Euroseas (NASDAQ:ESEA) Q2 2020 Earnings Call

0:00 Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me, Stasios Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for a six-month period and quarter ended June 30, 2020. Let's now turn to slide 3 to see our income statement highlights. For the second quarter, we reported total revenue of 13.5 million. Net income was 1.3 million, and net income attributable to common shareholders after a 0.2 million dividend on the Series B preferred shares was 1.11 million, or 20 cents gain per share basic and diluted.

0:52 Adjusted net income attributable to common shareholders for the period was 1.4 million, or 25 cents per share, basic and diluted. Azasta Dibidar was 4.4 million. Nasos will review our financial highlights in more detail later on in the presentation. Please turn slide 4 for details of some of our recent developments. During July 2020, the company completed the sale of three of its vessels, Motovessel Manolis P, Motovessel E.M. Inoussis and Motovessel Koos Hume for a total of approximately $7.6 million of net proceeds, of which $7 million was used to repay the outstanding loans on these ships.

1:45 Motovessel Manolis P was initially sold in March for $418 per lightweight or $2.72 million. but the deal did not materialize as the buyers failed to take delivery of the vessel due to the COVID-19 circumstances. Then, later in July, it was sold anew for scrap for $318 per lightweight ton or 2.07 million net proceeds. The second ship, MV Inoussis, Following the fire accident suffered in January 2020 and the settlement of 2.7 million from the ship underwriters, the vessel was eventually sold for scrap for the amount of 3.69 million net proceeds.

2:44 Finally, the third vessel, the motor vessel Coup of Fume, was also sold for scrap for the amount of 1.85 million net proceeds. During the second quarter of 2020, the company agreed with certain of its lenders to defer a portion of its 2020 loan repayments to be repaid together with the respective balloon installments. A total of 4.7 million was scheduled to December 21 or within 22. We are also in the process of finalizing with the last bank in our books, a deferral of $900,000 due Q3 and Q4 2020 to their respective balloons as well.

3:33 Furthermore, the company agreed with the holders of the Series B preferred shares to have the option of paying the quarterly dividends in kind for the period from April 1, 2020 to January 29, 2021 by issuing additional series B preferred shares and increasing the dividend rate to 9% from 8% if paid in kind. The company exercises this option for Q2. This turns to slide 5, where you can see our current fleet profile. Upon the completion of the sale of the three vessels, we will now have 16 vessels, which include 11 feeder container ships and 5 intermediate container carriers with approximately 590,000 deadweight tons and 46,000 TEU capacity and a weighted average age of 15.8 years.

4:30 We have been able to renew most of the expired charters at rates a little bit lower than their last ones and without facing idle times except for the EEM Hydra and Ninos which each faced about 14 days of idling time and the EEM Spetes which faced 53 days of idling. I will not go through the complete list of the new charters achieved but you can see them all on slide 6. I just want to also note that are generally flexible periods that we have had to agree to date.

5:26 Slide 7 shows our vessel employment in graphical form as well. As of June 30th, we have about 58% coverage for the remainder of 2020 based on minimum charter durations. Please turn to slide 8. Over the last five years, our operational and fleet utilization has been in excess of 98.8%. Euroseas 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 second quarter of 2020, operational and fleet utilization was 99.7%, while the commercial fleet utilization rate in the second quarter of 2020 was 94.6%.

6:22 The graph on the page compares daily costs excluding dry docking since 2011 with the average of our peers. Overall, our costs achieved are among the lowest of the public shipping companies. Let's go to slide 10 to discuss the general container ship market highlights of the second quarter. Time charter rates during the second quarter drew a negative picture across all container sizes, as shown by the context index. It started to recover towards the end of it, and most profoundly in July. For feeder and intermediate size vessels, there was an average drop of close to 25% on 6-12 months time charter rates observed between the first and second quarters.

7:14 According to Clarkson's, a 1,700 TEU geared vessel fell from an average of $7,800 per day in Q1 to $6,300 per day in Q2 and currently stands at $6,600 per day. The 2,500 TEU geared vessel fell from an average of $9,400 in Q1 to $7,700 in Q2 and currently stands at around 8,100 per day. The 4,250 TU gearless vessels fell from an average of just about 13,000 in Q1 to 8,500 in Q2 and currently stands at 11,500 approximately.

8:12 Average second-hand prices for older-than-20-year-old vessels remained around the scrap prices in Q2, which however were down around 20% versus Q1 due to the drop of the price of scrap items. For younger vessels of about 5 to 15 years old, there was a price drop of 10 to 15% for the 1,700 to 4,250 T-U range, with the bigger reductions in the smaller sizes. At this time, the new building prices, with no scrubbers, China-built, were stable with downward pressures, but the absence of transactions indicates the lack of interest at current asking prices.

9:04 The inactive container ship fleet currently stands at about 5.1%, totalling 1.2 million TEUs. This includes idle due to scrubbing retrofitting, which of course is mostly larger vessels and is about 280,000 TEU in total. It has to be noted that these numbers are down from the 2.7 million TEU, or 11% of the fleet, which was idle as of mid-May. The number of vessels scrapped increased slightly in Q2 versus Q1, but was restricted by the lockdown in India, Pakistan and Bangladesh that did not allow more ships to be scrapped.

9:52 Overall, the flicks has grown by 1% in 2020 so far, without of course accounting for either vessel reactivations or rivaling etc. Slide 11 As a result of the pandemic, the economic and trade world environment has dramatically and negatively changed in 2020. The IMF, in its most recent revision in June, projected that world GDP growth in 2020 would end up at minus 4.9%, a steep deterioration to its minus 3% predicted in April. with a reduction stemming from the USA, China, India and the ASEAN 5 economies mostly.

10:42 For 2021, though, the IMF global GDP growth is now projected at a strong 5.4%. Major global economies are expected to rebound strongly in 2021, with the US and the Eurozone rebounding by 4.5%, India by 6% and China by 8+. In terms of demand for containerized trade, which closely correlates to global GDP growth as we've said many times, the demand measured in TEU per mile is expected by Claxon to have a significant drop to minus 7.7% in 2020. However, a high growth rate of 7% is expected to return in 2021 owing to the rise of the global economy.

11:35 At this point, we should note that the trade and growth projections currently made will probably be revised as COVID-19 develops, but also due to the uncertainty of the geopolitical situation and especially trade between US and China. 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 in 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. This, however, is concentrated in the smaller size classes where we operate.

12:22 The right side chart shows the delivery schedule of the current container support 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. The red circled figures for 2020 to 2022 show the order book before any scrapping and slippages. Currently, the total container ship order book stands at 8.9% of the fleet, a figure which is the lowest observed in more than 20 years. This low level of order book provides a source of optimism for a quick recovery of the rates if trade demand recovers and supply side pressures will be at minimum levels.

13:15 This turns to slide 13 where we discuss our outlook summary. The unknown duration of the pandemic and its financial consequences render any type of modeling very unreliable. Our base case supply demand analysis, however, is based on the scenario where we experienced a deep recession in 2020 of minus 4.9% GDP growth, tied with a strong recovery in 2021 of 5.4% GDP growth as per the IMF. The current estimates from Clarkson's to quantify the effects of the pandemic on containerized trade indicate an exaggerated reaction in 2020 of minus 7.7%, followed by a sharp recovery in 2021 of 7%. Therefore, we generally anticipate a very weak 2020 and a strongly strengthening 2021 and 2022.

14:18 Meanwhile, chartering of vessels that were delivered by their charters during most part of the quarter proved difficult, as indicated by the bottoming of the Contacts Index in early June. However, over the past few weeks, firmer rates have been observed. While the New Building Order Book is at 20-year lows, a significant portion of it is scheduled to be delivered in 2020, along with vessels returning from retrofitting structures. Although this might potentially dampen the effect of the early market recovery we are currently witnessing, if the pandemic is controlled, we remain hopeful.

15:03 As said, the order book for 2021 onwards is very 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 any new orders. Therefore, the second half of 2021 and the whole of 2022 may prove to be booming periods if global demand picks up as generally expected. Let's turn to slide 14. The left side of this slide shows the evolution of the one-year time charter rates for containers of 2500 TEU since 2000. Since the financial crisis of 2008, rates stayed rather depressed, with three spikes within the $5.5 to $14,900 per day range. Currently, we see charter rates hovering at about $8,000 per day.

16:02 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 significantly below the median, and others historical values. This indicates that purchases of ships at today's current value could prove a very good investment. And with that, I will now pass the floor to our CFO, Tasos Aslidis, to go over our financial highlights in more detail. Thank you very much Aristides. Good morning from me as well, ladies and gentlemen. I will now take you to the next four slides to give you an overview of our financial results for the three and six month periods ended June 30th, 2020.

16:57 For that, let's look first at slide 16. For the second quarter of 2020, reported total net revenues of 13.5 million representing a 67.2% increase over total net revenues of 8.1 million during the second quarter of 2019, which was the result of increased average number and size of vessels we own in the second quarter of this year compared to the second quarter of 2018. The company reported net income for the period of 1.3 million, A net income attributable to common shareholders of 1.1 million as compared to a net loss of 0.7 million and a net loss attributable to common shareholders of 1.7 million respectively for the same period of 2019.

17:58 The results for the second quarter of 2020 also include 0.3 million of amortization for below-marked The interest and other financing costs for the second quarter of 2020 amounted to 1.1 million compared to 0.8 million for the same period of 2019, a period which also included additional finance charges of about 0.7 million. The interest during the second quarter of 2020 was higher and others. Depreciation expenses amounted to 1.7 million compared to 0.8 million for the same period of last year, again reflecting the increased number of vessels we owned during this period.

19:10 Adjusted TPDA for the second quarter of 2020 was 4.4 million compared to 1.6 million achieved during the same period of last year. Basic and diluted earnings per share, attributable to common shareholders for the second quarter were 20 cents, calculated on 5.6 million basic and diluted weighted average number of shares outstanding, compared to basic and diluted loss per share of $1.12 for the second quarter of last year, calculated on approximately 1.5 million basic and diluted weighted average number of shares outstanding. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized loss on derivatives, the amortization of below-market time surface acquired, and the loss on a vessel held for sale, the adjusted earnings per share attributable to common shareholders for the quarter ended June 30, 2020, were 25 cents, etc. compared to adjusting the loss of $1.14 per share for the same period of last year.

20:29 Usually security analysts do not include the above items in their published estimates of EIR per share. For the first half of 2020 now, the company reported total net revenues of $28.9 million, representing a 76.3% increase of the total net revenues The company reported net income for the period of 3.2 million, a net income attributable to common shareholders of 2.9 million, as compared to a net loss of 0.8 million and a net loss attributable to common shareholders of 2.2 million, respectively. for the first half of 2019.

21:22 The results for the first half of 2020 also include 1.2 million of amortization for below market time charges acquired. During the period, interest and other financing costs amounted to 2.4 million as compared to 1.5 million for the same period of last year, a period which again included and some additional finance charges of about 0.7 million. This increase in our interest charges is due to the increased amount of debt in the current period, first half of this year, as compared to the same period of 2019, and is partly offset by the decreased LIBOR rates that our bank loans get to pay during the period, again as compared The depreciation expenses for the first half of 2020 were 3.4 million compared to 1.6 million for the same period of 2019, reflecting the higher number of vessels we own.

22:33 Adjusted EBITDA for the first half of 2020 was 8.4 million compared to 3 million achieved during the first half of last year. Basic and diluted earnings per share attributable to common shareholders for the first half of 2020 was $0.52, calculated again on approximately 5.6 million basic diluted weighted average number of shares outstanding, compared to $1.44 loss for the first half of 2019, calculated on average of $1.5 million. etc. Excluding the effect on the income attributable to the common shareholders for the first half of this year of the unrealized loss of derivatives, the amortization of below-market time charts acquired and the loss on the sale of vessel debt per se, the adjusted earnings per share attributable to common shareholders for the six-month period ended June 30, 2020 would have been 42 cents compare to adjusted loss of $1.47 per share basically diluted for the same period of last year.

23:54 Let's now turn to slide 17 to review our fleet performance. Let's first look at our fleet utilization rates and let's start with our second quarter numbers on the left part of the slide. As usual, we have broken down our fleet utilization rate in commercial and operational As you can see in this slide, for the second quarter of 2020, we reported 94.6% commercial utilization rate and 99.7% operational utilization rate, compared to 96.7% commercial and 100% operational utilization rate for the second quarter of last year. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled repairs or dry docks if any of those happen during the period.

24:51 On average, 19 vessels were owned and operated during the second quarter of 2020, earning an average time chart equivalent rate of $9,458 per day, compared to $8,307 per day that we earn during the second quarter of 2019, a quarter during which we operated 11 vessels. Our total daily vessel operating expenses, including management fees, general and administrative expenses, but excluding dry docking costs, averaged $6,120 per vessel per day during the second quarter, as compared to $6,000 Let's now look at the bottom of the table to our daily cash flow breakeven levels, presented here on a per vessel per day basis.

25:56 For the second quarter of 2020, our cash flow breakeven level was $8,512 per vessel per day compared to $9,093 per vessel per day Let's now look at our first half figures in the right part of the table. So for the first half of 2020, we reported a 96.9% commercial utilization rate, a 97.9% operational utilization rate, compared to 98% commercial and 100% operational for the first half of last year. We operated 19 vessels during the first half of 2020, earning $9,541 per vessel per day, compared to $8,693 per vessel per day that our vessels earned during the first half of last year, during which we operated 11 vessels.

27:03 Our total daily vessel operating expenses, again, including management fees, and Anastasios Aslidis. Looking again at the bottom of the table, we can see that our cash flow rate even level for the first half is ended on a per vessel per day basis and we can see that that was etc. Let us now move to slide 18 to review our debt profile. This slide shows on the right hand side our cash flow break-even level expectations for the next 12 months and from the left side We can see our scheduled debt repayments over the next several years.

28:10 As you can see, in 2020, little less than half of our loan repayments, 7 million, are due to the sale of the three vessels that I received as mentioned earlier. Of the remaining, about 4.4 million is a loan due to a related party, and the company can repay that loan in shares under certain conditions. That leaves about 7 million loan repayments during 2020, most of which, though, were made in the first half, about 5.3 million, and as I mentioned, another 0.9 million will likely be deferred. Our loan repayments, as you can see again in the chart, over the next three years, keep declining.

29:00 In terms of our balloon payments, In 2021, we have to repay 16.1 million of our balloon payment that is covered by six of our vessels. In 2020, there is a smaller balloon payment of 1.9 million, again covered by one of our vessels. And finally, in 2023, we have balloon payments of about 30 million, representing loans collateralized by the remaining nine of our vessels. As we did in the past, we'll be able to refinance our volume payments as they come due. A quick note on the cost of our funding before we move to reviewing our personal break-evens.

29:45 We have an average margin on our bank debt of about 3.6%, and assuming a LIBOR rate of 0.3%, our senior debt costs on average is about 3.9%. If we take into account the cost of the related party loan and the preferred equity dividend, our average cost of our non-equity funding as of June 13, 2020 is about 4.5%. Looking now on the table to the right, we can see that if we express our loan repayments over the next 20 months in dollars per vessel per day, we get an $1,050 contribution for our daily cash flow breakeven level. If we furthermore make assumptions for the remaining components of our cash flow breakeven level, that is, our operating expenses, G&A expenses, interest, drive-off costs, and any cash payment of our preferred stock dividend, we come up with a cash flow breakeven level for the next 12 months of about $8,450 per investment per day.

31:07 As previously mentioned, the company has agreed with the holders of its Series B preferred shares to have the option of paying the quarterly dividend in kind for the period starting from April 1, 2020 to January 29, 2021 by issuing additional Series B preferred shares and increasing the dividend rate to 9% if the dividend is paid in kind. We have assumed in making this custom The book value of our vessels was about 113 million, and others, giving us a total book value of assets of about 123 million. On the liability side, we had an outstanding bank and other debt of 84.3 million, preferred equity of about 8.2 million, and other liabilities of about 8 million, thus leaving us with a net book value

32:38 of $22.4 million or approximately $4 per share. If we adjusted the book value of our vessels with their market value, based on our own estimates of their value, we can calculate the net asset value of our fleet to be in the range of $19-20 million or about $3.5 per share. We believe that our shares, recently trading around $2.5-3 per share, thus at a discount to our book and net asset value, present a good appreciation potential for our shareholders and investment opportunity for other investors.

33:23 And with that, I would like to turn the floor back to Aristides to manage the remaining of the call. Thank you, Tasso. I would now like to open up the floor for any questions you may have. Thank you, ladies and gentlemen. As a reminder, if you would like to ask a question, please press star and 1 on your telephone pad and wait for your name to be announced. And if you wish to answer, you can press star and 2. That's star and 1 to ask a question. We'll now take our first question. Take the telephone from Max and Grace. Please go ahead. Thank you. Good day. Kate Sullivan from Maxim Group. Just can we review the change in cash and balance sheet for this current quarter, given the sales after the end of 2Q20? I think you had vessels held for sale of 7.1 at the end of 2Q20 and then 7.6 million of sales. And so just will you write that up?

34:21 And can you just clarify some of the changes in the balance sheet this current quarter, please? The palaces sold the book value of the vessels held for sale. SRT mentioned the vessels were sold for a net $7.6 million, of which $7 million were used to repay their debts, so there was a net contribution from the sale of the vessels, from cash balance. and then for the insurance proceeds received in the quarter, did you receive cash with those insurance proceeds or maybe do you have a cash inflow related to that accrual in the current and upcoming quarters?

35:08 We have received about 40% already and there is about the remaining about 1.6 million, 1.7 million as receivable with respect to receiving Q3. After the sales and that cash collected, can you give any updated total cash balance? And I apologize if I missed it for the current quarter. We received the remaining proceeds from the insurance claim plus the remaining from the sale. I think we will do something close to 2.3 million in incremental cash. 2.3 incremental cash. Okay, thank you. And then also on the current make-up and after those sales in July, Are you comfortable with your current fleet mix?

35:54 Are you always evaluating maybe selling some of the older vessels for scrap going forward? Or can you comment on that, please? We might scrap one or two more vessels within the year, depending a little bit on how the market develops over the next few months. because we will need to pass some dry dockings and we will have to evaluate if it makes sense to dry dock the vessel and spend the amounts needed or it's best to scrap them and this will be determined based on the time chart rates that we see in the next couple of months.

36:41 You mentioned rates around 8,000 per day. Would you say the volatility in the rates has decreased in the last couple of weeks? I know your comments on it. It's hard to predict the near term versus the China-U.S. dynamic, but has volatility decreased in the rates at least a little bit in the last couple of weeks? Yes, the rates have improved a little bit in the last month or so. especially for the larger vessels, less so for the smaller vessels. But it is always a matter of positioning where you are at that time. There is not a huge inquiry by charters jumping to take your ship. This was never the situation, and of course it's not still there again.

37:35 Thank you for your time. Thanks, David. Thank you, and your next question comes from Poe Frapp from Noble Capital Markets. Please go ahead. Yeah, hi, good morning. Poe Frapp from Noble Capital Markets. Good morning. Good morning. Can you highlight your off-hire dates in the third quarter and fourth quarter that you're planned right now? Your off-hire dates? Yes, please. We have assumed, typically we assume a historical average of about 8 of higher days per year per vessel, so we assume 4 of higher days per vessel for the remaining of the year.

38:27 And we have scheduled of higher days for the dry vessels to be dry docked and the athens We have one vessel that we are evaluating whether to drive it, dock it or not, and pass it through a survey. If we keep the vessel and pass it through a survey, then we'll probably have another 25 days of dry dock for that vessel. Okay, and would that be in the third quarter or the fourth quarter? Fourth. I think it's the fourth. Fourth, fourth. I wasn't following exactly your amortization schedule that you have.

39:19 Can you just highlight how much amortization you have currently right now for the third and fourth quarters? And then you talked about potentially deferring $900,000 of amortization into You know, throwing it onto the maturity date or the balloon. Can you just give me a little clarity, a little more clarity on that, please? You're talking about our debt amortization, correct? Yes. So we have paid about, as I mentioned, 5.3 in the third half. But in the second half, there is roughly 1.7 million that... We would expect of which half, 0.9 million, very likely will be deferred. We have received a search from the bank and we're about to go through the documentation of it. So we would probably have to pay something like 800,000 amortization in the remainder of the year.

40:21 Okay, great. And then can you talk about vaccines and your other costs? Looking forward, it seems like they might be a little bit higher than what your run rate has been. Can you talk about costs a little bit? Yeah, operating costs, and then it looks like maybe with a smaller fleet, your G&A per day is going to go up a little bit. I think our estimates that we saw on slide 18 include the reduction of our fleet and the patented levers of our GNA. So that is what we expect to see based on our budget.

41:11 The same is true for the operating expenses. Okay, great. And then just to make sure that the insurance The vessel, this is really an amount or a claim that's built over the last six months. after the vessel's accident-related claim. So it truly reflects the earnings the vessel would have had during the first half of the year.

42:01 It was finalized early in the second quarter. That's why we had it in the second quarter and not half in the first half of the second. We have collected about 40% of the claim, and the remaining is to be collected, as I explained earlier, in the third quarter. Okay, and then you highlighted the $4.4 million of related party debt, and maybe I've seen this, maybe I've missed it before, but you're highlighting now that it could be paid in shares. Is this something that is a high probability or likelihood looking forward, or will you just continually push that out and not actually repay it with shares?

42:48 Our board will decide when it comes to pay. It is due December 31st of this year. Under certain conditions, the company can pay in shares. Probably we will not pay in shares, but that is to be decided by our board just before the payment is to be made. and then when you talk about you have 58% of remaining 2020-20 days booked or committed, do you have an average rate that's associated with those days? I don't understand the answer, but I can get back to you on that.

43:35 Okay, great. Thank you so much. Thank you, thank you. Thank you, and we now have no further questions. Thank you, thank you everybody for participating in the call and we hope to be able to come back to you in Q3 with good results again and with the COVID having come a little bit behind us, not totally behind us but have not deteriorated. Thank you very much.