Euroseas Ltd. (ESEA) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas Conference Call on the First Quarter 2021 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. I must advise you that this conference is being recorded today. Forward-looking statement. Please be reminded that the company announced their 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, Euroseas 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.
Aristides Pittas: Good morning, ladies and gentlemen, and welcome to our scheduled conference call for today. Together with me is Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the three months ended March 31, 2021. Let us turn to Slide 3. Our income statement highlights are shown here. For the first quarter of 2021, we reported total net revenues of $14.3 million and net income of $3.8 million. Net income attributable to common shareholders after a $0.2 million dividend on the Series B preferred shares in the first quarter of 2021 was $3.6 million or $0.53 per share basic and diluted. Adjusted net income attributable to the common shareholders was $3 million or $0.45 per share basic and diluted. This difference stems mainly from the unrealized gain we had on the value of our interest rate hedge. Adjusted EBITDA for the period stood at $5.6 million. Tasos will go over our financial highlights in more detail later on in the presentation. Please turn to Slide 4 where we discuss our recent operating developments. The charter of Akinada Bridge declared the 10 to 12 months option at $20,000 per day as from December 2021. Our EM Kea was extended for a period of 25 to 28 months at $22,000 per day, starting from April 2021. The EM Hydra was fixed for 23 to 25 months at $20,000 per day as from May 2021. The Joanna was fixed for a period of 18 to 21 months at $16,800 a day as from May 2021. Finally, the Synergy Busan was fixed for a period of 36 to 40 months at $25,000 per day as from April 2021. Overall, the duration of these charters was an average around two years. As mentioned in the previous earnings call, our EM Corfu suffered damage on its tail shaft in early December and was idle for two months due to repairs in drydock till February 9 and it has since resumed its operations. All the costs of the repair will be recovered by hull and machinery insurance, minus the deductible of about $100,000 and the off-hire time. There were no drydocks or any sales and purchases during the first quarter. I am very pleased to announce also the completion of our first Environment, Social & Governance report and the posting of it on our website. We are strong believers in the necessity, but also added value that is provided by exhaling in all three focus areas of ESG.
Tasos Aslidis: Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. I will now take you through the next five slides to give you an overview of our financial results for the first quarter of 2021 and compare them to the same periods of 2020. For that, let's turn to Slide 15. For the first quarter of 2021, the company reported total net revenues of $14.3 million, representing a 7.3% decrease of total net revenues of $15.4 million during the first quarter of 2020, which was primarily due to the lower number of vessels we operated in 2021. On average, 14 vessels were owned and operated during the first quarter of 2021 compared to 19 vessels during the first quarter of 2020. The company reported a net income for the period of $3.8 million and a net income attributable to common shareholders of $3.6 million, as compared to a net income of $2 million and a net income attributable to common shareholders of $1.8 million for the first quarter of 2020. Interest and other financing costs for the fourth quarter of 2020 amounted to $0.8 million compared to $1.1 million for the same period of 2019 as a result of lower debt levels during the period. It should be noted that in the fourth quarter of 2020, we also recorded a loss on debt extinguishment of $0.5 million, due to the conversion of the loan to common stock as per the terms of the loan agreement in November 2020. Depreciation expense for the fourth quarter of 2020 was $1.6 million as compared to $1.5 million in the fourth quarter of 2019. Dry docking expenses amounted to $0.1 million during the fourth quarter of 2020, comprising of the cost of one vessel completing an intermediate survey in water. For the same period of 2019, dry docking expenses amounted to $1.5 million, due to the cost of 1 vessel completing a special survey with dry dock and 2 vessels completing the intermediate surveys in water. Adjusted EBITDA for the fourth quarter of 2020 was at $2.1 million compared to $1.2 million for the corresponding period of 2019, an increase of about 76%. Basic and diluted earnings per share attributable to common shareholders for the fourth quarter of 2020 were $0.07, calculated on 6.1 million basic and diluted weighted average number of shares outstanding, compared to a basic diluted loss per share of $0.18 for the fourth quarter of 2019, calculated on 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 gain on derivatives, the amortization of below market time charters acquired and the gain on the sale of a vessel, the adjusted loss attributable to common shareholders for the quarter ended December 31, 2020, would have been $0.16 per share basic and diluted. If we further adjust this number for the loss on debt extinguishment, the adjusted loss per share is reduced to $0.08 per share basic diluted for the fourth quarter of 2020 compared to an adjusted loss of $0.32 per share basic diluted for the quarter -- for the fourth quarter of 2019. Usually, as we stated in the past, secured channels do not include the above items in the published estimates of earnings per share. Let's now look on the right part of the slide to our figures for the 12 months for the full year of 2020. For that period, the full year, the company reported total net revenues of $53.3 million, representing a 33.2% increase over total net revenues of $40 million during the 12 months of 2019. That is due both to the higher other numbers under a vessel so we operated and the higher earnings were during the period. The company reported net income for the year of $4 million, and net income attributable to common shareholders of $3.3 million, as compared to a net loss of $1.7 million and a net loss attributable to common shareholders of $3.5 million for the 12 months of 2019. Interest and other financing costs including interest income for the first quarter of 2021 amounted to $0.7 million, compared to $1.2 million for the same period of last year. This decrease is due to the decreased amount of debt outstanding between the two periods and the decrease in the weighted average LIBOR rate and margin in the current period as compared to – to the same period of last year. For the three months ended March 31, 2021, the company recognized a $0.5 million loss on its interest rate swap contract, comprising of a $0.52 million unrealized loss and a $0.04 million realized gain. We had no derivatives gain in the first quarter of 2020 with no derivative contracts. Depreciation expense for the first quarter of 2021 amounted to $1.6 million, compared to $1.7 million for the same period of last year, again due to the decreased number of vessels in the company’s fleet. Adjusted EBITDA for the first quarter of 2021 was $5.6 million, compared to $4.1 million during the first quarter of last year. Basic and diluted earnings per share for the first quarter of 2021 were $0.53 calculated on 6.7 million weight - basic and diluted weighted average number of shares outstanding, compared to basic and diluted earnings per share of $0.32 for the first quarter of last year, calculated on 5.57 million basic diluted weighted average number of shares outstanding. Excluding the effect from the income attributable to common shareholders for the quarter of the unrealized gain on derivatives, and the loss of – on a sale of a vessel the adjusted earnings per share for the quarter ended March 31, 2021would have been $0.45 per share basic and diluted, compared to adjusted earnings of $0.17 per share basic and diluted for the first quarter of 2020 from which results we have excluded the amortization of below market time charters acquired. Usually security analysts do not include the above items in the published estimates of earnings per share. Let's now to Slide 16 to review our fleet performance in greater detail. As usual, we will start our review by looking first at our utilization rates for the first quarter of 2021 and compare them to the same period of last year. Our fleet utilization rate is broken into commercial and operational. During the first quarter of 2021, our commercial utilization rate was 100%, while our operational utilization rate was 96.7%, compared to 98.9% commercial and 96.2% operational during the corresponding periods of last year. I should remind you here that our utilization rate calculation does not include vessels in drydocks or scheduled repairs, if any of those events occur during the period. As I mentioned earlier, on average, 14 vessels were owned and operated during the first quarter of 2021, earning an average time charter equivalent rate of $12,134 per vessel per day, compared to 19 vessels owned and operated in the first quarter of 2020, earning an average time charter equivalent rate of $9,615 per vessel per day. Our total daily operating expenses, including management fees, general and administrative expenses, but excluding drydocking cost averaged $6,914 per vessel per day during the first quarter of 2021, compared to $5,881 per vessel per day during the same period of last year. The increase part is being due to the different composition and smaller size of our fleet and partly due to increases of certain components of the costs. 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 first quarter of 2021, our cash flow breakeven level was $9,337 per vessel per day, compared to $8,611 per vessel per day during the same period of 2020. Let's move now to Slide 17. This is a new slide and we included this to provide our shareholders and investors with a tool to our shares the earning potential of our fleet in the rest of 2021 and during 2022. The table shown in this slide is two parts. The first refers to our already in place contracts. The table shows the available days for hire of our fleet making assumptions for the scheduled drydockings, the number of contracted days in each period, as well as the differential of the two remaining open days. As you can see, all of our vessels are contracted for the second quarter of this year, while 86% of our available days for the third quarter, 70% days – of our days for the fourth quarter are contracted too. Similarly, 49% of the 2022 available days are contracted and even 22% of our 2023 days are already contracted. For the contracted days, the table also shows the average contracted rate which allows you by making an assumption for the operating expenses and the G&A expenses per day to estimate their likely EBITDA contribution. For the open days, the user of this calculator or to make an assumption for the daily rate to be earned which would allow him or her to estimate their own EBITDA contribution. To provide an indicative calculation, this example uses the same rate as the one of the already contracted days one can see the effect from the total EBITDA for 2021 and 2022. I would like here to mention that based on the current market rates, as indicated in the new ConTex Index, our Open Days should earn on average of more than $30,000 per vessel per day with significantly above the current contracted average rate that we use as an indication in this table. This overall exercise is meant to provide a tool to calculate or will be therefore the remainder of 2021, but also for 2022 and even 2023 by entering once shown assumptions above the rates for the Open Dates. However, it is hard not to observe that even if we just assume that our open days will earn the rates as shown in the table, which as I mentioned as half and two-thirds of the current market rates for the remainder of 2021 and 2022, it’s hard not to observe that our EBITDA for 2022 would increase by 50% over the EBITDA for 2021, which in turn, as I previously mentioned, would be more than three times higher than the EBITDA level we had during last year. Let’s now move to Slide 18 to review our debt profile. This slide shows in the bottom graph our cash flow breakeven level expectation for the next 12 months and on the top part of the slide, we can see our scheduled debt repayments over the next several years. As you can see, our loan repayments during 2021 are scheduled to be $6.6 million. We can see this in the dark shaded part of the slide and they are scheduled to remain roughly at the same level in 2022 and decline in 2023. In 2021, we also had balloon payments of about $12 million we made collateralized by four of our vessels. In 2022, there is a smaller balloon payment of $1.9 million to be made, again collateralized by one vessel. And finally, in 2023, we have balloon payments of about $33 million collateralized by the remaining of our vessels. We will seek to refinance all of the above balloon payments when they come due in line with our practice in the past. In all previous instances, we were able to finance our balloon payments and extend the maturity of the loans. I would like to state here that in January 2021, we made a voluntary redemption of EUR 2 million of our preferred equity, reducing the balance to a little more than $6 million. An additional benefit for us of this voluntary repayment was that our preferred shareholders agreed to keep the dividend rate for our preferred stock to 8% if paid in cash or 9% if paid incurring at the option of the company. This dividend rate was set to become 14% in January of this year and as a result of the redemption will remain at the lower 8% levels for another two years pushing the potential increase to 2023 by which time it’s very likely that we will voluntarily redeem the remainder of our preferred equity. A further quick note here on the cost of our funding before we move to review the cash flow breakeven levels. As we pay an average margin on our bank debt of about 3.6% and assuming the LIBOR rate of 0.3%, our senior debt cost averages about 3.9%. If we take into account the cost of our preferred equity, our average cost of non-equity funding as of the end of last quarter was about 4%. Let's now look at the bottom of this table, where we can see our cash flow breakeven level expectation for the next 12 months in dollars per vessel per day. Our loan repayments that we discussed previously are to make $1,632 contribution to our breakeven level. If we make similar assumptions for the remaining components of our cash flow breakeven level that is operating expenses, general and administrative expenses, interest payments, drydocking cost and cash payments for our preferred stock dividend, we come up with a cash flow breakeven level for the next 12 months of about $9,800 per vessel per day. Let's now move now to Slide 19. This slide provides highlights from our balance sheet, both on the basis of the book value of our vessels and is adjusted for the current market value of the fleet. As of March 31, 2021, we had cash and other assets of about $12 million, while the book value of our vessels was about $97 million, giving us total book assets of about $109 million. On the liability side, we had an outstanding bank debt of $64.9 million, preferred equity outstanding of about $6.4 million, and other liabilities of about $6.6 million. If we replace the book value for our vessels with our charter-adjusted current market values of our fleet, we can calculate the net asset value of our fleet to be in the - around $165 million or about $24 per share. Recently, our shares have been trading in the range of $14 million to $17 million per share. Although this share price level reflects a significant increase since the beginning of the year, it still represents a significant discount to our net asset value per share, thus offering good appreciation potential for our shareholders and good investment opportunities for other investors. And with that, I would like to turn the floor back to Aristides to continue the call.
Aristides Pittas: Thank you, Tasos. Let’s now open up the floor for any discussion that we may have.
Operator: Your first question comes from the line of Tate Sullivan from Maxim Group. Please go ahead. Your line is open.
Tate Sullivan : Hello. Good day. Thank you. Starting on Slide 17 with the coverage days percentage at 49% for 2022 and here we are in almost end of May, how does that coverage percent compare historically? Is that a higher than normal level?
Aristides Pittas: It is much higher than what we have had during the last decade. Our strategy when charter rates are not so strong are to fix generally for smaller periods. And in good markets, we aim to fix for longer periods and it’s also easier achievable in the market. So, as you’ve seen the last few fixes that we did were on an average of two year length and we expect that the fixes that we will do for the remaining five vessels within this year will again be at least two years.
Tate Sullivan : Following up on that, so with two years, and been longer than historic, what is the current term length average of your current contracts, they were less than two or about a year probably?
Tasos Aslidis: Yes, I think the latest average is probably less than two years right now, but as vessels are – the charters of our vessels are renewed and rolled over, I imagine that will increase.
Tate Sullivan : Okay. Thank you and I know we are talking about ten years ago at this point, but I think, can you just review your comments about 2023 about rates probably anticipating the additional supply? And I mean, what might impact that timing in 2023? And what have you seen in previous cycles if you can comment?
Tasos Aslidis: 20% order book that we currently have approximately. It is historically not a very high order book. But -- and that order book delivers over a five year period. 2021 and 2022, we have a very little deliveries. So, that’s why we are very confident that this demand is there 2021 and 2022 are going to be extremely good years. In 2022, the fleet can grow by a maximum of 3.3% that is without any slippage, without any scrapping. So, that’s what really makes us confident for 2022. 2023, the deliveries – the expected deliveries are about 6.5% of the current fleet. This is not immaterial. It’s a significant delivery schedule. It is although on the bigger ships, very small part of these deliveries of 2023 have to do with ships up to 7,000 TEU where we are active. So, we are a bit more confident about that part of the market. But if demand does not continue growing very strongly, we could see a correction coming in 2023.
Tate Sullivan : Okay. Thank you very much for those follow-up comments and very comprehensive. And thank you. Have a great rest of the day.
Aristides Pittas: Thank you.
Tasos Aslidis: Thank you.
Operator: Thank you. And your next question comes from the line of Poe Fratt from NOBLE Capital Markets. Please go ahead. Your line is open.
Poe Fratt : Hey, good morning Aristides. Good morning, Tasos.
Tasos Aslidis: Good morning, Poe.
Poe Fratt : Just to follow-up on the question about just forward cover. Have you ever had forward cover that is this high?
Aristides Pittas: Difficult to say. I think maybe back in 2005 and 2006, we had similar coverage. But definitely for the last 15 years, no.
Poe Fratt : Okay. And then, as you look at extending the contract terms. Are you potentially changing any of the contract terms to enhance your or protect yourselves in case rates go down? So, that there aren’t any cancellation provisions? Or can you just discuss on sort of how you approach the contract terms and whether they changed at all as the markets moved up?
Aristides Pittas: I think, what has happened is that the markets has accepted itself to the covers set that they have to offer longer periods, because otherwise, they will have to pay even higher rates over a one year charter or six months charter. I recently read that that the charterer chartered a ship for 70,000 – for 1200 TEUs in for $70,000 a day. But we see that’s for a small period of three months. And so, that’s something charterers don’t want to pay and of course, something that – and we prefer to have the certainty of lower number which is still extremely profitable, but it gives us a longer duration. And the clauses in the charter parties they are not – there do not exist clauses that are make it easy for somebody to break the charter. And so, we don’t see significant changes there.
Poe Fratt : Okay. That’s helpful. And then, Aristides, if you could just sort of talk about your fleet profile and sort of as you are looking at some of the regulations coming down the pipe, can you just talk about how you are thinking on strategically how to deal with the future regulations?
Aristides Pittas: Of course, we adhere with all – to all current regulations and we will adhere to all future regulations. And whatever the IMO decides, which is essentially the governing entity of all ship – worldwide shipping, we are a strong supporters of the IMO and disciples to improve the living conditions of all the ships and the decarbonization process. So we are totally in favor of all that and we demonstrate that throughout ESG Report, which we just published today and put it up on our website showing where we are and where we will be going forward. Obviously, the fleet is going to get renewed to an extent as we buy new vessels and the older vessels are going to gradually be taken out of the markets. But I think it’s the fact that we have generally older vessels or fleet is on average age of 16 years doesn’t mean that we contribute disproportionally towards the pollution of that. Ships have changed very little over the last 25 years. Since 2013, we are seeing ships that are slightly more economical, i.e., produce slightly less fuel emissions, but just slightly. You can cover that by having your vessel trade have not slower and compete with a younger ship. So, the dynamics that will determine how we react are the market sensitive and of course, as I said, we will continue abiding by all the rules and we are supporters of further decarbonization. And we will adjust our policies accordingly.
Poe Fratt : Okay. Great. When might we start to see that process of some of the older vessels leaving the fleet?
Aristides Pittas: You probably saw that last year when we sold our eldest vessels. You saw five of our vessels being scrapped last year. Two of them would probably been scrapped anyway even if the market was strong, because they were around 30 years old. But the other three, they probably would not have been scrapped, if the markets were as strong as this. So, with a strong market, there is an incentive to keep the vessel a bit longer and to pass the vessel survey that may cost $1 million to $1.5 million and keep the vessel because you can recoup the extra cost of passing the special survey within a very short period of time. So, we will see what happens. Definitely, when we have a next drop in the market, you can expect to see us selling some of the elder vessels. But for the next couple of years, I don’t think that we will be disposing of any of our ships.
Poe Fratt : Okay. And then, Tasos, if you could address one thing. On Page 17, you’ve put calendar days and then available days for hire and it looks like you – there is a difference of, call it, just over 20 days per quarter for the next three quarters. But I am looking at your drydocking expenses over next 12 months is going up from – in putting materially the 641, should I be thinking about were drydocking days going forward? Or can you just give me some color on, sort of what your drydock schedule looks for – like for the rest of the year?
Tasos Aslidis: Well, I think that, what you see here the difference very lightly reflects as one scheduled drydock every quarter for the next three quarters and something similar for 2022. So, that is really where that difference comes from. Again, this is indicative, although it does reflect our best estimates for a drydocking schedule.
Poe Fratt : Okay. And so it looks like that $700,000 or $750,000 per quarter for drydocking expenses?
Tasos Aslidis: This is - the $641 is per day, right? That you see at the bottom of Slide 18. $641 per day is the contribution of drydocking expenses to cash breakeven level.
Poe Fratt : Yes. Yes, and then, I was just looking at the total expense for the quarter looking at the number of days that you have. Could you – typically, you are in pretty active discussions with your lenders. So, do you have an update on the balloon payments – $12 million balloon payment that is due at the end of the year. Should – how should we be thinking about that as far as terms?
Tasos Aslidis: I think it is very largely – it will be refinanced as I mentioned in my remarks. Although it should be fairly, we have already started exploring auctions to refinance that and reduce its cost and I think we are on a good path to do that.
Poe Fratt : Okay. And then, it looks like the ATM was active in the first quarter. Can you give me the number of shares that you issued in the first quarter? And then, comment on the activity going forward as much as you can?
Tasos Aslidis: I think we issued about roughly, 90,000 shares during the first quarter. I can get you the exact number as I get on the top of my head, but something like that. And we are going to use it opportunistically we believe the price at which we can issue stock is not dilutive to our shareholders. We provide an indication that we think our NAVs in the mid $20, $24 or you shouldn’t expect us to sell at $14 or $15 shares from the ATM.
Poe Fratt : Okay. And then, in the past, you’ve talked about potentially retiring the preferred, there doesn’t seem too much near-term pressure just because of the dividend rate is 8%. Can you talk about the preferred and whether it’s going to continue to be part of the capital structure as we look after this 2022?
Tasos Aslidis: I think I did mentioned in my remarks that it is very likely would be redeemed in the remaining of this year.
Poe Fratt : Okay. Thank you so much. I missed that.
Tasos Aslidis: Thank you. Thank you, Poe.
Aristides Pittas: Thank you, Poe.
Operator: Thank you. I will now pass the floor back to the Chairman and CEO, Aristides Pittas for closing remarks.
Aristides Pittas: Thank you everybody for being with us in today’s first quarter results discussion. We will be back to you in three months time. Thank you.
Tasos Aslidis: Thanks everybody. Have a nice day.
Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.
