Aristides Pittas - Chairman and CEO Tasos Aslidis - CFO

Donald Bogden - Wells Fargo

Thank you for standing by ladies and gentlemen and welcome to the Euroseas’ Conference Call on the Third 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 also being recorded today Wednesday, 11 November 2015. Please be reminded that the company announced their results 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 the federal securities laws, matters discussed maybe 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 number two of the webcast presentation, which has the full forward-looking statement and the same statement was also included in the press release. Please take a moment to go through the whole statements and read it. I would now like to pass the floor to Pittas. Please go ahead, sir.

Thank you. Good morning and thank you for joining us today for our conference call. Together with me is Tasos Aslidis, our CFO. The purpose of today’s call is to discuss our financial results for the three and nine month period ended September 30, 2015. Let’s turn to slide three of our presentation for our financial results overview. Let’s start with our third quarter results. For the third quarter of 2015, we reported total net revenues of $11.3 million. Net loss for the period was $1.4 million, while net loss attributable to common shareholders was $1.8 million or $0.29 loss per share basic and diluted. The difference being the $0.4 million in dividends paid through our Series B preferred shareholders. Adjusted EBITDA for the third quarter 2015 was $2 million. Turning to our first nine months of 2015 financial highlights, we reported total net revenues of $28.9 million. Net loss for the period was $10.1 million, while net loss attributable to common shareholders was $11.3 million, or $1.92 loss per share basic and diluted. The difference of $1.2 million is the dividends paid to our Series B preferred shareholders. Adjusted EBITDA for the first nine months of 2015 was $0.1 million. Our CFO, Tasos Aslidis will go over our financials in more detail later on during the presentation. Please turn to slide four for a brief discussion on the funding of our fleet expansion and shareholder rights offering results. Our new building program constitutes of four ships, two Ultramaxes and two Kamsarmaxes, two different Chinese yards. The first three ships scheduled for delivery in the first half of 2016 and the second Kamsarmax in Q4 2016. We already started our first Kamsarmax for four years of $14,100 per day. To-date we have paid $26.3 million to the yards with about $94 million remaining to be paid. We have already arranged finance for the two Ultramaxes at 60%-65% of market values, which should equate to around $30 million in total. And we are currently discussing the finance of the first Kamsarmax, which will be the first ship we will be taking delivery of in January 2016. Having received quote from atleast three banks, we are close to finalizing a deal to the level of $16 million to $17 million. The second Kamsarmax because it’s for delivery a year from today in November 2016, we are in no hurry to arrange the financing, but expect to do so much closer to the date. The remaining equity requirements will be covered through existing cash some selected balloon re-financing and possible sales of some of our elder ships. Our rights offering was completed on September 17, 2015 and shareholders subscribed for 2,343,335 of common stock at a price of $4.50 per share for gross proceeds of $10.55 million. Overall participation of close to 55% was considered satisfactory amidst a very challenging stock market and shipping market environment. The founding shareholder, Friends Investment Company, contributed slightly more than half of the total amount. Please turn to slide five to discuss our operational highlight. Over the last three months the containership feeder market gave up most of the gains in charter rates it had achieved in the first six months of the year, while the drybulk market remained weak. We were fortunate to renew several of our containership vessel charters at higher rates, which has positively influenced our third quarter results, but Q4 ‘15 and specially Q1 ‘16 will be more challenging. Nevertheless our strategy remains focused on navigating through the low market with shorter term charters in both sectors and be positioned appropriately to capitalize in the inevitable market recovery. One containership vessel, the Marinos has been idle since August and is currently looking for employment. As this is one of our least commercial vessels we have also put that into the market for sale and will proceed to do so unless we manage to find some employment in the meantime. On the dry bulk front the Monica P was fixed for 30 days at $5,500 per day and thereafter enter some employment for about 35 days at the lump sum of $670,000 a day which equates to about $6,400 per day. While the Eirini was extended for 11 to 15 months at the index related charter base of the BPI. During this period two of our vessels the Ninos and Manolis underwent their scheduled drydock. In October the containership Tiger Bridge that was due for its fifth special survey was sold for scrap for net proceeds of $2.7 million. The vessel was delivered the last week to the scrappers. On slide six, you will find our current fleet that includes the four new building drybulk vessels and the vessels in the water. In total we will have 18 vessels including nine drybulk vessels and nine container vessels. On slide seven, you can see the Euromar fleet, our joint venture with Eton Park and Rhone Capital. Euromar has a fleet of eight intermediate and two handy size container vessels between 1,700 and 3,100 teu. And one post Panamax vessel of 5,600 teu. Euroseas owns 14% of this venture and holds about $3 million in preferred equity and has a further $4 million commitment to be invested as preferred equity as well at Euromar’s option. Euromar’s current cash position is about $20.5 million. Let’s move to slide nine for a brief overview of the market. Starting with bulkers, weakness in the BDI continued in Q3 and on into Q4 as the index moved from 794 points on July 1st to 628 points on November 9th, having peaked at 1,222 points on August 5, 2015. In detail Daily Cape spot rates averaged $12,650 in Q3, Panamax $7,543 and Supramax $8,370, but all subsequently have dropped to $6,231 for Capes, $4,706 for drybulk and $5,874 per day for Supramax respectively. One year TC rates fluctuated very little during Q3, Capes from $13,900 per day in July to $12,700 per day in September, Panamaxes from $8,000 per day to $8,200 per day in September and Supramaxes from $7,800 per day in July to $8,200 per day in September. However there has been a substantial drop in Q4 and recent one year time charter rates stand at about $9,250 per day for Capes, $7,000 for Panamaxes and $7,000 for Supramaxes. During this period secondhand prices declined to 25 year lows dropping by about 15%. While no new building orders were placed due to the weak market there were a few re-sales by owners who did not have capacity to pay for them or yards which have taken them over. These re-sales are at 5% to 10% lower levels compared to last June. For Containership, time charter rates in Q3 dropped across all sizes and average by about 20%, although the drop was less for vessels below 4,250 teu. Rates have dropped further by about 15% in October. Secondhand prices remained stable with signs of softening and new building prices were stable. The idle fleet rose from about 228,000 teu in mid-June to about 934,000 teu as of October 19th. Increases were recorded across all sizes. Turning to slide 10, you can view the drybulk age profile and delivery schedule. The delivery schedule for drybulk vessels in the beginning of 2015 stood at the significant 11.3% of the fleet for the full year and of course was dominated by the larger vessels. It’s always very difficult to quantify how much of the order book will actually get delivered. Now seems that at least 35% of this order book will not get delivered due to cancellations, conversions or slippage. This is the same percentage as we saw last year. For 2016, the order book stands at 7.9%, but dropped significantly in 2017 to 2.1%. This is the only bright spot we currently see in the sector. Turn to slide 11, the containers delivery schedule at the beginning of 2015 stood at 10.4% and again was dominated by the larger vessels. Here again cancellations and slippages will change the original estimates. For 2016, the order book stands at a low level of 6.4%, which gives ground for optimism, especially as no new orders can be placed to be delivered before 2017. For 2017, the order book is also currently relatively low at 5.8%. At the beginning of the year, though this number was under 2%, but unfortunately many liner orders for big vessels competing for optimal slot size have pushed this number to the current levels. Hopefully, they’re retreating the market will deter the companies from placing new orders and even incentivize them to pre-agreed orders as we recently saw Maersk do with some options they had retained. The great majority of the order book is for large ships, but cascading is still happening. We have seen and we continue to see Panamaxes between 3,000 teu to 5,000 teu being displaced by the new larger ships in the longer routes. At the same time though, some of these ships cascaded down to routes that were served by the 1,000 teu to 3,000 teu ships. However, we have lately seen a stabilization of this process, as we have seen cheaper oil and size restrictions putting a brake on it. Please turn to Slide 12, the world economy has not changed much in 2015. While the U.S. is the growth engine of the world its economy has not been proving strong enough to pull the whole world behind it. While the Eurozone is slowly strengthening global uncertainties also remain. On the positive front, we continue to have low oil prices which is great for consumers. The much anticipated fed rates hike has not happened yet due to stock market jitters and worries of economic growth in the emerging markets. In the Eurozone the commitment to QE continues to reduce the capability of deflation. Graccident has been averted for now at least. The Iran nuclear deal moves a significant tension factor in the Middle East and opens up growth opportunities. China seems to be avoiding a hard landing. On the negative front though there are quite a few as well. Now that Russia plays a more active role in the Middle East it is increasing geopolitical instability. Worldwide financial volatility continues to rise as a strong US dollar is a headwind for emerging markets which do not see the full extent of the oil price decline. And the Fed is continuing to confuse markets regarding the timing of the tightening cycle. If the Fed raise rates in December it will obviously hurt the markets that have benefited from the low rates and this of course may further reduce global GDP. Emerging market growth has been led by India which should further benefit from policy reforms and increased investments. But large deviations amongst the group exists. Low commodity prices hit commodity producers like Brazil and does mention the Fed rates hike might change this further as costlier funding will hit the most indebted nations’ hardest. Nevertheless, growth is expected to remain high in emerging Asia, but lower than expected a year ago. Slide 13 shows expectations of world GDP according to IMF and also shipping demand growth. Projected world GDP in 2015 and 2016 is expected to be 3.1% and 3.6% respectively. Both 2015 and 2016 expectations have been revised downwards by 0.2% from the previous quarter and just recently the OECD have reduced its growth forecast a bit further. China is still expected by the IMF to grow by 6.8% in 2015 same as last quarter and still at the healthy level, while India is projected by the IMF to grow by 7.3% in 2015, which is slightly lower than the previous quarter by 0.2%. The U.S. is projected a slightly higher growth of 2.6% this quarter whilst Brazil now is expected to have 3% negative growth in 2015, down from the early projected negative growth of 1.5%. And also Russia has much lower projections currently at 3.8% from negative 3.4% in the previous quarter. For 2016 the IMF expects a continued slight improvement in the developed world. A reversal of the declining trend in Russia and Brazil and only China continuing to grow at a lesser rate than in 2015, 6.3% in 2016 compared to 6.8% for 2015. 2017 should overall be a slightly better year with even Brazil and Russia returning to positive growth. As can be seen in the bottom slide 12, Clarkson’s projections points to drybulk growth of zero in 2015. This has not been seen before post-2001, when China entered the World Trade Organization except immediately following the financial crisis in 2009. Containership trade is also showing less growth from what was expected during the previous quarter. Growth of 3.7%, which is down from 5.2% in the previous quarter. This is also the lowest growth rate we have seen since 2001 in this trade except 2009. We even expect that at the end of the year results will be even worse for containership growth. From those levels and with the global economy being projected to grow at a faster pace in 2016 and 2017 is only natural that we should see trade grow during the following two years. Let’s turn to slide 14 to summarize our outlook for the drybulk sector. Market fundamentals for 2016 appear very challenging, but should improve in 2017 as the order book is projected to be very low. Any possible upside in the market in 2016 currently relies on the demand recovery or excess scrapping. China remains the main source of drybulk trade growth although its economy seems to be adjusting to a new norm of a lower growth rate. Iron ore is a commodity that was hit the hardest this year due to the effort of the Chinese to switch for an infrastructure of developing economy to a more consumer oriented economy. Stabilization or increase in imports in 2016, and ‘17 would greatly help the markets. Chinese steel exports would provide some support to sub-Panamax tonnage. Chinese coal imports have slowed substantially for a second consecutive year, mainly due environmental concerns of falling gas and oil prices. The stabilization there would also provide much needed support. For 2016, there is upside potential for growing imports in China as well. India is still looking strong expecting coal trading to grow but less than expected a while ago. However its importance in drybulk trade continues to be modest compared to China as its reliance on externally provided raw materials is much less than Chinese. Increased efficiency of operations will further likely decrease demand for ships. Slow steaming seems to have reached its limits. Softening oil prices could reverse that trend, however so far charterers are reluctant to increase speeds due to the low charter rates. Also improving port efficiency is not good as it reduces the number of ships needed. Let’s turn to slide 15 to discuss the containership market. Here we expect the rates to improve during 2016 and ‘17 from current rates. As we expect the supply-demand balance in favor of demand. Rates should remain soft for the remaining of 2015 due to seasonal softening for our sizes, but to start increasing after Q1 2016 and after the redeployment of a big majority of the idle vessels. Continuing ordering of Mega vessels from the various alliances, if they happen, will create further worries for end 2017 onwards prospects. During 2015 about 2.1 million teu have been ordered, a very impressive number. The order book in the sub-Panamax sector seems to be very tight however different trading patterns and cascading will determine this market. Let’s turn to slide 17 to view our own drybulk employment schedule. Our drybulk coverage for 2015 currently stands at around 78% and for 2016 at 38%. As said previously we are continuing the practice of employing our vessels in short-term contracts or index link charters in anticipation of the market improvement. Let’s turn slide to 18 for our containership employment schedule. We currently have 56% coverage in ‘15 and 15% in ‘16. As with the drybulk vessels our strategy for our containerships has been to employ them on short-term employment in the anticipation of a market improvement. Please turn to slide 19. Eurobulk our manager is continuing to keep our cost low. Our daily cost per vessel for Q3 ‘15 was in line with our budget and similar to previous years. The graph in this page compares daily cost excluding drybulk cost -- drydock cost since 2008 with our peers. Overall our cost remain amongst the lowest of the public shipping companies. For the third quarter of 2015 our operational fleet utilization was 99.1% and our commercial fleet utilization 98%. Let’s now turn to slide 20. The left side of this slide shows the evolution of time charter rates of Panamax drybulk ships and containers of 1,700 teu since 2001. After a brief significant recovery that lasted just a few months container rates have dropped back to their lows and are only slightly higher to those of drybulk vessels which are at their lowest level of this ‘15 year period. The right hand side of the slide shows the current vessel values in relation historical prices. Both drybulk and containership prices remain below the average of the last 15 years and at or around the minimum price of the whole period. We continue to believe that we will see a gradual improvements starting over the next couple of years in both markets that will eventually boost prices closer to the historical averages. Assuming that the analyst of the IMF and the OECD are right in predicting and improving global GDP growth the containership market will probably lead the way by mid ‘16. Sometime in the second half of ‘16 or ‘17 we would expect the drybulk market to also start recovering and thus we will be able to capitalize on the four new building drybulk ships that we will take delivery in that year. 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 and nine months period ended September 30, 2015. For that, let’s turn first to slide 22 and take a look our results for the third quarter 2015 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 third quarter of 2015, we reported total net revenues of $11.3 million representing an 13.7% increase over total net revenues of $9.9 million during the third quarter of 2014. We reported net loss for the period of $1.39 million and a net loss attributable to common shareholders of $1.8 million as compared to net loss of $3.7 million and $4.1 million respectively for the third quarter of last year. As Aristides mentioned earlier, the difference between net loss and net loss attributable to common shareholders is $0.4 million in accounts for the dividends we paid to our Series B preferred shares in the third quarter of 2015. The preferred divided can be paid out at our option either in cash or in kind and we have elected to pay in kind for the last nine quarters. Basic and diluted loss per share attributable to common shareholders for the third quarter of 2015 was $0.29 compared to basic and diluted loss per share of $0.72 for the third quarter of last year. Excluding the effect on the loss attributable to common shareholders for the quarter of the derivatives, the adjusted net loss per share attributable to common shareholders for the quarter ended September 30, 2015 would have been $0.26 per share basic and diluted as compared to a net loss of $0.74 basic and diluted for the same quarter of last year. Adjusted EBITDA for the third quarter of 2015 was $2 million compared to negative $0.2 million during the third quarter of 2014. Let’s now turn to the first nine months period of 2015 and look at the highlights on the right side of the slide. For the first nine months of 2015, we reported total net revenues of $28.9 million, representing a 0.8% decrease over total net revenues of $29.1 million during the first nine months of 2014. We reported a net loss for the period of $10.1 million and a net loss attributable to common shareholders of $11.3 million as compared to a net loss of $11 million and $12 million respectively for the first nine months of 2014. Again the difference between the net loss and the net loss attributable to common shareholders is $1.2 million of dividends we paid to our Series B preferred shares. Basic and diluted loss per share attributable to common shareholders for this for the first nine months of 2015 was $1.92 compared to basic and diluted loss per share of $2.22 for the first nine months of 2014. Excluding the effect on the loss attributable to common shareholders of the realized and unrealized loss on derivatives. The adjusted net loss per share again attributable to common shareholders for the nine months period ended September 30, 2015 would have been $1.85 per share compared to a net loss of $2.22 per share for the same period of 2014. Adjusted EBITDA for the first nine months of 2015 was $0.1 million compared to negative $0.8 million achieved during the first nine months of last year. Let’s now move to slide 23. In this slide we’ll provide you our fleet performance for the three and nine months period ended September 30, 2015 in comparison to the same period of last year. As usual we have broken down our presentation our fleet utilization in commercial and operational. For the third quarter of this year we reported a 98% commercial utilization rate and 99.1% operational utilization rate as compared to 99.5% commercial and 100% operational for the same periods of last year. Our utilization rate calculation does not include vessels and drydock or in schedule repairs during the reporting periods. In the third quarter of 2015, we operated 15 vessels with a time charter equivalent of $8,929 per vessel per day, which represents a 24.6% increase compared to a time charter equivalent of $7,168 per vessel per day that we had during the same period of 2014, a period during which we also operated 15 vessels. Total operating expenses, including management fees, G&A, but excluding drydock costs were $5,846 per vessel per day for the third quarter of 2015 as compared to $6,136 per vessel per day for the same period of last year. Overall we believe we maintain one of the lowest operating cost structures among the public shipping companies and we think that this is one of our competitive advantages in the business. Let’s look now at the bottom of this table to our daily cash flow breakeven levels, presented here on a per vessel per day basis. For the third quarter of 2015, we reported an operating breakeven level including loan repayments, but before balloon payments of $8,213 per vessel per day as compared to $8,374 per vessels per day for the same period of last year. Now turning our attention to the first nine months of 2015, we reported 97.1% commercial utilization rate and 99.6% operational utilization rate as compared to 99.6% commercial and 99.8% operational for the same period of first nine months 2014. Once again, our utilization rate calculation does not include vessels in drydock or scheduled repairs. In the first nine months of 2015, we operated again 15 vessels with time charter equivalent rate of $7,529 per vessel per day, which represents 1.2% increase compared to time charter equivalent rate of $7,438 per vessel per day that we achieved during the same period of last year, during which we operated 14.47 vessels. Total operating expenses including management fees and G&A, but excluding drydock costs were $6,175 per vessel per day for the first nine months of this year as compared to $6,308 per vessel per day for the same period of 2014. Let’s now look again at the bottom of this table to our daily cash flow breakeven level for the period we discussed in the first nine months of 2015. You can see we reported an operating cash flow breakeven level, again including loan repayments, but not balloon repayments of $9,731 per vessel per day as compared to $10,087 per vessel per day for the first nine months of 2014. Let’s move to slide 24. This slide show on the right hand side our cash flow breakeven levels over the next 12 months and on the left side we can see our scheduled debt repayments, including scheduled balloon repayments over the next four years and including our assumed debt that we’re draw to finance the new buildings. As you can see from the chart on the left part of the slide, in 2015, we have scheduled to make $10.7 million of loan repayments and $9.3 million of balloon repayments. Of those balloon repayments we have refinanced $5 million earlier in the year, and we are about to complete documentation to refinance another $3.4 million of balloon repayments. Our loan repayments over the next 12 months amount to approximately $1,715 per vessel per day contribution to our cash flow breakeven level and you can see that figure in the last line of the table on the right part of the slide. If we make assumptions for the other elements of our breakeven level like the operating cost, general and administrative expenses, interest payments, drydocks then we come up with $8,900 per vessel per day as cash flow breakeven level not including balloon repayments. If we include the balloon repayments that would add another $1,750 per vessel per day to our breakeven, but again our intention and our record so far is that we’re trying to refinance those balloon repayments. So already we have refinance one third of those. Let’s move to the next slide, slide 25. As usual let me give you some highlights from our balance sheet. As of September 30, 2015 our total cash was about $26.5 million comprised of about $20.6 million of unrestricted cash and $5.9 million of restricted cash in retention Accounts. This amount includes funds that we raised in our recent shareholders right offering that Aristides mentioned earlier. Our outstanding debt as of September 30th amounted to $47.8 million and as a result our debt-to-capitalization ratio was about 27% and our debt-to-market value for our fleet ratio was about 60% and further our net debt that is debt minus costs to market value for our fleet ratio was about 26%. We are happy to report as of September 30, 2015 we were in compliance with all of our long covenants. A final word on our capital commitments. Again as mentioned earlier, our new building investment program requires us to pay about $118 million of funds over the periods of 2015 and 2016. We’ve already made payments for $26.4 million of our equity contribution for this new building program and the remaining capital expenditure of about $94 million we expect to finance with a combination of debt and equity. And with that let me turn the floor back to Aristides Pittas.

Thank you Tasos. Can we open up the floor for any questions you may have.

Of course we can. Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Wells Fargo from Donald Bogden. Your line is now open.

Good morning, guys. Is there a preference for a sale versus a new charter for the Marinos and if it was a sale what could you expect you get on a value basis there?

I think that the sale is probably is very close to scrap price, I would say. So, $2.3 million, $2.5 million, $2.8 million maximum. We have put the vessel in the market on Monday, we want to see how that goes, in the meantime we are looking to see if you can find the employment and we’ll take it from there, if we can’t find the employment, we will sell the vessel.

Got you, thanks. And my next question is the general question on I guess increasing balance sheet risk in the space heading into next year specifically within some of the private drybulk companies. Can you talk a bit to the posture that you think banks are taking as people try to renegotiate loans and people start to blow through covenants heading into 2016, I mean your own I guess funding gap with the newbuild program looks significantly more management than some of the public peers and that’s before even getting to some of the risk within private companies in the space, so I was just wondering if you could just kind of talk to that your general outlook on balance sheet risk?

Well I think that you are right there is a general problem within the industry especially the drybulk industry, right. Most private companies tend to be better capitalized than public companies. The balance sheets are usually stronger and the owners of those companies have the capacity to support their business. But obviously there will be cases where that is not the case and where banks will be anxious. For sure there is a lot of discussion happening between banks and owners at this stage and we have to see how it develops.

Got you, thanks for that. And then just follow-up on the containership market and to your comments on port efficiency, could you sort of quantify that where are these port improvements taking place? I mean as you think about port improvements versus I guess potential for delays within the completion of Panama canal I mean how do you think about sort of infrastructure developments impacting the containership market heading into next year?

We have already seen the last couple of years in Africa a significant improvement in the port infrastructure there and bigger ports being in operation with their own crane capacities, which have resulted in bigger gearless ships trading there. We are seeing the similar thing in Latin America plus also in the Indian Subcontinent. So ports are becoming more efficient and more capable of handling bigger vessels and this is what has actually helped the cascade process happen up to now. The new Panama Canal of course will also have an impact on the use of the bigger ships and will result in some of the traditional Panamax ships having to try and find the employment elsewhere.

Okay, appreciate that color guys. I have some housekeeping question that I’ll probably follow-up with you offline on. But thanks again.

Thank you, Donald.

Thank you.

Thank you, Mr. Bogden. [Operator Instructions] Gentlemen there appear to be no further request for questions. So I pass the floor back now to you for closing remarks.

Thank you all for attending our conference call for this quarter. We will be back to you next year with the end of the year results.

Thank you.

Thank you very much gentlemen and many thanks to our speakers today. That does conclude our conference. Thank you all for participating. You may now disconnect. Thank you Mr. Pittas and Mr. Aslidis.