EuroDry Ltd. (EDRY) Q4 2018 Earnings Report, Transcript and Summary

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Fourth Quarter 2018 Financial Results. We have with us, Mr. Aristides Pittas, Chairman and Chief Executive Officer; and Mr. Tasos 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. [Operator Instructions] I must advise the conference is being recorded today. And I would now like to pass the floor to your first speaker Mr. Pittas. Please go ahead, sir.

Thank you all for joining us today for our scheduled conference call. Together with me is Tasos Aslidis, our CFO. The purpose of today's call is to discuss our financial results for the fourth quarter period ended December 31, 2018 and our full year 2018 results. In May 2018 Euroseas contributed to EuroDry, its drybulk fleet of six vessels, one Ultramax and two Kamsarmax vessels built between 2016 and 2018, and three Japanese-built Panamax vessels built between 2000 and 2004. EuroDry was spun off from Euroseas on May 30th 2018. The results in this presentation refer to the drybulk fleet for the periods presented. Please turn to Slide 3. Our income statement highlights are shown here. For the fourth quarter of 2018, we reported total net revenues of $7 million, adjusted EBITDA of $3.5 million, and adjusted net income attributable to common shareholders of $700,000. Basic and diluted earnings per share attributable to common shareholders for the fourth quarter of 2018 was $0.31 per share. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in this presentation. Please turn to slide 4, for our chartering operational and sale & purchase highlights. We recently announced the acquisition of the Star of Nippon a Panamax size drybulk carrier of 75,000 deadweight built in 2004 in Japan for 10.1 million. The vessel was delivered to us on 30th November 2018 and renamed Starlight. This ship was immediately chartered out to the earliest delivery in July and latest in October 2019 at $9000 per day for the first 40 days and thereafter at a 100% of the BPI 4 times charter route index. Our Pantelis was fixed for a trip of about 20 days at $11,000 per day on November 9th, thereafter it was fixed for a trip of about 50 days at $9,050 per day and funneling that fixed for a per day trip of about 20 days at $5,500 per day. The Tasos was fixed for a trip of about 30 days at $7,750 per day from December 13th, and then fixed for a trip of about 60 days at $12,250 per day plus a ballast bonus of $225,000 which should result in about $7,000 to $7,500 per day average spend charter equivalent for the duration of the voyage. During the fourth quarter of 2018 the drybulk market was influenced by the continued uncertainty caused by the trade tensions between the US and China. Charter rates weakened throughout the quarter as can be seen by our frictions during this period and further declines have been registered in January and February of 2019. In this environment, we have finally secured this essay contract to cover the majority of our vessel with fixed rate contracts during 2019. As a result in the first quarter of 2019, which has covered the equivalent of 1.3 Panamax vessels at $11,950 per day with a lesser fee. For the second and third quarters of 2019, we have covered the equivalent of three Panamax vessels at 11,261 per day and 11,128 per day respectively. For the fourth quarter of 2019, we fixed the equivalent of two vessels at $11,192 per day. It should be noted that there are size, route another important differences between SSA contracts on physical charters. Notwithstanding the need to both cash margins which, may increase if the market changes against the acquisition. Our initial margin for these positions was about $1 million, which would could now withdraw if needed, as the drop in the markets provides us with unrealized net gains. There were no drydockings or repairs during this quarter. Please turn to slide five for the current snap shot of Eurodry's fleet. Including the Starlight, Eurodry comprises now of seven drybulk vessels with a cargo carrying capacity of 528,000 deadweight and with a fleet average age of 10.6 years old. Slide six shows the employment schedule. As you can see, effective coverage for the remainder of 2019 stands at about 66%. Having secured the two Kamsarmax's until mid-2020 on profitable rates, we are pursuing the strategy of employing the remaining five of our vessels on short-term contracts, index linked contracts or even pools but have secured the equivalent of a bit less from three additional vessels at around $11,200 per day throughout that phase as already mentioned. Please turn to slide eight. According to the January IMF projected world GDP growth report in 2018, growth is still expected to be 3.7%, same as the previous quarter. Only the Euro zone and Japan have been revised downward by about 0.2% to 1.8% and 0.9% respectively. All other many countries expectations remained the same. For 2019 global GDP growth is expected to be 3.5%, down from 3.7% expected during the previous quarter. The mix of the various countries is expected to be a different though than in 2018. The developed world and China should grow a bit less than in 2018, while some areas of the developing world mainly India and Brazil should grow at a slightly faster pace. Turning on to the drybulk trade according to Clarkson's, the trade in 2018 is now projected to have grown by 2.7%, down from the 3.7% expected in the previous quarter estimate. In 2019, Clarkson expects a healthy 3.1% of rate growth. We see more risks to the downside from these projections especially after the Vale incident. Please turn to Slide 9. The drybulk orderbook is still close to its lowest point in over two decades, which is likely to set the stage for constrained fleet growth for at least the next couple of years given that it takes about 1.5 to two years for the vessel to be delivered once it has been ordered. Let's turn to Slide 10 for the drybulk delivery schedule. At the beginning of 2019, the orderbook stood at 5%, up from the 2.9% at the beginning of 2018. This increase was partly due to slippage and partly due to new orders placed at the beginning of 2018. For 2020 the orderbook stands at 4.2% or about 40 million deadweight tons still a very low number. Let's turn to Slide 11, where we summarize our outlook on the drybulk market. In 2018, we saw an average increase of about 25% in charter rates over 2017. The last quarter however as already said disappointed and the rates ended up slightly worsened the average despite the opposite expectations, mainly due to the Chinese restriction on coal importing and a little bit slower iron ore trade. Since the beginning of 2019, rates have been dropping again as a result of the global slowdown resulting from the trade war and the worsening sentiment. The recent accident in Vale's iron ore mine in Brazil added insult to injury and seriously affected the market which fell strongly and only now appears to be stabilizing at low levels. However, it is too early to make an assessment of the damage done to the annual coal production and export from Brazil and there are expectations that volumes lost due to the Vale incident will be replaced from other sources. Our analysis for 2019 and 2020 shows a roughly balanced supply demand balance which would suggest rates staying constant on all the routes although we expect Q1 2019 to be quite depressed. The downward drivers are mainly Chinese but also Indian iron ore and coal imports which makes the price however either way in the remaining of the year. Whilst longer term iron ore trading volume growth is at risk due to the lack of further mining production investments in both Australia and Brazil the two major producers but the volume is expected to be shipped in 2019 and 2020 are quite strong. Coal imports despite the longer-term concerns due to the overall desire to reduce coal use have been surprisingly strong in 2018 and they are expected to further grow in 2019 and '20 as electricity demand growth remains robust. In a more general aspect global GDP growth will affect our markets. Current expectations call for just a slight drop in global growth which if it materializes will result in the market recovering in Q2 2019 and the latter part of the year. After the acquisition this trend reversals requires that the US keeps interest rates from rising further, the China stabilization program works and some agreements reached between the two of them over trade. All these are highly likely to happen. Environmental regulations coming into effect as of 2020 as a wildcard which may or may not create a tighter market and which are adding uncertainty in the future. I will not dwell on the pros and cons of putting scrubbers on vessels here as this matter has been exhaustively discussed within the industry. Suffice it to say that together with 95% and more over the vessel owners would be not install scrubbers in their vessels, and we will burn fully compliant fuels thus also trying to protect the environment beyond any doubt. Please turn to Slide 12. The left side of the slide shows the evolution on one-year time charter of Panamax drybulk vessels since 2001. While drybulk vessel rates bounced back from the all time lows in 2016, we were still below historical level even subtracting the two super cycle years. The right-hand side of the slide shows the vessel values in relation to historical prices. Drybulk prices nearly doubled over all time low values that were established at the beginning of 2016. Yet they are also still lower than historical average even subtracting the two super cycle peak years. We believe the second hand vessel values are still low compared to historical averages and also depreciated new build values and expect to see an increase once the effects of the current global uncertainly due to tradeoffs and the disruptions due to IMO 2020 start settling. If the current weak sentiment continues for a bit it could create opportunities to further grow the company by buying more sea passage. Notwithstanding the above, we also continue to explore possibilities of growing our listed company further thorough mergers or otherwise if the partner providing mutually agreed synergies can be found. I will 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, ladies and gentlemen. I will now take you over now over financial highlights for the fourth quarter and full-year of 2018 and compare to the carve out results of 2017 for a review of dry fleet. Let's look first at the fourth quarter numbers from Slide 14. For the fourth quarter of this year, we reported total net revenues of $7 million, representing a 21% increase of the total net revenues of $5.8 million during the fourth quarter of 2017, and that was the result of the increased number of vessels and the increased average time charter rates that our vessels earned during the period. We reported net income for the period of $0.8 million and net income attributable to common shareholders of $0.6 million as compared to net income and net income attributable to common shareholders of $1.3 million for the same period of last year. The difference between net income and net income attributable to common shareholders accounts for the dividend that we paid to our Series D preferred shares for the fourth quarter of this year. This preferred dividend was paid in time by issuing conditional Series D preferred shares. This is the last period that we paid the preferred dividend in kind starting in February 2019 we will be paying this dividend in cash. Adjusted EBITDA for the fourth quarter of was 3.5 million compared to 2.9 million achieved during the fourth quarter of last year, an increase of 22%. Excluding the effect from earnings attributable to common shareholders for the quarter of the gain or loss in derivatives, the adjusted net earnings attributable to common shareholders for the quarter ended December 31, 2018 would have been $0.31 per share basic and dilutive compared to adjusted income per share of $0.55 basic and diluted for the same quarter of last year. Let's now look at the right-part of the slide and review the figures for the full year 2017 and 2018. For 2018 we reported total net revenues of $24.5 million, representing 28% increase over total net revenues of $19.2 million during 2017, which again is a result of the increased number of vessels we operated and the increased rate in our vessels turns. We reported net income for the period of $1.1 million, and net income attributable to common shareholders of $0.6 million as compared to net income and net income attributable to common shareholders of $0.8 million for the period of 2017 for the full year 2017. As we stated, the difference between the net income and net income attributable to common shareholders is a dividend we paid through our Series B preferred shares. Adjusted EBITDA for the 12 months of 2018 was $9.4 million, compared to $7.4 million achieved during the last year, again an increase of about 27%. Excluding the effect from the earnings attributable to common shareholders of the gain or loss in derivatives, the adjusted earnings net income per share for this year would have been $0.24 compared to $0.36 for 2017. Let's now turn to Slide 15 to review our fleet performance for the fourth quarter and full year of 2019 and compared to the same periods of the previous year. Again, let's start with our fourth quarter numbers. Our utilization rates, as usual, is broken down into commercial and operational, where both accounted for and we said 100% commercial utilization rate for the quarter and 99.6% operational utilization rate, compared to 100% commercial and 99.9% operational for 2017. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled drydocks, scheduled repairs or in lay-up if any such events are reported during the period. In the fourth quarter of this year, -- during this year we operated 5.7 vessels as compared to 4.9 vessels during 2017. If we move further down to this table at the bottom of it, we can see the cash flow breakeven rates have based as we said for the year, which is about $11,634 per vessel per day for 2018 and as compared to $7,086 for 2017. Let's now move to the following Slide 16, to review that our debt profile. In this slide we can see the loan repayments the follow-up for the remaining life of our debt and as well as the value of the payments. In 2019, you can see balloon payments of $4 million which we expect to be able to refinance as we did in previous balloons for that loan. After that we had more balloon payments for the remaining of 2019 and 2020 with the next balloon payment being in 2021. If you look at our loan repayments on a per vessel per day basis those contribute $2,950 to our daily cash flow breakeven level and you can see that number on the lower line of the table on the right part of the slide. If we make assumptions for the remaining items which make-up our cash flow breakeven level rates like operating expenses, generally expenses in the drybulk, we see that our overall cash flow breakeven for the next 12 months just maybe to be just below $12,000 per vessel per day. Let's now move to Slide 17, where I give you some highlights from our balance sheet. This is simplified version of our balance sheet where we show the main groupings of our assets and our liabilities. On the asset side, we have cash and other equities of about 10.3 million, plus restricted cash of 3.4 million. We've also kept other assets of 3.3 million and our main assets as the value of our vessel accounts for about 811 million as of the end of last year. As of the end of last year the market value for our fleet is very close to our book value of the vessels. The total assets amount to about 827.7 million. On the liability side, we have bank debt of about 64 million which approximately accounts for 50% of our assets, which have a pre set equities of 19.6 million which approximately accounts for 16% of our total assets another liability of 2 million. That leads our net book value around 42 million or $18.5 per share which as I mentioned earlier is approximately the same as our net passage value per share. If we look at our closing share price last Friday of 7.89 million, dollar per share that represents a significant discount to the value of the company and should that the gap narrows that would represent a significant appreciations to our share price. And with that, let me pass the floor back to Aristides.

Thank you, Tasos. Let me open up the floor for any questions you may have.

[Operator Instructions] The first question is from the line of James Jang. Please go ahead, your line is now open.

So the rates have been a little weak for the lease for the first quarter. And so with the Pantelis being fixed at 5500, I mean what should we be looking at once that comes off charter at the end of the quarter? Would that be refix? Is there an option for the charterer to extend the contract?

The market currently seems to have stabilized a little bit and rising. Of course still we could expect a low number maybe around $6000 a day. But we've got a few days till the vessel opens up again. So let's see how the market evaluates.

So like for the Pantelis would you be more comfortable operating on the spot? Or would you look to fix it short-term?

The biggest we would do would be one voyage let's say from where we are to South America and back which would be 90 days, but we would not fix this elder ship on period because they trade better when they do direct voyages. So it will be again a fixer of between 20-25 days to 90 days. And a longer period fixer would probably be at even higher rate than the 6000 maybe 7000 or something like that today. But let's wait -- you know things move a lot these days so let's see how the market develops till the time it opens up.

And for the Alexandros it's in the Guardian Pool right? So how long is that? Is it going to maintain? I mean is it going to still be in the pool for the rest of the year?

Most probably it will. We can take it out after a few more months but we are generally satisfied with the performance of the pool. We are making a little bit more than the index of the vessel. So I think we will probably leave it there.

What are your thoughts on the macro side for coal this year? Do you think demand will stay elevated? Or do you think it will be flat year-over-year?

I think that coal has surprised on the upside more times than less during the last three four years. Again the basic expectation that most analysts hold is that it will be flat. I think it's possible that it can be a little bit higher than that. Coal is still needed and will be needed to provide electricity for quite some time now. We don't see peak coal have been limited.

[Operator Instructions] No more questions at this time. Speakers please continue.

Well, thank you everybody for listening in to our end of year results conference call. Will post another one in three months' time to see how things have developed since yes.

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