Earnings Call Transcript - EDRY Q3 2020

Operator, Operator

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry conference call on the third-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. I must advise you that this conference is being recorded today. Please be reminded that the company announces 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 risk and uncertainties that may result in such expectations not being realized. I kindly draw your attention to slide 2 of the webcast presentation which has the full 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 pass the floor over to Mr. Pittas. Thank you, sir. Please go ahead.

Aristides Pittas, Chairman and CEO

Good morning, everyone, and thank you for joining us today for our conference call. I’m Tasos Aslidis, the Chief Financial Officer. The purpose of today's call is to review our financial results for the third quarter and the nine-month period that ended on September 30, 2020. Please refer to slide 3. Our income statement reflects a strong year. In the third quarter of 2020, we reported total net revenues of $6.8 million, net income of $0.5 million, adjusted EBITDA of $2.8 million, and adjusted net income attributable to common shareholders of $0.1 million, or $0.05 per share. During this quarter, EuroDry benefited from the gradually improving charter market due to the reopening of economies after pandemic-related lockdowns. Since early October into November, market rates have declined somewhat but are still at satisfactory levels given the heightened economic uncertainty from the second wave of the pandemic and renewed lockdowns, particularly in Europe. Our CFO, Tasos Aslidis, will provide more detailed financial highlights later in the presentation. Please proceed to slide 4 for our chartering and operational highlights. MV Eirini was fixed on a period time charter at 99% of the Baltic Panamax Index for the 74,000 deadweight ton vessel, with a minimum duration until April 1, 2021, and a maximum duration of August 15, 2021. The Starlight was fixed in direct continuation of its previous charter at 98.5% of the BPI 74 average 4TC index, with a minimum duration until August 15, 2021, and a maximum duration of January 15, 2022. The total revenues from these two vessels in Q3 and Q4, considering the FFAs, are set through previously sold FFA contracts at an average rate of $11,000 per day. Moreover, we have sold FFAs for 30 days in Q1 2021 at a rate of $9,500 per day, covering one vessel for a month. There were no dry dockings or repairs during the third quarter. Please turn to slide 5 for a summary of EuroDry's current fleet. It consists of seven dry bulk vessels with an average fleet age of 11.8 years and a cargo carrying capacity of around 530,000 deadweight tons. Slide 6 displays the vessel employment schedule. As of October 26, 2020, effective cargo reserves for the remainder of 2020 stood at about 42% in terms of minimum fixed rate contracts, including vessels covered by FFAs. This figure does not include ships or minimum fixed charters that are exposed to market fluctuations despite potentially having secure employment. Now, let’s move to slide 7, which covers the market highlights for the third quarter of 2020. The quarter saw improved performance as the dry bulk market rebounded significantly following the challenging second quarter after the lockdowns ended. However, with the second wave of the pandemic and renewed lockdowns, we anticipate that the dry bulk markets will be impacted in the near term by the global economic situation influenced by COVID-19. In the medium term, we are optimistic about market improvements once the pandemic is managed, especially with the introduction of vaccines. Bulk rates for Panamaxes averaged $12,300 a day in Q3 but have now decreased to approximately $9,250 per day. One-year time charter rates averaged close to $12,000 per day but currently stand around $10,300 per day. Please turn to slide 9. As a result of the pandemic, the economic and trade world environment dramatically declined at the beginning of 2020. Initial estimates of its effect were extremely painful. But in the last two quarters, the IMF has been gradually increasing its GDP estimates. The IMF projected world GDP growth in 2020 has been revised upwards from minus 4.9% in the previous quarter, July, to minus 4.4% now. Among the developed and developing economies, China is the only big economy expected to post positive growth within 2020. In fact, China's return to growth seems stronger than expected previously, with signs of a more rapid recovery in the third quarter suggesting a 1.9% GDP growth compared to 1% GDP growth in the previous quarter. The US economic growth is projected at minus 4.3%, while the eurozone is expected to need a steeper road to recovery with the GDP growth expected for 2020 at minus 8.3%. All remaining important economies are now expected to contract, as is clearly evident in this slide, albeit at lower rates than those expected a quarter ago, except for India where staggering contraction of 10.3% is expected. In 2021, global growth according to the IMF is projected to return to growth, recovering from the decline in 2020 of minus 5.4% to a positive 5.2% growth rate. In this context, the US is expected to grow by 3.1% while the eurozone's area growth is expected to be around 5.2%, and China is a very strong 8.2%. Similarly, all other developed economies are projected to show a strong recovery. Looking at the dry bulk trade growth according to Clarksons, projected growth in 2020 is now estimated at a negative 3.3% while the 2021 focus suggests that the dry bulk trade is set to grow at a solid 5% rate. Please turn to slide 10. The order book as a percentage of total fleet up until November 2020 stands at 6.3%, which is the lowest level seen in the last 20-plus years. The principal reason 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 for the greater bulk of the last decade. With a relatively small current order book and normal demand expectations for the coming years, a fundamentally supported rebound in the dry bulk market should be expected in the near future. Also bearing in mind that it takes about 1.5 to 2 years for a vessel to be delivered once it is contracted. Please turn to slide 12 where we summarize our outlook on the dry bulk market. The unknown duration of the pandemic and its financial consequences render any type of modeling very difficult. Our base case scenario calls for the recent surge in COVID-19 cases in the Northern Hemisphere to negatively affect the markets through the first half of 2021. But aided by the progress recently achieved in vaccines, we expect the second half of the year to be very strong. Current year-to-date trade decline estimates and full-year 2020 projections will likely be revised upwards to those discussed before, as the charter rates have been higher since May/June 2020 than what the estimated supply and demand balance implies. COVID-19 related delays in ports have also likely taken more ships out of the market for more days than estimated, thus reducing the effective vessel supply. In parallel, the ordering of new ships is expected to be contained in the midst of the above demand uncertainty, but most importantly on the lack of clarity of the fuel of the future, as not knowing the optimal ship for even five years out makes the placing of any new order speculative and risky. As already discussed, we are looking forward to a promising 2021 amidst the low order book and a V-shaped demand rebound. We are hopeful for further easing of the trade tensions between China and the US, and likely to additional economic stimuli worldwide. Thus, the supply/demand balance over 2021 and 2022 will likely provide a foundation for charter rates, though remaining volatile, to at least maintain the recent levels or probably improve further. Please turn to slide 13. The left side of the slide shows the evolution of one-year time charter rates for Panamax dry bulk vessels since 2000. As of October 30, 2020, the one-year time charter rate for Panamax with carrying capacity of 75,000 deadweight stood at around $10,375 per day. As you can see on the right hand side of the slide, the current price of a 10-year-old Panamax vessel is around $13.8 million. In the last two, three years, dry bulk prices have been gradually increasing towards historical average prices, above the all-time low values that were established at the beginning of 2016 but have still not reached those levels. With a freight rate environment close to the median rate, we would expect asset values to increase closer to their median as well. In view of this, we tried to position ourselves to benefit from the developments, and we continuously evaluate opportunities for investments in vessels or pursue combinations with other fleets, especially focusing on using our status as a public company which can perhaps provide a consolidation platform. To help achieve these goals, we are also focused on efforts to improve our capital structure by reducing our capital cost and creating additional liquidity. Let me now pass the floor over to our CFO, Tasos Aslidis, to go over our financial highlights in more detail. Tasos?

Anastasios Aslidis, CFO

Thank you very much, Aristides. Good morning from me, as well, ladies and gentlemen. I will now take you through our financial results highlights for the three- and nine-month periods of 2020. For that, let's turn to slide 15. In the third quarter of 2020, we reported total net revenues of $6.8 million, amounting to an 11.3% decrease as compared to total net revenues of $7.7 million that we achieved during the third quarter of last year. Our net revenues decreased by almost $0.9 million due to lower time charter equivalent rates on our vessel earned compared to the same period of last year. The company reported net income for the period of $0.5 million, and net income attributable to common shareholders of $0.1 million as compared to a net loss of $0.4 million, and net loss attributable to common shareholders of $0.8 million from the third quarter of 2019. Interest and other financing costs for the third quarter of this year amounted to $0.6 million compared to $0.8 million for the same period last year. Our interest expenses during the third quarter of 2020 were lower due to the lower average outstanding debt and also the decreased LIBOR rates that our loans experienced as compared to the same period of 2019. Depreciation expense for the third quarter of 2020 amounted to about $1.7 million compared to $1.6 million for the same period for 2019. Again, for the quarter ended September 30, 2020, the company recognized a small loss on interest rate swaps and a $0.2 million realized loss on FFA contracts as compared to a loss on derivatives of $0.6 million for the same period of 2019, comprising of $0.5 million on loss of FFA contracts and $0.1 million on loss on one interest rate swap that we had last year. Adjusted EBITDA for the third quarter of 2020 was $2.8 million, and that compares to $2.2 million we achieved during the third quarter of 2019. Basic and diluted earnings per share attributable to common shareholders for the third quarter of 2020 was $0.06, calculated on approximately 2.3 million basic and diluted weighted average number of shares outstanding compared with basic and diluted loss per share of $0.35 for the third quarter of 2019. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized loss or gain on derivatives, the adjusted earnings per share attributable to common shareholders for this past quarter of 2020 would have been $0.05 compared to a loss of $0.26 per share, basic and diluted, for the same period of last year. Usually security analysts do not include the above items in their published estimates of earnings per share. Let's now discuss the results for the first nine months of the year. For this period in 2020, we reported total net revenues of $15.9 million, which is a 19.1% decrease from the $19.6 million in net revenues during the same period in 2019. This decline is attributed to lower time charter rates earned by our vessels in both periods. The company experienced a net loss of $5.6 million for the first nine months of this year. The net loss for common shareholders was $6.7 million, compared to a net loss of $1.4 million and a loss of $2.9 million for common shareholders in the first nine months of 2019. Interest and financing costs for the first nine months of 2020 were $1.9 million, down from $2.7 million in the same period last year, primarily due to lower average debt levels and a reduced LIBOR rate during that time. Depreciation expenses for the first nine months of 2020 totaled $4.9 million, slightly up from $4.8 million in the prior year. We recognized a $0.5 million loss on three interest rate swaps and a $0.3 million loss on FFA contracts for the first nine months of 2020, as opposed to a $0.3 million gain on derivatives in the same period last year, which included a $0.6 million gain on FFAs and a $0.3 million loss on interest rate swaps. Adjusted EBITDA for this period in 2020 was $1.8 million, down from $6.5 million in the first nine months of 2019. The basic and diluted loss per share for common shareholders was $2.97, based on 2.3 million shares, compared to a loss of $1.31 for the same period last year. Excluding the unrealized loss on derivatives affecting the loss attributable to common shareholders for the first nine months of the year, the adjusted loss per share would have been $2.70 compared to a loss of $1.13 per share for the same period in 2019. Let me now turn to slide 16 to review our fleet performance. We will start our review by looking first at fleet utilization rates. As usual, our fleet utilization rate can be broken down into commercial and operational. During the third quarter of this year, our commercial utilization rate was 100% while our operational utilization rate was 98.9% compared to 100% commercial and 99.5% operational for the third quarter of last year. I would like to remind you here that our utilization rate calculations do not include vessels with scheduled dry docks or scheduled repairs if such events occurred during the period. On average, seven vessels were owned and operated during the third quarter of this year, earning time charter equivalents rate of $11,873 per vessel, per day compared to $12,088 per vessel, per day during the third quarter of 2019 when we also operated the same seven vessels. Our total daily vessel operating expenses, including management fees and general and administrative expenses, but excluding drydock costs, averaged $6,397 per vessel, per day during the third quarter of this year compared to $5,722 per vessel, per day during the third quarter of 2019. If we move further down this table, we can see the cash flow breakeven rate for this past quarter which takes into account drydocking expenses, cash interest expenses, loan repayments, and preferred dividends if paid in cash. For the third quarter of this year, our daily cash flow breakeven rate was about $9,846 per vessel, per day compared to $10,845 per vessel, per day during the third quarter of 2019. Let's now look at the right part of the slide for our nine-month figures. During the nine-month period of 2020, our commercial utilization rate was again 100%, and our operational utilization rate was 99.6% compared to 100% commercial and 99.2% operational for the corresponding period of the previous year. For this nine-month period of 2020, we owned and operated seven vessels, earning a time charter equivalent rate of $8,927 per vessel, per day compared to $10,750 per vessel, per day during the first nine months of 2019 when we operated the same seven vessels. Our total daily operating expenses for the nine-month period, including management fees and G&A, but excluding drydocking costs, amounted to $6,195 per vessel, per day compared to $5,839 per vessel, per day during the corresponding nine months of 2019. Again, at the bottom of the table, we can see our breakeven rate for the period. Our cash flow breakeven rate was $10,863 per vessel, per day in 2020 compared to $12,308 per vessel, per day for the same period of the first nine months of last year. Let's now move to slide 17 to review our debt profile. In this slide, the top section displays our loan repayments and balloon repayments. The bottom section shows the projected cash flow breakeven level for the next 12 months. As of September 30, 2020, our outstanding bank debt was approximately $52 million. In 2021, we need to make a balloon payment of about $8 million, which is secured by three of our Panamax vessels. There is also a balloon payment of $2.1 million due in 2022 for our remaining Panamax vessel. These balloon payments are below the scrap value of the respective vessels, and we expect to have no difficulties financing them when they are due. Additionally, there are more balloon payments scheduled for 2023 and 2025. Regarding our funding costs, the average margin of our debt is about 3%. Assuming a LIBOR rate of 0.5%, the cost of our senior debt would be approximately 3.5%. If we include the cost of the dividend paid to our preferred equity, which can be paid in kind until January 2021, the blended cost of our non-equity funding would be around 5% at the end of the last quarter. Our loan repayments over the next 12 months, calculated on a per vessel, per day basis, total about $2,381, contributing to our daily cash flow breakeven, as illustrated in the bottom part of the slide. Considering other factors that contribute to our cash flow breakeven rate, including operating expenses, G&A expenses, dry bulk, interest, etc., we estimate an overall cash flow breakeven level per vessel per day for the next 12 months at approximately $9,850. Let's move now to slide 18 where we can see some highlights from our balance sheet. This is really, you can say, a high-level snapshot of our assets and liabilities. On the asset side first we can see that we have cash and other current assets about $7.1 million; and of course the book value of our vessels, which amounts to about $101 million, making our total book assets to about $108 million. On the liability side, we noted as of last quarter, bank debt of about $52 million which approximately represents 48% of the book value of our assets. Also we have preferred equity outstanding of about $16 million which accounts for another 15% of our booked assets, and other assets and other liabilities of about $4.3 million accounting roughly for about 4% of our assets. This leaves us with a net book value of about $35.5 million which amounts to about $15.4 per share. If we replace the book value of our vessels with their market value, which we estimate to be about 10% below the rated book value, we can calculate our net asset value to be over $10 per share. Clearly, if our shares stay below that level, we represent an investment with significant appreciation opportunity. And with that, I will pass the floor back to our Chairman and CEO, Aristides, to continue the call.

Aristides Pittas, Chairman and CEO

Thank you, Tasos. I can now open the floor for any questions that we may have.

Operator, Operator

Your first question comes from the line of Tate Sullivan from Maxim Group.

Tate Sullivan, Analyst

Thank you for the background. One thing that stood out was the extensions on five of your seven vessels regarding the contract timing. Can you share any feedback you’ve received from customers? What prevents them from committing to longer terms despite those contract extensions? If fleet growth is limited next year and lockdowns are ending, shouldn't there be a sense of urgency? Can you provide any comments on the feedback?

Aristides Pittas, Chairman and CEO

Yes, the older vessels in our fleet, built in 2000, are not particularly favored by operators looking for longer-term business. Therefore, we are trading them in the spot market and expect to continue doing so. The remaining vessels, specifically the medium-age ships built in 2004 to 2005, could potentially be fixed for longer periods, up to a year, and we are observing such charters taking place. For the younger ships, those under five years old, there is a market for periods of one to two years. Longer commitments are rare for these vessels. We could consider fixing them for a year at specific rates when we believe the rates are favorable. Currently, we have noticed a correction in charter rates, and we anticipate improved rates starting from the third quarter of 2021, or possibly even the second quarter. Given this outlook, we prefer to maintain shorter-term durations at today's rates.

Tate Sullivan, Analyst

Thank you. That leads into my next question. For 2021, you mentioned rates at about $10,400 per day compared to a breakeven of $9,850 per day. Did you indicate that next year you expect average rates to settle closer to the levels seen in Q3 2020? Could you clarify that comment?

Aristides Pittas, Chairman and CEO

It's been a volatile period, with rates fluctuating this year from $6,000 to as high as $13,000 or even $14,000 in the spot market. We anticipate that the first half of 2021, mainly due to the pandemic and subsequent lockdowns, will not be particularly strong, especially the first quarter. The second quarter's performance will largely depend on the pandemic's progression and trade relations. However, we do expect to see higher rates beginning in either the second or third quarter. Overall, we believe the average rate for the year will surpass this year's average, potentially aligning more with the rates seen in the third or fourth quarter. It's quite challenging to provide a precise estimate at this point.

Operator, Operator

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

Poe Fratt, Analyst

Hello. I just wanted to clarify your strategy, Aristides, regarding the current weakness you're facing in the near term. Considering the softness observed in the first half, particularly in the first quarter of 2021 due to seasonality, I noticed you're utilizing FFAs. Could you have covered a larger portion of your fleet with FFAs looking into the first quarter? Currently, only 90 days of your fleet is covered, and I'm curious about your strategy moving forward. Are you planning to layer on more FFAs as the year concludes, or will you be playing the market from this point on?

Aristides Pittas, Chairman and CEO

Very honestly, Poe, our intention was to get more cover if we saw FFAs at $10,000 a day. So we would have taken more cover if we saw that. We didn't feel very comfortable in taking more cover at levels below our actual all-cost breakeven cost. So we were hoping that we would see them go up to $10,000 again, in which case we would take some additional cover. We haven't seen that; Q1 is trading right now at under $8,000 a day. We wouldn't do something at this level. But if there is a new peak that we see within November or early December, which is possible, and we see levels returning to those levels, we will indeed get some more FFA coverage.

Poe Fratt, Analyst

Yes, you will be opportunistic based on what you observe. Could you clarify whether the 42% of days covered in the fourth quarter includes the FFAs in place or if it excludes them? Additionally, could you provide a rate associated with that contract cover of 42%?

Aristides Pittas, Chairman and CEO

I mean, it is included. This 42% includes the two vessels that will make $11,000 because they are covered through the FFAs. And it includes the Xenia Kamsarmax which is covered at $11,000 because it's a guaranteed floor. So it includes those three vessels really, and some part of the Tasos and the Pantelis whose charters expire now and we have not extended yet. So that is an average of $10,000 for those two, as well. So I would say that our average is slightly below $11,000 for the 42% that is covered, and the remaining is really open.

Poe Fratt, Analyst

Okay. And you do have that floor on the Xenia at $11,000, too, so is that included in there, or is it…?

Aristides Pittas, Chairman and CEO

Yes, that is included. Yes, that is included there.

Poe Fratt, Analyst

Okay, great. When you look at the contract for the Xenia, it seems to expire at the end of the year. Can you provide some insight on whether you believe you will be able to maintain that floor or if there will be a different structure in the contract?

Aristides Pittas, Chairman and CEO

No, this vessel will pass its special survey after finishing the current charter. We could complete it in January, but we have decided to do it right after the charter ends. We will determine how to employ the ship afterwards, as it currently does not have any employment.

Poe Fratt, Analyst

Okay. So that would be one special survey that you are looking at. Any other surveys…?

Aristides Pittas, Chairman and CEO

No, this is the only vessel that will need to undergo a survey in the coming quarter. I think we have nothing scheduled for Q1.

Anastasios Aslidis, CFO

I believe sure that we don't have anything else in Q1.

Poe Fratt, Analyst

Great. And, Tasos, if we could just double-check, it looks like the cost structure is pretty stable, looking forward. It has bounced around quarter to quarter a little bit. It looked like it was a little bit, at least from a G&A standpoint, down in the third quarter. Are there any major changes? It doesn't sound like it, but I just wanted to double-check: any major changes on the OpEx side looking at 2021?

Anastasios Aslidis, CFO

No, I don't expect we have any major structural changes on the OpEx side there. We should see OpEx at similar levels to this year, perhaps 1%, 1.5% higher, but no major changes.

Poe Fratt, Analyst

And I think you alluded to it on the balloon payment that is due in 2021, you are thinking about that. Are you actually in discussions with your banks on that loan payment and potentially extending that out?

Anastasios Aslidis, CFO

That payment is due next year, and we haven't had any discussions about it yet. However, $8 million is significantly less than the scrap price of those vessels, which are well above scrap value. Therefore, I don't anticipate any issues financing it at the current levels. At the balloon levels, we might even be able to secure more if we choose to.

Poe Fratt, Analyst

Great, thank you so much.

Operator, Operator

Thank you. I would now like to have the conference back to the CEO, Mr. Aristides Pittas. Please continue, sir.

Aristides Pittas, Chairman and CEO

I think this concludes our session of today. Thank you all for listening in, and we will talk together again in February when we come out with our results for 2020. Thank you.

Anastasios Aslidis, CFO

Thanks, everybody, for attending.

Operator, Operator

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