Aristides Pittas - Chairman and CEO Tasos Aslidis - Chief Financial Officer

Donald Bukten - Wells Fargo Paul Berghaus - Cornerstone Asset Management

Thank you for standing by, ladies and gentlemen. And welcome to the Euroseas’ Conference Call on the First Quarter 2015 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 you that this conference is being recorded today, Thursday the 21st of May, 2015. Please be reminded that the company announced their results after the market closed yesterday with a press release that has 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 federal securities laws, matters discussed maybe forward-looking statement, which are based on current management expectations that involve risks and uncertainties that may result in such expectation not being realized. I kindly draw your attention to slide #2 of the webcast presentation, which has the full forward-looking statement and read it. I would now like to pass the floor to Mr. Aristides Pittas, Chairman and Chief Executive Officer of Euroseas. Please go ahead, sir.

Good morning and thank you for joining Euroseas for our conference call today. Together with me is Tasos Aslidis, our CFO. The purpose of today's call is to discuss our financial results for the three-month period ended March 31, 2015. Let's turn to slide three of our presentation for our financial results overview. The operating results for the first quarter of 2015 reflect the continued depressed state of the drybulk market, putting further pressure on the cash flows of our drybulk ships. At the same time, timecharter rates for our medium and large feeder containerships did not yet reflect the significant improvement seen in rates since March 2015. In fact, we did loose about 5% of our container operating days due to availability of employment for two of containerships during the first quarter. We expect to have no commercial off-hire during the second quarter and also to start enjoying the benefits of the improving charter rates. For the first quarter of 2015, we reported total net revenues of $8.2 million. Net loss for the period was $5.4 million, while adjusted net loss was $5.2 million. Adjusted net loss attributable to common shareholders for the period was $5.6 million or $0.10 loss per share basic and diluted. The difference being the $0.4 million in dividends paid to our Series B Preferred Shareholders. Adjusted EBITDA for the first quarter of 2015 was a loss of $1.8 million. Regardless of the losses, our balance sheet remains at conservative levels. As of March 31, 2015, our total cash was $23.8 million, was about $8.3 million of drop in restricted funds and retention accounts. Our outstanding debt was $52.3 million. Our CFO, Tasios, will go over our financials in more detail later on during the call. Please turn to slide four, to see our operational highlights. During this period, we recharted six of our containerships as they came open for short period cycles at continuously improving rates. Starting in January at around $6,500 per day and rising to around $10,000 per day by April and May. The race in the containership sector, in particularly in the feeder size continued to improve, but we are optimistic that the stronger containership market will continue to the rest of this year and next. As for the bulkers, Aristides NP finished its previous contract and was fixed at $4,800 a day till end of June, while Eirini P was fixed for about a year at $5,000 per day for the first 20 days and 103% of the of BPI4 timecharter we will look thereafter. In the first quarter we had Pantelis drydock for 27 days at the cost of approximately $500,000. Our current fleet is shown on page five and includes the four newbuilding drybulk vessels already under construction. In total, we have 19 vessels, including nine drybulk vessels and 10 container carriers. On slide six you will find the Euromar fleet, our joint venture with Eton Park and Rhone Capital. Euromar has a fleet of eight Intermediate and two Handysize container vessels between 1,700 and 3,100 teu, and one Post Panamax vessel of 5,600 teu. Euroseas owns about 15% of this company. We have also committed $5 million as preferred equity to be invested in Euromar. Euromar’s current cash position is about $21 million, which cushions it against the skillful market. Let’s move to slide eight for a brief overview of the market. BDI dropped from 770 points at the beginning of the year to 600 on March 31st and currently stands at 608 as of 18th May. The average BDI levels of this quarter were the lowest since 1999. Breaking down, the BDI further received a huge volatility of the biggest sizes but also the continued drop in the smaller sizes too. Cape Spot rates started the year at $4,375 then rose to about $8,000 per day within January and ended the quarter at about $3,500 per day rising back to $5,700 recently. Panamax Spot rates started the year at $6,700 per day fluctuating down to $3,500 per day in February, and ended the quarter at $4,800 per day. Recently they stand at $4,060 [sic] [$4,622] per day. Supramax Spot rates started the quarter with $9,300 per day dropping to about $5,000 in February and rising again to $6,800 by the end of the quarter. One-year timecharter rates also declined across all sizes and for Capes from $12,800 per day as of December to $8,250 per day today. Panamaxes fell from $9,800 to $6,250 and Supramaxes from $9,600 to $7,250. Secondhand prices dropped by approximately a further 20% whilst newbuilding prices declined less about 10%. The future for containership is much brighter as rates have been going up in both 1700 and 2500 TEU segments. The Panamax segments that had gone up sharply towards the end of last year and the beginning of this have recently plateaued and gave back a little bit of their gains. Secondhand prices have hovered around all time low levels last in 2013 until the end of the first quarter. However following the rates rally, we have seen a couple of sales at levels 15% to 20% higher. At the same time, newbuilding prices have held stable. The idle fleet has been reduced to around 150,000 TEU which is the lowest since the summer of 2011, and seasonally the lowest since 2008. However, due to skipped sailings in the bigger sizes the idle fleet has risen again to about 340,000 as of the end of the April. Turning to slide nine, you can view the drybulk age profile and delivery schedule. The delivery schedule for drybulk vessels in the beginning of 2015 stood at a significant 11.3% of the fleet for the full year. This does not take into account cancellations, slippages and scrapping. In the past years, it has been very difficult to quantify how much of the orderbook will get delivered. We expect that at least 35% of this orderbook will not get delivered due to cancellations or conversions or slippage. This is the same percentage as we saw last year. Turning to slide 10. The containers delivery schedule at beginning of 2015 stood at 10.4% and that, of course, was dominated by the larger vessels. Here again cancellations and slippages will change the original estimates. But for containers, we believe this should be only about 10% similar to 2014. For 2016, the orderbook stands at a low level of 5.5%, which gives ground for optimism, especially as it seems likely that practically no new orders can be placed to be delivered before 2017. Practically, all the orders are for large ships. However, cascading is still happening fast. We have seen and we continue to see Panamaxes between 3,000 to 5,000 TEU being displaced by the new larger ships in the longer routes. At the same time though, some of these ships are cascading them to routes recently served by the 1,000 to 3,000 TEU ships. Turning to slide 11, the world economy has not changed much since the fourth quarter of 2014 with volatility still an ongoing issue. Europe pursues quantitative easing to avoid deflation but certain uncertainties globally remain. As always, there are positive and negative sides. While oil prices continue to remain low helping consumer demand grow as well as oil import dependent economies. A strong dollar and not so strong U.S. growth could delay rate increases by the thread. This is generally good news for the stock market but more complicated for shipping. Anyway, an increase should be minimal and gradual as rates should remain at historically low levels for a while longer. We continued to have freights and the Chinese government can do what it takes to reduce probabilities in its economy and avoid any further drop to its all regular used expected growth rates. On the other hand, India is expected to continue growing strongly. QA in the Eurozone should stimulate growth, especially if a Greek default is finally avoided. Geopolitical instability though continues, particularly in the Middle East and the Ukraine and this can determine the generally positive global economic improvements. Slight 12 shows expectations of world’s GDP according to the IMF and also shipping demand expected growth. Projected world’s GDP in 2015 and 2016 is still expected to be 3.5% and 3.8% respectively. No change from the previous quarter though lesser growth in the U.S. and Russia is counterbalanced by expected faster growth in India, Europe and Japan. While China is still expected by the IMF to grow by 6.8% in 2015, same as the last quarter, India is now projected to grow by 7.5%, surpassing China and the sizeable increase from the 6.3%, predicted by the IMF in the previous quarter. That can be seen in the bottom of slide 12. Clarksons’ projections point to drybulk growth of just 3.1% in 2015, which is less than the 3.4% expected last quarter. While the first quarter has seen negative demand growth mainly due to less, lower oil imports from China, the situation may improve if China’s stays closed to the 7% GDP growth as expected and India continues its strong recovery. Containership trade is a resilient and is still expected to grow by about 6.6%, slightly less than the 6.7% expected three months ago. Let’s turn to slide 13 to summarize our outlook for the drybulk sector. Market fundamentals for 2015 and ‘16 appear challenging. Any possible upside in the market during these two years relies on excessive demand recovery and excess scrapping. Scrapping is indeed moving in the right direction. Coupled with the low newbuilding borders, one can hope for a better market that’s further down the road. Two negatives though for the strong recoveries sometime through mid ’16 to mid ’17. But first, the slow-steaming seems to have reached its limits. Softening oil prices could even reverse this trend, although so far charterers are reluctant to increase speeds. Secondly, the increase in port efficiency which is not good, as it reduces number of ships needed. Turning to slide 14 to summarize our container market expectations. Demand prospects are expected to improve in ‘15 and ‘16 by 6% to 7%/ With no new incremental deliveries expected during this period, we expect the supply-demand balance slightly negative in ‘15 and in favor of demand in ‘16. The rates have firmed a lot in the first half of 2015, especially in the smaller sizes and expected to strengthen even more within 2016. Any softening within 2015 should be seasonal. Continuing ordering of mega vessels from the various alliances though, once again creates worries for the sector from 2017 onwards. Although currently the scheduled deliveries amounts to only 2% of the fleet in 2017, there is a fear this might increase further. The orderbook in the sub-Panamax sector seems to be very tight. However, different trading patterns and cascading had kept rates in that sector extremely low. Indications of a correction resulting in rate increases in our size of ships are evident in the last two to three months. Let’s turn to slide 16 to view our own drybulk employment schedule. Our drybulk coverage for 2015 currently stands at around 43% based on minimum durations and 65% based on maximum. It’s minimum for 2016. In an event, most of our ships, three out of five are all index based charters. So, we would benefit in the event of the month of the market recovery. Let’s turn to slide 17 to view our containership employment schedule. We currently have 44% coverage in 2015 based on minimum durations and the balanced 60% based on maximum. All our 10 vessels will come due for renewal in the rest of the year as we have continued to fix relatively short periods in anticipation of the market recovery. Now that we have seen it, we will probably fix some fleets for longer durations between one to three years. Please turn to slide 18. To review our bulk manager has continued to keep our costs very low. The graph in this space compares our daily cost excluding drydock expenses since 2008. Our daily costs per vessel for Q1 2015 was inline with our budget and similar to previous years. Overall our costs remain amongst the lowest of the public shipping companies. For the first quarter of 2015, our operational fleet utilization was 99.9% and our commercial fleet utilization was 94.7% as mentioned previously, mainly due to containerships, due to two containerships experiencing some idle time. Let's now turn to slide 19. The left side of the slide shows the evolution of time charter rates of Panamax drybulk ships and containers of 1700 TEUs since 2001. After several years when drybulk ships performed better than containerships, this has now reversed and containerships are now earning more than drybulk. The right hand side of slide 19 shows current asset values in relation to historical prices. Panamax prices are well below the average from 2000 to 2014, while containership prices are also still very weak despite of a increase from the all-time lows we have recently witnessed. We believe that we will see a gradual improvement over the next couple of years in the containership market, but for drybulk a significantly recovery would probably be a 2017 event. For the time being we are focused on implementing our significant newbuilding program and are examining ways to grow the company in a conservative way. We believe that our operating experience and established capital market presence allow us to consider and evaluate consolidation opportunities even in the regional vessels or fleet acquisitions in connection with the required financing. With that, I will pass the floor over to our CFO, Tasos Aslidis to take you through our financials in more detail.

Thank you very much, Aristides. Good morning from me as well ladies and gentlemen. As usual, I will now provide you with a brief overview of our financial results for the three months period ended March 31, 2015. For that let’s turn slide to 21, and take first a look at our results for the quarter in comparison to the same period of last year. I will repeat here some of the same figures that Aristides gave you in the beginning of the presentation. For the first quarter of 2015, we reported total net revenues of $8.2 million representing an about 14% decline of total net revenues of $9.5 million during the first quarter of 2014. We reported net loss for the period of $5.4 million and a net loss attributed to common shareholders of $5.8 million as compared to a net loss of $2.2 million to $2.5 million respectively for the first quarter of last year. As Aristides mentioned earlier, the difference between net loss and net loss attributable to common shareholders is $0.4 million of the dividends we paid to our Series B Preferred shares in the first quarter of 2015 and a similar amount $0.3 million in the first quarter of last year. This preferred dividend can be paid at our option either in cash or in kind, and we have elected to pay it in kind for the last five quarters. The results of the first quarter of 2015 include a total of $0.2 million of realized and unrealized loss on derivatives. Basic and diluted loss per share for the first quarter of 2015 was $0.10 compared to basic and diluted loss of $0.05 per share for the first quarter of 2014. Excluding the effect on the loss for the quarter of the realized and unrealized loss on derivatives, the adjusted loss per share for the quarter ended March 31, 2015, which have remained the same $0.10 per share basic and diluted compared to $0.05 per share basic and diluted for the same quarter of last year. Adjusted EBIDTA for the first quarter of 2015 was negative 1.8 million, down from positive 1 million achieved during the first quarter of 2014. Let’s now move to slide 22. In this slide we provide you with our fleet performance for the three months period ended March 31, 2015 again in comparison with the same period of last year. As usual, we have broken down our presentation of fleet utilization into commercial and operational. For the first quarter of 2015, we reported 94.7% commercial utilization rate and 99.9% operational utilization rate as compared to 100% commercial and 99.8% operational for the same period of last year. Our utilization rate calculation does not include vessels on drydock or unscheduled repairs during the reporting periods. In the third quarter of 2015, we operated 15 vessels with the timecharter equivalent of about $6,500 per vessel per day, which represents about 17% decline compared to the timecharter equivalent of $7,817 per vessel per day that we achieved during the same period of last year, during which we operated 14 vessels. Overall, we believed, we continued to maintain one of the lowest operating cost structures amongst the public shipping companies. And I believe this is one of our competitive advantages in the business. Total operating expenses including management fees, G&A but excluding drydocking costs were $5,862 per vessel per day for the first quarter of this year as compared to $5,548 per vessel per day for the same period of 2014. Let’s now look at the bottom of this table to our daily cash flow breakeven levels presented here on a per vessel per day basis. For the first quarter of 2015, we reported an operating breakeven level, including loan repayments of $8,774 per vessel per day as compared to approximately $7,736 per vessels per day for the same period of last year. Let's now move to slide 23. This slide shows on the right hand side our cash flow breakeven levels that we expect to have over the next 12 months. And from the left side, we see our scheduled debt repayments including scheduled balloon repayments. As we can see from the chart on the left side of the slide, in 2015, we are scheduled to make $8.8 million of loan repayments and to make three balloon payments totaling $10.7 million. And I’m happy to report that we have already are in the process and received offer letters to refinance $8.4 million of this amount. Our loan repayments, balloon repayments over the next 12 months amount our loan repayments to $1,650 per vessel per day and our balloon repayments to about $2,500 per vessel per day. And you can see that on the right side of the slide. After making assumptions for the other elements of our cash flow breakeven level, like operating expenses, administrative costs, interests and drydocking expenses, we currently estimate that we have the cash flow breakeven level for the next 12 months of about $9,250 per vessel per day, excluding balloon repayments. If we include balloon repayments over that amount of about $2,500 per vessel per day, will be the increase on our cash flow breakeven level. However, as I mentioned earlier, more than -- or about 70% of this amount is in our letter in the process of refinanced and we expect to do so with the remaining. Let's now move to the next slide, slide 24 and this as usual let me give you some highlights from our balance sheet. As of March 31, 2015, our total cash was about $23.8 million and consistent of about $15.5 million of unrestricted cash and about $8.3 million of restricted funds and retention accounts. Our outstanding debt was $52.3 million and as a result, our debt to capitalization ratio was about 36% and our debt to market value of the fleet ratio was about 58%, and our net debt to market value of our fleet ratio was a little more than 30%. Again, we are happy to report that as of March 31, 2015, we were in compliance with all of our loan covenants. Concluding let me give you a word about our capital commitments. Our newbuilding investment program, involve -- which involved four vessels to ultramaxes and two Kamsarmaxes, requires us remaining total payments of $118 million, of which we have already paid $21 million. The remaining of the commitments will be financed with debt and equity. Regarding the debt portion, we have already secured loans for our two ultramaxes, which are to be delivered at the end of 2015 and beginning of 2016. We’re in process of raising debt for one of the Kamsarmaxes, which is to be delivered to the end of this year and we expect that to be a relatively straight forward process as the vessel has a four-year timecharter at $14,100 per day. And the fourth vessel, the second Kamsarmax will -- is to be delivered at the end of 2016 and will arrange the loan for that during next year. And with that, let me pass the floor back to Aristides to conclude.

Thank you, Tasios. I’d like to open the floor to any questions there might be.

Thank you [Operator Instruction] Your first question comes from the line of [Donald Bukten] [ph] of Wells Fargo. Please go ahead.

Good morning, gentlemen.

Hello, Donald. How are you?

Doing well, thank you.

Yeah.

My first question is a follow-up to your slides on rationalization measures in the drybulk market and I am -- we’ve already seen a sharp rise in scraping? But can you quantify other rationalization measures, are you seeing either operational or coal vessel laps and if so, are they widespread yet?

We are seeing mostly on the case side vessels, we have seen also some even coal layoffs but also ideal ships. And on the smaller ships we are not seeing that too much, they still manage to find employments, there might be a few waiting days for Panamaxes, Supramaxes and Handysize has manage -- still manage better than that.

Great. Thanks. And also if you are an owner and you are going to the yard currently, I mean, how far back can you push a vessel via slippage for say 2015 and 2016, is it just simply a month or two or yards negotiating longer than that now?

Well, it depends on the yard and on the circumstances. But generally for, I would say, listed companies like us would substance, your negotiating powers are not huge, you have a contract, you have to buy that and the easier way to obtain an extension is to order an additional ship and the push everything further down the road. So in essence you pay more but over a longer period of time you don’t want to do that, it’s not easy to get extensions for long durations. In our case I think what will happen is that both ships that are due for 2016 delivery will be delivered at beginning of 2016 and I think this is probably what will actually happen, although, we don’t have any such agreement. It’s probably what will happen and probably also the ship that is for delivering at the end of 2016 will be delivered at the end of 2017 -- at the beginning of 2017, sorry.

Okay. Appreciate it. That’s very helpful. And finally, just a last rationalization measure, I mean cancellations, are you seeing cancelations occurring yet? And are these cancelations being marketed to other owners if there are resale buyers out there, because I mean given the lack of S&P liquidity is very difficult to sort of ascertain what the sort of process going on with your cancellations is?

Yes. I agreed cancellations are not happening a lot. Resale, there is interest for resale both yours but also owners does not take delivery of the suits. They have all been the one, don’t have the capacity to do that. are marketing some ships to be sold, and that’s not too much happening.

Okay. And finally one last question on financing, the general drybulk market financing situation remains pretty murky. We are hearing that some traditional shipping banks have put drybulk financing efforts on hold with others actively seeking to reduce their exposure. How do you see this playing out as owners try to finance much of the late 2015 and more so 2016 order book?

I think financing for the good clients and the strong balance sheet is always going to be there. We always know that the bank let the people to donate the money. When they are afraid about the survivability of an owner, there will be very cautious in doing that. Also finance I think will continue to be there, but it will continue to be there as a percentage of the market value of the ship. So if one has secured 65% financing on a newbuild when it cost I don’t know 35 million and it cost today 28 million, you will get 65% finance on that, not on the initial 35 million.

Okay. Well, I appreciate your color on those questions, guys. Have a good day.

Thank you, Donald.

[Operator Instructions] Your next question comes from Paul Berghaus of Cornerstone Asset Management. Please go ahead. Mr. Berghaus, your line is open. Please go ahead.

Yes. I have just two questions. Can you comment on what you’re planning to do if anything in terms of maintaining your listing on NASDAQ and any possible share buyback or reverse split plans that you have for the future? That would be my first question.

Sure. If we plan to do a reverse split, we will definitely do this for us. It’s more of a technicality rather than something extremely important. So of course, we are going to comply with the requirements of the NASDAQ. We have the approval of the general assembly, so it’s matter of time to do it whenever we feel it’s appropriate to do it.

So are you intending to do a reverse split in order to get your price over 1? And it always seems to me reverse splits are kind of a test now for shareholders?

That is the only way to technically comply given the circumstances in the market where -- in parallel. So that is the easy way to comply with and obviously in parallel, we are trying to manage the combined weight that shows its value and the stock price increases. But if that doesn’t happen within the period that we will have to comply, we will do the reverse split.

I see. And I saw that one-time several months ago you had mentioned the possibility or at least raised the possibility of having a share buyback program by the company. Is that no longer in view because of your declined revenues and increasing expenses?

Yeah. It’s not happening at this point because of the reasons that you stated. We have to take delivery of the newbuildings and we think that we need to preserve the company cost to enable us to take delivery of the ships. So it’s a time where people and company should be buying assets, buying ships rather than selling.

Okay. And then just one last question. Again, with declining revenues and increasing expenses and I know it’s been a tough-tough market for you all, can you give us any kind of color or perspective in terms of whether you believe we’ve reached the bottom of the trough in terms of the cycle and that the worst is behind and maybe some light at the end of the tunnel over the next six to nine months or is that still a premature view?

No. No. I think we are -- and of course, this is a forward-looking statement. But I think that we contained the market following the strong recovery. Charter rates have improved substantially. I don’t think it’s just a belief that it will go away. I think, ‘15 and ‘16 are going to be good years for the container market and that is going to definitely support us where 10 months of our 15 ships in the water are container ships at this point in time. So the containership market, we think is going to help us significantly during the next year or so. The drybulk, we are at rates where I don’t think charter rates can go lower. They are faithful but we will have to be patient there for probably around the year. But overall for Euroseas, I believe that we are over the trough at this point in time. We have to concentrate on growing the company and this is where the management focuses at this point.

Okay. Thank you very much. That does it for me.

Thank you.

Thank you, too.

Thank you. There appear to be no further questions on the phone lines. Please continue.

Okay. Thanks. If there is no more questions, let’s leave it here and there will be review again at the end of next quarter. Thank you.

Thanks everybody.

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect.