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 First Quarter 2016 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'll be a presentation followed by a question-and-answer session [Operator Instructions]. I must advise you that the conference is being recorded today. 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'd 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. 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 statement and read it. And I'd now like to pass the floor to Mr. Pittas. Please go ahead, sir.

Good morning and thank you all 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 months ended March 31, 2016. Let's turn to slide three of our presentation for our financial results overview. For the first quarter of 2016, we reported total net revenues of $6.5 million. Net loss for the period was $2.8 million, while net loss attributable to common shareholders was $3.3 million. The difference being approximately $0.4 million in peak [ph] dividends paid through our Series B preferred shareholders. Adjusted net loss attributable to common shareholders for the period was $3.1 million or $0.38 loss per share basic and diluted. Adjusted EBITDA for the first quarter of 2016 was negative $0.1 million. As of March 31, 2016, our outstanding debt excluding the unamortized loan fees was about $55 million, versus restricted and non-restricted cash of about $12.6 million. We are in compliance with all our loan covenants subject to finalization of documentation of an in-principle agreement for the relaxation of loan-to-value covenants with certain of our banks, which is also combined with relaxation on installment repayments and balloon extensions. We estimate that about $3.5 million of repayments due this year and next will be pushed to the end of 2017. Please turn to slide four to discuss operational highlights. Whilst we have been focusing in managing our cash flow and liquidity due to the difficult markets, at the same time we've been trying to take advantage of this poor market and renewing our fleet most optimally. We are looking for opportunities to replace our older vessels with vessels several years younger with minimal incremental investment as prices for vessels older than 15 years, especially container ships, have been squeezed around scrap prices. In that context, we sold in May, our vessel M/V Captain Costas for scrap generating aggregated gross proceeds of about $2.8 million. We intend to replace the Captain Costas with a vessel several years younger, and we are looking for opportunities to that respect. In February, we took delivery of our first Kamsarmax new building, M/V Xenia, which commenced a four-year charter at the daily rate of $14,100, significantly above the present market levels. We expect to take delivery of two of the remaining vessels of our new building program, two Ultramaxes in 2016 according to the schedule provided by the yard. The remaining third vessel of our new building program, a Kamsarmax, is scheduled for 2018, postponing the initial delivery date, which was within 2016. In operating our current fleet, we have extended the employments for three of our containership vessels, and charted the two bulkers that came open. The Kuo Hsiung was extended for seven to eight months at $6,900, the Manolis P for 10 months to 12 months at $6,800, and the Evridiki G was extended for 24 months at $11,000. The latter is in line with our strategy of fixing longer term employment only in cases where rates achievable exceed $10,000. For our bulkers, the Monica P was last fixed on a 25-day trip at $4,350, and the Eleni P was fixed at $6,000 per day, till June. On slide five, you will find our fleet as of today that includes the three new building drybulk vessels and the vessels in the water; in total 14 vessels, eight drybulk and six containerships. On slide six you can see the Euromar fleet, our joint venture with Eton Park and Rhone Capital. Euromar has a fleet of seven intermediate and two handysize container vessels between 1,700 and 3,100 TEU, and one Post Panamax vessel of 5,600 TEU. We remind you that Euroseas owns 14% of this venture and holds 3.7 million in preferred equity, plus has a further 4 million commitment to be invested as preferred equity as well at Euromar's option. Euromar's cash position at the end of Q1 '16 was $20 million. Let's move to slide eight for a brief overview of the market. Starting with bulkers, weakness in the BDI continued in Q1 2016 as the index ended the quarter at 429 points from 473 points at the start of the year. However, the BDI reached 290 points in mid-February before starting to rise again. The index soared to 659 points in April 18, with rates rising across all sizes and currently stands at 624 points as of May 23. Daily Cape spot rates averaged $2,650 in Q1, Panamax averaged $3,000, and Supramax, $3,650. But subsequently, all have increased dramatically. As of May 23, 2006, Capes are at $6,900, Panamax at $4,900, and Supramax at $5,900. One-year's time charter rates have moved sideways. Capes from $6,450 to $6,550 in March, Panamaxes from $5,350 in January to $5,100 in March, and Supramax from $5,200 in January to $5,375 in March. As of May 23, time charter rates has stood a bit high for Capes at $7,000 a day, $5,750 for Panamaxes, and $5,000 per day for Supramaxes. Secondhand prices have declined to multi-year lows, dropping to scrap price levels for vessels over 15 years old. However, during the last two or three weeks, we have seen a rise in interest, and a rise in prices of about 10%. No new building orders were placed, but there were a few resales by owners who did not have capacity to pay for them or yards which have taken them over. These resales are at levels of approximately $17 million for Ultramaxes, $19 million for Kamsarmaxes, and $34 million for Capes. These levels are roughly 30% to 40% lower than the price at which the ships were originally ordered. For containerships, time charter rates in Q1 for vessels below 5,500 TEU dropped further, and are in the region of $5,000 to $7,000, with smaller vessels earning the most. The idle fleet rose from about 1.35 million TEU in mid-January to about 1.5 million TEU as of mid-March, and now stands at a slightly lower 1.38 million. The idle fleet represents a high 7% of the total fleet in TEU terms, and is high percentage-wise on the Panamax fleet. Here also, secondhand prices dropped even further, and 15-year-old vessels are valued at scrap price. New building prices were stable, however activity was practically nonexistent in the last quarter. Scrapping seems to be accelerating here amidst higher scrap prices seen lately. Turning to slide nine, you can review drybulk age profile and drybulk schedule. The delivery schedule for drybulk vessels in 2016 stands at a very significant 11.9% of the fleet for the full year, it's always very difficult to quantify how much of the order book will actually get delivered within a year. Since 2009, it's been around 35% on average of the scheduled order book that has not gotten delivered due to cancellations, conversions, or slippage. In 2015, we saw this number jump to 43%. This year, we believe that more than 50% of the order book will actually not be delivered. Also, scrapping should hit a multi-year high. For 2017, the drybulk order book stands at 3%, a significant drop from 2016. In all likelihood, this number will rise, not of course due to new orders, which we don't believe will materialize because of the depressed market, but due to slippage this year. 2018 is also significantly under ordered [ph] presently. Please turn to slide 10, the container delivery schedule at the beginning of 2016 stood at 6.8%, and was dominated by the larger vessels. Here again, cancellations and slippages will change the original estimate, but much less compared to the drybulk market, as the contracts for containerships are usually more robust due to the better overall quality of both owners and yards involved. For 2017 and 2018, the order book increased during last year as many liner orders for larger vessels competing for optimal slot size have pushed this number up, and now it stands at 6.3% and 4.9% respectively. Hopefully the retreating market will deter companies from placing new orders, and even incentivize them to delay or cancel pre-agreed orders, as we 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 to 5,000 TEU being displaced by the new larger ships in the longer routes. At the same time though, some of these ships have cascaded down to routes that were served by 1,000 to 3,000 TEU ships. However, we have lately seen a stabilization of this process with cheaper oil and size restrictions appearing to be putting a break in the process. Please turn to slide 11, unfortunately the sentiment globally continue to disappoint. Worldwide and certain geopolitical and economic trends amid adjustments in commodity and especially oil price levels, adjustments of China's economy, the resulting effects from commodity export economics. All these are creating a very volatile market. On the positive front, the low price of oil should eventually stimulate growth with an increasing consumer demand. Growth in the Eurozone has been revised upwards, and growth in emerging markets are expected to be slightly higher this year than in 2015. The Iran nuclear deal removes a significant tension factor in the Middle East, and opens up further growth opportunities, as we have already seen. China seems to be avoiding a hard landing. In addition to these relatively positives though, we have quite a few negatives as well. The strong USD is definitely a headwind for emerging markets, which did not see the full extent of the oil price decline. The Fed's rate hike and the new anticipated one within the year, the renminbi's devaluation, the confusion of the Chinese stock market rules and performance are all causing a global rise in risk aversion. On the longer term negative, we also view the aging populations globally, which reduce productive capacity, and create problems to pension systems. Growth is expected to remain high in emerging Asia, but will be lower than expected a year ago. While India's benefit from policy reforms and increased investment, costlier funding will hit the most indebted nations hardest. Finally, political uncertainty in Brazil, and the impact of low oil prices in the Middle East are continuous concerns. Slide 12 show expectations of world GDP according to the IMF, and also shipping demand growth. Projected world GDP in 2016 is expected to be 3.2%, revised downwards by 0.2% from the previous quarter. China is expected by the IMF to grow by a healthy 6.5% in 2016, a 0.2% increase from the last quarter. And India is still projected to grow by a strong 7.5%, same as the previous quarter. The U.S. is now projected a slightly lower growth of 2.4% from 2.6% in the previous quarter, while Brazil is now expected to have 3.8% negative growth in '16, down from the early projected negative growth of 3.5%. Also, Russia has lower projections currently, at negative 1.8% from negative 1% in the previous quarter. We currently believe drybulk growth will be 1% in '16, following 0% growth in '15. The 1% growth in 2016 is projected to be slightly more than the 0.8% estimate of the previous quarter. Containership trade is showing slightly more growth from what was expected during the previous quarter at 4.1% from 4%. For 2017, global growth is expected to be stronger than this year, at 3.5%, though slightly lower than the 3.6% initially projected. If that happens, drybulk and container trade should be slightly stronger too. Let's hope these projections materialize. The last four years indicate, though, that actual worldwide GDP has always lagged the IMF projections at the beginning of the respective year, by between 0.1% to 0.5%. Let's turn to slide 13 to summarize our outlook for the drybulk sector. Market fundamentals for 2016, after the worst quarter in drybulk shipping ever, appear to be improving amidst record scrapping and better-than-expected demand, especially for iron ore, but also South American grains. If demand picks up in 2017, and half of the slipped tonnage of 2016 gets cancelled, the market should be better in 2017. China remains the main source of drybulk trade growth although its economy seems to be adjusting to a new norm over lower growth rate and the change of focus towards consumption. Iron ore imports is the commodity with the greatest prospects despite the slower steel production. The Chinese government has announced plans to limit steel production by shutting down excess capacity of 100-150 million tons annually and shutting down uneconomical iron ore mines. It also plans to shut down coal mines of about 500 million tons capacity annually within the next three-five years. This news could be counterbalanced by increased Iron Ore and Coal imports due to the shutdown of local uneconomical mines. So far this year this looks as if it is happening as a record Iron Ore Imports into China were recorded in Q1 2016 6% rise year-over-year. Also from China, solid grain imports and steel exports give great support to sub-Panamax tonnage. On the other hand, India is still looking strong and coal trading will grow but this will be less than expected a while ago as the Indian government is aiming for self sufficiency by developing domestic mines. This is bound to eventually happen. Let's turn to slide 14, to discuss the containers market. Here we expect demand to continue growing during 2016, however with the lowest growth rate ever recorded. The container industry has entered the maturing stage and growth rates of a growing industry of the past decades are not there anymore. We expect a supply/demand balance marginally in favor of supply in 2016 and 2017. The oversupply will be in the larger vessels but there is some hope for smaller vessels where new supply is lesser than respective scrapping and trade growth. Developing trading patterns and cascading will determine the smaller vessels market. For the time being ordering has halted but any continuing strategic ordering of Mega vessels from the various alliances, if they happen, will create further worries for 2018 onwards. The opening of the new Panama Canal in late July is expected to open new trading patterns and introduction of very large containerships in the USA trades. Withdrawals of Panamax and smaller post Panamax vessels from those trades are expected, creating further uncertainties. Let's turn to slide 16, to view around drybulk employment schedule. Our drybulk coverage for 2016 currently stands at around 48%. We are continuing the practice of employing our vessels in short term contracts or index linked charters in expectation of the market improvement. Let's turn to slide 17 for our containership employment schedule. We currently have about 64% coverage in 2016. As with our drybulk vessels a strategy for our containerships has been to employ them on short term employment in the anticipation of the market improvement except where we can earn more than $10,000 per day as if the availability with high refund capacity we're seriously sought after by various charterers. Please turn to slide 18. Eurobulk our manager is continuing to keep our costs low. Our daily costs per vessel for Q1 '16 was in line with our budget and similar to previous years. The graph in this page compares daily costs excluding drydock since 2008 with our peers. Overall, our cost remains amongst the lowest of the public shipping companies. For the first quarter of 2016, our operational fleet utilization was a perfect 100% and our commercial fleet utilization 93.7%. Let's now turn to slide 19. 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. Container rates are approaching lows last seen in 2010 and drybulk vessels are at all-time lows. The right hand side of the slide shows the current vessels values in relation to historical prices. Both drybulk and containership prices are at the lowest levels since in the last 15 years. While shorter term market dynamics may result in even lower prices as many owners are forced to sell either voluntarily due to liquidity issues or by the banks, we believe that we will see a fast improvement once people start to see some light at the end of the tunnel as already these valuations do not reflect the long-term revenue capacity of vessels. Assuming that the analyst of IMF are right in predicting slightly stronger global GDP growth in 2017, we should be on track for market improvements in both markets once the current big order books get depleted within the next couple of years; provided of course the industry doesn't shoot itself to -- on the leg again by starting to re-order new ships. And with that I want to pass the floor over to our CFO Tasos Aslidis to take you through our current financials in more detail. Tasos, please go ahead.

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 ended March 31, 2016. For that, let's turn first to slide 21 and take a look at our results for the first quarter of 2016 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. The results of the first quarter of 2016 reflect the continued depressed state of the drybulk containership markets. For the period we reported we reported total net revenues of $6.5 million representing a 20% decrease over total net revenues of $8.2 million that we had during the first quarter of last year. We reported net loss for the period of $2.8 million and a net loss attributable to common shareholders of $3.3 million as compared to net loss of $5.4 million and $5.8 million respectively for the first quarter of 2015. 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 first quarter of 2016. This preferred divided can be paid out at our option either in cash or in kind and we have elected to pay it in kind for the last 9 quarters. Basic and diluted loss per share for the first quarter of 2016 was $0.4 compared to basic and diluted loss per share of $1 for the first quarter of 2015. Excluding the effect of the unrealized and realized loss on derivatives the adjusted loss per share for the quarter ended March 31, 2016 would have been $0.38 per share basic and diluted compared to a loss of $0.97 per share basic and diluted for the same quarter of last year. Adjusted EBITDA for the first quarter of 2016 was negative $0.1 million as compared to negative $1.8 million that we had during the first quarter of last year. Let's now move to slide 22. In this slide we will provide you as usual with our fleet performance for the three month period ended March 31, 2016, again in comparison to the same period of last year. As usual again we have broken down our presentation of fleet utilization in commercial and operational. Thus for the first quarter of this year we reported 93.7% commercial utilization rate, a 100% operational utilization rate as compared to 94.7% commercial and 99.9% operational for the same period of last year. Our utilization rate calculation, I want to remind you, does not include vessels and drybulk or in schedule repair during the reporting period. In the first quarter of this year, we operated in average of 11.54 vessels, and on average it's a time charter equivalent rate of $6,565 per day, representing about 1% lower rate compared -- I want to say, higher rate compared to the time charter equivalent of 6,500 per vessel per day that we had during the same period of 2015. In period, during weeks, we operated 15 vessels. Total operating expenses, including management fees, G&A, but excluding drybulking cost were $6,130 per vessel per day for the first quarter of 2016, as compared to $6,542 per vessel per day for the same period of last year; a decline of approximately 6%. Overall, we believe we'll maintain one of the lowest operating cost structures amongst 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 the per vessel per day basis. For the first quarter of 2016, we reported an operating cash flow breakeven level, including loan repayments, but before any balloon payments of $8,253 per vessel per day, as compared to $8,774 per vessel per day during the same period of 2015. Let's now move to slide 23. This slide shows on the right-hand side, our cash flow breakeven levels over the next 12 months. On the left side, we can see our scheduled debt repayments, including scheduled balloon payments over the next five years, and also including -- which includes our current debt and our assumed debt, that is the debt we expect to draw to finance our new buildings. As you can see from the chart on the left part of the slide, we have successfully refinanced all of our $10.7 million balloons that were due in 2015, as well as a $3 million balloon payment that was due in the first quarter of this year. As of today, we have only a $6.4 million balloon during the fourth quarter of 2016 that we plan to refinance within the course of the year. Our loan repayments over the next 12 months amount to approximately $1,800 per vessel per day contribution to our cash flow breakeven, and you can see those figures in the last line of the table on the right part of the slide. This figure excludes total balloon payments, as I mentioned, of 6.4 million during 2016, and it also excludes the other $3 million of balloon that we, as I mentioned, we refinanced this year. If we make assumptions for the other elements of our cash flow breakeven level, like the operating costs, G&A expenses, interest payments, drybulking expenses, then we come up with $9,200 per vessel per day as our cash flow breakeven level for the next 12 months, not including any balloon repayments. Also, I'd like to mention here that we have agreed with one of our banks to restructure the repayments of portion of our debt until the end of 2017, and relax that in covenants including the loan to value covenant. The effect of this restructuring is not included in the figures of this slide, and it will reduce our loan repayments over the next 12 months by more than $2.5 million or about $500 per vessel per day, reducing the cash flow breakeven level to around $8,700 per vessel per day for the next 12 months. Let's now move to the next slide, slide 24. And as usual, let me give you in this slide some highlights from our balance sheet before I conclude. As of March 31, 2016, our unrestricted cash was about 12.6 million, comprised of about 3.1 million of unrestricted cash and 9.5 million of restricted funds. Our outstanding debt, excluding unamortized loan fees as of March 31, 2016, stood at $55 million, and as a result, our debt-to-capitalization ratio was about 31%, and our net-debt-to-market-value for our fleet ratio was about 62%. A final word on our capital commitments; our new building program requires us to pay about $84 million of funds over the period of the construction of the vessels. We have already made payments of $23 million from our equity contribution towards the new building program. The remaining capital expenditure, we expect to finance with a combination of equity and debt, and in that respect we have secured debt financing of 62.5% and 65% respectively for the two vessels that are scheduled to be delivered in 2016. And with that, let me turn the floor back to Aristides.

Thank you, Tasos. If we have any questions, we would like to take them at this moment.

Thank you very much indeed, sir. [Operator Instructions] And you have a question from Wells Fargo from the line of Donald Bogden, and your line is now open, sir.

Good afternoon gentlemen, and apologies if you mentioned this because I was dropped, but what's your remaining CapEx for the new buildings in 2016 and 2017 respectively?

In 2016, we are to take delivery of, according to the schedule that Aristides has provided, of two Ultramaxes. For those, the remaining payments, we expect them to be about $17 million each.

$17 million each, okay, and in 2017 for the last remaining new building?

2018 –- it's currently scheduled at the first quarter of 2018. We have no new building deliveries in 2017.

Okay.

And for the two Ultramaxes that are coming later on this year, we have arranged financing already from banks.

Banks financing it…

Yes.

All right, thank you, that's it from me gentlemen.

Thanks, Donald.

Thank you very much, sir. And there appear to be no further requests for questions. I shall pass the floor back to you for closing remarks.

Thank you for listening to us in today's results. We will be contacting you again in three months time with the results of the second quarter, and hopefully a slightly better market. Thanks a lot.

Thanks everybody.

Thank you very much gentlemen. And with many thanks to both our speakers today, that does conclude the conference. Thank you all for participating. You may now disconnect. Thank you so much gentlemen.

Thank you.

Thank you. Bye-bye.