. Basic and diluted loss per share attributable to common shareholders for the first half of twenty nineteen was $0.96 calculated again on $2,200,000 basic diluted weighted average number of shares outstanding compared to $0.64 per share loss for the first half of twenty nineteen calculated again on 2,200,000 shares. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized loss or gain on derivatives and the deemed preferred dividend, the adjusted loss attributable to the common shareholders for the 6 month period ended June 30, 2019 would have been $0.87 per share basic and diluted compared to adjusted loss of $0.69 per share basic and diluted for the same period of last year. Let's now turn to Slide 15. In this slide, we'll review our fleet performance for the Q2 of 2019 and compare it to the same period of the previous year. Our utilization rate is as usual broken down into the commercial and operational components. In the second 3 months of 2019, we had a 99.9% commercial utilization rate and 98.3 percent operational utilization rate compared to 100% for both for the corresponding periods in 2019. I want to remind you here that our utilization rate calculation does not include vessels that were in scheduled dry docks or repairs if any such event occurred during the reporting period. In the Q2 of this year, we operated 7 vessels with an average time charter equivalent rate of 10 $1,724 per vessel per day compared to 5.6 vessels in the same period of 2018, which earn an average $12,069 per vessel per day. Total daily operating expenses including management fees, G and A expenses but excluding drydocking cost averaged $5,948 per vessel per day during the Q2 of this year as compared to $6,726 per vessel per day for the same quarter of 2018. Let's now look at the bottom of this table to our daily cash flow breakeven level presented here on a per vessel per day basis. For the Q2 of 2019, we reported an operating cash flow breakeven level including loan repayments and the cash portion of our preferred dividend of $11,780 per vessel per day as compared to 12,003 and $34 per vessel per day that we had during the Q2 of 2018. Let's now turn to Slide 16. This slide shows on the right hand side enactment of our cash flow breakeven level for the next 12 months, and on the left side we show our scheduled debt repayments, including scheduled Balu repayments over the next 5 years. The chart shows our debt profile actually before and after the recent refinancing of the balloon payment of Irin. As we see in the chart after the refinancing of the aforementioned balloon payment, we have no balloon payments coming up in 2019 2020 with the first one being in 2021. We believe that we have a competitive debt cost for the size of our company with the average senior debt margin standing at around 3%, which assuming a LIBOR at around 2.5% would translate to a no link cost for our senior debt of about 5.5%. If we include the cost of our preferred equity, the overall cost of our structured financing would be close to 6.3%. I would like to note that we have recently redeemed about $4,300,000 of our Series B preferred shares in exchange of a decrease in the quarterly dividend rate to 9.25 percent from 12% until January 2021 when our rate was still is to increase to 14%. The remaining amount of Series B preferred shares is about $15,000,000 and that represents about 20 percent of our debt and preferred equity funding. Expressed in dollars per day, our loan principal payments over the next 12 months amount to about $2,850 per vessel per day contribution to our cash flow breakeven level. Our preferred dividend payments contribute another $5.50 per vessel per day. If we make similar assumptions for the rest of the components of our cash flow breakeven that is the operating expenses, the general and administrative expenses, interest, dry docking, etcetera, all of which expressed in a per vessel per day basis, we can project that we have approximately a cash flow breakeven level over the next 12 months of about $11,700 per vessel per day. You can see that on the table on the right part of the slide. And with this, I would like to pass the floor back to our Chairman and CEO Aristides to continue the call. Thank you, Tassos. Let me open up the floor for any questions we may have. Thank Your first question, sir, comes from the line of Tate Sullivan from Maxim Group. Please go ahead. Your line is open. Hi. Thank you. First reviewing the downtime in the quarter for the Starlight, did it end up being a bit longer than you forecasted? Or was it within budget? Or what were some on it or were there any unexpected costs related to that please? No. We budgeted 5 days less to be honest, on that dry dock, but the weather was not helping. So things got a little bit delayed. The ballast water installation ended up being a little bit more costly than expected. But other than that, the end result was about $1,400,000 in 35 days. Okay. And looking at is the other ships scheduled to go in dry dock this current quarter undergoing a similar process to what the Starlight did and do you expect similar costs? It is, but we expect the cost to be lower at $1,000,000 to $1,100,000 $1,100,000 $1,100,000 and the duration to be less than 30 days. Is that due to being a smaller ship or different shipyard or what other factors? It had an easier ballast water treatment plant installation because the way the machinery was laid out, it was much easier to do. Other than that, the ships are quite similar ships. But this one required a little bit less work than the other. Okay. Thank you for that detail. Sure. Anything else? Thank you, sir. There are no further questions. I'll hand back to you for closing remarks. Thank you very much for listening into us. We'll be back in November with our Q3 results. Thank you. Thanks everybody. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.