Aristides Pittas - Chairman & CEO Tasos Aslidis - CFO

James Jang - Maxim Group

Good afternoon. Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas Conference Call on the Second Quarter 2018 Financial Results. We have with us Mr. Aristides Pittas, Chairman and Chief Executive Officer; and Mr. Tasos Aslidis, Chief Financial Officer of the Company. [Operator Instructions] I must advise you that 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 2 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, now I would like to pass the floor to Mr. Tasos Aslidis. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me is Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the three and six month period ended June 30, 2018. Let's turn to Slide 3. During the second quarter of 2018, we achieved a significant milestone in executing our strategy by completing the spin-off of six of our drybulk vessels into EuroDry Ltd., a shipping company also listed on NASDAQ. We are pleased to see that our shareholders benefited by having the market value of their combined EuroDry and Euroseas holdings increase by more than 40% as a result of the spin-off. The combined price after the spin-off amounted to $3.32 per share compared to $2.24 per share immediately prior to the spin-off, a 48% gain. Euroseas is now the only U.S. listed mainly feeder container Company. We believe the feeder container sector will experience positive demand supply dynamics over the next couple of years, and the low order book and relatively elder fleet profile are expected to keep supply growth under control. At the same time, demand growth should be positively influenced by expected continuing economic growth in most regions of the world. Indeed, during the second quarter of 2018 the container ship market continued its recovery, and although rates have softened a bit since early July, they remain at levels that will allow us to produce profits for our shareholders. We remained focused on growing Euroseas to a significant publicly listed consolidated platform for the feeder container sector. We continuously evaluate investment opportunities of either individual vessels or fleets that could be accretive to our shareholders. Let's turn to Slide 4. The Euroseas fleet is comprised of 11 container vessels with a total cargo capacity of 25,500 TEU approximately. Let's turn to Slide 5, to have a quick look at the balance sheet of the new Euroseas. As of June 30, the Company has about $13 million of cash $31 million of debt, $18 million of preferred equity, and $4 million of book common equity. In reality, the actual NAV of the Company is significantly higher than the book equity implies, at about $26 million to $29 million or $2.4 to $2.6 per share as the market values of the Company vessels are significantly higher than the book values. During the very tough container market years of late 2015 to early 2017, we had been forced to write impairments on most of our vessels. However, with the recovery of the markets, values have been rising towards the historical averages, thus book values no longer reflect reality. The LTV ratio for the Company is about 42%, which further reflects the current strength of our balance sheet. Slide 6, shows the key items of our Q2 income statement. We had net revenues of $9.8 million, adjusted EBITDA of $2.4 million and net income to common shareholders of $1.8 million. This translates to earnings per share basic and diluted of $0.16 per share or adjusted earnings per share of $0.10 per share if we exclude the one-off gain from the sale of the Monica P. It should be noted that the quarter ended up being profitable despite the fact that one of the 11 company vessels, the EM Astoria, was out of service for about 75% of its available days. Moving to Slide 7, for our operational highlights. The Monica P, the only drybulk vessel that had been left in Euroseas was delivered to her new owners on June 25th, as planned. The only drydock we had in the second quarter was the Ninos, which commenced from June 22nd, and was delivered back to her charterers on August the 1st. Idle time included the Akinada Bridge, which was idle for about two days, waiting for employment, and additionally we had 66 technical off-hire days, practically all of which were attributed to the EM Astoria damage. The EM Astoria suffered propeller damage and lost a propeller blade towards the end of April. A new blade has been ordered but due to long delivery times the vessel is expected to be ready to resume its charter by mid September. The repair costs minus about $100,000 deductible are expected to be recovered by insurance, but the loss of hire during the idle period is not. Please turn to Slide 8. Eurobulk, our manager continues to keep our costs low. Our daily cost per vessel for the second quarter of 2018 was in line with our budget similar to previous years. The graph in the page compares daily costs excluding drydocking since 2008 with our peers. Overall, our costs remain among the lowest of the public shipping companies. For the second quarter of 2018, our operational fleet utilization was 93.9%, a major decline to our normal 99.5%. As discussed, this is due to the EM Astoria incident. Our commercial fleet utilization was 99.8%. Let's move to Slide 9, to view our employments chart. We have currently about 53% coverage for the remainder of 2018, we have been able to fix all our vessels at profitable rates and our strategy has been to accept the best rate possible for periods between 3 to 12 months, always keeping in mind to have the various ships opening up in a staggered fashion so as to minimize volatility, which can be significant in this market, but also to be able to take advantage of a still improving market. Slide 10, shows the Q2 container ship market highlights. Time charter rates in Q2 for feeder and intermediate size vessels ranging from 1000 TEU to 5000 TEU have all risen about 15% to 40% on average, with bigger increases in the above 4000 TEU sizes. The 1700 TEU geared vessel rose from an average of $9700 per day in Q1 to $10800 in Q2, and currently stands at $10400. The 2500 TEU geared vessel rose from an average of $9800 in Q1 to $11700 in Q2, and currently stands at around $12000. Average second hand prices for older than 15 year old vessels rose about 20% on average in Q2. However, for younger vessels of about 10 years old and younger, the rises were about 10% to 15%. Newbuilding prices also rose about $1.5 million to $2 million for vessels of 1700 TEU to 2500 TEU. The idle fleet was about 250,000 TEUs at the end of June, but has now increased to around 350,000 TEUs. Scraping was very slow in Q2, only 9,000 TEU was scraped amidst very firm scrap prices, but in anticipation of a better market, owners avoided scrapping their vessels. But our fleet grew by 4.1% year-to-date without accounting for idle vessels, reactivation, and idling. In July 2018, rates have declined a bit especially for larger ships between 4000 TEU to 8000 TEU. We can see in the first context corrections in a long time and these corrections are on average about 5% to 10% from the recent highs. Let's turn to Slide 11, the left side of the Slide shows the evolution of time charter rates for containers of 1700 TEU since 2001. Container rates for vessels of our size have recovered strongly from their all time lows, and are currently hovering close to their historical levels. The right hand side of the Slide shows vessel values in relation to historical prices. Container ship values are still below the historical values, and those are below their expected newbuild depreciated values. We believe the current valuation still does not reflect the long-term revenue capacity of the ships. Please turn to Slide 12, the IMF projected world GDP growth in 2018 is still expected to be 3.9% unchanged from the previous quarter despite the recent trade war fears. China is expected by the IMF to grow by a healthy 6.6% again unchanged from the previous quarter while India’s growth projection has been slightly lower to still very satisfactory level of 7.3%. The U.S. is projected to grow by 2.9%, the same as the previous quarter. Brazil is the only country which has been significantly downgraded from the previous quarter to 1.8% growth in 2018, this is 0.5% lower than the previous quarter estimate. Turning onto the container trade, according to Clarksons the trade is now projected to grow by 4.8% this year up 0.2% from the previous quarter estimate. Please turn to Slide 13, the container delivery schedule at the beginning of 2018 stood at 4.8% and is still dominated by the larger vessels. Here again cancelation of slippages will result in less deliveries then originally predicted and the order book drops a bit in 2019 to 4.5%. For the smaller feeder vessels where we are active, we can see that the order book looking forward is – smaller than the overall order book and it stands at around 10% all together. On to Slide 14, we expect the supply, demand balance to be slightly positive in 2018, this has already led to rates rising significantly especially for smaller vessels for which rates are around historical average levels. But the fundamentals for the sub-5,000 TEU vessels are actually better than for the other container fleets. Both the trade rate is increasing faster and also the deliveries are less than in the bigger ships. The order book for 2019 and 2020 is a low suggesting that 2019 can be a very good year if demand holds out. But of course lately there are increasing concerns of the trade war that the U.S. government seems to be triggering might result in lower demand for shipping especially if it escalates. On the other hand environmental regulations coming into effect in 2020 could result in further slow steaming which in turn will require more ships improve the demand supply balance and likely lead to high charter rates. I will now pass the floor to our CFO, Tasos Aslidis to go over our financial highlights.

Thank you very much, Aristides. Good morning from me ladies and gentlemen. I will take the next three slides to give you an overview of our financial results for the second quarter and first half of 2018 in comparison with same period of the previous year. Let’s look at Slide 16, for the second quarter of 2018 we reported total net revenues of $9.8 million representing an 85% increase over total net revenues of $5.3 million during the second quarter of 2017. This was the result of the increased average number of vessels we operated during the quarter and also the increased average time charter rate our vessels earned. We reported net income for the period of $2.1 million and net income attributable to common shareholders of $1.8 million as compared to a net loss of $0.8 million and a net loss attributable to common shareholders of $1.2 million respectively for the same period of 2017. The difference between net income and net income attributable to common shareholders accounts for the dividend we paid to our Series B preferred shares in the second quarter of this year. This preferred dividend can be paid out entirely either in cash or in kind, and we have elected to pay it in kind for the last 18 quarters. The results for the second quarter of 2018 includes a $1.3 million gains on sale of a vessel the Monica P as Aristides mentioned. Drydock expense for the quarter amounted to $0.4 million as one vessels underwent drydocking, depreciation expenses for the second quarter of 2018 amounted to $0.8 million compared to $1 million for the same period of last year. Although the average number of vessels increased, one vessels was held for sale during the second quarter 2018 and it did not contributed to depreciation charge and the new vessels acquired have lower average daily depreciation charge as a result of the lower acquisition cost and greater remaining useful life compared to the existing vessels. Vessel operating expenses were $5.3 million in the second quarter of 2018 as compared to $3.4 million for the second quarter of last year – mainly due to the increased average number of vessels we operated during the quarter. Other general and administrative expenses amounted to $6.63 million for the second quarter of 2018 marginally higher compared to the – marginally lower compared to the $0.66 million for the second quarter of 2017. Interest and other financing costs for the second quarter of this year amounted to $0.7 million compared to $0.4 million for last year. Our adjusted EBITDA for the second quarter of 2018 was $2.4 million compared to $0.6 million achieved during the second quarter of this year a four times increase. Basic and diluted earnings per share attributable to common shareholders for the second quarter of 2018 were $0.16 per share compared to basic and diluted loss per share of $0.11 for the second quarter of last year. Excluding the effect on the earnings attributable to common shareholders of the unrealized gain and loss on derivatives and the gain on sale of a vessel, the adjusted net earnings per share for the common shareholders for the quarter would have been $0.04 basic and diluted compared to an adjusted net loss of $0.11 basic and diluted for the same quarter – the second quarter of 2017. Moving on to the results for the first half, we are pleased to report net revenues of $18.1 million representing a 76.3% increase over total net revenues of $10.2 million during the first half of 2017. Again as a result of the increased average number of vessels operated in the increased average time charter rate earned. We reported net income for the period of $0.7 million and a net loss attributable to common shareholders of $0.1 million as compared to net loss and net loss attributable to common shareholders of $2.1 million and $3 million respectively for the first half of last year. The results for the first half of 2018 again include a $1.3 million gain on sale of a vessel as compared to a $0.5 million gain on sale of a vessel for the same period 2017. Depreciation expenses for the first half of 2018 were $1.7 million compared to $1.9 million during the same period of last year. Interest and other financing costs for the first half of 2018 amounted to $1.3 million compared to $0.7 million for the same period of last year. This increase is due to the increased amount of debt that we had and the increased LIBOR in the current period compared to the same period of 2017. Adjusted EBITDA for the first half of 2018 was $2.4 million compared to a negative $0.1 million achieved during the first half of 2017. Basic and diluted loss per share attributable to common shareholders for the first half of this year was $0.01 per share compared to basic and diluted loss of $0.28 per share for the first half of 2017. Excluding again the effect on the income or loss attributable to the common shareholders for the first half of this year of the unrealized and realized loss and derivatives and the gain in sale of vessels, the adjusted net loss per share attributable to common shareholders for the six months period ended June 30, 2018 would have been $0.13 compared to a loss of $0.32 per share basic and diluted for the first half of 2017. Let’s now turn to Slide 17 to review our fleet performance for the second quarter and first half of this year and compared to the same period and same results for the year before. Let’s start with our three months numbers, first our fleet utilization rates, as usual we have broken them down into commercial and operational. As you can see on the left hand side of the slide, for the second quarter of this year we reported 99.8% commercial utilization rate and the 93.9% operational utilization rate compared to 100% commercial and 99.8% operational for the same period of 2017. I want to remind 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 11.95 vessels with an average time charter equivalent rate of $10,028 per vessel per day representing a 35% increase compared to the time charter equivalent rate of $7,428 per vessel per day which we achieved during the same period of last year, a period during which we operated 8.12 vessels on average. Total operating expenses including management fees and general and administrative expenses, but excluding drydock costs were $6,278 per vessel per day for the second quarter of this year as compared to $6,220 per vessel per day for the same period of 2017. As Aristides had mentioned a real overall we believe we’ll maintain one of the lowest operating cost structures among 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 2018 we reported an operating cash flow breakeven level including loan repayments but before any balloon payments of $8,170 per vessel per day as compared to $7,459 per vessel per day for the same period of 2018. Let’s now look at our first half of 2018 results and for that let’s look on the right part of the slide. For the first half of 2018, we reported a 98.8% commercial utilization rate and 96.8% operational utilization rate as compared to 97.1% and 99.6% respectively for the same period of 2017. For the first half of 2018, we operated an average of 11.97 vessels and reported a time charter equivalent rate of $9,228 per vessel per day representing a 33% increase compared to the time charter equivalent rate of $6,918 per vessel per day that we had during the same period of last year a period during which we operated 8.38 vessels. Total operating expenses again including management fees and general and administrative expenses, but excluding drydock costs were $6,543 per vessel per day for the first half of this year compared to $6,055 per vessel per day for the same period of last year. Looking again at the bottom of this table, our daily customer breakeven level for the first half of 2018 was $8,800 per vessel per day, a number that includes loan repayments but excludes balloon repayments. This compares to $7,289 per vessel per day that we had during the same period of 2017. Let's now move to Slide 18. This slide shows on the right-hand side, our cash flow breakeven budget as we estimated for the next 12 months. And from the left-hand side, we show our scheduled debt repayments, including scheduled balloon repayments over the next four years. You will notice in the graph, in 2018 we had $700,000 of balloon repayments, following the successful refinancing of what was the original balloon of about $4.9 million in Q1 2018. While in 2019 we have balloon repayments of $7.9 million due. Typically, and as said managed do so far, we expect to be able to refinance those balloon payments in 2019. Expense in dollars per vessel per day, our loan repayments over the next 12 months amount to $1,000 per vessel per day, contributed to our daily cash flow breakeven level. Again, this excludes total balloon payments of $7.9 million that are due within the next 12 months that we expect to be able to refinance. Looking at the right part of the Slide, and making assumptions for the other components of our operating expense - of our cash flow breakeven level, like, operating expenses, G&A expenses, interest, drydocking costs et cetera. We come up with an overall expected cash flow breakeven level of about $8,150 per vessel per day over the next 12 months. Looking ahead, and let's now turn to Slide 19. Let me summarize where we spent our spin-off. After the spin-off, we started new face for the Company, which now is a unique [indiscernible] Company, the only Company that focuses on the container feeder market. We believe that the sector is an attractive point in its cycle, as I feel it's mentioned we don’t want to being at the lowest levels for the last 15 years with very - creating very minimal supply pressures and with demand hopefully following the synchronized recovery worldwide. We want to built on this Company as a tru-play company and make it a consolidating platform in the public markets and we focus thus to create shareholder value for our shareholders. And with that, let me turn the floor back to Aristides, to manage the remaining of the call.

Thank you, Tasos. We are open to questions that anybody may have. Thank you.

[Operator Instructions] Your first question today comes from the line of James Jang from Maxim Group. Please go ahead, your line is now open.

So, just looking at the fleet employment profile, it looks like you guys are happy operating some vessels on spot at the moment. How have you seen rates start to develop or at least start to get deeper into Q3?

As we said, we are seeing a slight correction on rates and we have one ship only that has just concluded its charter, which is the bigger vessel, the Akinada, and we have not been able to fix that vessel yet. So we will experience some idle time there. The smaller vessels, they are all employed and we think will be employed for the next couple of months, as the indications are, the charterers, we keep most them till the end of the window that they have available. But we are finding it - for the bigger ship, harder than we thought we would.

So, there could be some material effect for the third quarter earnings, correct?

From the Akinada Bridge, if we are not able to secure some employment, this could be quite significant.

You guys told - more as a short-term thing, do you think in Q4, the rates will go back up to about the previous charter rate?

I think that usually within September or October, everything else being equal, charter rates improve for container ships. So we think that things should look better in a couple of months.

Have you seen - the intra agent trade or the intraregional trades still strengthened or have you seen some more come out extensions where the vessels are trading further away from the typical?

The one area where we've seen a correction, and say, the bigger part of this use is the longer trades with medium sized vessels. So, we saw some time specific lines cancelling sailings. We haven't seen a softening in the regional trades where all the smaller vessels trade.

Do you have a drydock schedule for 2019 yet?

There are a couple of vessels that have to be drydocked, I mean, I can provide you offline the specifics but I think – we don't have – we have, as I see here, we have some in-water surveys that we expect to [indiscernible] we have only one other drydock in the next 12 months.

We have no further questions at this time. So I'll hand the floor back.

Well, thank you for listening in our conference call today. And we'll speak again in about three months.

Thanks everybody.

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