Aristides Pittas - Chairman and CEO Tasos Aslidis - CFO

James Jang - The Maxim Group

Thank you for standing by ladies and gentlemen, and welcome to the Euroseas' Conference Call on the Second Quarter 2017 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 this 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 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. I kindly draw your attention to slide number 2 of the web cast presentation, which has the full forward-looking statements and the same statement was also included in the press release. Please take a moment to go through the whole statement and read it. I would 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 scheduled 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 six months ended June 30, 2017. Let's turn to slide 3 of our presentation for our financial results overview. The results of the second quarter of 2017 reflect the improving levels of the containership in dry bulk markets compared to the same period of 2016. Although charter rates peaked in early May, and have softened since, they remain at levels noticeably higher than the respective periods of last year. Net loss for the period was $1 million, while adjusted net loss attributable to common shareholders was $1.5 million or $0.13 loss per share basic and diluted. The difference is the $0.4 million of dividends from the Series D preferred shares. Net revenues were $10 million and adjusted EBITDA was $2 million. On the right hand side of slide 3, we have our first half 2016 results. Net loss for the period was $3.2 million, while adjusted net loss attributable to common shareholders was $4.6 million or $0.42 loss per share basic and diluted. The difference is the $0.9 million of dividends from the Series B preferred shares, and the $0.5 million gain on sale of vessel. Net revenues were $18.3 million and adjusted EBITDA was $2.2 million. Please turn to slide 4 to discuss our operational highlights for the quarter. We agreed to purchase and took delivery of M/V EM Astoria a feeder size containership vessel of 2,688 TEU built in 2004 from Euromar, with 100% bank financing and a 35% profit share agreement with the bank. The construction of our second Newbuilding Kamsarmax, a sister ship to our motor vessel Xenia, is proceeding as planned. The newbuilding is scheduled for delivery by June 2018. Regarding it's payment schedule, the second 10% installment is due in September 2017. The third 10% installment on or about February 2018, and the final installment of 70% delivery of the vessel expected by June 2018. There was no drydocking during the quarter, except Eirini P, which passed an in-water survey with a total cost of $80,000. Also, there were no commercial off-hire days during this quarter, and operational utilization was 99.8%. On slide 5, we provide our chart, the highlights during Q2 in 2017. Starting with our bulkers, the Monica P was fixed for about two to four months, at $10,000 per day. The Tasos was just fixed for voyage of about 90 days and about $9,100 per day. And the Pantelis was fixed for trip of about 20-25 days at $7,250 per day. For our containers, the Ninos was extended for 145-175 days, at $7,500 per day and the Kuo Hsiung, for a similar period at the same rate. The Aegean Express was extended at $6,500 per day for about two months. On slide 6, you will find our fleet as of today. In total, we have 15 vessels, seven drybulk vessels, including the newbuilding and eight containerships. On slide 7, we have listed the Euromar fleet, the joint venture with Eton Park and Rhone Capital. Euromar has a fleet of six intermediates, two handysize container vessels, and one Post-Panamax vessels of 5,600 TEUs. We remind you that, Euroseas owns 14% of this venture and all the preferred units. Let's move to slide 9 for a brief overview of the market. The BDI closed at the 1,297 points on March 31 and averaged 1,006 points during Q2 2017, after bottoming at 818 points on June 6, and ending up at 901 points at June 30. Currently, the BDI has recovered to 1,038 points as of August 8. Daily Cape spot rates averaged $12,043 per day in Q2, while Panamax spot rates averaged $8,800 per day and Supramax spot rates averaged $8,790 per day. They closed the quarter at $8,923, $8,746 and $ 8,571 per day, respectively. But currently, they stand at $13,804 for Capes, $9,367 for Panamaxes and $8,600 for Supramaxes as of August 8, 2017. One year time charter rates increased across all sizes. Capes, from $13,500 per day for the Q1 average to $14,960 for the Q2 average. Panamaxes from $9,200 per day for Q1 average to $10,200 per day for Q2 average. Supramaxes from $8,800 per day for Q1 to $9,400 per day for Q2 average. As of August 2017, time charter rates stood at about $14,700 per day for Capes, $10,400 per day for Panamaxes and $9,750 per day for Supramaxes. Second hand five year old vessel prices remained mostly stable during Q2, some downward bias, which appears to have reversed. As resale newbuilding vessel candidates have disappeared, a small number of new orders have emerged with 2019 and 2020 deliveries. Newbuilding prices for Chinese build are in the region of $24 million for Kamsarmax and Ultramax vessels. Year-to-date, the drybulk fleet has grown by about 2.5%. Please turn to slide 10 to discuss the containership market. Time charter rates in Q2 for feeder and intermediate size vessels ranging from 1,000 to 5,000 TEUs have all averaged higher, with rises varying from around 5% for the smaller sizes to 40% for the older Panamaxes. The 1,700 TEU geared vessel rose from an average of $6,400 in Q1 to close to $7,000 in Q2. The 2,500 TEU geared vessel from an average of $6,800 in Q1 to $8,900 in Q2. Average secondhand prices for older than 15 year old vessels have moved sideways between Q1 and Q2. However, the sentiment is positive and sellers seem to be on the stronger side. Newbuilding prices were stable. However, activity was minimal in the last quarter and concentrated mainly in smaller vessels, with mostly 2019 deliveries. The idle fleet dropped from about 967,000 TEUs in the beginning of April to about 536,000 TEU by June 26. However, most of these reductions came from the bigger sizes. As of the end of July, the idle fleet has dropped even further, to 473,000 TEU. Scrapping also decreased in Q2 versus Q1 from about 210,000 TEUs to just about 60,000 TEUS, amid the stronger market. Year-to-date, the fleet has grown by 1.3%. On slide 11, you can review the drybulk profile and order book delivery schedule. The delivery schedule for drybulk vessels in 2017 currently stands at 7.4% of the fleet and is dominated by the larger ships. However, slippage and cancellations continue to occur, and you could see the actual number of deliveries in 2017, significantly less than originally predicted. Overall, deliveries in 2017 should be the lowest over the last 10 years. The 2018 order book is even less, and if we have healthy scrapping, the actual fleet could grow less than 2% in 2018. Please turn to slide 12; the container delivery schedule at the beginning of 2017 stood at 8.3% and is still dominated by the larger vessels. Here again, cancellations and slippages will result in less deliveries than originally predicted. The great majority of the order book is still for large ships, but cascading continues to be happening, although to a lesser extent. We continue to see Panamaxes between 3,000 and 5,000 TEUs being displaced by the new larger ships and longer hours. Even more so, now that the new Panama Canal gate has been opened. At the same time, some Panamaxes are cascading down to [indiscernible] by 1,000 to 3,000 TEU vessels. However, cheaper oil and size restrictions appear to be putting a brake in this process. This bodes well for this fleet range, as we do not expect weakness fleet growth in this segment for the next couple of years. Please turn to slide 15, to have a brief discussion on the world economy, which is of course the driver of our business. Despite continuing anti-globalization pressures, a [indiscernible] strong showing on the U.S., European, Japanese and Chinese economies, provide support for trade growth. We have stronger than expected consumer confidence in the U.S., while investment pick up, infrastructure programs and tax cuts in the U.S. are still expected. And we also have stronger than expected growth in the U.K. and other developed economies, while rising commodity prices are boosting growth in commodity exporting countries. Most major stock markets are close to five year highs and prominently, the U.S. keeps achieving new all time highs. Finally, the result in France, supports a more integrated European Union. On the negative front, we have the revived U.S.-Russia tension, and quite a number of geopolitical hotspots, including North Korea missile ambitions, Venezuela's near collapse, effects of Turkish definition of democracy on its economy and the ongoing war in Syria and the Middle East. On the purely financial front, bank viability in Europe and protectionist policy fears in the U.S. continue to pose a possible threat to the ongoing strong recovery. Slide 14 shows expectations of world's GDP growth according to the IMF and also shipping demand growth. Projected world GDP in 2017 is now expected to be 3.5%, a 0.1% increase from the previous quarter. China is expected by the IMF to grow by a healthy 6.6%, slightly up from the previous quarter of 6.5%. India is projected to grow by 7.2%, the same strong level as in the previous quarter. Also the U.S. is still projected to grow by 2.3% and Brazil is expected to have the same 0.2% growth in 2017, as during the previous quarter. Russia is now expected to do slightly better than the previous quarter estimate, at 1.4% growth instead of 1.1%. Turning on to shipping, drybulk growth according to Clarkson's is projected to grow by 3.5%, up 1% from the previous quarter. Also containership trade according to Clarkson's, show slightly more growth on the previous quarter at 4.8% from 4.3% previously. Let's turn to slide 15 to summarize our outlook for the drybulk sector. Market fundamentals for 2017 so far indicate robust demand and a depleting order book for the sector. We expect 2017 to average significantly higher than 2016. However, the early overheating of the market, makes it difficult to repeat the year-to-date highs. For 2018, we expect small further improvements in the demand-supply balance. Demand looks firm, as just said. However, uncertainty is still high with developments in China continuing to be in the forefront. China remains the main source of drybulk trade growth, although it's economy seems to be adjusting to the new norm of lower growth. Iron Ore [indiscernible], the largest contributor of drybulk trade growth have been strong, amidst a very firm steel demand and rising imports attributed mostly to local mine closures, with also very good end demand. Similar trends are witnessed in coal imports. China's transition to a more market oriented economy, is aiming to rationalize many loss-making businesses. This includes the sub-down of many uneconomical iron ore and coal mines, boosting imports and helping drybulk demand. This trend, which started developing in the last two to three years, is expected to continue. If more than 2% of new orders are placed for 2019 delivery, the supply-demand in 2019 will likely turn negative. However, this is based on the conservative assumption of a 2% demand growth. It's still too early to call exactly what will be happening in 2019. Let's turn to slide 16 for our outlook on the container market. We expect demand growth in 2017 to be better than 2016. The year-to-date data suggests even more promising growth than initially estimated. We expect the supply demand-balance in favor of demand, both in 2017 and in 2019. Despite the big order book of big vessels, massive and continuous cascading has moved the oversupply to the smaller vessels as well. Developing trading patterns and further cascading will determine the smaller vessels market in the future. For the time being, ordering has almost halted, only some small vessels have been ordered in the last quarter. But any continuing strategic order in the vessels from the various alliances, could create further worries 2019 onwards. The rapid absorption of the idle fleet, should it continue, will result in higher charter rates as well for vessels of our size. Let's now turn to slide 18 to view our drybulk employment schedule. Our drybulk coverage for 2017 currently stands at about 57%. We are continuing the practice of employing vessels on short term contracts or index charters, in the expectation of further market improvement. Slide 19 shows our containership employment schedule. We currently have about 68% coverage in 2017, and just as we have with our drybulk vessels, the strategy for our containerships has been to employ them on short term employments, in anticipation of the market improvement, except where we can earn more than $10,000 a day. Please turn to slide 20; Euro bulker managers are continuing to keep our costs low. Our daily cost per vessel for 2017 was in line with our budget and similar to previous years. The graph in the page compares daily costs, excluding drydocking, since 2008 with our peers. Overall, our cost remains amongst the lowest of the public shipping companies. For the second quarter of 2017, our operational fleet utilization was 99.8%, and our commercial fleet utilization was 100% as already mentioned. Let's turn to slide 21; the left side of the slide shows the evolution of time charter age of Panamax drybulk ships and containers of 1,700 TEU since 2001. Drybulk vessel rates have bounced back from their all time lows last year, but are still historically low. Despite the recent rise in rates of larger containerships, containers for vessels of our size are still at lows last seen in 2010. As discussed, the strengthening demand, coupled with a reduction in the idle fleet, could lead to a better market towards the end of the current quarter and Q4. The right hand side of the slide shows vessel values in relation to historical prices. Drybulk prices have moved above all time low values, which were established at the beginning of 2016, whereas containers are just starting to move away from their all time lows. We believe the current valuation, still do not reflect the long term revenue capacity of the vessels in either sector, but is specially shown on the container side. Assuming that the analysts of IMF are right in predicting slightly stronger global GDP growth in 2017, we should be on market for market improvements in both markets, once the current order book gets delivered within the next year or so. Provided of course, that the industry does not shoot itself again in the foot, by starting to reorder new ships. With our balance sheet strengthened and our new order book streamlined, we will now focus in trying to take advantage of the still low points in the markets, to cautiously grow the company further. And 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 in every quarter, I will provide you with a brief overview of our financial statements and results for the three and six month periods ended June 30, 2017. For graphic, let's turn first to slide 23 and take a look at our results for the three month period ended June 30, 2017. For the second quarter of 2017, we reported total net revenues of $10 million, representing a 36.4% increase over total net revenues of $7.3 million during the second quarter of last year. We reported net loss for the period of $1 million, and then net loss attributable to common shareholders of $1.5 million, as compared to a net loss of $19 million and net loss attributable to common shareholders of $19.6 million respectively for the same period of 2016. Please note, that the results for the second quarter of 2016, include amongst others, $1.4 million loss on termination of a newbuilding contract and a $14 million impairment charge on investment in joint venture, none of which incurred in the second quarter this year. As Aristides mentioned earlier, the difference between net loss and net loss attributable to common shareholders of $0.4 million, accounts for the dividends we pay to our Series B preferred shares in the second quarter of the year. This preferred dividend can be paid out at our option, even in cash or in kind, and we have elected to pay in kind for the last 14 quarters. Basic diluted loss per share attributable to common shareholders for the second quarter of 2017 was $0.13 compared to basic and diluted loss per share of $2.42 for the second quarter of 2016. Excluding the effect on the loss attributable to common shareholders for the quarter of the changing value of derivatives, the adapted net loss per share attributable to common shareholders for the quarter ended June 30, 2017, which have remained unchanged from $0.13 per share, basic and diluted, compared to adjusted net loss of $0.51 per share basic and diluted for the same quarter of last year, which adjustment, includes also, in addition to the changing value of derivatives, the loss of termination of a newbuilding contract, and the impairment of investment in joint venture. Adjusted EBITDA for the second quarter of 2017 was $2 million compared to a negative EBITDA of $0.9 million achieved during the second quarter of last year. Let's now turn to the right hands side of this slide, slide 23, to look at our first half results. For the first half of 2017, we reported total net revenues of $18.3 million, representing a 32% increase over total net revenues of $13.9 million, that we had during the first half of 2016, and that's a result of the increased average number of vessels and the increased average time charter rate equivalent with our vessel tariffs [ph]. We reported a net loss for the period of $3.2 million and a net loss attributable to common shareholders of $4.1 million, as compared to a net loss of $22 million and $22.9 million respectively for the first half of 2016. The results for the first half of 2017, include a $0.5 million gain on the sale of the vessel, as compared to a $0.2 million unrealized loss in derivatives, a $0.1 million realized loss in derivatives and a $0.1 million gain on the sale of our vessel for the same period of 2016, in addition of course to the loss under contract termination and the $14 million impairment. The difference between net loss and net loss attributable to common shareholders of $0.9 million accounts for the dividends we paid to our Series B preferred shares in the first half of 2017. Basic and diluted loss per share attributable to common shareholders for the first half of 2017 was $0.37 compared to basic and diluted loss per share of $2.82 for the first half of last year. Excluding the effect on the loss attributable to common shareholders for the first half of this year, of the changing value of derivatives, the adjusted net loss per share attributable to common shareholders, would have been $0.42 compared to a loss of $0.89 per share, basic and diluted for the same period of 2016. Again, adjusted for derivatives and the impairment and the loss on termination of a newbuilding contract. Adjusted EBITDA for the first half of 2017 was $2.2 million compared to a negative EBITDA of $1 million for the same period of 2016. Let's now move to slide 24; in this slide, we will provide you with our fleet performance for the three and six month periods ended June 30, 2017 and compare it with the same performance over the same periods of last years. Let's start with our three months ended June 30, 2017 and our fleet utilization rates, which as usual we have broken down into commercial and operational. Thus, for the second quarter of this year, we reported a 100% commercial utilization rate and 99.8% operational utilization rate, compared to 99.3% commercial and 99.3% operational utilization rate for the same period of last year. I want to remind you here, that our utilization rate calculation, does not include vessels in scheduled drydock, scheduled repairs or in lay-up during the reporting period. In the second quarter of this year, we operated 13.12 vessels and set the time charter equivalent rate to $8,191 per vessel per day representing a 13.5% increase compared with time charter equivalent of $7,213 per vessel per day that we achieved during the same period of 2016, a period during which we operated 11.44 vessels and dry bulk rates were at a historical low point. Total operating expenses, including management fees and general and administrative expenses, but excluding dry docking costs, were $5,984 per vessel per day for the second quarter of 2017 as compared to $6,065 per vessel per day for the same period, the second quarter of 2016, representing a decline of about 1.3%. As Aristides had mentioned earlier, overall, we believe we maintain one of the lowest operating cost structures amongst our public peers and we think this is one of our competitive advantages in the business. 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 second quarter of 2017, we reported an operating cash flow breakeven level, including loan repayments but before any balloon repayments or $7,598 per vessel per day, as compared to $8,918 per vessel per day, during the second quarter of 2016. Let's now look at our first half numbers; again, starting from our fleet utilization rates, broken down again in commercial and operational. For the first half of 2017, we reported a 98.1% commercial utilization rate and a 98.8% operational utilization rate, as compared to 99.2% commercial and 99.6% operational utilization rate for the same period of last year. Again, our utilization rate calculation does not include vessels in scheduled dry-docks, scheduled repairs or in layup. In the first half of this year, we operated an average of 13.25 vessels and had a time charter equivalent rate of $7,354 per vessel per day, representing an 14.2% increase compared to a time charter equivalent rate of $6,702 per vessel per day that we had during the same period of 2016, during which we operated 11.49 vessels and again, dry bulks were at historical low levels. Total operating expenses including management fees, general and administrative expenses, but again excluding dry docking cost were $5,835 per vessel per day for the first half of this year, compared to $6,097 per vessel per day for the same period of last year, representing a decline of about 4.3%. Looking again at the bottom of this table to our daily cash flow breakeven level presented for the first half, we see that we had a cash flow breakeven level of $7,375 per vessel per day, a number that includes loan repayments, but not include balloon repayments, and that compares to $8,462 per vessel per day, that we had in the first half of 2016. Let's now move to slide 25; this slide shows on the right hand side, our cash flow breakeven budget estimated for the next 12 months and on the left hand, our scheduled debt repayments, including scheduled balloon repayments over the next five years. As you can see, we have managed to improve our liquidity, by restructuring and refinancing some of our loans during 2016, which resulted in very low debt repayments during this year. Regarding balloon repayments, we made the $1.1 million balloon repayment, originally due in the fourth quarter of this year [indiscernible], one of our vessels, M/V Joanna, is now unencumbered. In 2018, we have $8.1 million of balloon repayments, while in 2019, we have balloon repayments of about $17 million due. Typically and so far, we have managed to refinance the biggest part of our balloon payments as they come due. The table [indiscernible] on this slide, does not include debt that we likely have to draw to finance the vessel that we have currently under construction, which is to be delivered by June 2018. Expressed in dollars per vessel per day, our loan repayments over the next 12 months amount to about $1,250 per vessel per day, contribution to our cash flow breakeven. You can see this number on the table on the right part of the slide. If we make assumptions above the rest of our operating items, such as operating expenses, G&A expenses, interest and dry dock expenses on a per vessel per day basis, we have another breakeven level of around $8,350 per vessel per day over the next 12 months. Again, without any balloon payments included, which is included at about $1,000 per vessel per day through our operating cash flow breakeven level for the period. Let's now turn to slide 26, for a discussion of our cash flow and net asset value sensitivity to market changes. Euroseas currently has about 50% of total available days for the 2017 and about 10% of total available days for 2018 committed at fixed rates, while the remaining 50% in 2017 and 90% of the available days in 2018 are either chartered at index linked rates or are to be chartered, and consequently are exposed and would benefit from market changes. Thus we are in a good position to take advantage of any market recovery, as we have been doing so far this year. At the same time, our low cash flow breakeven level that we discussed in the previous slides, provides us an extra cushion to absorb any market volatility, if it happens. You can see the sensitivity of our results to market developments in this table, at the bottom part of the slide, where specifically, we saw the effect on our earnings of $1,000 per day change in the market rates. In 2017, EBITDA market increases by $1,000 per vessel per day, it will contribute about $1.2 million to our bottom line, which would translate to about $0.11 per share. While in 2018, the same increase in daily rates, $1,000 per vessel per day, will translate to $4.4 million to our bottom line, which in turn would translate to about $0.39 per share. Similarly, if the values of our ships increase by $1 million each, that means that our 14 ships would increase in value by $14 million, which would translate to about $1.25 per share increase in our NAV, while when we get delivery of our 15th vessel, which is currently being built in 2018, and $1 million increase per vessel would result to an increase to our NAV per share of about $1.34. And with this, I would like to turn the floor back to Aristides to conclude the call and we can answer your questions.

Hello, we are ready to take any questions you may have.

[Operator Instructions]. And you do have a question from James Jang from The Maxim Group. James, your line is open.

Hey, good afternoon guys.

Good afternoon James.

Hey James. Hi.

So I just had a quick one about the feeder side. What have you seen in terms of activity in inquiries on the feeders? Have you been getting more or less, how does the outlook look for the rest of 2017 and 2018?

On the chartering side?

Yeah.

It has followed a similar path, I would say, to the drybulk generally. We saw an improvement leading up to April, May, a softening afterwards and we still haven't seen a significant strengthening yet, but we have seen the idle fleet go down, which is a good indication, and we hope that we will see a reversal of this slight of the consolidating downward trend we have seen in the last couple of months. We hope to see that reversing a little bit. But overall, the demand has been strong, and the supply is not increasing strongly. So we think that, if not this year, 2018 will be a still better year.

Okay. So segueing into that, so a number of the feeders, they come off charter, Q3, Q4. Are you planning to recharter those vessels when they will be delivered, or would you wait until 2018, when rates are supposed to get stronger?

No. Of course we will charter them, but we will charter them at -- for lower periods to smaller periods, aiming to charter them for longer periods, when we see time charter rates exceed $10,000 a day, which is something that we consider might happen within 2018.

Okay, great. And one final one, do you guys have any -- have you had any discussions internally about possibly adding more vessels into the fleet?

Sure. We are looking into that possibility and having some discussions. So definitely, the intention is to grow the fleet, yes.

Are they primarily focused on the Euromar fleet or outside vessels?

We are looking at both Euromar vessels, but also at vessels from the market.

Okay. Great. All right. That's all I had. Thanks guys.

Thanks a lot James. Thanks.

Thank you. [Operator Instructions]. There are no more questions sir. Please do continue. Thank you.

Thank you all for listening into this conference call, and we will be back in about three months time. Thanks.

Thanks everybody.

Thank you. Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you all for participating. You may all disconnect.