EuroDry Ltd. Q2 FY2020 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Second 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. At this time, 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. Please be reminded that the company announced its results with a press release that has been publicly distributed. Before passing the floor to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, EuroDry will be making forward-looking statements. These statements are within the meaning of the federal securities laws. Matters discussed may be forward-looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to slide 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. Thank you, sir, please go ahead.

Good morning everyone, and thank you for joining our conference call today. With me is Tasos Aslidis, our Chief Financial Officer. The purpose of this call is to review our financial results for the second quarter and the first half of the year, which ended on June 30, 2020. On slide three, our income statement shows a challenging year. In the second quarter of 2020, we reported total net revenues of $4 million, with a net loss of $3.8 million, adjusted EBITDA of negative $1.3 million, and an adjusted net income loss attributable to common shareholders of $3.9 million. Our adjusted basic and diluted earnings per share attributable to common shareholders were a loss of $1.73 per share. These results are the lowest we have seen since spinning off our dry fleet from Euroseas in mid-2018, primarily due to a poor market start and the fact that two of our vessels underwent special service during this quarter. However, given the improving market conditions and no more planned dry dockings for the year, we expect a positive change in Q3. Tasos will provide further details about our financial highlights later in the presentation. Please turn to slide four to review updates on our chartering operations and sales. Our motor vessel Pantelis was fixed for a trip of approximately 55 to 65 days at about $7,000 per day during Q2. Recently, it was fixed again for a trip of around 45 to 100 days at $10,850 per day or $11,500 per day, depending on the loading area. Similarly, the motor vessel Tasos was fixed for a trip of about 80 to 100 days at $6,875 per day, which after accounting for the ballasting leg, results in approximately $5,785 per day at the beginning of Q2. It was then fixed in early July for a period of 90 to 100 days at $9,000 a day. During the second quarter, we sold 180 days in certain fourth quarter FFA contracts at an average of $10,000 per day, effectively fixing one of our 2004-built vessels, which operate on index-based charters at $10,000 a day. In early July, we fixed another 180 days at $20,000 a day, effectively securing our second mid-2000 built vessel, also an index-based charter. This means we have fully covered these two vessels at an average of $11,000 per day for Q3 and Q4. Regarding the dry dockings and repairs from the second quarter, our motor vessels M/V Pantelis and M/V Tasos, being the oldest in our fleet, completed their special surveys in dry dock. The Pantelis also installed a water ballast water treatment plant. The total recorded cost of these dry docks in Q2 was about $1.5 million, not including the cost of the water ballast. We have no further dry dockings scheduled for 2020. Moving on to our financial highlights, we decided to defer Q3 and Q4 installments of our three Panamaxes facility and include them in the upcoming balloon payments. We have also reached an agreement with our preferred shareholders to allow the company the option from April 1, 2020, to January 29, 2021, to pay the preferred dividend in-kind by issuing new preferred shares. If the dividend is paid in-kind, the cost will increase by 1%, which is what our Board opted to do for Q2. Please turn to slide five for a snapshot of the EuroDry fleet, consisting of seven dry bulk vessels with an average fleet age of 11.8 years and total cargo capacity of 570,000 deadweight tonnage. On slide six, you can see the vessel employment schedule, which shows an effective coverage of about 70% for the remainder of 2020 in terms of minimum fixed rate contracts, including those covered by FFAs. This figure does not include ships on index charters, which are susceptible to market fluctuations despite securing employment. Transitioning to slide seven, we will discuss the market highlights for the second quarter of 2020. The dry bulk market faced significant impacts from the COVID-19 pandemic and related lockdowns, leading to reduced cargo volumes and substantial declines in charter rates. However, towards the end of June, the market began to show signs of recovery, correlating with the reopening of major economies, with rates returning to levels seen at the start of the year. Consequently, we anticipate a positive reversal in Q3 as mentioned earlier. Currently, spot rates for Panamaxes are around $9,500 per day, with one-year time charter rates up to approximately $11,500 per day, suggesting that market participants expect further recovery in the coming months. Please turn to slide nine. The pandemic has dramatically altered the economic and freight environment in 2020. The IMF originally projected world GDP growth in 2020 to decline by 3%, but in a significant revision in June, this was lowered to a negative 4.9%. Among developed economies, China's outlook has improved to a 1% growth from a previously estimated decline of 1.2%. All other major economies, including the U.S. and Eurozone, are expected to contract significantly. However, the IMF predicts a substantial recovery of 5.4% in 2021, with expected growth rates of 4.5% for the U.S. and around 6% for the Euro area. The dry bulk freight growth is expected to follow GDP trends, with Clarksons projecting a negative 4.1% growth for 2020, and a rebound of 5.5% in 2021. Turning to slide 10, for 2020 deliveries, the order book, mainly composed of large vessels, currently stands at 6.3%. If scrapping or slippage estimates increase, fleet growth may only reach around 3%. For 2021, the order book is around 3.4%, and with lower scrapping and slippage, fleet growth could be approximately 1%. Currently, the order for 2022 is only 0.9%, indicating that with scrapping and slippage, we might see a decrease in fleet size that year if only a few new orders occur. On slide 11, you’ll observe that the order book as a percentage of the total fleet up until July 2020 is at 7.5%, marking the lowest level seen in over 20 years. The primary cause for the poor performance in dry bulk shipping over the past decade has been an overwhelming number of deliveries that surpassed freight growth. After a significant peak in contracting activity in 2008, new orders have dropped to minimal levels. With a reduced order book and realistic demand forecasts for the upcoming years, we should expect a fundamental rebound in the dry bulk market soon, especially considering it takes about one and a half to two years for a vessel to be delivered once contracted. On slide 12, we summarize our dry bulk outlook. The unpredictable duration of the pandemic and its financial consequences make any forecasts uncertain. We face significant operational risks and challenges due to port lockdowns affecting crew changes on our vessels. We have implemented measures to protect crew members and shore employees' health and safety, despite ongoing hurdles and travel restrictions due to global lockdowns. Initial estimates from Clarksons indicated a reduction in demand for dry bulk freight in 2020, followed by a sharp recovery in 2021, similar to the economic rebound seen after the 2009 financial crisis. However, recent estimates from Clarksons suggest a further deterioration in demand for 2020 by 4.1% against fleet growth of 3%. This imbalance is not supported by the rising market rates. If current rates persist, it would indicate higher-than-expected demand and could lead to positive surprises for the remainder of the year. New ship orders are expected to remain limited due to demand uncertainties and the lack of clarity on future fuel options. Without knowing the optimal ship designs for the next five years, placing new orders that might take over 20 years to pay off appears speculative and risky. In this context, 2021 appears to be promising, given the low order book, rebound in demand, and potential easing of trade tensions between China and the U.S. Moving to slide 13, the left side shows the evolution of one-year time charter rates for Panamax dry bulk vessels since 2000. After bouncing back from unsustainable lows in 2016, COVID-19 has pushed us to revisit those levels. However, since June, rates have been on the rise, and we are approaching the historical median rate of about $13,000 per day, which, if reached, would signify substantial profits for EuroDry. The right side of the slide shows that the current value of a 10-year-old Panamax vessel is around $13 million. Over the past two to three years, dry bulk prices have gradually risen towards historical averages but have not yet reached those levels. Following the COVID-19 outbreak, vessel values adjusted downward by approximately 10% to 15%. With a stabilizing and improving freight rate environment, we anticipate asset values should also begin to rise. Given these factors, we aim to position ourselves to capitalize on market developments and continuously evaluate investment opportunities in vessels or potential fleet combinations, particularly leveraging our status as a public company to create a consolidation platform. I will now hand it over to our CFO, Tasos Aslidis, to provide more details on our financial highlights.

Thank you, Aristides. Good morning, everyone. I will now go through the highlights of our financial results for the three and six months ending June 30, 2020. For the second quarter of 2020, we reported total net revenues of $4 million, a decrease of 35.6% from $6.2 million in the second quarter of 2019. This decline was primarily due to lower time charter rates experienced by our vessels, which were impacted by the pandemic in the first half of the year. The company recorded a net loss of $3.8 million, with a net loss attributable to common shareholders of $4.2 million, compared to a net loss of $1.9 million and a net loss attributable to common shareholders of $2.6 million for the same period in 2019. Interest and financing costs for the second quarter amounted to $0.6 million versus $0.9 million a year prior, attributed to lower average outstanding debt and decreased LIBOR rates for loans. Depreciation expenses were around $1.6 million, remaining relatively stable compared to the previous year. The results included a $0.2 million unrealized loss on three interest rate swap contracts and a $0.1 million unrealized loss on a forward freight agreement, contrasting with a $0.2 million loss on interest rate swaps and a $0.9 million loss on freight contracts from the second quarter of 2019. Adjusted EBITDA for the second quarter was negative $1.3 million, compared to positive $1.8 million the previous year. Basic and diluted loss per share attributable to common shareholders was $1.86, calculated on about 2.3 million shares, compared to a loss per share of $1.14 for the second quarter of 2019 based on approximately 2.2 million shares. Excluding unrealized losses in derivatives, the adjusted loss attributable to common shareholders for the quarter ended June 30, 2020, was $1.73 compared to $0.65 in the same period last year. Typically, analysts exclude these items from their earnings per share estimates. For the first half of 2020, our total net revenues were $9.1 million, down 24.1% from $12 million in the first half of 2019, again driven by lower time charter rates. The net loss for this period was $6.1 million, with a net loss attributable to common shareholders of $6.9 million, compared to a net loss of $0.9 million and a loss of $2.2 million for the first half of 2019. Interest and financing costs for the first half amounted to $1.2 million, down from $1.9 million, also due to lower average debt and LIBOR rates. Depreciation expenses increased slightly to approximately $3.3 million compared to $3.2 million in the same period of 2019, primarily due to the cost base of vessels affected by the installation of ballast water management systems. Adjusted EBITDA for the first half was negative $1 million, compared to positive $4.3 million in 2019. The basic and diluted loss per share for the first half was $3.03, calculated on about 2.3 million shares, compared to a loss of $0.96 for the first half of 2019. Excluding unrealized losses on derivatives, the adjusted loss attributable to common shareholders was $2.76 for the first half compared to $0.87 in the same period last year. Now, let’s review our fleet performance. For the second quarter, our commercial utilization rate was 100%, while operational utilization was 99.9%, compared to 99.9% commercial and 98.3% operational for the prior year’s second quarter. We had an average of seven vessels in operation during this period, with an average time charter equivalent rate of $7,297 per vessel per day compared to $10,724 in the same quarter of 2019. Total daily operating expenses averaged $6,131 per vessel per day in the second quarter, up from $5,940 the year before. Our cash flow breakeven rate for the second quarter was about $11,836 per vessel per day, compared to $12,569 for the same period in 2019. In the first half of 2020, commercial utilization remained at 100%, with operational utilization also at 100%, compared to 99.9% and 99% respectively the previous year. We maintained the same average of seven vessels, earning an average time charter equivalent rate of $7,609 per vessel per day compared to $10,078 in the previous year. Daily operating expenses for the first half were $6,093 per vessel per day, compared to $5,898 in 2019. For this half, our cash flow breakeven rate was $11,489 per vessel per day compared to $12,110 the previous year. Regarding our debt profile, as of June 30, 2020, EuroDry had an outstanding bank debt of approximately $53.4 million. We made total loan repayments of about $5 million in 2020 after deferring certain installments. In 2021, we have a balloon payment of $8 million due, supported by our freight Panamax vessels, followed by another balloon payment of $2.1 million in 2022. These payments are below the strike price of their respective vessels. Our average debt margin is about 3%, and assuming a LIBOR rate of 0.5%, our cost of senior debt would be around 3.5%. Including our preferred equity’s cost of 10.25%, our average blended cost for non-equity financing was about 5% at the end of the second quarter. Our loan repayments for the next 12 months contribute about $2,100 to the daily cash flow breakeven level, giving a total est. of around $9,580 per vessel per day. Strong cash and assets amount to around $6.8 million, with vessels valued at about $102.5 million, totaling $109 million in assets. Our bank debt represents approximately 49% of our assets and preferred equity accounts for another 14%. The net book value stands around $35 million or approximately $15 per share. Considering market values instead of book values, our net asset value per share would range from $10 to $11. With the current trading price around $5, there’s a significant discount compared to the company's intrinsic value. I will now pass it back to our Chairman and CEO, Aristides, to continue.

Thank you, Tasos. I would like to open the floor for any discussion or questions.

Thank you. Your first question comes from the line of Tate Sullivan from Maxim Group. Please ask your question.

Can you talk about today and you noted in your press release that your ability to extend the maturity for the debt due in 2020, has your conversation with your lenders changed in the last six months or can you just give some context to those conversations, please?

Yes, as we said, we did extend the maturities of the installments that were due in Q3 and Q4 with one bank that financed three vessels and that was extended till the end of 2021 along with a balloon. So, this is one refinancing that we did. And the other important thing that we did was that we agreed with our preferred holders to be able to pay them in-kind rather than in cash, the coupons that are due within this year and up till January 2021. So, these are the two developments that we can report today that have actually happened.

Thank you. It seems your lenders are adaptable, and you've already extended the maturities. Thank you. Regarding the operating environment in the second quarter, which has improved significantly since then, is there a possibility to reduce any of your operating costs if volatility persists?

Well, first of all, I think that the costs might have slightly increased because of the pandemic and the operational issues that we have been facing in regards to calling at ports and changing crew and sending spares and all that stuff. But it's very slight, and we have been able to keep that under control and expect to continue to do so, whilst definitely safeguarding our crew. The market has indeed improved quite substantially, and Q3, as I said, is expected to be a much better quarter than Q2. Charter rates have increased very significantly and we've been able to fix up seats either through FFAs or directly at the rates that are even profitable.

You mentioned that rates are closing in on about $13,000 a day. Can you provide any comments on the quarter-to-date average rates so far?

I want to say that the quarter-to-date average rates are around $11,000 overall. So, it's significantly higher than the previous quarter which was, I think, around $7,000.

Great. Thank you. You mentioned some water ballast equipment work from the second quarter of 2020. Is that extending into the third quarter of 2020, or are there any expected dry dock expenses in the third quarter?

No, we don't expect any dry dockings or any water ballast expenses in Q3 nor Q4.

Okay. All right. Well, great. Thank you. That's all the follow-up I had. Thank you.

Thanks, Tate. Thank you.

Your next question comes from the line of Poe Fratt from Noble Capital Markets. Please ask your question.

Yes. Good morning.

Hi, Poe.

I was hoping to get some insight on which assets are currently unencumbered and what your potential borrowing capacity might be on any of the unsecured assets at this moment. Additionally, considering your strategy to either retire or restructure the preferred with the upcoming increase in the dividend next year, I understand it's not cash, but it does carry a significant rate. I'm curious if that is a focus or if you're primarily concentrating on refinancing the debt that is maturing next year?

Yes, we are discussing refinancing existing debt at this stage, but we have nothing to report yet, but we are confident that things will move along quite nicely. And we are equally confident that we will be able to find an agreement with our current equity holders, who have been supporting the company up to now to somehow minimize the effects of this increase in the coupons that we are to see in 2021. Nothing to report yet, but we are discussing all these possibilities, obviously.

Great. And any comment on just your borrowing capacity right now on any assets that are unencumbered or unsecured?

All the assets are currently encumbered, but the amount of leverage on them is not huge. And we might be able to somehow increase that, if needed.

Selected vessels are almost at least one vessel, which is one of our new versions, that currently has 40% loans. This vessel has the potential to increase its debt and be refinanced.

Yes, in past calls, you may have mentioned that you have nearly $10 million in under-levered assets or borrowing capacity. Is that still the case, and could you comment on what borrowing capacity you would have if you leveraged up to 55%?

I believe we may have the opportunity to increase our borrowings by $5 million to $6 million by either leveraging existing vessels or restructuring a loan set to expire in 2021. However, we do not require this in the immediate future for the next six months, as charter rates have improved and we have secured charters that cover 70% of our open days for the rest of the year. There is no urgent need for additional funds, and we do not foresee needing them. Nonetheless, by the end of the year, we will have further strengthened our balance sheet.

We have managed, as you can see on slide 17, to reduce our cash flow breakeven from almost $11,000 down to $9,600, which was the result of the actions that Aristides mentioned and the fact that we don't have dry bulk coming in the next 12 months. So, cash flow-wise at the current rate, we are cash flow positive. We expect to be cash flow positive.

Yes, I understand that $900 of the improvement is due to picking up the preferred. Tasos, could you discuss the breakeven costs? In the second quarter of 2020, the interest expense was $916 per day, and the forward-looking number indicates you're expecting $730 a day. Is there a non-cash component that contributes to that decrease, or what are your assumptions regarding the interest rate calculation moving forward?

The historical number includes a period with a significantly higher LIBOR at the beginning of this year. I think the forward-looking LIBOR is very low, and that is one of the reasons for the decrease in interest expenses. And of course, some debt has been repaid, so there's a smaller balance, which we think there is supply.

Okay. And it looks like you've done a good job on keeping costs fairly low and looks like they're going to be stable over the next 12 months according to that slide too, right?

Looks right, yes.

Great. Earlier this week, there was some unusual trading activity in your stock price. Can you provide any insight into what you think was happening that day?

Yes, absolutely no, no color on what was happening. I mean, the same thing that I explained to whoever asked, NASDAQ included, but there was no event or there is nothing from the companies that could have created the type of outburst in activity.

Great. I thought so. I just had to ask. Thank you.

You're welcome. Thank you very much. Do we have another question?

There are no further questions at this time. Please continue.

Well, thank you very much for being with us for the results of Q2 and we'll be with you again in three months' time to discuss hopefully much better results than what we had this quarter. Thank you very much.

Thanks, everybody.

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