EuroDry Ltd. (EDRY) Earnings Call Transcript & Summary

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. [Operator Instructions] 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 2 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, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me is Tasos Aslidis, Chief Financial Officer. The purpose of today's call is to discuss our financial results for the second quarter and 6-month period ended June 30, 2020. Please turn to Slide 3. Our income statement highlights are shown here. For the second quarter of 2020, we reported total net revenues of $4 million, a net loss of $3.8 million, adjusted EBITDA of minus $1.3 million and adjusted net income attributable to the common shareholders of minus $3.9 million. Adjusted basic and diluted earnings per share attributable to common shareholders for the second quarter of 2020 were minus $1.73 per share. These were the worst results we have posted since spinning off our drive fleet from Euroseas in mid-2018. This was due to the terrible charter market, coupled with the fact that 2 of our vessels have to complete special surveys during this quarter. The improving market, coupled with the fact that no more dry dockings are due during the year should lead to a reversal of focus in Q3. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our charter, operations and sale and purchase highlights. Water vessels Pantelis was fixed for a trip of about 55 to 65 days at around $7,000 per day during Q2. Thereafter a few days ago, it was fixed for a trip for about 45 to 100 days at $10,850 per day or $11,500 per day, depending on the loading area. Similarly, motor vessel Tasos was fixed for a trip for about 80 to 100 days at $6,875 per day, which net of the ballasting leg translates to $5,785 per day at the beginning of Q2. Thereafter, it was 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 third and fourth quarter FFA contracts at an average of $10,000 per day, practically fixing one of our 2004-build vessels, which are on index-based charters at $10,000 a day. In early July, we fixed another 180 days at $12,000 a day, thus practically fixing our second mid 2000-build vessel, which is also an index-based charter at that level. Therefore, we have on average fully covered these 2 vessels at $11,000 per day for Q3 and Q4. Regarding the dry dockings and the repairs of the second quarter, 2 of our motor vessels, MV Pantelis and MV Tasos, the 12 disc vessels in our fleet, completed the fourth special survey and dry dock. Motor Vessel Pantelis also installed a water ballast treatment plant as well. The total cost of these dry docks booked in Q2 was about $1.5 million, excluding the cost of the water ballast. No more dry dockings are scheduled for 2020. Looking on to our financial highlights. First, we agreed to defer Q3 and Q4 installments of our 3 Panamaxes facility and include them to the respective balloon payment. Second, we agreed with our preferred shareholders to introduce the option from April 1, 2020 to January 29, 2029 -- '21 for the company to pay the preferred dividend in-kind by issuing new preferred shares. If paid-in-kind the dividend cost would increase by 1%, and that is what our Board elected to do for Q2. Please turn to Slide 5. You see a current snap shot of EuroDry's fleet. It's comprised of 7 dry bulk vessels with a fleet average age of 11.8 years and the cargo carrying capacity of 530,000 deadweight approximately. Slide 6 shows the vessel employment schedule. As you can see, effective coverage as of August 5, 2020, for the remainder of 2020 stands at about 70% in terms of minimum fixed rate contracts, including the vessels covered by FFA. This figure excludes ships on index charters, which are open to market fluctuations, even though they may have secured employment. Turn to Slide 7, where we will go over the market highlights for the second quarter of 2020. During the second quarter of 2020, the dry bulk market experienced the effects of the COVID-19 pandemic and lockdown of the main economies, resulting in decreased cargo volumes transported and significant declines in charter rates. During the second half of June, the market has started recovering in line with the reopening of the major economies. The rates returning to the levels in the beginning of the year. Therefore, we expect this reversal of fortunes in Q3, as I mentioned. Spot rates for Panamaxes currently stands at around $9,500 per day. The 1-year time charter rates are higher at approximately $11,500 per day, indicating that the market participants expect a further recovery within the next few months. Please turn to Slide 9. As a result of the pandemic, the economic and trade world environment is dramatically and negatively changed in 2020. In April predictions, the IMF projected world GDP growth in 2020 to contract sharply at 3% per annum, but in an extraordinary revision in June, it revised the prospects lower to a negative 4.9%. Among the developed economies, China's performance is now projected to improve by 1% from negative 1.2% estimated in April by the IMF. All remaining important economies are now expected to contract; the U.S. by 8%, the Eurozone by 10.2%, et cetera, as you can see in the slide. For 2021 and according to IMF estimates, 2021 is poised to experience a significant recovery of 5.4%. In this premise, the growth forecast in the U.S. is 4.5%, while in the Euro area, it is expected to be around 6%. Similarly, all other economies are projected to show strong recovery. To a big extent, dry bulk trade growth follows the pattern of GDP growth. According to Clarksons, projected growth in 2020 is now estimated at negative 4.1%, while the 2021 forecast suggest the growth on the dry bulk trade of 5.5%. Please turn to Slide 10. For 2020 deliveries, the order book, which is dominated by large vessels, currently stands at 6.3%. Clarksons estimates that scrapping a segment will eventually result in a fleet growth of around 3%. For 2021, the order book is estimated at 3.4% with softer scrappings and slippers that will result in a fleet growth of about 1%. The order book for 2022 is currently only 0.9%, which would imply the tough scrapping and slippage, we could see a shrinking fleet that year, if just a few new orders replaced in 2022 deliveries. Please turn to Page 11. The order book as a percentage of total fleet up until July 2020, stands at 7.5%, which equals the lowest level seen in the last 20-plus years. The root cause for the poor performance of dry bulk shipping during the last decade has been the high number of deliveries, which easily outpaced the growth of the trade. After the shortening level of contracting activity in 2008, which speak that about 80% of the existing fleet, 8-0, the number of new orders as fallen to very low levels. With a relatively small order book and realistic 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 Page 12. Where we summarize our dry bulk outlook. The unknown duration of the pandemic and its financial consequences render any predictions quite unreliable. In addition to the redevelopment uncertainties, we are facing significant operational risks and difficulties. Work lockdowns have affected our ability to change crew on both our vessels. We have taken relevant measures to ensure our crew's health and solve employees, health and safety, despite the ongoing hurdles and driven restrictions imposed by lockdowns around the world. Initial estimates from Clarksons to quantify the effects of the coronavirus pandemic on dry bulk trade indicated a drop in demand in 2020, followed by a sharp recovery in 2021 similar to the way economies reacted during the 2009 financial crisis. Most recent estimates from Clarksons indicate further deterioration in demand for 2020, as I already said, of 4.1% against a 3% fleet growth. This imbalance is not supported by the recently increasing market rate. If current rates remain unchanged, it would be an indication that demand is running higher than expected, and we could be positively surprised in the remaining part of the year. New ship orders are expected to be contained in the midst of the above demand uncertainty and also the lack of clarity of the fuel of the future. Not knowing the optimal ships for even 5 years out, makes the placing of any new order that might require 20-plus years to pay off very speculative and risky. In this environment, 2021 seems to be shaping up as a promising year amidst a low order book as we see demand rebound and expectations for easing of the trade tensions between China and the U.S. Please turn to Slide 13. The left side of the slide shows the evolution of 1-year time charter rates of Panamax dry bulk vessel since 2000. After the dry bulk vessel rates bounced back from the unsustainable all-time lows of 2016, COVID-19 seems to be prompting us to revisit them. However, since June, rates have been increasing. And as of now, we are closing in on the historical median rate of about $13,000 per day. Rates that, if achieved, would certainly imply significant profits for Europe. As you can see on the right-hand side of the slide, the current price of the 10-year old Panamax vessel is around $13 million. In the last 2, 3 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. After the outbreak of COVID-19, mid-aged vessels values corrected by about 10% to 15%. With stabilizing and even improving freight rate environment, we would expect asset values to start increasing as well. With view of the above, we try to position ourselves to benefit from the developments and we continuously evaluate opportunities for investments in vessels, OpEx fuel combinations with other fleets, especially focusing on using our status as a public company, which can perhaps provide a consolidation platform. Let me now pass the floor over to our CFO, Tasos Aslidis, to go over our financial highlights in more detail.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will now take you through our financial results highlights for the 3 and 6 months periods ended June 30, 2020. So with that, let's turn to Page 16. The second quarter of 2020, we reported total net revenue of $4 million, representing a 35.6% decrease of corporate net revenues of $6.2 million we achieved during the second quarter of 2019. And Aristides mentioned, that was the result of the lower time charter rates with our investment earned affected by the pandemic during the first half of the year. The company reported net loss for the period of $3.8 million. Net loss attributable to common shareholders of $4.2 million as compared to loss attributable to common shareholders of $1.9 million and $2.6 million, respectively, for the same period of 2019. There is another financial cost for the second quarter of 2020 amounted to $0.6 million compared to $0.9 million for the same period of last year. Interest expenses during the second quarter of 2020 were lower due to the lower average of 2020 and the decreased LIBOR rates are [indiscernible] phase during the period as compared against to the last year. Depreciation expenses for the second quarter of 2020 amounted to about $1.6 million and remains potentially unchanged compared to the same period of last year. The results for the second quarter of 2020 included a $0.2 million unrealized loss on 3 interest rates swap contract, the $0.1 million unrealized loss on a forward credit agreement contract as compared to $0.2 million unrealized loss on interest rate swaps and a $0.9 million of unrealized loss on underpaid contracts during the second quarter of 2019. Adjusted EBITDA for the second quarter of 2020 was negative $1.3 million compared to a positive $1.8 million achieved during the same period second quarter 2019. Basic and diluted loss per share attributable to common shareholders for the second quarter of 2020 was $1.86, translated from [indiscernible] basic and diluted weighted average number of general spending compared to basic diluted loss per share of $1.14 for the second quarter of 2019, calculated to an approximately 2.2 million shares as diluted outstanding. Excluding the effect on the loss attributable to common shareholders for the quarter will be unrealized loss on derivatives, the adjusted loss after performance shareholders for the quarter ended June 30, 2020, would have been $1.73, basically diluted compared to an adjusted loss of $0.65 basic and diluted for the same period of last year. Usually, security analysts do not include the above items in their public statements. For the first half of 2020, the company reported total net revenues of $9.1 million, representing a 24.1% decrease over total net revenues of $12 million during the first half of 2019, which, as I mentioned earlier, was the result of the lower time charter rates our vessels earned during the first half of this year. The company reported net loss for the period of $6.1 million, net loss attributable to common shareholders of $6.9 million as compared to net loss of $0.9 million and net loss attributable to common shareholders of $2.2 million for the first half of 2019. Interest and other financing costs for the first half of 2020 amounted to $1.2 million compared to $1.9 million for the same period of last year. This decrease is due to the lower average outstanding debt, the decreased LIBOR rate of our loans in this period as compared to the same one last year. Depreciation for the first half of 2020 were approximately $3.3 million compared to $3.2 million during the same period of 2019. The small increase is mainly due to the increase in the cost base of certain vessels investments due to the recent installation of ballast water management systems]. Adjusted EBITDA for the first half of 2020 was negative $1 million compared to a $44.3 million achieved during the first half of 2019. Basic and diluted loss per share, attributable to common shareholders for the first half of 2020 was $3.03, calculated on $2.3 million -- approximately $2.3 million basic and diluted weighted average number of traditional compared to similar loss of $0.96 for the first half of 2019. Excluding the effect on the loss attributable to common shareholders for the first half of 2020 of the unrealized local derivatives. The adjusted loss to common shareholders for the 6-month period ended June 30, 2020, would have been $2.76 compared to $0.87 for the same period of last year. Please now turn to Slide 16 to review our fleet performance. I'll pass our view by losing first term fleet utilization rates. As usual, our fleet utilization rate is broken down into commercial and operational. During the second quarter of this year, our commercial utilization rate was 100%, while our operational utilization rate was 99.9% compared to 99.9% commercial, 98.3% operational 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 dry docks or stable repairs, which are events to play during the period. Another 7 vessels were on and operated during the second quarter of 2020. And another time charter equivalent rate of $7,297 per vessel per day compared to $10,724 per vessel per day and during the second quarter of 2019 during which we also operated [indiscernible]. Our total daily vessel operating expenses excluding management fees, general and administrative expenses, but excluding dry docking costs, other $6,131 per vessel per day during the second quarter of this year compared to $5,940 per vessel per day during the second quarter of 2019. We will move further down in this table at the bottom of it. We can see the cash flow breakeven rate that we get during the second quarter, number, which takes into account dry booking expenses, cash interest expense, loan repayments and preferred dividend payments payment plans. For the second quarter of 2020, then our daily cash flow breakeven rate was about $11,836 per vessel per day compared to $12,569 per vessel per day for the second quarter of 2019. Let's now move at the same figures for our first half. During the first half of 2020, our commercial utilization rate and our operational utilization rate was also 100% compared to 99.9% commercial and 99% operational for the same period the first half of last year. Turning to another 7 vessels owned and operated, earning an average time charter equivalent rate $7,390 per vessel per day compared to $10,078 per vessel per day during the same period of last year, again, during which we operated 7 vessels. Our total daily operating expenses, including management fees, G&A, but excluding dry docking costs for the 6-month period amounted to $6,093 per vessel per day compared to $5,898 per vessel per day during the first half of 2019. At the bottom of the table again in the right side here, our breakeven rate -- our cash flow breakeven rate was $11,489 per vessel per day in the second half -- in the first half of 2020 compared to $12,110 per vessel per day for the same period in the first half of last year. Let me move now to Slide 17 and review with you our debt profile. In this slide, on the left part, you can see our loan repayments as well as our balloon repayments. On the right part of the slide, we can see the projection of our cash flow breakeven level for the following 12 months. As of June 30, 2020, EuroDry take outstanding bank debt of about $53.4 million. The entire year of 2020, we have made the total loan repayments of about $5 million after the deferment of certain installments with the respective loan balloons, as Aristides mentioned here. 2021, as you can see from the chart, we've a balloon payment of $8 million due, which is supported by our 3 Panamax vessels, followed by balloon payment of $2.1 million in 2022, supported by our remaining Panamax vessels. The repayments are below the scrap price of the respected 4 vessels, even these relatively low scrap prices. We anticipate that we have no issues financing them when due. You can see additional [Audio Gap] 2023 and 2025. Quick notes from me on the rest of the plans. As we said, an average margin on our debt is about 3% and assuming a LIBOR rate of 0.5% on the top of it, our cost of senior debt would be around 3.5%. If we included the cost of the dividend of our preferred entity, which is 10.25% since we take it in time until January 2021, the average blended cost of our non-equity funding, would have been around 5% as of the end of the second quarter. Our loan repayments for the next 12 months expressed in the per vessel per day basis, it would be about $2,900 for daily cash flow breakeven level as you can see at the bottom of the table of the right part of the slide. We make assumptions for the remaining items that make up our cash flow operative rate like our operating expenses or general and administrative expenses, dry docking, interest, etc., we come up to an overall cash flow breakeven level per vessel per day for the next 12 months for approximately $9,580 If we move to Slide 18, where we can see some highlights from our balance sheet. This is indeed a solidified version of it, where we can see the main groupings of our assets and liabilities. On the asset side, first, we have cash and other current assets of about $6.8 million. And of course, our vessels, which as of June 30, 2020, have a book value of about $102.5 million, using our total free cash, we've about $109 million. On the liability side, we had bank debt of about $53.4 million, which approximately represents 49% of our book value for our assets. Also we have a preferred equity outstanding of about $15.8 million, which accounts for another 14% of our book assets, other liabilities for about $5.3 million, accounting for about 5% for us. These figures leave our net book value at around $35 million or approximately $15 per share. We will now turn you to consideration the market value for our vessels, except of the group, which is about 10% lower. Our net asset value per share would be in the range of $10 to $11. Thus, the recent trading range of our shares of around $5 represents a significant discount to the intrinsic value of the company. With that, I will pass the floor back to our Chairman and CEO, Aristides, to continue the call.

Thank you, Tasos. I would like -- now want to open the floor for any discussion that we have or any questions.

[Operator Instructions] Your first question comes from the line of Tate Sullivan from Maxim Group.

Can you talk about today, and you noted in the press release that your ability to extend the maturity of the debt due in 2020. Has the conversation with your lenders changed in the last 6 months? Or can you just give some context to those conversations to us?

Yes. As we said, we did extend the maturities of the installments that were due in Q3 and Q4 with one bank, he said, that financed [Audio Gap] that was extended till the end of 2021, along with the 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 in cash, the coupons that are due within this year and up until January 2021. So these are the 2 developments that we can disclose today that has actually happened.

Okay. And it sounds like your lenders are flexible with that, and in having regard to you already did that extensive maturity. In midst -- occurrent here, I'm going back to the operating environment in 2Q, and I know it's improved meaningfully since there. Is there since then -- is there any ability to cut any of your operating costs in this kind of environment if the volatility continues?

Well, first of all, I think that costs might have slightly increased because of the pandemic and the operational issues that we have been facing in regards to calling crew on calls and changing crew and all and sending spares and all that stuff. But it's very slight, we have been able to keep that under control and expect to continue to do so, whilst definitely safeguarding our crew. And -- but 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 our ships either through FFAs or directly at rates that are even profitable.

You mentioned following up on that front, thank you, you mentioned rates closing in on about $13,000 a day. Can you -- did you give any comments? I may have missed on the quarter-to-date average of rate so far? Can you give any comment?

I want to say that 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. And I think, you did mentioned some broader balance equipment work from 2Q '20. Is some of that extending into 3Q '20? Are there any expected dry dock expenses in 3Q?

No. We don't expect any dry dockings or any of the balance of expenses in Q3 nor Q4.

Your next question comes from the line of Peo Fratt from NOBLE Capital Markets.

I was hoping to get some color on what assets under or not currently encumbered or what your potential borrowing power would be on any of the unsecured assets right now? And also looking in the context of your strategy of trying to -- either retired or restructured the preferred with the step-up in the dividend rate next year. I know it's not cash, but still it picks at a pretty high rate. And I was just wondering if we're looking at that or we're more focused on refinancing the debt that's coming up next year?

Yes. We are discussing about refinancing existing debt at this stage, but we have nothing to revoke yet, but we are confident that things would 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 coupon that we have to see in 2021. Nothing to report yet, but discussing all these possibilities, obviously.

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

Well, 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.

Yes. Selected vessels are almost at 40%, at least 1, which is one of our new vessels it at 40% loan-to-value now. So that vessel point is room to increase dividend.

Yes. I think in previous calls, you might have highlighted that you have close to $10 million in under-levered assets or borrowing capacity. Is that still accurate? Or can you just comment on what your -- if you were to lever up to 55%, what available you might have there as far as borrowing capacity?

I think we might be able to increase our borrowings by $5 million to $6 million or by increasing the leverage on existing vessels or restructuring the loan that is to expire in 2021. We don't need any of that looking forward for the first -- for the upcoming 6 months because charter rates have improved and we've secured, as I said previously to date and have security charters covering 70% of our open days for the remainder of the year. So we don't need something imminently, and we will not be needing it. But obviously, towards the end of the year, we will have further strengthened the balance sheet.

We can manage, as you can see on Slide 17, to reduce our cash low-grade even from almost $11,000 down to $9,600, with the results of the actions that Aristides mentioned. And the fact that we don't have dry docking coming in the next 12 months. So cash flow wise, at the current rate, we are cash flow positive. We expect that the cash will flow.

Yes. And I understood that $900 of them could have been the picking of the preferred, right? The one thing, Tasos, if you could talk about -- since you mentioned the breakeven cost, in the second quarter of 2020, you had $916 per day of interest expense. And you're looking -- forward-looking number on the next page incorporates or it indicates that you're looking for $730 a day of interest expense. Is there a noncash component that lowers that? Or are -- what are your assumptions on that looking forward interest rate calculation?

The historical number includes the period with significantly higher LIBOR in the beginning of this year. I think the issued forward-looking LIBOR is very low. That is one of the reasons for the reduced interest expenses. Of course, some debt has been repaid. So there is a smaller balance we see in the supply.

Okay. And it looks like you've done a good job on keeping costs fairly low and it looks like they're going to be stable over the next 12 months according to that Slide 2, right?

It's correct, yes.

Great. And then earlier this week, there were some unusual trading activities in your stock pricing, can you -- I'm not sure you can, but any color on what you think was happening that day?

Yes. Absolutely, no color on what happened. This is what the same thing I explained to whoever asked -- and that included -- but there was no events or there is nothing from the company that could have created the [indiscernible].

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 3 months' time to discuss, hopefully, much better results than what we have disclosed. Thank you very much.

Thanks, everyone.

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