Euroseas Ltd. (ESEA) Q2 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me is Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for six month period and quarter ended June 30, 2020. Let's now turn to Slide 3 to see our income statement highlights. For the second quarter, we reported total revenue of $13.5 million, net income was $1.3 million and net income attributable to common shareholders after a $0.2 million dividend on the Series B Preferred Shares was $1.11 million or $0.20 gain per share basic and diluted. Adjusted net income attributable to common shareholders for the period was $1.4 million or $0.25 per share basic and diluted. Adjusted EBITDA was $4.4 million. Tasos will review our financial highlights in more detail later on in the presentation. Please turn to Slide 4 for details of some of our recent developments. During July 2020, the company completed the sale of three of its vessels, motor vessel Manolis P, motor vessel EM Oinousses and motor vessel Kuo Hsiung for a total of approximately $7.6 million of net proceeds, of which $7 million was used to repay the outstanding loans of the vessels. Motor vessels Manolis P was initially sold in March for $418 per lightweight or 2.72 million, but the deal did not materialize as the buyers failed to take delivery of the vessel due to the COVID-19 circumstances. Then, later in July it was sold anew for scrap for $318 per lightweight ton or $2.07 million net proceeds. The second ship M/V Oinousses following the fire accident suffered in January 2020 and the settlement of $2.7 million from the ship underwriters, the vessel was eventually sold for scrap for the amount of $3.69 million net proceeds. Finally, the third vessels, the motor vessel Kuo Hsiung was also sold for scrap for the amount of $1.85 million net proceeds. During the second quarter of 2020 the company agreed with certain of its lenders to defer a portion of its 2020 loan repayments to be repaid together with the respective balloon installments. A total of $4.7 million was scheduled to December 2021 or within 2022. We are also in the process of finalizing with the last bank in our book, a deferral of $900,000 due Q3 and Q4 of 2020 to their respective balloons as well. Furthermore, the company agreed with the holders of the Series B Preferred Shares to have the option of paying the quarterly dividends in time for the period from April 1, 2020 to January 29, 2021 by issuing additional Series B Preferred Shares and increasing the dividend rate to 9% from 8% if paid in time. The company exercises this option for Q2. Please turn to Slide 5 where you can see our current fleet profile. On the completion of the sale of the three vessels, we will now have 16 vessels, which include 11 feeder container ships and five intermediate container carriers with approximately 590,000 deadweight tons and 46,000 TEU capacity at the weighted average age of 15.8 years. Please turn to Slide 6 for our chartering operations and drydocking highlights. We have been able to renew most of the expired charters at rates a little bit lower than the last ones and without facing idle times, except for the EM Kea and Ninos with seats faced about 14 days [of idling] time and the EM Spetses, which faced 53 days of Idling. I will not go through the complete list of the new charters achieved, but you can see them all on Slide 6. I just want to also note that the generally flexible periods that – the generally flexible periods that we have had to agree to date. Slide 7 shows our vessel employment in graphical form as well. As of June 30, we have about 58% coverage for the remainder of 2020 based on minimum charter duration. Please turn to Slide 8. Over the last five years our operational and fleet utilization has been in excess of 98.8%. Euroseas has an outstanding safety and environmental record, but at the same time, the company is managing to keep costs low, despite running an older fleet than the other listed companies. For the second quarter of 2020 operational fleet utilization was 99.7%, while the commercial fleet utilization rate in the second quarter of 2020 was 94.6%. The graph on the page compares daily costs, excluding drydocking since 2011 with the average of our peers. Overall, our costs achieved are among the lowest of the public shipping companies. Let's go to Slide 10 to discuss the general containership market highlights of the second quarter. Time charter rates during the second quarter drew a negative picture at across all containership sizes as shown by the context index. It started to recover towards the end of it and most profoundly in July. For feeder and intermediate size vessels, there was an average drop of close to 25% on 6 months to 12 months time charter rates observed between the first and second quarter. According to Clarksons 1,700 TEU geared vessel fell from an average of $7,800 per day in Q1 to $6,300 per day in Q2 and currently stands at $6,600 per day. The 2,500 TEU geared vessel fell from an average of $9,400 in Q1 to $7,700 in Q2 and currently stands at around $8,100 per day. The 4,250 TEU gearless vessels fell from an average of just about $13,000 in Q1 to $8,500 in Q2 and currently stands at 11,500 approximately. Average secondhand prices for older than 20 year old vessels remained around the scrap prices in Q2, which, however, were down around 20% versus Q1 due to the drop of the price of [scrap iron]. For younger vessels of about 5 to 15 years old, there was a price drop of 10% to 15% for the 1,700 to 4,250 TEU range with a bigger reductions in the smaller sizes. At this time the new building prices with no scrubber, China built was stable with downward pressures, but the absence of transactions indicates the lack of interest at current asking prices. The inactive containership fleet currently stands at about 5.1% totaling 1.2 million TEUs. This includes Idle due to scrubber retrofitting, which, of course, is mostly larger vessels and is about 280,000 TEU in total. It has to be noted, that these numbers are down from the 2.7 million TEU or 11% of the fleet, which was idle as of mid-May. The number of vessels scrapped increased slightly in Q2 versus Q1, but was restricted by the lockdown in India, Pakistan, and Bangladesh that did not allow more ships to be scrapped. Overall, the fleet has grown by 1% in 2020 so far, without, of course, accounting for idle vessels reactivations or idling, etc. Please turn to Slide 11. As a result of the pandemic, the economic and trade world environment has dramatically and negatively changed in 2020. The IMF in its most recent revision in June projected that world GDP growth in 2020 will end up at minus 4.9%, a steep deterioration to its minus 3% predicted in April, with the reductions stemming from the USA, China, India and the ASEAN-5 economies mostly. For 2021 though, the IMF Global GDP growth is now projected at a strong 5.4%. Major global economies are expected to rebound strongly in 2021 with the U.S. and the Eurozone rebounding by 4.5%, India by 6%, and China by 8% plus. In terms of demand for containerized trade which closely correlates to global GDP growth as we've said many times, the demand measured in TEU per mile is expected by Clarkson who had a significant drop to minus 7.7% in 2020. However, a high growth rate of 7% is expected to return in 2021, owing to the rise of the global economy. At this point we should note that the trade and growth projections currently made will probably be revised as COVID-19 develops, but also due to the uncertainty of the geopolitical situation and especially trade between the U.S. and China. Therefore, market development projections are even harder than usually to make. Please turn to Slide 12 to review the containership age profile and order book deliver schedule. As you can see in the containership based profile chart on the left side of the slide, we have a young fleet with a mere 6% of ships being over 20 years old. This, however, is concentrated in the smaller size classes where we operate. The right side chart shows the delivery schedule of the current containership order book, which is expressed as a percentage of the fleet. The circled figures for the years 2017 to 2019 shows the actual fleet growth after taking into account scrapping, cancellations and slippages. The red circle figures for 2020 to 2022 show the order book before any scrapping and slippages. Currently, the total containership order book stands at 8.9% of the fleet, a figure which is the lowest observed in more than 20 years. This low level of order book provides a source of optimism for a quick recovery of the rates if trade demand recovers as supply side pressures will be at minimum levels. Please turn to Slide 13 where we discuss our outlook summary. The unknown duration of the pandemic and its financial consequences render any type of modeling very unreliable. Our base case supply/demand analysis, however, is based on the scenario where we experience a deep recession in 2020 of minus 4.9% GDP growth tied with a strong recovery in 2021 of 5.4% GDP growth as per the IMF. The current estimates from Clarksons to quantify the effects of the pandemic on containerized trade indicate an exaggerated reaction in 2020 of minus 7.7%, followed by a sharp recovery in 2021 of 7%. Therefore, we generally anticipate a very weak 2020 and a strongly strengthening 2021 and 2022. Meanwhile, chartering of vessels that were delivered by their charterers during most part of the quarter through difficult as indicated by the bottoming of the CONTEX Index in early June. However, over the past few weeks firmer rates have been observed, while the new building order book is at 20 year lows, a significant portion of its scheduled to be delivery – which is scheduled to be delivered in 2020 along with vessels returning from retrofitting scrubbers. [Although], this might potentially dampen the effect of the urban markets recovery we are currently witnessing, if the pandemic is controlled, we remain healthy. As said, the order book for 2021 onwards is very low and since owners do not yet know what the optimal fuel for the not too distant future will be, they are reluctant to place any new orders. Therefore, the second half of 2021 and the whole of 2022 may prove to be booming periods if global demand picks up as generally expected. Let's turn to Slide 14. The left side of this slide shows the evolution of the one-year time charter rates for containers of 2,500 TEUs since 2000. Since the financial crisis of 2008, rates stayed rather depressed with three spikes within the $5,500 to $14,900 per day range. Currently, we see charter rates hovering at about $8,000 per day. The right hand side of the slide shows vessel values in relation to historical prices since 2011. As you can see containership values are still significantly below the median and average historical values. This indicates the purchases of ships at today's current values could prove very good investments. And with that, I will now pass the floor to our CFO, Tasos Aslidis to go over our financial highlights in more detail.

Thank you very much, Aristides. Good morning from me as well ladies and gentlemen. I will now take you through the next four slides to give you an overview of our financial results for the three and six-month periods ended June 30, 2020. With that, let's look first at Slide 16. For the second quarter of 2020, reported total net revenues of $13.5 million, representing 67.2% increase over total net revenues of $8.1 million during the second quarter of 2019, which was the result of increased average number and size of vessels we owned in the second quarter of this year, compared to the second quarter of 2019. The company reported net income for the period of $1.3 million and net income attributable to common shareholders of $1.1 million as compared to a net loss of $0.7 million and a net loss attributable to common shareholders of $1.7 million, respectively, for the same period of 2019. The results for the second quarter of 2020 also include $0.3 million of amortization of below market time charters acquired. Interest and other financing costs for the second quarter of 2020 amounted to $1.1 million, compared to $0.8 million for the same period of 2019. A period which also included additional finance charges of about $0.7 million. Interest during the second quarter of 2020 was higher due to higher average outstanding debt during the period as compared to last year, partly offset by the lower LIBOR rates our bank loans shipped to [indiscernible] during the period as compared to the same period of last year. Depreciation expenses for the second quarter of 2020 amounted to $1.7 million, compared to $0.8 million for the same period of last year, again reflecting the increased number of vessels we owned during this period. Adjusted EBITDA for the second quarter of 2020 was $4.4 million, compared to $1.6 million achieved during the same period of last year. Basic and diluted earnings per share attributable to common shareholders for the second quarter of 2020 were $0.20 calculated on 5.6 million basic and diluted weighted average number of shares outstanding, compared to basic and diluted loss per share of $1.12 for the second quarter of last year, calculated on approximately 1.5 million basic and diluted weighted average number of shares outstanding. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized loss on derivatives the amortization of below time market charters acquired and the loss on the sale, and the vessel held for sale, the adjusted earnings per share attributable to common shareholders for the quarter ended June 30, 2020 were $0.25, compared to adjusted loss of $1.14 per share for the same period of last year. Usually security analysts do not include the above items in their published estimates of earnings per share. For the first half of 2020, now the company reported total net revenues of $28.9 million, representing a 76.3% increase over total net revenues of $16.4 million during the first half of last year, again as a result of the increased average number of vessels and the size of vessels we own. The company reported net income for the period of $3.2 million and net income attributable to common shareholders of $2.9 million as compared to a net loss of $0.8 million and a net loss attributable to common shareholders of $2.2 million, respectively, for the first half of 2019. The results for the first half of 2020 also include $1.2 million of amortization of below market time charters acquired. During the period interest and other financing costs amounted to $2.4 million as compared to $1.5 million for the same period of last year, a period which again included some additional finance charges of about $0.7 million. This increase in our interest charges is due to the increased amount of debt in the current period, first half of this year, as compared to the same period of 2019 and it is partly offset by the decreased LIBOR rates of our bank loans set to pay during the period, again, as compared to the same period of last year. Depreciation expenses for the first half of 2020 were 3.4 million, compared to $1.6 million for the same period of 2019, reflecting the higher number of vessels we owned. Adjusted EBITDA for the first half of 2020 was $8.4 million, compared to $3 million achieved during the first half of last year. Basic and diluted earnings per share attributable to common shareholders for the first half of 2020 was $0.52, calculated, again, on approximately 5.6 million basic and diluted weighted average number of shares outstanding compared to $1.44 loss for the first half of 2019, calculated on average of 1.5 million basic and diluted shares outstanding. Excluding the effect on the income attributable to the common shareholders for the first half of this year of the unrealized loss of derivatives, the amortization of below market time charters acquired and the loss on the sale of vessel sets for sale, the adjusted earnings per share attributable to common shareholders for the six month period ended June 30, 2020 would have been $0.42, compared to adjusted loss of [$1.47] per share basic and diluted for the same period of last year. Let's now turn to Slide 17 to review our fleet performance. Let's first look at our fleet utilization rates and let's start with our second quarter numbers on the left part of the slide. As usual, we have broken down our fleet utilization rate in commercial and operation. As you can see in this slide, for the second quarter of 2020, we reported 94.6% commercial utilization rate and 99.7% operational utilization rate, compared to 96.7% commercial and 100% operational utilization rate for the second quarter of last year. I would like to remind you here that our utilization rate calculation does not include vessels in scheduled repairs or drydocks if any of those happen during the period. On average, 19 vessels were owned and operated during the second quarter of 2020, earnings and other time charter equivalent rate of $9,458 per day, compared to $8,307 per vessel per day that we earned during the second quarter of 2019, a quarter during which we operated 11 vessels. Our total daily vessel operating expenses, including management fees, general and administrative expenses, but excluding drydocking costs, averaged $6,120 per vessel per day during the second quarter as compared to $6,423 per vessel per day during the same quarter of last year. Let's now look at the bottom of the table to our daily cash flow breakeven levels presented here on a per vessel per day basis. For the second quarter of 2020, our cash flow breakeven level was $8,512 per vessel per day, compared to $9,093 per vessel per day for the same period of last year. Let's now look at our first half figures in the right part of the table. So, for the first half of 2020, we reported a 96.9% commercial utilization rate and 97.9% operational utilization rate, compared to 98% commercial, and 100% operational for the first half of last year. On average, we operated 19 vessels during the first half of 2020 earning $9,541 per vessel per day, compared to [$8,650] per vessel per day that we – our vessels earned during the first half of last year period, during which we operated 11 vessels. Our total daily vessel operating expenses, again, including management fees, general and administrative expenses, but without drydocking costs averaged $6,003 per vessel per day during the first half of this year, compared to $6,324 per vessel per day for the first – for the same period of 2019. Looking again at the bottom of the table, we can see that our cash flow breakeven level for the first half presented on a per vessel per day basis and we can see that was $8,608 for 2020, compared to $9,144 per vessel per day for the first – for, the first half of 2019. Let's now move to Slide 18 to review our debt profile. This slide shows on the right hand side our cash flow breakeven level expectations for the next 12 month. And on the left side, we can see our scheduled debt repayments over the next several years. As you can see in 2020 little less of our – little less than half of our loan repayments, $7 million are due to the sale of the three vessels what Aristides mentioned earlier. Of the remaining, about $4.4 million is a loan due to a related party and the company can repay that loan in shares under such condition. That leaves about $7 million in loan repayments, during 2020, most of which is though were made in the first half, about $5.3 million. And as Aristides mentioned, another $0.9 million would likely be differed. Our loan repayments, as we can see, again, in the chart, over the next three years keep declining. In terms of our balloon payments, in 2021 we have to repay $16.1 million for balloon payment that is covered by six of our vessels. 2020 there is a smaller balloon payment of $1.9 million, again, covered by one of our vessels. And finally in 2023 we have balloon payments of about $30 million, representing loans collateralized by the remaining nine of our vessels. We believe that as we did in the past, we will be able to refinance our balloon payments as they come due. A quick note on the cost of our funding, before we move to reviewing our cash flow breakeven. We have an average margin on our bank debt of about 3.6%, assuming the LIBOR rate of 0.3%, our senior debt costs on average is about 3.9%. If we take into account the cost of the related party loan in the preferred equity dividend, our average cost of our non-equity funding as of June 30, 2020 is about 4.5%. Switching on to the table to the right, we can see that we express our loan repayments over the next 12 months in dollars per vessel per day will get $1,050 contribution to our daily cash flow breakeven level. If we furthermore make assumptions for the remaining components of our cash flow breakeven level, that is our operating expenses, G&A expenses, interest, drydock costs and any cash payment of our preferred stock dividend, we come up with a cash flow breakeven level for the next 12 months of about $8,450 per vessel per day. As previously mentioned, the company agreed with the holders of its Series B Preferred Shares to have the option of paying the quarterly dividends in time for the period for the period starting from April 1, 2020 to January 29, 2021 by issuing additional Series B Preferred Shares and increasing the dividend rate to 9% from 8% if the dividend is paid in time. We have assumed in making this cash flow breakeven projection that our preferred shares will collect the dividend in time until January 2021. Let's now turn to slide 19. This slide provides some highlights from our balance sheet. As of June 30, 2020 we had cash and other current assets of about $10 million. The book value of our vessels was about $113 million, giving us a total book value of asset of about $123 million. On the liability side, we had an outstanding bank and debt – bank and other debt of $84.3 million, preferred equity of about $8.2 million, and other liabilities of about $8 million. Thus leaving us with a net book value of $22.4 million or approximately $4 per share. If we adjusted the book value of our vessels with our market value based on our own estimates of the value, we can calculate the net asset value for our fleet to be in the range of $19 million to $20 million or about $3.5 per share. We believe that our shares recently trading around [$25 to $30] per share [indiscernible] discount to our book and net asset value present a good appreciation potential for our shareholders and investment opportunity for other investors. And with that, I would like to turn the floor back to Aristides to manage the remaining of the call.

Thank you, Tasos. I would now like to open up the floor for any questions you may have.

Thank you. [Operator Instructions] We will now take our first question from Tate Sullivan from Maxim Group. Please go ahead.

Hello. Thank you. Good day. I'm Tate Sullivan from Maxim Group. Just could we review the change in cash and balance sheet for this current quarter given the sales after the end of 2Q 2020? I think you had vessels held for sale of $7.1 million at the end of 2Q 2020 and then $7.6 million of sales. And so, just will you right that up, and is that – I mean, can you just clarify some of the changes in the balance sheet for this current quarter, please?

I mean, the balances shows the book value of the vessels held for sale. As Aristides mentioned, the vessels were sold for a net $7.6 million, of which $7 million were used to repay the debt, so there was a net contribution from the sale of the vessels to our cash balance.

Okay. And then for the insurance proceeds received in the quarter, did you receive cash with those insurance proceeds or maybe do you have a cash inflow related to that accrual in the upcoming quarter – in the current and upcoming quarters.

We have received about 40% already, and there is about – the remaining about $1.6 million or $1.7 million as receivables, which we expect to receive in Q3.

In Q3, can you give after the sales in that cash collected, can you give any updated total cash balance and I apologize if I missed it for the current quarter?

We received the remaining proceeds from the insurance claim, plus the remaining from the same. I think we were look to something close to $2.3 million incremental cash revision.

$2.3 million incremental cash this quarter. Thank you. And then also on the current make-up and after those sales in July, are you comfortable with your current fleet mix or you always evaluating maybe selling some of the older vessels for scrap going forward or can you comment on that please?

We might scrap one or two more vessels within the year depending a little bit on how the market develops over the next few months. Because we will need to pass some drydockings and we will have to evaluate if it makes sense to drydock the vessel and spend the amounts needed or it's best to scrap them. And this will be determined based on the time charter rates that we see in the next couple of months.

Okay. And you mentioned – last from me, pardon, you mentioned rates around $8,000 per day, would you say the volatility in the rates has decreased in the last couple of weeks or – I mean, I know your comments on, I mean it's hard to predict the near-term versus the China-U.S. dynamic, but I mean has volatility decreased in the rates at least a little bit in the last couple of weeks.

Yes. The rates have improved a little bit in the last month or so, especially for the larger vessels, less so for the smaller vessels, but it is always a matter of positioning, where you are at that time. There is not a huge inquiry by charters jumping to [take your seat], this was never the situation, and of course it's not still there again.

Okay, thank you for your time.

Thanks, Tate.

Thank you, Tate

Thank you. And your next question comes from Poe Fratt from NOBLE Capital Market. Please go ahead.

Yeah, hi, good morning Poe Fratt from NOBLE Capital Markets. Good morning, Aristides. Good morning, Tasos. Can you highlight your off-hire days in the third quarter and fourth quarter that you’re planned right now?

The off-hire days?

Yes, please.

We have assumed – typically we assume our historical average of about eight or five days per year per vessel. So, we are assuming four or five days per vessel for the remaining of the year.

And we have scheduled off-hire days for the dry vessels – to be dry docked and the [indiscernible] is the one that is scheduled to be drydocked.

We have one vessels, as Aristides mentioned, that we are evaluating whether to drydock it or not and pass it to survey. If we keep the vessel and pass through survey then we probably have another 20, 25 day of drydock of our vessel.

Okay. And would that be in the third quarter or the fourth quarter?

Both.

Okay. And Tasos could you just – I wasn't following exactly – you're amortization schedule that you have, can you just highlight how much amortization you have currently right now for the third and fourth quarter, and then you talked about potentially deferring $900,000 of amortization into – thrown it under the maturity date of the balloon. Can you just give me a little bit clarity – a little more clarity on that, please?

You're talking about our debt amortization, correct?

Yes.

So, we have paid about – as I mentioned $5.3 million in the first half, but in the second half there is $1.7 – roughly $1.7 million that we would expect, of which [half $0.9 million] very likely will be deferred. We have received the terms from the bank and we're about to document to – go through the documentation of it. So, we would probably have to pay something like $800,000 amortization in the remainder of this year.

Okay, great. And then can you talk about OpEx and your other costs. Looking forward, it seems like they might be a little bit higher than what your run rate has been, can you just talk about cost a little bit?

You mean in terms of the operating cost?

Yeah. Operating cost and then it looks like maybe with the smaller fleet your G&A per day is going to go up a little bit, but if you could just clarify that.

I think our estimates that we saw on Slide 18 include the reduction of our fleet in the back of the leverage of our G&A. So, this – that is what we expect to see, I mean it's based on our budget and the same is true for the operating expenses.

Okay, great. And then just to make sure that the insurance collectible or insurance proceeds was booked in the third – in the second quarter end, it was $2.7 million and that had a positive impact on your EBITDA that you reported a $4.4 million, correct?

Correct. The vessel was – the vessel – this is really an amount acclaimed [built over] the last six months after the vessels accident and related claims. So, it truly reflects the earnings, the vessel which we have had during the first half of the year and it was collected – it was finalized early in the second quarter. That's why we had it in the second quarter and a half in the first half and the second, we have collected about 40% of the claim and the remaining is to be collected as I explained to earlier in the third quarter.

Okay. And then you highlighted the $4.4 million of related party debt and I have – maybe I have seen this, maybe I missed it before, but you're highlighting now that it could be paid in shares. Is this something that is a high probability or likelihood looking forward or do you – will you just continually push that out not as repay with shares?

Our Board will decide when it’s time to pay. It is due December 31 of this year, and it is not – I mean under certain conditions the company can pay it in shares, probably we will not pay it in shares, but that is to be decided by our Board just before the payment needs to be made.

Okay. And then when you talk about, you have 58% of the remaining 2020 days booked or committed, do you have an average rate that's associated with those days?

I mean, I don't have [indiscernible] I can get back to you on that.

Okay, great. Thank you so much.

Thank you, thank you, Poe.

Thank you. And we now have no further questions. I'd like to hand the floor back to Mr. Aristides Pittas. Go ahead please.

Thank you. Thank you, everybody for participating in the call. And we hope to be able to come back to you in Q3 with good results again, and with the COVID having come a little bit behind us, not totally behind us, but have not deteriorated. Thank you very much.

Thank you. That does conclude our webcast. Thank you all for joining. You may now disconnect.