Aristides Pittas - Chairman and CEO Tasos Aslidis - CFO

James Jang - Maxim Poe Fratt - Noble Capital Markets

Good afternoon, ladies and gentleman. Thank you for standing by and welcome to the Euroseas Conference Call on the Third 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. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. 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 results in such expectations not being realized. I kindly draw your attention to slide 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, now, I would like to pass the floor to Mr. Pittas. 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 nine-month period ended September 30, 2018. On May 30, 2018, Euroseas spun off its drybulk fleet, excluding Monica P, a handymax drybulk carrier that had been agreed to be sold into EuroDry, a separate publicly listed company also listed on the Nasdaq Capital Market. Shareholders of the Company received one EuroDry share for every five shares of the Company they held. As a result of the spin-off and the subsequent sale of Motor Vessel Monica P, the Company has become a pure containership company and the only publicly listed company concentrating on the feeder containership sector. The results in this presentation refer to Euroseas continuing operations excluding the contribution from Euroseas Ltd. of vessels spun-off into EuroDry in May 2018, the discontinued operations; historical comparative periods have been adjusted accordingly. Let’s now turn to slide three to see our income statement highlights for the third quarter. We had total net revenues of $8.3 million, adjusted EBITDA was $0.6 million, net loss $0.9 million and net loss attributable to common shareholders after a $0.2 million dividend on Series B Preferred Shares, of $1.1 million or $0.10 loss per share of basic and diluted. This loss was due to two facts. One, EM Astoria, was out of service for the whole quarter and the going repairs for the damage propeller as already reported; and two, our biggest vessel the Akinada Bridge was caught in the vacuum that was created due to the close of some lines for midsized vessels and experienced 17 days idle and lower earnings in general that had normally been expected. We expect a similar situation for Q4 2018 as the Akinada has struggled till recently to find employment and was only today fixed at $8,500 till September next year. And also, Joanna has been idle up till today in preparation for undergoing drydocking. We expect to return to profitability in Q1 2019. Please turn to slide four for our chartering and operational highlights. As I already mentioned, upon the time charter expiry for the Akinada Bridge with Cosco on July 30th, the vessel remained idle for 17 days and then was fixed to carry empty containers for a 40-day trip, which produced a time charter equivalent rate of about $3,500 a day and subsequently remained idle till today, when she was finally fixed for 10 months period, as I said at $8500 a day. The Ninos was expanded for minimum 140 days to maximum 175 days at $9750 per day. The Kuo Hsiung was extended for a minimum of 140 days to maximum 175 days as well at $9,750 per day. And the Aegean Express was extended for three to five months at $9,250 per day. The EM Oinousses was also extended for a period of 4 to 10 months at $9,500 per day. The EM Astoria successfully completed the repairs it undertook following propeller damage that occurred in May 2018. Insurance will cover most of the costs apart from the loss of hire during the repair period. The vessel reentered charter service in October 2, 2018 to complete her charter and was subsequently recharted for $9,650 per day, a level above her previous charter of $8,000 a day. Please turn to slide five. Eurobulk, our manager continues to keep our costs low. Our daily cost per vessel for the third quarter of 2018 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 costs remain among the lowest of the public shipping companies. For the third quarter of 2018, our operational fleet utilization was 90.6%, a major decline from our normal 99-plus-percent. As discussed, this is mainly due to the EM Astoria incident. Our commercial fleet utilization was 97.9%, again lower than a usual 99-plus-percent due to the idling of the Akinada Bridge. Let's move to slide six to view our employment chart. We have currently, about 92% coverage for the remainder of 2018. We have been able to fix all our vessels top and up for recharters at profitable rates except M/V Akinada Bridge that remained idle till today and then with Joanna that we have decided to bring its dry dock a bit forward and the fix now during the seasonally slow period. Our strategy continues to be to fix 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 as we’ve seen in this market, but also to be able to take advantage of the market we expect to improve further from Q2 2019 onwards. Let's turn to slide seven for our containership market highlights. Time charter rates in Q3 for feeder and intermediate size vessels ranging from 1,000 to 5,600 teu have all fallen about 10% to 40% on average with a bigger drop in the above 4,000 teu sizes. The 1,700 teu geared vessel fell from an average of $10,800 in Q2 to $9,950 in Q3 and currently stands at $8,500. The 2,500 teu geared vessel fell from an average of $11,680 in Q2 to $11,200 in Q3 and currently stands at $9,500 per day. Average secondhand prices for older than 20-year old vessels fell to their scrap prices in Q3, however, for younger vessels of about 10 years old, the drop seems to be less but there are not many transactions happening. Newbuilding prices on the contrary rose about $0.5 million to 2.5 million for vessels of 1,700 and 2,500 teu, from $25.5 million to $26 million and from $32 million to $34.5 million, respectively The idle fleet grew to 662,000 teu, i.e. about 3% of the world fleet, as of October 29, according to Alphaliner. Scrapping was very slow in Q3, however, in the last few weeks and following the market deterioration, we see accelerated scrapping. The fleet grew by 5.2% year-to-date, without accounting for idle vessels reactivation et cetera. Let’s turn to slide eight. The left side of the slide shows the evolution of time charter rates for containers of 1,700 teu since 2001. Container rates for vessels of our size recovered strongly from their all-time lows and reached their historical average levels in the summer, prior to softening again a bit during Q3 and Q4 up to now. 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 significantly 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 nine. The IMF projected world GDP growth in 2018 is expected to be 3.7%, down from 3.9% expected the previous quarter. China is expected by the IMF to grow by a healthy 6.6% unchanged from the previous quarter while India's growth projection has also remained unchanged at 7.3%. The U.S. is projected to grow by 2.9% in 2018, the same as the previous quarter. Brazil is the only country which has been significantly downgraded from the previous quarter to 1.4% growth, down from 1.8% previous quarter. For 2019, global GDP growth is expected to remain the same as the revised 2018 expectation of 3.7%. The mix of the various counties is expected to be a bit different, though than in 2018. The developed world and China grow a bit less than in 2018, while the developing world including India, Brazil and Russia should grow at a faster pace. Turning on to the container trade, according to Clarksons, the trade is now projected to grow by 3.4%, down from 4.8% from the previous quarter estimate, and expected to grow in 2019 by 3.8%. Please turn to slide 10. The container delivery schedule for vessels up to 3,000 teu, at the beginning of 2018 stood at 5.1%. Here again, slippages will result in somewhat less deliveries than originally predicted. The order book is similar for 2019 at 5.2%. For the smaller feeder vessels where we are active we can see that despite some orders having being placed recently, the order book looking forward is smaller than the overall order book and stands at around 10% total over the next three years. Please turn to slide 11. Following the fall in demand since the beginning of the second half of this year, we expect the supply-demand balance to be negative in 2018, despite the positive signs in the first half of the year. Weak demand in Europe, soft Intra Asia growth and negative sentiment due to the announced trade wars is eroding demand growth. The fundamentals for the sub 5,000 teu vessels though remain favorable as the order books remains historically low, despite the recent uptick in feeder ordering. There are of course concerns that the trade war that the U.S. government has triggered may further dampen demand going forward. The order book for 2019 and 2020 is low, as I said, suggesting that supply pressures will be less than in 2018, but the built-up again of the idle fleet that we’re witnessing now, is delaying any upside in rates. Thus, we’re expecting the market to improve starting from Q2 2019 onwards. Environmental regulations coming into effect in 2020 could result in longer drydock stays and further slow-steaming which in turn will require more ships, improve further the demand-supply balance and likely lead to higher charter rates unless of course we see significant number of new orders. I will now pass the floor to our CFO, Tasos Aslidis, to go over the financial highlights.

Thank you very much, Aristides. Good morning from me as well ladies and gentlemen. I will take the next four slides to give you an overview of our financial results for the three and nine-month period ended September 30, 2018. The figures that we will review, refer to the continuing operations of the Euroseas that is they strip out the contribution of vessels that were spun off in May 2018 into EuroDry. Let’s look at slide 13. For the third quarter of 2018, we reported total net revenues of $8.3 million, representing a 46% increase over total net revenue of $5.7 million during the third quarter of last year. We reported net loss for the period of $0.9 million and a net loss attributable to common shareholders of $1.1 million as compared to a net loss of $5.5 million and the net loss attributable to common shareholders of $5.9 million, respectively for the third quarter of 2017. The results for the third quarter of 2017 include a $4.6 million loss on write down on two vessels classified then as held for sale. 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 third quarter of this year and last year as well. This preferred dividend can be paid out entirely either in cash or in kind at our option, and we have elected to pay in kind for the last 18 quarters. In the third quarter of 2018, the dividend paid reflects the portion of the preferred shares that remained with Euroseas after the spinoff. Adjusted EBITDA for the third quarter of 2018 was $0.6 million compared to $0.5 million achieved during the third quarter of 2017. Basic and diluted loss per share attributable to common shareholders for the third quarter of this year was $0.10 per share compared to $0.53 loss for the third quarter of 2017. Excluding the effect on the loss attributable to common shareholders for the quarter of the gain on derivatives, the loss on write down of vessels held for sale, and the adjusted net loss per share attributable to common shareholders for the quarter ended September 30, 2018 would have been $0.10 per share basic and diluted compared to adjusted net loss of $0.12 per share basic and diluted for the third quarter of last year. Moving now on to the results for the first nine months of 2018. Again, we are pleased to report total net revenues of $26.4 million, representing a 65.4% increase over total net revenues of $16 million during the first nine months of 2017. We reported a net loss for the period of $0.1 million and a net loss attributable to common shareholders of $1.2 million as compared to net loss of $7.6 million and net loss attributable to common shareholders of $9 million, respectively for the first nine months of 2017. Again, the difference between net income and net income attributable to common shareholders account for the dividend we paid to our Series B Preferred Shares. The results for the first nine months of 2018 include a $1.3 million gain on sale of a vessel while the results for the first nine months of 2017 include a $0.5 million gain on sale of a vessel and a $4.6 million loss on write down on two vessels held for sale. Adjusted EBITDA for the first nine months of 2018 was $3.1 million compared to $0.4 million during the first nine months of last year. Basic and diluted loss per share attributable to common shareholders for the first nine months of this year was $0.11 compared to basic and diluted loss per share of $0.81 for the first nine months of 2017. Again, excluding the effect on the loss attributable to common shareholders for the first nine months of both years of the gain on sale of a vessel, and the loss on write down of vessels held for sale, the adjusted net loss per share attributable to common shareholders for the nine-month period ended September 30, 2018, would have been $0.23 compared to adjusted net loss of $0.44 per share basic and diluted for the same period of 2017. Let's now turn to slide 14 to review our fleet performance for the third quarter and first nine months of this year and compare them to the same periods from the year before. Let’s start with our three-month numbers first and first look at our fleet utilization rates. As usual, we have broken down the utilization rate in commercial and operational. As you can see on the left hand side of the slide, for the third quarter of this year, we reported 97.9% commercial utilization rate and 90.6% operational utilization rate as compared to 100% commercial and operational utilization rate for the same period of 2017. Aristides explained earlier the reasons for this difference. I want to remind you here that our utilization rate calculation does not include vessels in scheduled drydock, scheduled repairs or in lay-up, if any, during the reporting period. In the third quarter of this year, we operated 11 vessels with an average time charter equivalent rate of $9,704 per vessel per day, representing a 37% increase compared to time charter equivalent rate of $7,094 per vessel per day that we achieved during the same period of 2017, a period during which we operated 9.02 vessels on average. Total operating expenses including management fees, and general and administrative expenses but excluding drydock costs, were $5,399 per vessel per day for the third quarter of this year as compared to $5,381 per vessel per day for the same period of 2017. As Aristides mentioned earlier, overall, we believe we 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 the table to our daily cash flow breakeven levels presented here on a per vessel per day basis. For the third quarter of 2018, we reported an operating cash flow breakeven level including loan and repayments but before any balloon repayments of $8,727 per vessel per day as compared to $8,675 per vessel per day for the third quarter of 2017. Let’s look now at our first nine-month figures for 2018 at the right part of the table. For the first nine months of 2018, we reported a 98.5% commercial utilization rate and 94.8% operational utilization rate compared to 98.1% and 99.7% respectively for the same period of last year. We operated an average of 11.64 vessels and reported time charter equivalent rate of $9,371 per vessel per day, representing again a 34% increase compared to a time charter equivalent rate of $6,993 per vessel per day that we had recorded during the same period of last year, a period during which we operated 8.58 vessels. Total operating expenses, again, including management fees and general and administrative expenses but excluding drydocking costs were $6,368 per vessel per day for the first nine months of this year compared to $6,057 per vessel per day for the same period of 2017. Again, looking at the bottom of this table, our daily cash flow breakeven level for the first nine months of 2019 was $8,666 per vessel per day compared to $7,645 per vessel per day during the same period of 2017. Let’s now move to slide 15. This slide provides us some highlights from our balance sheet. As of September 30, 2018, we had an outstanding debt of $31.8 million and preferred equity outstanding of $19.4 million. We had a total cash of $9 million and net other liabilities excluding the current portion of our debt of $5.3 million. I would like to mention that because of write downs that we took over the last several years, during which the container market was at record low levels, the book value of our vessels is significantly lower than market value. I would also like to point out that our leverage measured as our loan-to-value ratio is quite low, estimated at around 45%. This low leverage is one of the ways that we plan to fund possible fleet growth. Specifically, we’re in the process of arranging refinancing of the majority of our loss for our vessels that would allow us not only to reduce the cost of our debt, but also arrange for facility to quickly arrange for debt for any new vessel acquisition. This process is in customary recommendation, and when completed, this refinancing will release about $4 million of unrestricted cash from our fleet which alongside our ongoing ATM offering will be available to finance future growth. Let’s now move to slide 16. This slide shows on the right hand side, our cash flow breakeven budget for the next 12 months and on the left hand side, we show our scheduled debt repayments for the next two years before and after the previously discussed debt financing. As you can see, we do not have any balloon payments in the next two years and have quite low debt repayment levels. Expressed in dollars per vessel per day, our loan repayments, over the next 12 months, amount to $1,200 per vessel per day contribution to our daily cash flow breakeven level. Looking at the right part of the slide, the little table there, and making assumptions for the remaining components of our operating cash flow and finding 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. And we believe this low cash flow breakeven level will provide us sufficient flexibility to fund growth and deal with market developments. And with that, I would like to turn the floor back to our Aristides to manage the remaining of the call.

Thank you, Tasos and thank you everybody for listening. May I open the table for questions?

Thank you. [Operator Instructions] We will now take our first question. Please go ahead. Your line is now open.

Hi. This is James Jang from Maxim. Good afternoon, guys. So, I wanted to ask, so Poseidon is doing a deal with Global Ship Lease. So, are you guys looking for one-off vessel for fleet growth, or are you still looking for something more substantial?

We have our options always open, James. We are looking at other combinations. And it is possible that something will develop. But, if we don’t find something and we don’t have something ready to report right now, we are happy growing vessel by vessel as it goes. But, one of the reasons we span off Euroseas from EuroDry and separated the containers from the drybulk vessels was because it would enable us to discuss about block fleet coming into these companies in an easier way.

There is nothing specific that we are discussing right now.

Okay, great. And, with the revision down for the container trade, do you think that’s an effect of the tariffs?

So, the tariff is going to affect the trade…

Yes. So, for ‘18, it was a -- the teu was about 4.8, it’s down to 3.8, and then for ‘19 it’s been revised down also. So, have you guys seen something to kind of say this is probably due to the tariffs that are ongoing?

It’s obviously due to the tariffs to an extent. It’s not a direct impact of the tariffs because the cargo that’s flowing into the U.S. has not dropped, but it’s a parallel loss because the sentiment in all the world has become more negative and it’s holding up investments, it’s holding up consumption, it’s holding up a lot of people, the whole negative sentiment. And that’s why we have seen the revision down to these levels. These levels are still good enough to provide for the good market because the newbuildings that are expected in ‘19 and ‘20 are not too much but of course significant deterioration on those expectations would become a problem. But, this is not what is anticipated by the market.

Got you. And for the drydocking for the Joanna, what should we be looking at in terms of cost? Is it in water or out of water?

No. This is a normal drydocking which is done every five years. So, you should be budgeting I would say -- Tasos, do you have the numbers, 700, 800 max?

It’s something like that. I think, we have around $700,000 expectation.

Okay. Got you. And typically, how many days off-hire should we be looking, would this be about 22 days?

Yes, something like that, between 20 and 25, I guess.

We will now take our next question. Please go ahead. Your line is now open.

Hi. This is Poe Fratt from Noble Capital Markets. Good morning or good afternoon. It’s good to see the Akinada Bridge back to work. Can you talk about the trade-off between getting visibility for year [ph] versus the rate? The rate is quite a bit lower than where it was working over this summer. Can you just talk about that a little bit?

Sure. The midsized vessels suffered quite a lot in Q3 and towards the end of Q3. There were quite -- there were a few lines that dropped some services and closed some lines completely which released a lot of ships between 5,000 and 8,000 teu into the market. So, suddenly, there was too many of them. And this led to this very-rapid drop in the chartering levels. Now, this seems to have vended. The ships are being redeployed. And funny enough for the Akinada, we couldn’t find anything to do for the last month. And then, suddenly, we had two businesses for the Akinada and were even able to choose the one that we did. Had we waited, we cloud have perhaps gotten a higher number, but we waited long enough. So, it's still a profitable number, although slightly, and we ceded and fixed the vessel.

Great. Tasos, would you highlight any downtime you expect in 2019 at this point in time?

Based on what we know now and -- we don’t have any downtime. I think, we have planned a drydock of Akinada Bridge towards the end of the year after the current - the newly completed charter ends. And for what we would probably budget, I would say between -- at least 25 days because we’re going to have to do a more extensive drydocking.

Great. So, maybe fourth quarter of ‘19 but maybe first quarter of ‘20?

Third [ph] quarter of ‘19 I would say.

Third quarter, sorry, that time. Okay. And then, when you look at the preferred dividends, from what I recall, that’s just going to go, you no longer have the election ticket [ph] early next year. Is there any thought that you might try to refinance that or restructure that?

Yes, you’re correct. The dividend for the preferred shares will become 12%, starting February 2019, and we have obviously included, take that into consideration. And we’re looking continuously to find cheaper alternatives, but -- to that instrument.

Great. And I think with the recent announcement with the ATM, I think you’re still in the blackout period or you couldn’t issue. Can you just talk about how you plan to use the ATM and what the -- I know it’s small, but sort of the goals of the ATM are?

We plan to use it opportunistically when the market gives us the opportunity to complement the other means of providing funding for our operations and for our growth.

Okay. And going back to fleet growth, it seems like you’re looking but there is nothing that seems attractive right now. Is that a fair characterization? We think with the rates coming down that maybe there might be some more attractive opportunities, is that not the case?

We are looking at various projects. And as you say, we want to see if prices will start falling as well as because we haven’t seen that yet. So, two things may happen. Either the market may start improving, which we think will be something that we will see after the Chinese New Year, end of January, beginning in February, and we might see slight softening of the price enabling us to grow further or prices may stay as they are and we don’t see a lot of deals in the market. The truth is that we don’t see a lot of deals in the market today.

Great. And then, Tasos, when do you expect to complete the refinancing?

It should be completed, either by the end of this -- I think by the end of this month is the plan.

Great. Thanks a lot.

Thank you, Poe.

Thanks, Poe.

We have no further questions at this time. Please continue.

Okay. Thank you everybody for participating in this conference call and for your interest in our Company. We will be back with the end of year results in February. And, good bye.

Thanks everybody for attending.

That does conclude the conference for today. Thank you for participating. You may all disconnect.