EuroDry Ltd. Q1 FY2020 Earnings Call

Thank you for standing by, ladies and gentlemen. And welcome to the EuroDry conference call on the first quarter 2020 financial results. We have with us today, Mr. Pittas, Chairman and Chief Executive Officer and Mr. Aslidis, Chief Financial Officer of the company. All participants are in a 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 on Tuesday, May 19, 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, EuroDry will be making forward-looking statements. These statements are within the meaning of the federal securities laws. The statements in today's conference call that are not historical facts including, among other things, the expected financial performance of EuroDry's business, EuroDry's ability to pursue growth opportunities, EuroDry's 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 EuroDry and the drydock industry in general may be forward-looking statements such as defined in Section 21A of the Securities Exchange Act of 1934, as amended. 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 two of the webcast presentation, which has the full forward-looking statements 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. Mr. Pittas, please go ahead.

Thank you. The call is to discuss our financial results for the three months period ended March 31, 2020. Please turn to slide three. Our income statement highlights are shown here. For the first quarter of 2020, we reported total net revenues of $5.1 million, adjusted EBITDA of $0.6 million and adjusted net income attributable to common shareholders of minus $2.1 million. Adjusted basic and diluted earnings per share attributable to common shareholders for the first quarter of 2020 was minus $0.91 per share. An average of seven vessels were owned and operated during the first quarter of 2020, earning an average time charter equivalent rate of $7,885 per day. The company declared its fifth cash dividend of $0.4 million approximately on Series B preferred shares, resulting in a net loss attributable to shareholders of $2.6 million or $1.17 loss per share basic and diluted. Please turn to slide four for our chartering operations and sales and purchase highlights. The Pantelis was fixed for a trip of about 45 to 55 days at around $5,000 per day. The Tasos was initially fixed for a trip of about 20 to 25 days at $2,500 per day and afterwards it was fixed for a period of 95 to 100 days at $6,875 per day passing Singapore, which including the ballast voyage equates to time charter equivalents of about $6,000 per day. Ekaterini was fixed for a period of minimum 12 months at 106% of the Kamsarmax 5TC index. The first quarter of 2020, we had no FFA contracts. In reference to drydocking costs and repairs in 2020, up-to-date, they are as follows. The Tasos entered the drydock on March 22, 2020 and stayed there for a period of approximately 18 days at a preliminary estimated cost of about $900,000. The Pantelis just entered the drydocks today for the fourth special survey and ballast water tank installation with an estimated cost of $850,000 for a period of 22 days plus about $400,000 for the installation of the ballast water treatment plant. No more drydockings are scheduled for 2020. Please turn to slide five to see a current snapshot of EuroDry's fleet. It is comprised of seven drybulk vessels with a fleet average age of 11.8 years and a cargo carrying capacity of 529,000 deadweight. Slide six shows the employment schedule. As you can see, effective coverage as of May 15, 2020 for the remainder of the year stands at about 16% in terms of minimum fixed rate contracts and about 50% contracted days based on minimum durations. The latter figure includes ships on index charters which are open to market fluctuations but have secured employment. Turn to slide seven, where we will go over the market highlights for the first quarter of 2020. The year 2020 to-date has been marked by the dramatic effects of the global economy and seaborne trade of the COVID-19 pandemic. Drybulk seaborne trade, in particular, declined dramatically causing charter rates for Panamax vessels to drop to levels about 50% lower compared to the fourth quarter of 2019, a period that already showed signs of a weakening market. By mid-May 2020, charter rates have dropped even further with the cape market experiencing the hardest falls and now earning significantly less than Panamaxes. Spot rates for Panamaxes at around $4,500 per day are slightly lower than operating expenses. One-year time charter rates have also dropped but are nearly double those of current spot rates, indicating that the market participants expect a recovery within the next few months. Please turn to slide nine. As a result of the pandemic, the global economy is projected by the IMF to contract sharply by minus 3% in 2020 for 3.3% growth expected in the previous quarter. Among the developed economies, China's performance markedly contracts to 1.2% from 6% previously, bringing nearly half a century of long-run growth to an end. For the advanced economies, the U.S. economic activity in 2020 plunges to minus 5.9% as the COVID-19 outbreak affects both economy's supply and demand side when compared to the 2% growth estimated in the previous quarter. In this context, the IMF predictions for Eurozone indicate a huge drop in economic growth there as well at minus 7.5% while India's growth forecast was revised downwards to 1.9% from its earlier estimate of 5.8%. Brazil's economic outlook darkens after an expected GDP growth of negative minus 5.3%, compared to 2.2% positive growth in the previous quarter. For 2021, the IMF estimates that once the pandemic abates in the second half of 2020 and containment efforts can gradually be lifted, the global economy will grow by 5.8% as economic activity normalizes, helped by policy support. In this premise, the growth outlook of both the U.S. and the Euro area are expected to recover to 4.7% growth whereas the 2021 forecast for China is expected to be 9.2%, India 7.4%, Russia 3.5% and Brazil 2.9%. Looking on to the drybulk trade, according to Clarksons, projected growth in 2020 is now estimated at negative 3.7% whilst in tandem with the IMF forecast of a swift recovery in 2021, the outlook for drybulk trade growth is a strong positive 5.3% growth in that year. Please turn to slide 10. In 2020, the order book which is dominated by large vessels currently stands at 6.3%. Clarksons estimates that scrapping and slippage will eventually result in a fleet growth of around 2.5%. For 2021, the order book is estimated at 3%, without the scrapping and slippage will result in a fleet growth of about 1.9%. The order book for 2022 is currently only 0.6%, which would imply without the scrapings and slippages, we could see a shrinking fleet that year if just a few new orders are placed with 2022 deliveries. Please turn to page 11. The order book as a percentage of total fleet up until May 2020 stands at 8.1%, which equals the lowest level of the last 20-plus years. The root cause for the poor performance of drybulk shipping during the last decade has been the high number of deliveries which easily outpaced the growth of the trade. After the peaking in 2008 of the contracting activity at about 50% of the existing fleet, the number of new orders has declined beyond the normal 10% level. With a relatively small order book and realistic demand expectations for the coming years, a fundamentally supported rebound in the drybulk market should be expected in the near future, bearing in mind that it takes about one-and-a-half to two years for a vessel to be delivered once it is ordered. So please turn to page 12 where we summarize our drybulk outlook. The unknown duration of the pandemic and its financial consequences render any type of forecasting a very difficult exercise. Initial estimates from Clarksons to quantify the effects of the Coronavirus pandemic on drybulk trade indicates a sharp drop in demand in 2020 followed by a soft recovery in 2021, similar to the way economies reacted during that 2009 financial crisis. Hoping that we have been through the toughest part of the pandemic's effects in the first quarter of 2020, we might not expect to see any significant gains during the summer, but markets could see meaningful improvements by year-end. In parallel, as ordering of new ships is expected to be contained in the midst of the above demand uncertainty and the lack of clarity of the fuel for the future. Not knowing the optimal ships for even five years out makes placing any new order that might require 20-plus years to pay off, very speculative and risky. Therefore, 2021 indicates a promising year amidst a low order book and expectations for a strong global recovery which should continue into 2022. Next please turn to slide 13. The left side of the slide shows the evolution of one-year time charter rates of Panamax drybulk vessels since 2000. Even though drybulk vessel rates bounced back from the unsustainable all-time lows in 2016, COVID-19 is now forcing us to revisit these levels. The right-hand side of the slide shows the vessel values in relation to 10-year historical prices. In the two to three years, drybulk prices have been gradually increasing towards historical levels above all-time low values that were established at the beginning of 2016 until the outbreak of COVID but have still not reached median or average values. After COVID-19, they corrected by about 10% to 15%. The prices have not fallen as dramatically as charter rates. With a stabilizing and even improving freight rate environment, we would expect asset values to improve as well. Therefore, we try to position ourselves to benefit from such a development and we continuously evaluate opportunities for investment in vessels or pursue combinations with other fleets, especially focusing on using our status as a public company to provide a consolidation platform. Let me now pass the floor over to our CFO, Tasos Aslidis, to go over our financial highlights in more detail.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will take you over now through our financial results highlights for the three months ended March 31, 2020. For that, please turn now to page 15. For the first quarter of 2020, we reported total net revenues of $5.1 million, representing a 12.5% decrease over total net revenues of $5.8 million during the first quarter of 2019 and that was a result, as Aristides mentioned, of the lower time charter rates our vessels earned during the quarter. The company reported a net loss for the period of $2.3 million and a net loss attributable to common shareholders of $2.6 million as compared to net income and net income attributable to common shareholders of $0.9 million and $0.4 million, respectively, for the same period first quarter of 2019. Depreciation expenses for the first quarter of 2020 were $1.6 million and remain unchanged compared to the same period of last year. Adjusted EBITDA for the first quarter of 2020 was $0.6 million compared to EBITDA of $2.5 million during the first quarter of last year. Basic and diluted loss per share attributable to common shareholders for the first quarter of 2020 was $1.17, calculated on 2.3 million basic and diluted weighted average number of shares outstanding, compared to basic and diluted earnings of $0.18 for the first quarter of 2019 calculated on approximately 2.2 million basic and diluted weighted average number of shares outstanding. Excluding the effect on the loss attributable to common shareholders for the quarter of the unrealized loss on derivatives and the loss on inventory valuation, the adjusted loss for the quarter ended March 31, 2020 would have been $0.91 basic and diluted, compared to an adjusted loss of $0.21 for the same period of last year. Usually, security analysts do not include the above items in their published estimates of earnings per share. Please now turn to slide 16 to review our fleet performance. We will start our review by looking first at our fleet utilization rate. As usual, our utilization rate is broken down into commercial and operational. During the first quarter of 2020, we had 100% commercial and operational utilization rate, as compared to 100% commercial, 99.7% operational for the first quarter of last year. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled dry docks or scheduled repairs, if such events took place during the periods. On average, seven vessels were owned and operated during the first quarter of 2020, earning an average time charter equivalent rate of $7,885 per vessel per day compared to also seven vessels being operated in the same period of last year and on average $9,472 per day. Our total daily vessel operating expenses, including management fees, general and administration expenses but excluding drydocking costs, averaged $6,055 per vessel per day during the first quarter of this year, as compared to $5,849 per vessel per day for the same quarter of 2019. If we move further down to this table at the bottom of it, we can see the cash flow breakeven rates that we had for the first quarter of 2020. A number which takes into account drydocking expenses, cash interest expense, loan repayments and preferred dividend payments. For the first quarter of 2020 then, our daily cash flow breakeven rate was about $11,140 per vessel per day compared to $11,557 per day for the same period of 2019, representing a small reduction. Let's now turn to slide 17 to review our debt profile. On the left part of the slide, we can see our loan repayments for the remaining life of our loans as well as our balloon repayments. And on the right part of the slide, we can see the projection of our flow breakeven level for the following 12 months. As of March 31, 2020, EuroDry had an outstanding bank debt of $54.9 million with an average margin of about 3%. In the entire year of 2020, we have to make total loan repayments of about $5 million. In 2021, as we can see from the chart, we have a balloon payment of $6.6 million due, which is supported by three vessels, followed by a balloon payment of $2.1 million in 2022. These balloon payments are less than the scrap price of the respective vessels even at today's scrap prices and we anticipate that we will have no issues with refinancing them when due. We have additional balloon payments in 2023 and 2025. A quick note on the cost of our funding. Assuming a LIBOR rate of 1% and on top of the approximate 3% average margin I mentioned earlier, our cost of the senior debt would be around 4%. If we included the dividend cost of our preferred equity, which is 9.25% until January 2021, the average blended cost of our non-equity funding would have been around 5% as of the end of last quarter. Regarding our preferred equity, I would like to remind you again here that in June 2019, we prepaid approximately $4.3 million of our Series B Preferred Shares in exchange for a reduction in our dividend rate from 12% down to 9.25% until January 2021 when our dividend rate is set to increase to 14%. The remaining outstanding amount of our Series B Preferred Shares at the end of last quarter was $15.4 million. Our loan repayments for the next 12 months expressed on a vessel per day basis contribute about $2,700 to our daily cash flow breakeven level per vessel, as you can see at the bottom line of the table on the right part of the slide. It will make assumptions for the remaining items that make up our cash flow breakeven rate like operating expenses, general and administrative expenses, drydocking, interest, etc., we come up with an overall cash flow breakeven level per vessel per day for the next 12 months of approximately $10,800. Let's now move to slide 18 where we can see some highlights from our balance sheet. This is indeed a simplified version of our balance sheet where we see the main groupings of our assets and liabilities. On the asset side first, we show costs and current assets of about $9 million and including the book value of our vessels as of March 31, 2020, our total assets amounting to about $113 million. On the liability side, we have bank debt of about $54.9 million which approximately accounts for 49% of the book value of our assets. Also, we have preferred equity financing of $15.4 million which accounts for 14% of our assets and we have also other liabilities at about $4.5 million accounting for 4% of our assets. These figures leave our net book value at around $39 million or $16.8 per share. If we do take into consideration the market value of our vessels, which declined about 10% during the first quarter of 2020, our net asset value per share would be in the range of $11 to $13. Thus the recent trading range of our shares of between $4 and $5 represents a significant discount to the value of the company. Should that gap narrow, along with a possible recovery of the markets, it would represent a significant appreciation opportunity for our shareholders. And with that, let me pass the floor back to Aristides to continue with the call.

Thank you Tasos. Can we have some questions, if there are any, please?

We will now take our first question. Please go ahead. Your line is now open.

Hi. Good day. It's Tate Sullivan from Maxim Group. I hope you can hear me okay. I always appreciate the update on the downtime expected. In the upcoming quarter, you mentioned no more expected downtime for 2020 and I am looking at slide six specifically. Are you done upgrading or installing your ballast equipment in the other five boats? Or can you set some expectations for 2021, please, for potential downtime?

I am not sure about 2021. The ballast water treatment plants will be on all of the ships except for the Tasos which would be due, I think in 2022. And I don't think we have any other drydocks in 2021 either. We just have one drydock in 2021 which is for the Xenia.

Okay. Great. Thank you. And then it was small in the completed quarter ones you have seen that before for you inventory write-down. What is that related to? Is that fuel? Or can you give some more description about that?

It is fuel that we had onboard one of our vessels, which was operating on a voyage charter basis and because of the significant drop of oil prices between February and the end of the quarter, we had to take a write-down on the value of the fuel.

Okay. Thank you. And then last for me is, I know every country, every region has different reactions to the current global situation, the economic and COVID situation. Can you remind me where your banks are located in roughly? And then when you start discussions to extend balloon payments that start in 2021, please?

We have two banks located in Greece. We are talking with another bank's office in Greece. And the remaining of our banks are based in Germany. We have already had some discussions about possibly finding ways to reschedule some of our debt, of the near-term debt.

Thank you for that detail, as always. Have a good rest of the day.

Thank you very much Tate.

Thank you. And your next question, we will take our next question. Please go ahead. Your line is now open.

Hi. Good morning. This is Poe Fratt from Noble Capital Markets. Good morning Aristides. Good morning Tasos.

Hi Poe.

Hi. Could you give us the current rate or maybe the first quarter 2020 rate on the Alexandros P that was in the Guardian Pool? Where did that pool average in the first quarter? And then, if you can give us an idea of maybe an average to-date in that pool for this quarter?

Tasos, do you have that handy?

Yes. I can give you an estimate. It should be below $10,000 obviously, but can I get back to you on that? Or maybe later in the call?

Yes. That would be great. Maybe if you look at the TCE rate in the first quarter of just a little bit under $8,000, you talked about forward cover for the rest of the year. Maybe if you could just drill down to the second quarter. If we look at the forward cover, what forward cover, on a percentage basis, would you be comfortable quoting? And then on top of that, where would the quarter’s average to-date be for TCE rate?

Poe, it's relatively easy for you to calculate because except for the Tasos and the Pantelis, which are always chartered at spot voyages and we include in the presentation the charter rates, the remaining four vessels are based on the index. So if you just look at the index, you can calculate the index for the Panamaxes and the index for the Kamsarmaxes, you can calculate the exact rate, except on one vessel Xenia where we are based on the index, but we have a floor of $11,000. So that vessel is earning $11,000. So it's easy to calculate. The remaining three Panamaxes are based on the index, as you can see in the presentation. So you just have to use that number to get where you think we should be. And for the Alexandros, which is in the Guardian Pool, I would just tell you that we are trading, that the pool is performing slightly better than the Supramax index and the Alexandros P having a 114 points is actually earning a little bit more than 114% of the index.

In fact, to respond to your earlier question, Poe, Alexandros earned on a net net basis about $8,500 in the first quarter. The Supramax spot rates averaged around $7,400. So that supports the point that Aristides mentioned.

Yes. That's helpful. And then could you, Tasos, walk us through your current liquidity and beyond cash what you have available? And maybe highlight some of the unencumbered assets that you potentially could leverage? And I guess my goal was to sort of see how you are positioned to maybe either partially or fully redeem the preferred before that rate goes up by about 500 basis points?

Yes, I think the current situation supports the point that Aristides mentioned.

Poe, can I answer this question. In the near term, Tasos has started saying the market is not helping us to make it easy for us to be able to refinance the preferred that we want to do by February next year. We have in mind that we will use any liquidity that we manage during the next months to create through existing ships, but also refinance some of the ships, either through sale and leasebacks or direct refinancing to be able to repay the preferred because obviously it becomes expensive. So this is the plan. We think, initially, we thought we would be doing this time of the year but obviously because of the developments, I don't think it would be very easy to do now. And it will be something that will probably happen during the fall.

Great. That's helpful. And then if you could just expand on the ballast water treatment program and it sounds like you may not have a ballast water treatment installation in 2021. Did I hear that correctly? If you could just walk through the ballast water treatment program schedule, that would be helpful again.

The Pantelis, which just entered drydock today, will install the ballast water treatment plant during this process. Following this, all vessels will have a ballast water treatment plant except for the Tasos. The Tasos will need to install its ballast water treatment plant in its next drydocking, which is expected to occur in 2022 or 2023.

Great. Thank you. That's very helpful.

Thank you, Poe.

Thank you.

There are currently no further questions. Mr. Pittas and Mr. Aslidis, please continue.

Thank you very much. We would like to end this call here and we will be with you next quarter hopefully with a better market situation at the time.

Thanks everybody for attending.

That does conclude the conference for today. Thank you for participating. You may all disconnect.