Euroseas (NASDAQ:ESEA) Q1 2020 Earnings Call

0:00 Your conference will begin shortly. Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas conference call on the first quarter 2020 financial results. We have with us today Mr. Pittas, Chairman and Chief Executive Officer, and Mr. Elisilidis, 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, At which time, if you wish to ask a question, you will need to press star and 1 on your telephone keypad and wait for your name to be announced.

1:05 I must advise you that this conference is being recorded today, Wednesday 27 May 2020. 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, Euroseas will be making forward-looking statements. These statements are within the meaning of the Federal Securities Laws. The statements in today's conference call are not historical facts, including, among other things, the expected financial performance of Euroseas' business, Euroseas' ability to pursue growth opportunities, Euroseas' expectations or objectives regarding future and market charter rate expectations, and in particular, the effects of COVID-19, on the financial condition and operations of Euroseas and the container industry in general may be forward-looking statements as such as defined in Section 21E of the Securities Exchange Act of 1934 as amended.

2:12 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 realised. I kindly draw your attention to slide 2 of the webcast presentation, which has the 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 half-pass the floor over to Mr. Pittard. 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 Stasios Aslidis, our Chief Financial Officer.

2:57 The purpose of today's call is to discuss our financial results for the three-month period ended March 31st, 2020. Let's now turn to slide 3 to see our income statement highlights. For the first quarter, total net revenues were $15.4 million, net income was $2 million, and net income attributable to common shareholders After a $160,000 dividend on Series B preferred shares was $1.8 million or $0.32 gain per share basic and diluted. Adjusted net income attributable to common shareholders for the period was $1 million or $0.17 per share basic and diluted.

3:45 Adjusted EBITDA was $4.1 million. Please turn to slide 4 for details of some of our recent developments. During the second half of 2019, the company acquired 8 vessels in total with an average age of 12.5 years and total capacity of 25,600 TEU, thus increasing the fleet by more than 70% in number of vessels and more than 100% in terms of total TEU capacity. In addition to the various routine operations, there were two noteworthy events related to our fleet insofar in 2020.

4:34 First, we sold the motor vessel Manolis P for scrap with targeted delivery period in the first half of April 2020. Unfortunately, the sale was not completed due to the closure of the scrap yards related to COVID-19 lockdowns. We are in dispute with the buyers over the sale which is being dealt through arbitration in London. The vessel will however be sold for scrap when the scrapyards reopen, probably to a new buyer. Secondly, as already reported in January 2020, the motor vessel EM Inousses suffered an engine room fire, luckily with no effect to our crew.

5:22 This has been temporarily repaired and we have decided to scrap the vessel a few months earlier than initially envisioned as soon as scrapyards reopen in order to avoid costly repairs. The COVID-19 pandemic has come center stage in the world scene since March 2020 with the economic effects influencing world trade and demand for shipping. This slowdown is expected to result in reduced charter rates and earnings in the remaining of 2020. In that respect, we have started discussions with our banks to defer some of our 2020 loan repayments to ensure that we have sufficient liquidity in the near term.

6:07 ASOS will provide you more information later on. Please turn to slide 5, where you can see our current fleet profile after the latest additions. We now have 19 vessels which include 14 feeder container ships and 5 intermediate container carriers with 661,000 deadweight tons and 51,000 TEU capacity of average weight and average age by TEU of 16.5 years. As mentioned earlier, Manolis P. and E.M. Inoussis are in the process of being scrapped as soon as scrapyards open. Let's turn to slide 6 for our chartering, operational and dry docking highlights.

6:52 Up to now, we have been able to renew most of the charters that expired over the first months of the year, at rates generally a little bit lower than their last charters, and without facing idle times, except the Akinada Bridge, the Ninos and the Hydra, which each faced about 15 days of idling. Only the EM's patches, which opened up to early May, has not yet found new employment. I will not go through the complete list of new charters achieved, but you can see them all on slide 6. Slide 7 shows our vessel employment in graphical form as well. As of May 25th, we have about 57% coverage for the remainder of 2020 based on the minimum durations.

7:45 Please turn to slide 8. Over the last five years, our operational and fleet utilization has been in excess of 98.9%. Eurosys has an outstanding safety and environmental record, but at the same time, the company is managing to keep costs low despite running an older fleet than the other listed companies. For the first quarter of 2020, Operational fleet utilization was 96.2%. Practically all the drawback is attributed to the fire on the Inousis. The commercial fleet utilization rate in the first quarter of 2020 was 99%. The graph on the page compares daily costs excluding dry docking since 2011 with our peers.

8:38 Overall, our costs achieved are among the lowest of the public shipping companies. Let's turn to slide 10 to discuss the container ship market highlights of the first quarter. Time charter rates in the first quarter for feeder and intermediate size vessels ranging from 1,000 to 5,600 TEU vessels drew a negative picture as shown by the context index. The 1,700 to 42 TEU and a few hundred DEU sizes fell at about 10%. The bigger ships also fell but a bit less. April and May figures are even lower and the number of idling vessels is rising.

9:24 According to Clarkson's, the 1,700 DEU geared vessel fell from an average of 8,500 in Q4 to 7,770 in Q1 and currently stands at 6,200. The 2,500 TEU geared vessel fell from an average of 10,130 in Q4 to 9,370 in Q1 and currently stands at around $7,500 per day. Whilst the 4,400 TEU gearless vessel fell from an average of 13,800 in Q4 to 12,900 in Q1, and currently stands at 8,250.

10:09 Average second-hand prices for older than 20-year-old vessels remained around their now-dropping, though, scrap prices. However, for younger vessels of about 5 to 15 years old, there was a drop circa 15%. The inactive container ship fleet serves to a record of 524 vessels totaling 2.6 million TEU as of May 11, according to a recent Tradewinds article. This includes idle due to scrubber retrofitting, which of course is mostly larger vessels and is about 700,000 TEU total.

10:57 Scrapping remained at the same levels as the latter part of 2019, which is very low for the current market. Only about 40,000 CEU are scrapped in 2020 so far. Due to the lockdown of scrapyards, worldwide vessels can't be scrapped currently and any quoted prices are 20-25% lower than the previous prices. The fleet has grown by 0.6% in 2020 so far, without, of course, accounting for idle vessels reactivations or idling. Please turn to slide 11. Due to COVID-19, the IMF-projected world GDP growth in 2020 is revised downwards from 3.3% positive growth to minus 3%, with reductions stemming from the USA, China, India, and the ASEAN 5 economies mostly.

11:58 India was also reduced this quarter from 5.8% the IMF predicted three months earlier to 1.9% growth predicted today. For 2021, global GDP growth rebounds to 5.8% as per the IMF, as still their base case scenario is for a rapid global recovery. Four major global economies are expected to rebound strongly in 2021, with the US and the Eurozone rebounding by 4.7%, India by 7.4%, and China by 9.2%. In terms of demand for containerized trade, demand measured in TEU per mile is expected by Clarkson's to have a sharp drop at minus 10.3% in 2020.

12:53 while a high growth rate of 8.9% is expected to return in 2021 owing to the rise of the global economy. Should be noted that rate and growth projections currently made will probably be revised as COVID-19 develops but also due to the uncertainty of the geopolitical situation. Therefore, market development projections are even harder than usually to make. Please turn to slide 12 to review the container shipage profile and order book delivery schedule. As you can see on the container shipage profile chart on the left side of the slide, we have a young fleet with a mere 6% of ships being over 20 years old only.

13:45 This, however, is concentrated in the smaller size classes where we operate. On the right side, The chart shows the delivery schedule of the current container ship order book, which is expressed as a percentage of the fleet. The circled figures for the years 2017 to 2019 show the actual fleet growth after taking into account scrapping, cancellations and slippages, whilst the red circled figures for 2020 to 2022 show the order book before any scrapping and slippages. Currently, the container ship order book stands at 10% of the fleet, a figure which is the lowest observed in more than 20 years.

14:34 This low level of order book provides a source of optimism for a quick recovery of the rate if trade demand recovers as supply side pressures will be at minimal levels. Please turn on to slide 13 where we discuss our outlook summary. The disruption of economic activity and seaborn trade caused by the unprecedented worldwide lockdown, as well as the still evolving pandemic, render any forecast a very ambitious exercise surrounded with a high degree of uncertainty. As discussed, initial estimates from Clarkson's to quantify the effects of the pandemic on containerized trade indicate a sharp drop in demand in 2020 of 10%, followed by a sharp recovery in 2021 of 9%, similar to the way economies reacted during the 2008-2009 financial crisis.

15:35 Therefore, we expect a very weak 2020 and a strongly strengthening 2021 and 2022. Hoping to have been through the toughest part of the pandemic's effect in the first half of 2020, We still might not expect to see any significant gains during the summer, but markets could see meaningful improvements by year-end. For the following few months, it will be difficult to charter vessels that are delivered by the charters and the owners. The best hope is to extend, if possible, with existing charters for whatever periods are available at somewhat lower rates in order to avoid idling.

16:22 The order book, as a percentage of the fleet, is the lowest of the last 20 plus years, indicating limited supply growth over the next 2-3 years. Still, a significant percentage of it is to be delivered in 2020, though some of it will spill into 2021, plus the return of quite a few vessels, mainly larger ones that are in shipyards retrofitting scrubbers, will dampen the effect of any market recovery, as the effects of COVID-19 hopefully retreat towards the latter part of the year. The order book for 2021 onwards is luckily quite low, and since owners do not yet know what the optimal fuel for the not-too-distant future will be, they are reluctant to place new orders, so the second half of 2021 and the whole of 2022 may prove to be boom periods if global demand picks up as generally expected.

17:25 Let's turn to slide 14. The left side of the slide shows the evolution of the one-year time charter rates for containers of 2,500 EU since 2000. Since the financial crisis of 2008, rates stayed rather depressed with three spikes within the $5,500 to $15,000 per day range. Currently, we see charter rates hovering at $7,500 per day. The right-hand side of the slide shows vessel values in relation to historical prices since 2011. As you can see, container ship values are still below the median historical values and of course significantly lower than historical average levels as well.

18:17 I will now pass the floor 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 the next four slides to give you an overview of our financial results for the first quarter of 2020 and compare them with the same period of 2019. For that, let's look first at slide 16. For the first quarter of 2020, the company reported total net revenues of 15.4 million, representing an 85% increase of a total net revenues of 8.3 million during the first quarter of last year.

19:02 The main reason for this revenue increase was the number of vessels we operated, 19 in 2020, as compared to 11 in 2019. The company reported a net income for the period of 2 million and a net income attributable to common shareholders of 1.8 million as compared to a net loss of 0.02 million and a net loss attributable to common shareholders of 0.49 million for the first quarter of 2019. The results for the first quarter of 2020 also include 0.8 million of amortization of below market time charges acquired.

19:51 Depreciation expenses for the first quarter of 2020 amounted to 1.7 million compared to 0.8 million for the same period of 2019 due to the increased number of vessels we operated. In the first quarter of 2020, None of our vessels underwent dry docking, while in the same period of last year we had one vessel completing a special survey with a dry dock with a cost of 0.7 million. In interest, another financing cost for the first quarter of 2020 amounted to 1.3 million compared to 0.7 million in the first quarter of 2019. This increase is due to the increased amount of debt we carried in the current period compared to last year, and is partly offset by the lower LIBOR rate we had to pay this year again as compared to the previous year.

20:54 Adjusted EBITDA for the first quarter of 2020 was 4.1 million compared to 1.5 million achieved in the first quarter of 2019, representing a 179% change, increase, again mostly driven by the higher number of vessels we operated. Basic and diluted earnings per share for the first quarter of 2020 were $0.32 calculated of 5.58 million basic and diluted weighted average number of sales outstanding compared to basic and diluted loss per share of Eirini Pitta would have been 17 cents compared to an adjusted loss of 33 cents for the first quarter of 2019.

22:21 Usually security analysts do not include the above items in their published estimates of earnings per share. Let's now turn to slide 17 to review our fleet performance for the first quarter of 2020 and again compare it to the same period of last year. Let's first look at our fleet utilization rate. As users, we have broken down our fleet utilization rate in commercial and operational. As you can see on the slide, for the first quarter of 2020, we reported a 98.9% commercial utilization rate and a 96.2% operational utilization rate as compared to a 99.4% commercial utilization rate.

23:10 and 100% operational utilization rate for the same period of 2019. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled dry dock, scheduled repairs or in lay-up, if there is any, during the reported period. As I mentioned earlier, in the first quarter of 2020, we operated 19 vessels, which had an average time charter equivalent rate of $9,615 per vessel per day, compared to a time charter equivalent rate of $9,088 per vessel per day for the same period of 2019, a period that we operated 11 vessels on average.

23:56 Total operating expenses, including management fees and general and administrative expenses, but excluding trade-off costs, were $5,881 per vessel per day for the first quarter of 2020, compared to $6,223 per vessel per day for the same period of life years. Let's look now at the bottom of the table, to our daily cash flow rate given levels, presented here on a per vessel per day basis. For the first quarter of 2020, We reported an operating cash flow break-even level, including loan repayment, but before any balloon repayment, of $8,518 per vessel per day, as compared to $8,800 per vessel per day for the first quarter of 2019.

24:51 Let's now move to slide 18 to review our debt profile. This slide shows on the right hand side our cash flow break-driven expectation for the next 12 months and on the left side we can see our scheduled debt repayments over the next several years. As you can see from the chart on the left, almost 30% of our loan repayments this year, about 5 million, are due to a related party and under certain conditions the company can repay them itself. In 2021, we have to repay 19.2 million of our balloon payments for a loan that covers 9 of our vessels. And in 2022, there is also a 1.7 million balloon repayment related to one of our vessels.

25:47 Finally, in 2023, we have to make 3 balloon payments of nearly 30 million for the remaining 9 of our vessels. The regular loan repayments, if I may say so, the dark parts of the bar shown in the chart, are scheduled to decline every year over the next four years. Expressed in dollars per vessel per day, our loan repayments over the next 12 months amount to $1,700 and contribute thus to our cash flow break-even level. Looking now at the right part of the slide, and the table there, and by making assumptions for the remaining components of our cash flow break-even level, that is operating expenses, G&A expenses, interest, dry docs, and the cash payment of our preferred stock dividend, we come up with our cash flow break-even level for the next 12 months, which amounts to about $8,780 per person per day.

26:56 As I mentioned earlier, due to the extreme circumstances introduced by the COVID-19 pandemic, we are in discussions with our banks to defer some of the loan repayments due in 2020. We are also in discussions with our reserve equity holders to possibly pay the dividends in 2020 We expect that these accommodations, when formalized, will reduce in half or more the cash requirements of our loan repayments and preferential dividend payments, bringing down our break-even level to around or just below $8,000 per vessel per day.

27:46 Let's turn now to slide 19. This slide provides some highlights from our balances. As of March 31st 2020, we had cast another assets of 13.6 million, and the book value of our vessel was about 113 million, giving us a total book value of our assets of approximately 126 million. On the liability side, we had an outstanding bank and other debt of about 87 million, and other liabilities of 9.5 million, thus leaving us with a book value of about 22 million.

28:35 If we adjusted the book value with the market value of our vessels, based on internal estimates, we can calculate the net asset value of our fleet of about 26 million or 4.7 With recent share price trading rates of between $2 and $3 per share, this level represents a significant discount to the book and net asset value of the company and potentially represents a good investment for our shareholders. And with that, I would like to turn the floor back to Aristides to manage the remaining of the calls. Yes, Tasos, thank you. I am now opening the floor for any questions you may have.

29:38 Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star 3. Thank you. We will now take our last question. Tate Sullivan from Maxine Group. Please go ahead. Your line is now open. Hi, Tate. Thank you. Hello. Just a first question on the ship exit, the current term contracts for your fleet. When you indicate in your ship list and the reason for the question to set expectations for this current quarter and next, when you indicate, for instance, the term contract, current term contracts ends in May, Is it usually at the end of the month or can it vary?

30:30 Is it sometimes in the middle of the month or at the beginning of the month for all your term contracts, please? It varies. It could be any time during the month. We try to round things and we report the month rather than the specific date. Okay. And then your earlier comments on the scrap yards, can you give more background on where usually your container ships make it scrapped and are the yards In the process of opening, where are they in general? More background on the regional diversification of where they're closed and where maybe they may be open faster, please. Yeah, I mean, 90% of the ships that are scrapped are scrapped in India, Pakistan, and Bangladesh.

31:17 These are the three areas which have the biggest scrapping. You can scrap the ship in Turkey or in a few other places, but you get much less money for that. Both of our ships are positioned in the United Arab's location there, and therefore the most probable places for them to be scrapped are either Pakistan or India. These countries have locked down the scrapyards for over a month now, but there are discussions of these scrapyards opening up very soon.

32:09 In fact, in Pakistan, they say that the yards are open. However, there is no way to repatriate your crew yet. So, practically, you cannot sell a vessel for sale because you cannot take it for scrap because you cannot take it through war. But we hope that things will improve within the next few weeks, couple of weeks, and the ships will be sold within this quarter, within Q2. Oh, within Q2. Okay. Thank you very much. Have a good rest of the day. Your next question comes from Paul Fratz from Noble Capital Market.

32:59 Please go ahead, your line is now open. Hi, good morning Aristides, good morning Tom. Can you highlight whether there's going to be potentially any insurance recovery for the fire in the engine? And then secondly, can you just highlight the scrap value that you're looking for? It looks like you've got a deposit on the Manolos P of about $1.1 million. Can you just highlight any additional cash that you potentially are looking at with scrapping the Manolos P and then also the Unisys? On the manual SP, as you say correctly, we had 1.1 million deposit which we now have put in an escrow account subject to the developments of the arbitration procedure.

33:55 Scrap prices are being quoted 20-25% below where they were before the crisis. Although this is somehow artificial because if you look at steel and scrap prices globally, they haven't dropped. They might even be increasing. But because of the scrapyards having been closed for so long, the scrap brokers are now asking, paying a lower price. We will see how that will develop. will be sold at the price of maybe anything between 300 and 380, let's say, dollars per ton, I would say, which is just a little bit less than what we had agreed previously.

34:58 But let's say around $1.5 million, around $2.5 million maybe. And the inuces will be sold something like $3.5 to $4 million I would probably estimate right now. And of course we are going to get fully covered from the insurance for all the damage that we suffered. So that cost will be recovered fully, minus 100,000 of deductible, maybe. And would you be able to quantify the damage that was incurred from the fire?

35:47 I wouldn't like to do that right now. This is a process we are in with the insurance. But it really doesn't matter too much because what we recover is what we expense. Okay, great. It sort of covered the cash club. And then, Tassos, can you talk about the below-market time charter immunization and will we see that in the second quarter or for how long should we see that? We should see it in the second quarter. but a declining rate. I'll be happy to provide some information for you that relates primarily to the ships that we bought back in November that came with some charters that were then below market. And as you know, when you acquire such a charter, you have to make the appropriate account adjustment.

36:45 But I think that they would be going down over the next couple of quarters. Let's say linearly, it was about 600k this time around. Great, and then could you highlight how much you're looking for as far as the deferral of amortization in 2020? I think as I mentioned we expect to see something close to $800 per vessel per day, which I think should amount to nearly $4.5 to $5 million. The next 12 months budget numbers are based on 19 vessels.

37:34 Is there a linear association if we're based on 17 vessels or any adjustments that you could highlight for us that are based on what you're... Most of the numbers would be the same. The DNA will increase by about $100. and the preferred dividend might increase by about $30. If it remains in cash, if it is converted in PIC, it will not affect the cash flow break even. The only effect I see here that could be the G&A that might increase $100. Because the loan repayments, they would be proportionally almost proportionate, depends on the specific vessels, reduced because when you sell a ship you might have to pay part of the outstanding debt.

38:31 Great. And then it looks like dry docking activity was pretty low in the first quarter and you're budgeting higher numbers. Could you just give us some timing on maybe the second quarter dry docking activity or for the rest of the year? I believe we have one dry dock next quarter, although to be certain I would like to check and get back to you on that. We have a couple of ships that are due for a special survey, one in Q3 and one in Q4. We will decide if we're going to pass those special surveys.

39:16 They are amongst the elders of our vessels and we will decide if we're going to pass those special surveys or not, depending on how the market has will be faring at the time. If the markets are very poor, we will not spend the money to pass the special survey. If the markets are recovering and we can see that we will recover the money for the special survey within a year's time after we pass it, we will pass the special survey. And, Aristides, would you mind mentioning that, you know, the names of the vessels that are going to the third and fourth quarters that you're saying? It's the Ninos, I think, and the Athens.

40:05 Great. Thank you so much. Thank you, Paul. Thank you. Once again, please press star 1 if you wish to ask a question, and star 2 to cancel that request. Thank you all for participating in our call this quarter and we will see you in three months' time again and discuss the Q2 developments and hopefully the retraction of the COVID-19 worldwide.

40:50 Thank you all. Thank you for participating. You may all disconnect.