Euroseas Ltd. (ESEA) Earnings Call Transcript

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas conference call to discuss Euroholdings spin-off. We will have with us Mr. Aristides Pittas, Chairman and Chief Executive Officer; Mr. Tasos Aslidis, Chief Financial Officer of the company. I must advise you that this conference is being recorded today. Please be reminded that the company announced its intent to spin-off 3 older vessels, M/V Aegean Express, M/V Joanna and M/V Diamantis P into a separate company, Euroholdings Limited, with a press release that has been publicly distributed. Before passing the call to Mr. Pittas, I would like to remind everyone that today's presentation and conference call, Euroseas will make 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'd like to pass the floor to Mr. Pittas. Please go ahead, sir.

Good morning, ladies and gentlemen. We are currently in Korea, the whole management team of Euroseas. You all know that Euroseas is a provider of worldwide ocean-going transportation services through the ownership and operation of container vessels. Today, we took delivery of a 2,800 TEU newbuilding vessel. And tomorrow, we are taking delivery of another 2,800 TEU container vessel, the last of the series of 9 newbuilds that were placed -- orders were placed for at the beginning of 2021 and 2022. Euroseas currently will have 25 vessels on the water, and the current capacity of 72,000 TEU approximately. And we also have another 2 vessels under construction, 4,300 TEU each, with delivery expected in 2027. You also know probably that Euroseas has been listed on the NASDAQ since 2007. And I think a major differentiator that we have to many other companies is that the interest of the public shareholders and the interest of the managing family, the Pittas family, are very much aligned due to the common ownership. The Pittas family, which founded the company, owns close to 60% of the shares in the company. We only have one class of common stock, we have an independent Board of Directors and a very experienced executive team over the years that we've been public. Vessel management is performed via the affiliated management company, Eurobulk, which has a proven track record in the last 20 years being public, but even before that, of safe and cost-efficient operations. In addition to investing in accretive opportunities and maximizing operational returns, we strive to create value by providing shareholders with clear investment sources. Thus, in 2018, the then owned drybulk fleet of Euroseas was spun off in a separate company, EuroDry, leaving Euroseas focused on the feeder/intermediate container sector. That spin-off went extremely well as the combined valuation of the 2 companies increased about 50% right after the spin-off of EuroDry. We believe that the similar opportunity to increase value appears to us around the current spin-off of our elder vessels. Euroholdings, a spin-off of the elder vessels of Euroseas in a separate publicly listed company, should allow each company to follow its own strategy, have its own risk/return profile and thus offer more options for investors. Based on our EuroDry experience, we expect the combined valuation to be higher than if they continued operating together. Please move to the next slide, to give you some details of which vessels we're spinning out. We're spinning out the 3 oldest vessels of Euroseas in exchange of 100% of the shares of Euroholdings. The 3 vessels are M/V Aegean Express, a 1,400 TEU built 1997 vessel, which has an intermediate special survey and in-water survey due in September 2025; and motor vessel Joanna is a 1,700 TEU built 1999 vessel with its next intermediate survey in-water in June 2027; and motor vessel Diamantis, which is built in 1998, it's 2,000 TEU approximately, and it has its next intermediate survey plus the next drydocking in October 2026. The 3 vessels have an average age of 26.5 years approximately, are debt-free and are valued at approximately $26.5 million by an independent valuator with the scrap value representing about $12 million of that and the remaining really being existing charters on the ships or charters that we expect to secure on the motor vessel Diamantis. These 3 vessels represent just 5% of Euroseas' net asset value. This means that Euroseas practically is not changing at all. It's just offering a 5% dividend to the Euroholdings shares of its shareholders. In the process of registering the Euroholdings shares with the SEC, we are in the process of registering the Euroholdings shares with the SEC, and we have applied for listing them on the NASDAQ. The distribution will occur upon effectiveness of the registration statement and the approval by the NASDAQ. Tasos will give you a bit more details a bit later on the exact process. After the spin-off, Euroseas will still own 22 vessels, including the 15 feeder vessels and 7 intermediate containerships and have the 2 vessels under construction, I mentioned before. The 9 of the 22 vessels are part of the program -- of the newbuilding program I told you in the beginning of the presentation. They were built between 2023 and 2025. The average age of the fleet in the water has reduced to about 12.5 years. We have also affected the retrofit program on the largest vessels of the fleet to reduce fuel consumption and further improve the environmental profile of the fleet. Thus, Euroseas is positioning itself as a reliable environment-friendly transportation provider, partner of the major liner companies working towards a sustainable future. It seemed a good idea to sell or do something with the elder vessels and we chose the Euroholdings procedure because we believe firmly that there is still value in these elder vessels. You can see in the following slide the vessels that Euroseas will keep and the 3 vessels that will go to Euroholdings. The next slide, I'll talk to you a little bit on the reasons for the spin-off. As I said, we see value in the older vessels. They are near the end of the economic life, we acknowledge that, but they are currently unlevered and will generate very significant cash flow, thus allowing for growth and meaningful distribution to our shareholders. Euroholdings will have the opportunity to leverage its expertise in managing shipping assets to create outsized returns for shareholders. With the shorter remaining economic life and the easy to assess end-of-life valuation, the scrap value, residual value uncertainty is essentially eliminated. And thus valuation of the company should better reflect its NAV. There is no downside that we can see in the NAV valuation of the company. It's comprised of the scrap price, as I said, and the charter value that is already secured for the 2 ships. And one of the ships Diamantis has not yet secured the charter. We are working on that charter. It finished some temporary repairs it had to do. And now we are looking at the various potential opportunities in the market, trying to fix the vessel at the best possible rate and considering all possible options for this vessel in order to maximize its value. So Euroholdings, we think, can become a consolidator of vessels exploiting the niche in the shipping market, which is undergoing a transition due to the environmental regulations, which are driven by decarbonization. There is value there. We believe we will unlock it, and that's why we're doing this spin-off. Euroseas on the other hand will continue with the current strategy of renovating the fleet, fixing long-term charters as we can and being a huge and very significant tonnage provider for the main liner companies. So with that, I think I would like to pass the floor to Tasos to give you some more information on the -- yes, let me first tell you a few things about the corporate structure. The corporate structure and governance of Euroholdings is very, very similar to Euroseas with the same management team, the same Board of Directors. Management team, as you know, is myself, Tasos Aslidis, with Simos Pariaros is the other -- who is the Chief Administrative Officer. The other C-level employees of the company and the Board of Directors you can see it on the slide. So minimum increase in costs is what I think we are achieving through this structure, but opening up a door for new opportunities with a 5% of Euroseas NAV. And with that, I will give the floor to Tasos to take you through the details of how this will work.

Thank you, Aristides. I will use the next 5 to 10 minutes to give you a little bit about the mechanics, a top-level view of the mechanics of the spin-off and the distribution and then some highlights from the charter book and the balance sheet of the 2 companies. There will be a distribution of the shares of Euroholdings to all Euroseas shareholders. There is an intended and expected record date, which currently we think it will be January 23, and there will be a distribution date on January 30, 2025. Those will depend, of course, on getting timely approval from the SEC on the effectiveness of the statement and approvals from NASDAQ to list Euroholdings shares on NASDAQ. There will be -- there are now about 7 million shares of Euroseas, and we're going to use an exchange rate of 2.5 Euroseas shares for 1 Euroholdings share. Thus, there will be about 2.8 million Euroholdings shares that will be distributed to Euroseas shareholders. Later in the day, there will be a registration statement available that will provide further information about the whole spin-off exercise and the certain further mechanics of the transaction. Let me move down to the Slide #10, where we can compartmentalize the various charter books. And first, let's look at Euroholdings where you can see the current charters of the 3 vessels that will constitute Euroholdings fleet. Aegean Express, we have announced earlier this week or at the end of last week that it has been chartered for about 10 months, $16,700 per day. Joanna was announced that it was chartered for 3 years and goes all way to the fourth quarter of 2026. And as Aristides mentioned, our third vessel Diamantis P is just completing some minor repairs and is seeking for charter and potentially other commercial alternatives. The important thing about these 3 vessels is that they are unlevered. And thus if we move to Slide 11, you can see that they have a very low cash flow breakeven, relatively low operating cost level for the age of the vessels, a relatively low allocation of G&A expenses, minimal drydocking expenses based on the in-water surveys that we expect here in the next couple of years, thus having an overall breakeven level of about $7,800 per vessel per day. You can appreciate with the market being at least in the high teens, if not in the 20s for these types of vessels, how much cash flow margin these vessels generate, which, as Aristides mentioned, will allow us to -- will provide us with many options of how to use the funds, part of them for distributions and also for growing the Euroholdings model further. Let's move to Slide 12 to get some very brief highlights of the NAV per share of Euroholdings, which have taken some third-party valuations for the fleet, which is about $26.5 million. There is no debt. And as I mentioned in my previous slide, there will be 2.8 million shares outstanding. So the NAV per share is expected to be $9.5, and we expect to trade very close, if not at that level. Let's now close our remarks by taking a look at what is left with Euroseas, which is a lot left. On Slide 14, you can see now the charter book of Euroseas. You have seen that information before. All of our vessels are currently chartered. About 75% of our available days in 2025 are chartered and about 35% of our available days for 2026. So there is significant visibility of revenues. And as you can look at the levels of charters, you can see, especially if you look also on the following slide, Slide 12 -- Slide 15, I'm sorry, the contribution that we have also in Euroseas on a per vessel per day basis with an average charter rate around $30,000 and an average cash flow breakeven level of around $12,000. There is a significant excess cash flow that is generated at the Euroseas as well from 22 vessels in this case that would allow us to continue our investment, dividend and share buyback strategy. Our debt level, you can see on the top part of this slide, and constitutes of debt that results in about $40 million of debt repayments in 2025, significantly less in 2026 and about $35 million in 2027. A good chunk of the repayments that are due in 2025 and 2027 are balloon repayments. And typically Euroseas is able to refinance those and we'll do that if we choose to do so. We have made in the past remarks about the cost of our debt. The average cost of our debt is about 2%, the average margin, which on the top of a 3 months SOF rate of 4.35% result in having an overall cost of debt of about 6.4%. And that's further reduced since we have covered the 10% of our debt through interest rate swaps. Let's move down to the last slide, Slide 16, to give you an assessment of the NAV of Euroseas on a pro forma basis. We're using here September 30 published numbers, and we are making adjustments that reflect the debt that we have assumed for the 2 vessels we just took delivery of, the payments for the 2 newbuildings we ordered in the fourth quarter. And with that, we expect to have a debt of about $272 million, and valuation as of December for the 22 vessel fleet of about $711 million on a charter-free basis, which is adjusted a little bit lower because of the charters that we have. You can appreciate here that the market has increased since we have booked our charters. That's why we have a negative charter value. And we have made advancements for the 2 vessels that we ordered about $17 million. Taken all together, we have a pro forma NAV of about $457 million, and against our 7 million shares results in almost $65 per share NAV. At the end of last week, we traded at $36 per share, and that represents a 45% discount vis-a-vis to NAV, which we expect and we hope to reduce significantly, especially as we communicate our strategy of focusing of modern vessels and retrofitted vessels. I think with that, we have concluded our main remarks. I mean, we are ending up from Euroseas with 2 companies, Euroseas that has a modern fleet. It's a growing company. The short form -- the company that is solely dedicated in the feeder/intermediate container sector; and Euroholdings, as Aristides explained, we view as a platform for consolidating elder vessels and pursuing other opportunities in an industry that is in transition due amongst other things to decarbonization. I'll turn the floor back to Aristides if he has any concluding remarks.

Thank you, Tasos. I think this completes the presentation. We would be very interested to share any questions and try to answer them.

[Operator Instructions] Our first question comes from the line of Mark Reichman with NOBLE Capital Markets.

I just have 2 questions. The first is, could you just please elaborate on how you expect the 2 companies to differ in terms of capital structure, capital allocation, dividend policy and commercial strategy? And on that commercial strategy, I'm talking kind of feeder versus intermediates.

Okay. That's 4 questions in one, but I'll try and answer them all. Our commercial strategy, Euroholdings will be more open to discuss different sizes of vessels, even different types of vessels. Euroholdings will look at opportunities in the maritime spectrum that might not be related with feeder container vessels. So Euroseas, on the other hand, changes nothing. It's as it used to be. On the second issue of capital structure, again, there is not a real difference in the capital structure other than that Euroholdings currently is unlevered. We are not saying that we might not lever it, but the capital structure is only common stock that is fully aligned with the family and debt. Currently, as I said, Euroholdings does not have debt, but we might decide at some point that we have a good opportunity and we need to get some debt. And so that's the second thing. The third thing is capital allocation. I think it goes a lot -- it's like the commercial allocation. Capital will be allocated to the right investments, which might not be in the same field. Dividend policy, we envisage that we will be giving a higher dividend in Euroholdings than Euroseas. In Euroseas, we have always aimed to provide a dividend yield which is in the levels between 6% and 8%; 5% -- and 9% maybe if we stretch it at some point, but a very decent dividend. Euroholdings will be closer to a 10% dividend. So that's one differentiation. Also Euroseas might be using share repurchases to enhance shareholder returns. I think Euroholdings at this stage is too small to look at this kind of policy, but we will see as time goes by. Have I answered all your questions, Mark?

You did. You did. I had one more, but I'm just going to get back in the queue, so others can ask their questions.

[Operator Instructions] Our next question comes from the line of Tate Sullivan with Maxim Group.

Congratulations on the newbuild delivery today and tomorrow. And you mentioned the previous spin-off of EuroDry organizationally. I mean, does that previous experience make you ready to do another spin-off, more ready to do another spin-off? Did you change anything organizationally?

No, absolutely, Tate, you are very right. The familiarity that we had through that first effort in 2018 and the success, I would say, of it made it a relatively easy decision for us to take when we were considering what to do with the elder ships and with our idea about gradually reducing the amount of elder ships that we have within Euroseas. And it made much more sense at that point to keep the old vessels because there is still life in them rather than sell them at the market at that point.

There's also interest. From the charters that we booked, you can see that there is a margin -- interest on the markets to keep using those vessels.

Right. The Aegean Express contract. And then do you mention -- I don't think so, are there -- will you plan to extend any capital from Euroseas to Euroholdings? Will there be any retained ownership? I did not hear that, but I wanted to check.

I think there will be -- Euroseas will receive only shares of Euroholdings, and Euroseas will distribute all the shares to its shareholders. So after the distribution, strictly speaking, there will be no connection between Euroseas and Euroholdings. They will have a common manager, of course, of the vessels, the Eurobulk. And in the beginning, the same management and the same Board, but they would operate independently.

[Operator Instructions] Our next question comes from the line of Poe Fratt with Alliance Global Partners.

I just had a couple of questions. One is just -- can you just talk about -- I think you said that you decided you looked at the S&P market on these 3 assets, and you decided to spin them out instead of selling them. Can you -- did you actively market them in the S&P market? Or did you -- is that just a sort of a strategic decision?

No, we -- it was more of a strategic decision, but we are very close to the S&P market. So we know what happens. On the Diamantis, we have had some interest but the levels that we have seen up to now were lower than what we thought we can get through the chartering. But this is a project that has not finalized yet. And within the next week or 2, we should have the final decision on the Diamantis.

So you -- I'm sorry, Aristides, so you may sell that before the spin-off?

The vessels have been spun out into Euroholdings. And even if it is sold, the proceeds would obviously go to Euroholdings to pursue the strategy of buying other ships at the right time. But we are discussing chartering opportunities together with the possibility of a sale. We'll see what materializes. But whatever happens, it stays within Euroholdings.

Okay. And would you address one issue that I've heard from a lot of investors is that the shipping industry doesn't need any more small companies that don't have critical mass in economies of scale. And can you just sort of talk about your view on that?

Sure. Two things. Everything has to do with profitability. So even a small company can be profitable. I think Euroseas has proved that over the years by starting as a very small company and still being probably one of the smallest listed entities. But it's been extremely profitable. So profitability doesn't necessarily have to do with scale. So that's one issue. And the second issue is I think that we differ tremendously to most of the other small companies that have gone public, because shareholder interest is aligned with the management interest in this case. There is only one value class of stock, which is common stock, and therefore the only way for this company to be profitable is if we manage to improve the result for the common shareholders. And...

Also there is -- we identified that need that we try to describe that the industry is undergoing the transition because of the decarbonization. We noticed that many of our clients, liner companies wanted to have certain older vessels off their balance sheet. Euroseas got into some deals in the past couple of years. And we feel that there will be a need of growing space with a company like Euroholdings, which have room to grow and develop and provide really a service to the industry of consolidating and exploiting the use of the older vessels. We definitely have experience in operating older vessels. So we identify we believe a need, and we feel we have the expertise.