SOURCE: Capital Link Shipping

Capital Link Shipping

March 03, 2009 08:30 ET

Aristides J. Pittas, Chairman and CEO of Euroseas Ltd. (NASDAQ: ESEA), Discusses the Dry Cargo Sector and Euroseas

Interview With Barry Parker of BDP1 Connect

NEW YORK, NY--(Marketwire - March 3, 2009) - Aristides J. Pittas, the Chairman and CEO of Euroseas Ltd. (NASDAQ: ESEA), was interviewed yesterday by Barry D. Parker of BDP1 Connect. The interview focused on the development of Euroseas and on the dry cargo sector in general. Please find below the interview in its entirety. A PDF copy of the interview can also be accessed on www.CapitalLinkShipping.com or by clicking on the the link below http://shipping.capitallink.com/interviews/2009/pittas_transcript030209.pdf

Barry Parker: We have with us today Mr. Aristides J. Pittas, the Chairman and CEO of Euroseas Ltd. Euroseas operates in the dry cargo, drybulk and container shipping markets and trades on the NASDAQ Global Market under the ticker ESEA. Aristides, tell us what drives the ESEA story. In your conference call for Q4 and the full year 2008 you mentioned the four pillars of your business strategy. Euroseas is one of few companies in shipping which, with a strong balance sheet, still pays a dividend and continues to grow its fleet during these tough economic times. Can you tell us how you maintained your focus on your business strategy during the boom years and what we could expect going forward?

Aristides Pittas: Indeed, we have been disciplined enough to remain faithful to the 4 pillars of our business strategy. These pillars are to selectively acquire vessels in the dry space based on strict investment criteria, focus on cost control, maintain balanced employment between the spot and period markets, and use leverage wisely and conservatively.

Over the past year, we have been preparing for a possible market downturn as stratospheric rates cannot last forever. I must admit though that we had expected the correction to come later in 2009, more gradually and to be driven by vessel oversupply.

We did not anticipate the credit crunch and subsequent demand collapse. This has compounded the magnitude and severity of the current crisis but if there is one positive coming out of this situation it is that it should lead to significant vessel cancellations and scrapping of projects to build new shipyards. This should lead to a quicker recovery of our business when the global economy eventually picks up again.

In any event, we avoided investing at the peak of the market thus being able to maintain a strong balance sheet with a very low level of debt and plenty of cash. Thus, we are currently in an enviable position of being able to carefully plan the renewal and expansion of our fleet whilst continuing to pay out attractive dividends.

As I mentioned in the earnings conference call, instead of having troubled discussions with our bankers about existing loan facilities, we are discussing new financings for new projects. We have already secured a 55% financing for the handymax vessel we acquired in January and expect to conclude a similar deal for the panamax vessel we acquired and will be taking delivery of in early March.

Our chartering policy of maintaining a balance between period and spot employment has been maintained but we had avoided taking longer term charters fearing that charterers would not perform in a falling market. We have thus avoided exposure to potentially toxic charters at extremely high rates but we obviously will be feeling the effects of the current low spot charters.

We currently have cover for about 75% of our bulker operating days for 2009 and 2010 and 54% and 26% respectively for 2009 and 2010 of our container operating days.

The last cornerstone of our business strategy is cost control. This remains of paramount importance and emphasis and it becomes even more crucial in times like this.

Barry Parker: You currently own and operate 15 vessels and have recently acquired your sixteenth. You mention that you are ready to exploit opportunities to expand and renew your fleet. Is there a number of vessels you would like to have by year end 2009? What about 2010? Or is that too far ahead for you?

Aristides Pittas: It is difficult to give an actual hard number as to how many vessels we expect to have at the end of 2009 or 2010. The recent fall in asset values provides excellent opportunities to invest in the dry markets and to continue with our modernization and fleet expansion program.

Our initial actions this year have been to replace our two oldest bulk carrier vessels with two younger and slightly larger drybulk carriers. This has been done at a total net cost of about 30m USD whilst a few months ago these transactions would have cost us in excess of 100m USD.

We expect to continue to be active in the S&P market. Weak markets present great opportunities for strong companies that follow a long term strategy. We believe that our investments in the down market will help create shareholder value over the longer term.

Barry Parker: You have said that you will increase your exposure in the Forward Freight Market or FFA market as we call it. What are the benefits of using FFAs in today's market?

Aristides Pittas: As I said in our quarterly earnings conference call, we have currently covered about 75% of our drybulk available days for 2009 and 2010 through time charters and cleared FFAs at rates on average above our cash flow break-even levels. Most of this coverage is through FFAs.

Provided the correlation between FFAs and what we actually achieve in the physical markets holds, the FFAs provide good support for our bulkers, better we feel than time charters, as it eliminates charterers performance and default risk. At the same time, they also provide flexibility in trading the vessels and also the ability to reverse positions easily in a changing market.

The only draw back of such an instrument is the increased margins that may be required in a rising market which will affect short term liquidity and the volatility it creates in the quarterly earnings as the FFAs are valued on a mark to market basis accounting wise.

FFAs become dangerous if one starts to speculate as it takes only a phone call to execute but consequences can be dire. If used as a hedging tool though we feel they can be of great help.

Barry Parker: Which sector do you expect to have a quicker turn around -- the dry bulk or the container? And why?

Aristides Pittas: This is a difficult question. Historically both sectors move loosely in parallel but peaks and troughs are not of the same magnitude as individual fundamentals have different bearings.

For example, during the latest shipping boom, container charter rates increased much less than the drybulk rates. This was mainly due to the fact that drybulk owners had not anticipated the demand growth and had not placed enough newbuilding orders whereas container owners were more proactive and had placed enough orders to cater for the increasing demand.

The two dry sectors have some common drivers. Both dry bulk and containerized trade growth closely follow GDP growth and there is a good correlation between them. So we do not expect to witness a recovery in either sector unless we see a significant improvement in the world GDP.

However, dry bulk is tied mainly to infrastructure development and usually leads developments in consumer confidence which is important for containerized trade to pick up. Therefore one would expect dry bulk to lead the recovery by a few months, especially since the stimulus packages undertaken by governments will require significant quantities of raw materials predominantly carried by bulkers. In this particular instance though, with the huge drybulk orderbook it is possible that even as demand picks up there will be too many new deliveries into the market thus further delaying the drybulk recovery. We will have to see delays, cancellations and scrapping playing their role in balancing the world fleet before rates improve substantially.

Barry Parker: What percentage of the current container fleet is laid up? Do you expect this number to increase?

Aristides Pittas: Currently about 8.5% of the world container fleet is laid up according to Alphaliner. We do expect this number to rise as the recession in the U.S. and Euro zone deepens. The container vessels laid up are currently mainly the smaller ones which are not under long term employment, but we are starting to see bigger ships also becoming idle or laying up as they come out of their charters. Laying up is a prudent move when charter rates fall significantly below operating costs and the vessels are too young to decide to scrap them.

The bad markets do not last forever and ships will again be making money. We believe that the smaller containerships like the ones owned by Euroseas, between 1000 - 2500 teu will be the first to come out of lay-up as they are neither being overbuilt nor require huge volumes of cargo to fill them up.

Barry Parker: How will this affect your 2009 results?

Aristides Pittas: Surely, low charter rates and laying up ships will reduce our revenues and earnings for our existing fleet. We are well prepared to weather the current market environment and we believe that even without further accretive acquisitions we will have positive cash flow in 2009 on the basis of our existing charters and our low loan repayments. In fact, we will be able to utilize our excess cash to pursue the growth of our company with new acquisitions.

Barry Parker: Where would the BDI need to be to make ship owners happy?

Aristides Pittas: Shipowners, like every other human being, always want more than what they have; however I can assure you that drybulk vessels being bought at today's prices would break even at today's BDI levels around 2,000 and would make a good profit at 2,500. Of course owners who have bought their ships at higher prices are definitely losing money if they are trading at the current BDI levels. More philosophically though, happiness, even for shipowners, shouldn't be related to the BDI and luckily, for most of the owners I know, it isn't!

About Barry Parker:

Barry Parker is a financial writer and analyst. His articles appear in a number of prominent maritime periodicals including Fairplay, Seatrade, Lloyds Shipping Economist and James Transport Finance and Capital Link Shipping.

Contact Information

  • For more information on Euroseas, please contact
    Nicolas Bornozis
    Capital Link, Inc.
    Tel. 212-661-7566
    E-mail: euroseas@capitallink.com