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Executives

Adam Prior - Vice President, The Equity Group, Inc.

Ion G. Varouxakis - Chairman, President and Chief Executive Officer

Analysts

Natasha Boyden - Cantor Fitzgerald

Scott Burk - Oppenheimer & Company

FreeSeas, Inc. (FREE) Q2 2009 Earnings Call August 18, 2009 11:00 AM ET

Operator

Good day everyone and welcome to the FreeSeas 2009 Second Quarter Conference Call. At this time I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

I will now turn the conference over to Mr. Adam Prior of the Equity Group. Please go ahead.

Adam Prior

Thank you and good morning everyone. Thank you for joining us. Copies of today's press release are available at the Investor Relations section at FreeSeas website at www.freeseas.gr. You are also welcome to contact my office at 212-836-9615 and we would be happy to send you a copy.

As part of this conference call, the company also has an accompanying slide presentation available in PDF format on the company's website. To access this presentation, once at the Investor Relations section, interested parties should click on the conference call link.

Before we get started I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect FreeSeas business and prospects and results of operations.

Such risks are fully detailed in FreeSeas filings with Security and Exchange Commission. Regarding the disclaimer language, I would also like to refer you to slide number two of the webcast presentation for further information.

With that I'd now to turn the call over to Ion Varouxakis, President and CEO of the company. Please go ahead, Ion.

Ion G. Varouxakis

Thank you, Adam. Good morning and thank you for joining us. As you will see on page three of our slide presentation, I will begin with a discussion of today's announcement of a new vessel acquisition, which we feel represents a turning point for our company. I'll then move to a brief discussion of our quarterly and first half financial results and provide a general overview of our business and market. And then we'll take your questions.

The acquisition of our 10 vessel was made possible, as you'll see on slide four, thanks to the successful completion of a common stock offer in July, whereby we raised 16.7 million in net proceeds. This inclusion of capital further strengthened our balance sheet and allowed our company to take advantage of a tremendous opportunity on the vessel acquisition front.

As we have noted in recent calls, our corporate structure is such that we could expand our fleet without significant incremental costs to our operations or corporate overhead. In addition, the second Handysize market provides a potential avenue for the acquisition of immediately accretive assets.

Over the past year there has been considerable disruption in the global shipping markets. However out of the turmoil arose opportunities as second hand vessels in this Handysize market segment are now at once in a generation prices. Throughout our history, we have maintained the discipline but aggressive approach to growing our fleet and we feel that quickly and successfully, we have responded to the opportunities presented by the market.

The completion of the offering positioned us to take advantage of this unique opportunity, executing on the company's fleet expansion plan and further growing our company. Thus we are very pleased to announce today that we have agreed to acquire FreeSeas tenth vessel, the Free Neptune which is detailed in the next slide.

We will acquire this vessel of 30,800 dwt built in 1996 in Japan for a price of approximately 11 million through distressed asset sales process. This addition to our fleet lower the average age of our fleet, increases our tonnage capacity, and most importantly is expected to be immediately accretive to earnings.

Let me take a moment and explain the impact this will immediately have on our earnings potential. As you have noticed several times as a result of FreeSeas' streamlined operating infrastructure and fixed cost, this vessel will lower our per vessel breakeven. The Free Neptune will allow us to spread our expenses over ten vessels instead of nine. This can make a dramatic difference for a company of our size, which can greatly improve our profit potential and improve our net margins.

We expect to fix the Free Neptune upon her delivery to FreeSeas in the next couple of weeks and we'll keep investors apprised of its charter hire. As you can note a vessel acquisition is always a landmark event, a great upside for a company, and we expect will begin contributing to our financial results in this third quarter.

Let me now take a moment to briefly discuss our financial results. We have been pleased with our results in the tumultuous market conditions we have experienced so far in 2009. FreeSeas operating revenues for the 2009 second quarter were $12.4 million as compared to $15.1 million reported in the same period of the prior year. Revenues for the quarter were affected by technical and operational occurrences, along with lower market rates, offset by an increase in the company's fleet.

We are very pleased to have achieved a high level of utilization, while still focusing on managing costs. During the quarter, we reduced daily vessel operating expenses and were profitable, reporting net income of $560,000 or $0.03 per diluted share, generated positive cash flow and our adjusted EBITDA for the quarter was $5.7 million.

As you will see on slide five, we have continued to grow throughout 2009, as FreeSeas has achieved year-over-year growth in revenues, net income and adjusted EBITDA. For the first half of 2009, our operating revenues were $29.9 million, an increase of 26% from $33.8 billion in the comparable period of the prior year.

Net income for the first six months of 2009 was 6.8 million or $0.32 per diluted share, based on 21.2 million diluted weighted average number of shares outstanding, as compared to net income of 4.5 billion or $0.21 per diluted share, based on 21.9 million diluted shares outstanding for the first half of 2008.

Adjusted EBITDA for the first half of 2009 increased to 17.6 million from 12.5 million in the comparable period of the prior year.

In the next slide, we have included a debt repayment scheduled for the remainder of 2009 through 2016. We believe that our current financial position and relationship with our lenders is solid. We maintain a close relation with the commercial banks and we feel that their willingness to work with us reflects the quality of FreeSeas fleet and charter agreements, their belief in management and the outlook for our business model.

Of note, the company is current on all of its payments, including an additional $7.75 million in payments made since June 30, which represent 85.2% of our debt obligation for the third quarter of 2009. We're in full compliance with our financial covenants with our lenders. As of June 30, 2009, the company's debt ratio was about 50%.

A summary of the balance sheet is included in slide nine for your review. Of note these totals do not include the net proceeds received in our July offering. These will appear in the next quarterly financials.

Let me take a moment to briefly discuss the industry, particularly the Handysize market. As you can see on the slide 11, we are encouraged by the improving in the drybulk market, with rates having increased over the past six months. While some seasonal weakness has appeared, we believe that the overall market picture is different from the beginning of the year, with rates being substantially higher than what many expected them to be in January. They are certainly much higher than what the January FFA rates seems to predict for the beginning of the year.

We believe that there are several factors driving these rate increases. The imports in China of raw materials such as iron ore and coal have increased levels not seen in a year. Recently released figures from China, for whatever they are worth, showed record iron ore imports in July.

India seems to be poised to become a regional player of strategic importance. The recent inter-governmental agreement between the U.S. and India seem to testify to that. Handysize and Handymax vessels have showed less rate volatility in the last few months, which is consistent with historic trends for these vessel class and have been remarkably resilient.

Handysize vessels typically transport commodities on the lower end of the -- let's call it food chain, i.e. semi-finished vessel goods and commodities closer to the final consumption, such as rice, sugar, cement, fertilizer, et cetera. And we do transport those from larger hubs to more remote areas, where less port infrastructure is typically available and where the vessels own means of loading and discharge are used.

Looking longer term, we'll see over the next two slides, the worldwide Handysize fleet is in a period of transition. More than half the worldwide Handysize fleet is over 20 years of age, where FreeSeas current fleet is approximately 13-14 years old. The worldwide Handysize fleet has been shrinking since the beginning of the year and scrapping of overage tonnage has out weighted actual new building deliveries.

We believe that these indicators are all ongoing trends, which should increase the earnings potential of our fleet going forward.

Moving to the next slide, you can see how each vessel adds incremental value given our current cost structure. In June 2008, FreeSeas owned and operated seven vessels with a total deadweight tonnage of 193,000 tonnes. After the deliver of the Free Neptune we will own and operate 10 Handysize Handymax vessels with a total debt weight of approximately 200,000 tonnes.

As noted in our fleet summary in slide 15, we have period time charters at favorable rates on three of our nine vessels and have been successfully and consistently been securing employment of our remaining vessels at profitable rates on the spot market.

In conclusion, we remain focused on achieving profitable operations and appropriately deploying our capital to optimize long term value for our shareholders. We have been pleased with our cost reduction efforts and operational efficiency throughout the year and feel that the recent developments of our common stock offering and acquisition of our tenth vessel are landmarks and positive growth indicators for the company. We feel that FreeSeas is well positioned to take advantage of improving rates in our market segment and look forward to the future with optimism.

With that please open it up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Natasha Boyden of Cantor Fitzgerald.

Natasha Boyden - Cantor Fitzgerald

Thank you everybody. Good morning, Ion.

Ion Varouxakis

Hey, good morning Natasha.

Natasha Boyden - Cantor Fitzgerald

Looking at Free Destiny and Free Envoy, your two oldest vessels, at this point have you considered either selling or scrapping those ships and are charters discriminating again, older ships, finance market.

Ion Varouxakis

Well, first of all, the vessels are trading at rates that are substantially above their operating costs. Surprisingly the Free Destiny has had lower, very low operating cost since the beginning of the year, no break downs and as such she certainly isn't scrap kind (ph), at this stage. The same goes for the Free Envoy.

If there were to be sold, they would be sold for further trading. We are not considering selling them for further trading at this point in time. And we'll keep fixing them for the time being and should the market rise, we'll then consider our options again.

Natasha Boyden - Cantor Fitzgerald

Okay and then I think on slide 16 or in the press release you mentioned the Free Destiny is repositioning right now, how many days of hire are you expecting that vessel to have in the third quarter?

Ion Varouxakis

Well she isn't exactly off hire. I mean, when you reposition a vessel, obviously you take the average of the previous and the next employment to calculate the average rate. So when we fix a vessel at the rate of $13,000 for the vessel to be in the Persian Gulf, we were aware that this was a higher rate because then we would have to balance to the reposition of the Atlantic. So that's about 15 days to the next position approximately. So then we have to see from there what they are going to charter her for.

But on average, let's say that this vessel earns slightly less than the modern vessels we own. So, if for example the Free Impala earns 9,000, the Free Destiny will pick up 1,000 below that on average, for example.

Natasha Boyden - Cantor Fitzgerald

Okay. And then looking at some from what the Free Lady and the charter of about $51,000 a day and I think that was almost 40% of your revenue in the second quarter. Do you, A; have any concerns about counter party risk with any of your current charters and B; with the charter for the Free Lady in particular.

Ion Varouxakis

No.

Natasha Boyden - Cantor Fitzgerald

Okay, so there's been no discussion about renegotiating the contract.

Ion Varouxakis

No.

Natasha Boyden - Cantor Fitzgerald

Okay, that's helpful. Lastly, can you just walk through the math on the Free Neptune. Now you stated quite clearly you expected to be immediately accretive to earnings.

Ion Varouxakis

I promise myself not to do that, Natasha but I will try to give some color (ph).

Natasha Boyden - Cantor Fitzgerald

Okay.

Ion Varouxakis

The acquisition price is 11 million, and I will tell you why is the acquisition price is 11 million, okay. She is a 13 year old vessel which will depreciate over 28 years. That means depreciation of about $0.5 million or something like that a year, 600,000 per year. And the vessel is, let's say that she has a potential to earn -- I'm going to give a wide range because I don't want we are negotiating the charters. I don't want to give a figure that can be basically any figure between mid-teens to mid-20s depending on where she's going to be delivered and how long the trips going to be. So that's obviously if you annualize that this is an extremely favorable acquisition.

Natasha Boyden - Cantor Fitzgerald

Okay. And does the acquisition also include the dilution from your 10 million of share equity offering?

Ion Varouxakis

Yes.

Natasha Boyden - Cantor Fitzgerald

Okay. All right, great, that's everything from me. Thank you.

Ion Varouxakis

Thank you very much.

Operator

Your next question comes from the line of Scott Burk of Oppenheimer.

Scott Burk - Oppenheimer & Company

Hi, good morning, Ion.

Ion Varouxakis

Good morning.

Scott Burk - Oppenheimer & Company

Hi regarding the Neptune, you mentioned it's once in a generation pricing and that's why we wanted to acquire this vessel. What this vessel, what would the price have been at the peak back in 2007?

Ion Varouxakis

Four times this price.

Scott Burk - Oppenheimer & Company

$44 million?

Ion Varouxakis

At least.

Scott Burk - Oppenheimer & Company

Okay. And so if you do the math you are at 16 million of equity and you paid 11 million for this ship. Are you going to be able to use any debt leverage to fund a portion of this acquisition or will you fund it all with equity?

Ion Varouxakis

We intend to fund it all in equity. We obviously have the flexibility of having that vessel with no mortgage and we have to do this (ph) in due course.

Scott Burk - Oppenheimer & Company

Okay. So, that means you have roughly $5 million left available for acquisitions or you have other uses for that.

Ion Varouxakis

No, let's say that this is working capital, don't forget about 1.6 million or 1.5 million is going to be used to repay debt. So we thought it's not enough to buy a ship with that three, four million. But it's working capital and as in the next few months, we generate more cash from our leasing vessels with a very little upturn in the market, we could be seeing money adding up to the balance sheet, which we can use one way or the other, including using this vessel as a collateral

Scott Burk - Oppenheimer & Company

Right. Okay. But sounds like if you wanted to get aggressive with more purchases you would need to raise additional equities, is that the right assumption?

Ion Varouxakis

Well, let say that if that move would be accretive and we prove that this acquisition has been accretive I don't see who would be against moving in that direction.

Scott Burk - Oppenheimer & Company

Okay. And then had a question about vessels OpEx and G&A they are up a bit over last quarter. Just wonder if - what kind of rate we should assume going forward for the third and the fourth quarters?

Ion Varouxakis

I think that the average of the first six months is a good guidance. There were some one of items that did hit the second quarter, but these do happen from time to time. So I think the six months averages are - moving forward.

Scott Burk - Oppenheimer & Company

Okay. And I remember asking about this last quarter but you have been mostly are you even planning using the spot market to employ your vessels recently. Can we assume that you are going to continue to use the spot market or are you starting to look for longer charters at this point?

Ion Varouxakis

Yeah, that's a fair assumption. We could keep working in the spot market. Actually the rates for the Handy's have been extremely stable over the last three, four months, really around in the same level. So there is no rush to fix some period. We think there is more upside actually than downside at this level.

Scott Burk - Oppenheimer & Company

Okay. And then one concern that I had for more broadly for the industry, now you have got iron ore prices of above $100 a ton and that implies that a lot of domestic Chinese iron ore can come back online and offset some of the imports we've seen the last few months? I'm just wondering if you are seeing anything from your cargo movement that may support the idea that Chinese import demand for iron ore continues to grow or not?

Ion Varouxakis

We do not -- I mean, we do not transfer so much iron ore. We do more sort of other types of cargoes as I mentioned earlier on. And we expect to do grains like now in the season, we expect to do -- we'll be doing concentrate. So not so much iron ore, even really for the larger vessel. So, I cannot really guide you on that but I mean, this is the big issue obviously, whether it's going to revert to a more local trade. However, if that happens we should expect more demand of Supermaxes because of their gear and that again would be helpful for our segment, generally.

Scott Burk - Oppenheimer & Company

Okay. And just as I guess, kind of extended question to the trade that your involved in. Are you seeing what kind of demand trends are you seeing now, with cranes or overall?

Ion Varouxakis

Yeah, I think it's pretty stable environment over the last few months. And I think that we've been fixing at the same rates and actually we marketed today the Free Neptune for the first time. We've seen a lot of enquires. So we think this is very positive sign and I was surprised actually at the very quick response and also the Free Knight, which is opening up soon has seen a lot of demand.

It's not that the rates are going to go up necessarily but there is a steady demand for cargoes to be moved around. So that's an encouraging sign. We'll have to wait in after -- really we have the September, October according going into the traditional season to see how the market moves in. And we have a good chance of seeing upward pressure at that time.

Scott Burk - Oppenheimer & Company

Okay. Thanks.

Ion Varouxakis

Thank you.

Operator

(Operator Instructions).

Ion Varouxakis

So there are no more questions?

Operator

I apologize. There are no further questions. I will now turn the conference back to management.

Ion Varouxakis

Okay. So thank you all for joining us. And we look forward to speaking with you again next quarter. Thank you very much.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating. And have a nice day. All parties may now disconnect.

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