Earnings Call: Q1 2019

May 24, 2019

You for standing by, ladies and gentlemen, and welcome to the EuroDry Limited Call on the Q1 2019 Financial Results. We have with us Mr. Aristides Pekas, Chairman and Chief Executive Officer and Mr. Tasos Asides, Chief Financial Officer of the company. At this time, all participants are in 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. Statements in this presentation may be forward looking statements within the meaning of federal securities laws. The matters discussed herein that are forward looking statements are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward looking statements due to potential risks and uncertainties, including but not limited to, the need to manage our growth and integrate additional capital, acquire additional vessels volatility in the dry box shipping business and vessel charter rates our ability to obtain sufficient capital the volatility of our stock price and other risks and factors. Forward looking statements made during this presentation speak only as of the date on which they are made, and EuroDry does not undertake any obligation to update any forward looking statements to reflect events or circumstances after the date of this presentation. Because forward looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on any forward looking statements. All written or oral forward looking statements by EuroDry or persons acting on its behalf are qualified by these cautionary statements. This presentation also contains historical data about the drybulk trade, the drybulk and the drybulk. These figures have been compiled by the company based on available data from a variety of sources like broker reports and various industry publications or represent company's own estimates. The company exercised reasonable care and judgment in preparing these estimates. However, the estimates provided herein may not match information from other sources. This presentation shall not constitute an offer to sell or the solicitation of an offer to buy securities nor shall there be any sale of securities of aid or infiction in which such offer, solicitation or sale would be unlawful under the securities laws of such jurisdiction. Now I would like to pass the floor to Mr. Pietas. 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 Q1 period ended March 31, 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 2,000,002,004. 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 Q1 of 2019, we reported total net revenues of $5,800,000 dollars adjusted EBITDA of $2,500,000 and net income attributable to common shareholders of 400,000 Basic and diluted earnings per share attributable to common shareholders for the Q1 of 2019 was €0.18 per share. An average of 7 vessels were owned and operated during the Q1 of 2019, earning an average time charter equivalent rate of 9 $1,472 per day. The company declared its 4th preferred share dividend of $500,000 which was paid partly in kind $100,000 by issuing additional Series B preferred shares and partly in cash $400,000 euros 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 operational and sale and purchase highlights. During the Q1 of 2019, the drybulk continued the decline since the declining trend of the Q4 of last year as they were affected by trade uncertainties and iron ore supply disruptions. Shutter rates reached bottom in February, but they have since then recovered to their levels in the beginning of the year. For our fleet, this decline was significantly mitigated due to our physical and FFA contracts we put in place at the beginning of the quarter that partly insulated us from the depressed markets. In particular, the Pantelis was fixed for a trip of about 30 days at $5,500 per day, thereafter fixed for a trip of about 55 days at $9,850 per day. Betasios was fixed for a trip of about 30 days at $7,750 per day. Thereafter, it was fixed for a trip of about 60 days at $12,250 per day, plus $225,000 ballast bonus, which should result in about $7,000 to $7,500 per day time charter equivalent. And thereafter, it was fixed for another trip of about 75 days at $6,900 per day. The Starlight was fixed with earliest redelivery July and latest October 2019 at $9,000 per day for the 1st 40 days and thereafter 100 percent of the BPI for time charter index. 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 $600,000 Going forward, we have hedged 2 70 days in Q3 at the rate of approximately $11,128 per day and similarly 2 70 days in Q4 at the rate of approximately $11,361 per day. Please note that the quoted average prices are gross before deducting commissions and clearing expenses, which are roughly in the rates of $55 per contract day. Please also note that there are size, route and other important differences between FFA contracts and physical charters, notwithstanding the need to post cash security margin if the market changes against the contracts entered to, in our case, if the market increases. There were no dry dockings or repairs for this quarter. However, for the Q2, we do expect to dry dock MV Starlight. Please turn to Slide 5 for the synopsis of the EuroDry fleet as of today. Including the Starlight, EuroDry comprises of 7 drybulk vessels with a cargo carrying capacity of 528,000 deadweight tons and with a fleet average age of 10.6 years. Slide 6 shows the employment schedule. As you can see, coverage for the remainder of 2019, including Baltic Panamax Index and FFA contracts, stands at about 78%. Having secured the 2 Kamsarmax 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 pools. As discussed previously, we have practically hedged 3 of these vessels for the remainder of 2019 at slightly above $11,000 per day via the FFAs. Our market exposure for the rest of 2019 is currently therefore practically just 2 vessels. But in 2020, we are wide open in expectation of market improvements. In the following slides, we can exercise our outlook into the drybulk market. Let's turn to Slide 8. The IMF projected world GDP growth in 2019 is revised downwards from 3.5 percent in the previous quarter to 3.3 percent with reductions stemming from mostly all big economies except China, which was revised marginally upwards to 6.3%. It seems the IMF believes China's stimulus will work. The U. S. Is down by 0.2% to 2.3% the Eurozone down by 0.3% to 1.3% India down 0.2% to 73% and Brazil down the most by 0.4% to 2.1%. For 2020, global GDP growth rebounds to 3.6% as per the IMF, which is, however, lower than their expectations the previous quarter by 0.1%. U. S. Slightly, Japan significantly and China just marginally are expected to decline a bit relative to the IMF's 2019 expectation, but all other major players are expected to slightly improve. Looking on the drybulk trade, according to Clarkson, the trade in 2019 is now projected to grow by 2.4%, down from the 3.1% expected in the previous quarter estimate. The major reason for this decline being the Vale mining incident, of course. In 2020, Clarkson expects a recovery of the growth rate to 3.2%. Please turn to Slide 9 to review the drybulk delivery schedule. Currently, the order book stands at 5.4 percent for 2019, 4.2 percent for 2020 and just 1% for 2021. This is comparatively very low, near the lowest levels of the last 20 years. Please 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 is placed for 2021 delivery should be extremely small. Please turn to Page 10, where we summarize our outlook on the drybulk market. We believe that the recent market slowdown is due to short term factors and that in the medium and long term, the fundamental supply demand balance is supportive of an improving market. Mainly due to the Vale incident, the rates for the Capesize vessels dropped below OpEx levels in February. However, a strong improvement recently has brought them back to around $12,000 per day. Panamax and Supras were much less affected by the Vale disaster and dropped much less before increasing again to about $10,000 per day 9,000 dollars per day, respectively. The recent accident in Vale's iron ore mine in Brazil will reduce Brazilian iron ore exports between 50,000,000 to 70,000,000 tons annually until the mines come back to operation. Vale had recently announced the return of about 30,000,000 tons of iron ore exports back in the market. However, the local authorities for a second time ordered the temporary seizure of the mines. The lost quantities can only be partially replaced by increasing production across other mines in the world. Low order book levels and reduced vessel availability for unavoidable downtime to implement solutions required for compliance with emissions and ballast water treatment regulation and possible slowdown of the average speed of the fleet would limit fleet growth and allow any trade recovery to translate to higher charter rates. Taking all these facts into account, our analysis for 2019, 2020 and 2021 shows a slightly improving supply demand balance, which would suggest a strong second half twenty nineteen considering the weak environment in Q1 and an even stronger 2020. Also for 2021, the current fundamentals look very promising as the order book stands only at 1% 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. Coal imports, despite the longer term concerns due to the overall desire to reduce coal use, are still expected to further grow in 2019 2020 as electricity demand growth remains robust. Grain trade is also expected to do better in 2019 than 2018, especially if a much desired trade agreement between China and U. S. Is ever reached. Finally, environmental regulations coming into effect as of 2020 are the wildcard, which may or may not create a tighter market and which are adding uncertainty into the future. Let's turn to Slide 11. The left side of the slide shows the evolution of 1 year time charter of 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 median rate for 2,001 to 20.18 is at about $13,300 per day. The right hand side of the slide shows the vessel values in relation to 10 years historical prices. Of course, drybulk prices have moved above all time low values that were established at the beginning of 20 16, but the average price of 10 year old Panamaxes is $18,000,000 and we are still significantly lower than that. With a stabilizing and even improving freight rate environment, we would expect asset values to improve as well. I will now pass the floor over to our CFO, Tasos Aslidis, to go over our financial highlights. Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will take you over now our financial result highlights for the Q1 of 2019. For that, please turn to Page 13. For the Q1 of this year, we reported total net revenues of $5,800,000 representing a 25% increase over total net revenues of $4,600,000 during the Q1 of 2018 and this increase was mainly due to the increased average number of vessels we operated. We reported net income for the period of €900,000 and net income attributable to common shareholders of €400,000 as compared to net loss attributable to common shareholders of $1,400,000 for the same period of last year. The difference between net income and net income attributable to common shareholders is the preferred dividend of €500,000 that we declared on our Series B preferred shares during the Q1 of this year. This preferred dividend was paid partly in kind €100,000 by issuing additional Series B preferred shares and partly in cash the remaining $400,000 Interest and other financing costs, including interest income for the Q1 of 2019, amounted €900,000 compared to €400,000 for the same period of 2018. Interest during the Q1 of 2019 was higher due to higher debt and higher LIBOR that we paid during the period as compared again to last year. Depreciation expenses for the Q1 of 2018 increased $1,600,000 compared to $1,200,000 for the same period of 2018, again as a result of the increased average number of vessels we operate. Increased general and administrative expenses reflect mainly the operation of the company as a separate public company following the completion of the spin off that Aristides mentioned in the beginning of the presentation. Adjusted EBITDA for the Q1 of 2019 was $2,500,000 compared to $100,000 achieved during the Q1 of 2019. Excluding the effect from the earnings attributable to common shareholders of the unrealized gain in derivatives, the adjusted loss attributable to common shareholders for the quarter ended March 31, 2019, would have been $0.21 per share basic and diluted compared to an adjusted loss of $0.69 basic and diluted for the same period of last year. Now can you please kindly turn to slide 14? In this slide, we will review our fleet performance during the Q1 of this year and compare it to the same period of the previous year. Our utilization rate is as usual broken down into commercial and operational components. We had a 100% commercial utilization rate for the quarter and 99.7 percent operational utilization rate compared to again 100% commercial and 99.7% operational utilization rate for the same period of 2018. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled repairs or dry dock if such events took place during the period. In the Q1 of this year, we operated 7 vessels with another time charter equivalent rate of $9,472 per vessel per day compared to 5 vessels in the same period of 2019, which though earned $11,116 per vessel per day. Total operating expenses, including management fees, general and administrative expenses, but excluding dry docking costs, decreased by 12% during the Q1 of this year compared to the same period of 2018. As always, we want to emphasize that cost control remains a key component of our strategy. Let's now look at the bottom of this table to our daily cash flow breakeven levels presented here on a per vessel per day basis. For the Q1 of 2019, we reported an operating cash flow breakeven level, including loan repayments and the cash portion of the preferred dividend, but before any balloon payments of $11,575 per vessel per day as compared to $13,623 per vessel per day as we said during the Q1 of 2018. Let's now turn to Slide 16. This slide shows on the right hand side an estimate of our cash flow breakeven level for the next 12 months. And from the left side, we show our scheduled debt repayments, including scheduled balloon repayments over the next 5 years. The chart shows our debt profile before and after the refinancing of the balloon payment of Irini P of €4,000,000 which was scheduled to be paid in the Q2 and we recently completed the refinanced. We can see in the chart that we have no balloon payments coming up before 2021. Expressed in dollars per vessel 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. If we make similar assumptions for the rest of the components of our cash flow breakeven and make assumptions for our operating expenses, generally and administrative expenses, interest, drydocking costs, etcetera, always on a per vessel per day basis, we can project that we will have approximately a cash flow breakeven level over the next 12 months of $12,650 per vessel per day. You can see that table on the right part of the slide. Lastly, let's now turn to slide 16. In this slide, we will review highlights from our balance sheet. The left side of this slide shows a snapshot for the company's capital structure. On the left back, on the top, we list our unrestricted cash of $9,400,000 the restricted cash and other liquid assets of $4,400,000 as well as other assets of about 4,000,000 dollars Including our vessels at book value, our total losses at the end of the Q1 of 2019 stood at about 127,000,000 dollars Of that, the book value of our vessels was $109,000,000 which is within which is within 5% of their market value. Moving on to our liabilities. Our bank debt amounts to about $61,000,000 which is roughly 50% of our total assets, while our preferred equity outstanding is about $20,000,000 or about 15% of our total assets and other liabilities about $3,000,000 or 2% of our assets. The above numbers result in a net book value of about 43,000,000 dollars or about $19 per share. And in closing, I would like to mention that again this figure, our current stock price of $7.5 per share represents a significant discount to the intrinsic value of the company. And with that, I would like to pass the floor back to our Chairman and CEO, Aristides to continue the call. Thank you, Tasos. I would like to open the floor up for any questions we may have. Thank you. Ladies and gentlemen, we will now begin the question and answer session. We will now take our first question. Please go ahead. Your line is now open. Hello. This is Tate Sullivan from Maxim Group. First question on cash flow in Slide 15. To confirm, you said there are no more balloon payments due for the rest of 'nineteen, is that correct? Yes. That is correct. We don't have any balloons coming due in the remaining of this year and 2020. The next balloon payment will be in 2021. 2021. And then it was a great cash flow quarter in the Q1 of 'nineteen with about cash flow from operations of close to 7,000,000 dollars Is that probably the high for the year just based on timing of collecting receivables? Or can you give any detail into outlook for cash flow from operations or capital expenditures or needs? I think it was mostly collection of receivables. Other than that, it was another quarter because as you pointed out, the average earnings were lower than the same period of last year. Okay, understood. It was also the lack of any dry docking expenses. Okay, good point. And on that note, on the drydocking that you expect in 2Q, what are the usual expenses related to that period that it will be drydocked? A typical cost for drydocking 1 of our vessels, 1 of our Panamaxes, which are built in the air in the between 2000, 2004, is around $800,000 per dry dock. Okay, great. Okay. And we expect 1 drydock in Q2 and 1 in Q3 this year. Okay. Okay. And while we're talking touching base too and the impact of the recent tenor of China U. S. Trade negotiations, Has that come up in your negotiations with customers for future contracts at all? Or I mean, what are specific examples of how that has impacted your fleet, please, if you can discuss? We haven't had any direct impact from that. What we get the impact from the cargo flows generally as a market. There is nothing particular in our trading. For example, due to the grain tariffs, we tend to get less business out of the U. S. For grains and more out of Argentina, Brazil, Latin America generally. So, but the overall sentiment is negative through these trade wars and it affects general sentiment, which general sentiment drives markets. Right. Absolutely. Well, thank you for that and have a great rest of the day and thank you for all the details. Thank you very much. Thank you. We will now take our next question. Please go ahead. Your line is now open. Yes. Hi. Poe Fratt from Noble Capital Markets. Good morning. Hi, Poe. I was just on the Starlight, it looks like it's up to 20 days as far as what you're budgeting for downtime for the drydock? Yes. I think that's about right, I believe. And then the Q3, can you specify which vessel is going to be in drydock and also like amount of time? The Irini, the Irini and again about 20 to 25 days. Okay, great. And then when you look at the Pantelis and the Tasos right now, it looks like they're open at the end of this month. Can you give us an idea of sort of the current market for those 2 vessels? And then also the rationale for not doing any FFAs for the 2nd quarter, but then loading them on the 3rd 4th? Yes. We do have the FFAs on the second quarter. We still have them. I think didn't I maybe I didn't mention them in as we were talking. But yes, we do have FFOs there for the second quarter as well at around $11,000 So that's an omission, but they are there. And right now, the levels that we are seeing for vessels like Tasos and Pandellis are around 10,000, hopefully up to 10,000. Great. That's helpful. And yes, I did miss the 2nd quarter FFAs. Is that have you layered on 270 or was it closer to the It was 270 days and it's our mission. It's not in the presentation, yes. Great. That's helpful. And then in TESUS, when you look at the refinancing of the RINI debt, it looks like you may have paid down part of the debt and then pushed out the maturity. Can you sort of give us sort of what exactly happened there? So it was essentially a direct refinancing of the amount. In fact, we might have gotten slightly more, like some something like $50,000 more. So it was just pushed out. And of course, the refinanced debt is also amortized. So that's why you see the new balloon being lower than the original balloon. Okay. So I could put the difference as what will be amortized over the I assume it was pushed up for 3 years then? Exactly, exactly 3 years. You can see from the chart that's from about €4,000,000 the new balloon is €2,100,000 So the difference roughly €1,900,000 was amortized equally over the next 3 years. It is to be repaid as we change it over the next 3 years. Yes. And any change in the LIBOR spread or any other structural changes to that? I think the LIBOR spread was marginally better, but roughly the same, the low of risk. Okay, it's 2.7%. Yes, 2.7%, I wasn't sure. 20.70 basis points. Great. Okay. Thank you so much. Well, actually one last one, if you wouldn't mind. Has the given what happened over the Q1, is the tone of the M and A market changed at all? Or any comment on what you're seeing as far as potential expansion opportunity? I think things have been a bit quiet during the quarter on that front. Everybody is still in wait and see mode to see how things develop. 1, because of the trade wars, but second also because of the IMO changes and the fuel issues. So people are dealing with these things more than looking at actively at M and A at this stage. At least that's what we see ourselves. Great. Thank you so much. Thank you. Thank you, I think there's no more questions and we No questions at this time. Okay. So then I'd like to thank everybody that was listening in and we'll talk to you again in 3 months' time with our Q2 results. Thank you. Thanks, everybody. That does conclude the conference for today. Thank you for participating. You may all disconnect.