EuroDry Ltd (EDRY) 2022 Q4 法說會逐字稿

Thank you for standing by ladies and gentlemen, and welcome to EuroDry conference call on the fourth-quarter 2022 financial results. We have with us today, 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 its results with a press release that has been publicly distributed.

Before passing the floor to Mr. Pittas, I would like to remind everybody that in today's presentation and conference call, EuroDry will be making forward-looking statements. These statements are within the meanings 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 will kindly draw your attention to slide number 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 over to Mr. Pittas. Please go ahead, sir.

Good morning, ladies and gentlemen. 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 fourth quarter and full year ended December 31, 2022. Tasos will go over our financial highlights in more detail later in the presentation.

Please turn to slide 3. Our income statement highlights are shown here. For the fourth quarter of 2022, we reported total net revenues of $15.1 million and net income of $6.3 million or $2.20 per diluted share. Adjusted net income attributable to common shareholders was $3.3 million, or $1.18 per diluted share, the difference stemming mostly from the one-time profit we had selling our eldest vessel, M/V Pantelis. Adjusted EBITDA for the period was $7.3 million. Please refer to the press release for the reconciliation of adjusted net income attributable to common shareholders and adjusted EBITDA.

As of February 10, 2023, we had repurchased 147,362 shares of common shares in the open market for about $2.1 million under our repurchase plan of up to $10 million announced in August 2022. We will continue to execute the share repurchase program at management's discretion.

For the full year 2022, our net revenue was $70.2 million and net income was $33 million or $11.62 per diluted share. Adjusted net income for the period was $28.4 million or $9.86 per share diluted. Adjusted EBITDA for the period was $43.2 million.

Please turn to slide 4 for our chartering and operational highlights. On the chartering front, we have been active in securing short-term employment for all our vessels as a result of a weakened Q4 2022 market. And believe that when the market turns, we can fix these vessels for longer contracts at higher levels. However, we have fixed 2 of our 10 vessels for a minimum of 13 to 24 months, respectively, but on index-linked charters at 105.5% of the average Baltic Kamsarmax Index, thus maintaining our exposure to the spot market there as well.

Fixes done during Q4 was still at decent levels, but all our other vessels that have been refixed in January had been at still lower levels below $10,000 a day as can be seen in the slide. I'm just going to note here the one charter of motor vessel, Molyvos Luck, as this vessel was re-delivered early from its previous charterer after mutual agreement and was refixed for the remainder of the charter at $7,750 per day, i.e., for about 40 to 50 days. The original charterer paid the difference between the original charter rate being $25,750 per day and the rate of the new charter in advance, essentially leaving us with no material loss of income.

Moving down to the drydocks and repairs. Motor vessel Eirini was in drydock for approximately 53 days passing a scheduled special survey. 20 of these days were in Q4 2022 and the remainder in Q1 2023. There were no idle or commercial off-hire periods during this quarter. In addition, during the quarter, we sold 90 days of an FFA contract for Q1 2023 the equivalent of one-timer expression at $12,000 per day. This contract is well in the money as the market is quite lower today.

Please turn to slide 5. The company has a fleet of 10 vessels divided into two subsectors. Five modern and eco ships younger than 10 years old -- two Ultramaxes, two Kamsarmaxes, and one Supramax -- and five Japanese vintage Panamaxes, which however continue to be valuable world crossers of the industry. Overall, our fleet has a total cargo capacity of about 730,000 deadweight and an average age of approximately 13.6 years.

Turning to slide 6, we provide a graphical update of our fleet employment. As you can see, fixed rate coverage for 2023, including the FFA, stands at about 13.8%. This figure excludes ships on index charters, which are open to market fluctuations but have secured employment.

Slide 7 reviews the market highlights for the fourth quarter of 2022 up until recently. The average spot market rate for Panamaxes was approximately $14,700 per day in the fourth quarter of 2022. By December 30, the spot rates have dropped to approximately $12,100 per day. And remarkably, this rate has dropped by about 47% to $6,438 per day as of February 10, 2023.

The drop in the one-year time charter rates for Panamaxes has been more moderate standing on average of around $14,700 per day during the quarter and currently standing at $13,700 per day. Both the BPI and BDI indices reflected the weaker demand and lackluster shipping activity due to a slowdown of imports to China, global slowdown of economic growth, the Ukraine-Russia war, energy security focus, and rising interest rates.

Please now turn to slide 9. In its latest report, the IMF revised its global growth projections for 2023 and 2024, signaling some positivity in world economic growth and greater-than-expected resilience in a number of economies. The IMF now projects world growth to reach 2.9% in 2023, rising to 3.1% in 2024. The rise in central bank rates to fight inflation and Russia's war in Ukraine continued to weigh on economic activity.

The rapid spread of COVID-19 in China dampened the growth in 2022, but the recent reopening has paved the way for the faster-than-expected recovery with a projected GDP growth of 5.2% in 2023 and 4.5% in 2024. 2023 GDP growth for the United States was revised upwards to 1.4% but is projected to inch down to 1% in 2024 owing to persistent inflation and the Federal Reserve's forecast outlook.

European growth projections are up by 0.2% from the previous quarter to 0.7% for the whole year 2023 whilst the growth rebound to 1.6% is expected in 2024. Well, now the risks of high energy costs, waning confidence, and the rising interest rates are likely to persist into the year.

Growth in emerging and developing countries is expected to be quite slow in 2023, but higher than previously expected. Especially the recent IMF's GDP focus with China has improved to 5.2% from 4.5% previously, mainly on the basis of the significant loosening of the COVID restrictions. Also, the Russian economy has recently been upgraded from a negative 0.3% in 2023 to a positive 2.1% for 2024. India is expected to grow at the fastest pace of 6.1% while Brazil's economy is now projected to grow 1.2% in 2023 and 1.5% in 2024.

According to Clarksons' estimate, dry bulk freight demand is expected to return to growth in 2023 following the contraction last year. For 2023, dry bulk freight rate is expected to grow by 1.6% and 2% in 2024.

Please turn to slide 10, where we review the current dry bulk market cycle. The order book continues to fuel positive market sentiment as it remains at historically low levels. The order book as a percentage of total fleet stands at 7.2% as of February 2023. This suggests minimal fleet growth over the next two, three years, likely leading to higher rates of trade increases. Additionally, new environmental regulations that kicked off this year could further influence supply growth by forcing some vessels to retire or to reduce their operational speed.

Continuing on to slide 11, according to Clarksons' latest report, new deliveries as a percentage of total fleet is expected to be 3.8% by the end of 2023, 2.4% in 2024, and just 0.8% in 2025. The actual fleet growth is expected, of course, to be lower due to recycling. As of February 2023, the total dry bulk vessel operating fleet was 13,182 vessels. 8% of this fleet is older than 20 years old and a candidate for scrapping.

Please turn to slide 12, where we summarize our outlook for the dry bulk market. The dry bulk market continues to soften with freight rates losing 50% year on year, having returned to pre-pandemic levels. The market continues to face significant headwinds on the back of geopolitical uncertainties. China's zero-COVID containment policy and a weak global economic outlook with recessionary risks sparking slowdown fears in key markets.

At the same time, certain logistical bottlenecks that grew during the pandemic years have reversed significantly. There are, however, certain demand catalysts that could lead us to return to normal or even above normal growth rates. China's return to normality after the real estate crisis and the reversal of zero-COVID containment policy, along with announced stimulus packages, is one of the major potential drivers of the market recovery.

By extension, an end to the war between Ukraine and Russia would lead to higher grade in exports and huge construction projects. Also, once central bank interest rates hiking has reached the level necessary to control inflation, a more predictable investment environment, higher economic growth, and thus, more dry bulk trade should start to materialize.

On the supply side, the ordering of new ships has been practically non-existent due to lack of available slots in shipyards and the lack of clarity for the fuel of the future. The order book to fleet ratio, as discussed, is near the lowest historical levels, creating the backdrop for the charter rate recovery if demand returns to normal levels.

Furthermore, the introduction of emissions-regulation-related measures, the EEXI and the CII, could further curtail supply as already explained. It is yet quite unclear how soon the above described developers will enter into force. So the timing of the market recovery is uncertain, but it's bound to happen.

Finally, let's turn to slide 13. The left chart shows the evolution of one-year time charter rates of Panamax dry bulk vessel since 2002. As of February 10 this year, the one-year time charter rate for Panamax ships with a capacity of 75,000 deadweight tons stood at $13,700 per day. This is close to the historical median level.

In the right chart, you can see the historical price range for a 10-year-old Panamax vessel, which has a current price of about $22.5 million. This is more than the highest price levels seen in the last 12- and 20-plus years, but still considerably higher than the historical average on median prices. Clearly, prices are higher than what current charter rates would suggest, and this reflects the expectations amongst market participants that there will be a strong recovery in rates soon.

We share the view that the recovery should come sooner rather than later. And whilst we believe that Q1 2023 will be the first loss-making quarter for EuroDry after eight consecutive profitable quarters in which the company booked a combined profit of more than $21 per share, we would hope that it will be just a parenthesis and in Q2, the company will return to profitability.

If for any reason charter rates do not recover as expected, it will give us the opportunity to use our strong balance sheet to grow the fleet with newer assets whose values we will also have corrected due to the protracted poor charter markets. In cyclical markets like shipping, it is those companies that time their acquisitions at their lower end of the cycle that eventually will be rewarded. In the meantime, we will continue to execute conservatively on our stock repurchase program as indeed we perceive our stock market valuation to be by a couple of orders of magnitude lower than our intrinsic fair value.

Let me now pass the floor over to our CFO, Tasos Aslidis, to go over our financial highlights in more detail. Tasos, the floor is yours.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. Over the next four slides, I will give you an overview of our financial highlights for the fourth quarter and full year of 2022 and compare them with our actual results in the equivalent periods of 2021. For that, let's turn to slide 15.

For the fourth quarter of 2022, the company reported total net revenues of $15.1 million, representing a 32.3% decrease over total net revenues of $22.3 million during the fourth quarter of last year, which was a result of the decreased average time charter equivalent rate our vessels earned in the fourth quarter of this year compared to last year. The company reported a net income and a net income attributable to common shareholders for the period of $6.27 million as compared to a net income of $16 million and a net income attributable to common shareholders of $15.2 million for the same of the fourth quarter of 2021.

Interest and other financing costs for the fourth quarter of 2022 increased to about $1.5 million as compared to $0.7 million for the same period of 2021. Interest expense was higher mainly due to the increased amount of debt and of course, the increased LIBOR rates [are launched there to pay] during the period as compared to the same period of last year.

Adjusted EBITDA for the fourth quarter of 2022 was $7.3 million compared to $16 million achieved during the fourth quarter of 2021. Basic and diluted earnings per share attributable to common shareholders for the fourth quarter was $2.21 basic calculated on $2.8 million and $2.20 diluted calculated, again, on about $2.9 million weighted average number of shares outstanding compared to $5.38 basic and $5.32 diluted during the same period of last year.

Excluding the effect on the income attributable to common shareholders for the quarter of the change in fair value of derivatives in gain on sale of a vessel, the adjusted earnings attributable to common shareholders for the fourth quarter of this year would have been $1.18 per share basic (inaudible) per share diluted compared to adjusted earnings of $4.34 per share basic and $4.29 per share diluted for the same period of last year. Typically, secure channels do not include the above items in their published estimates of earnings per share.

Let's now move to right half of the slide to review the same figures for the full year of 2022. For the full year, the company reported total net revenues of $70.2 million, representing an 8.9% increase over total net revenues of $64.4 million during 2021 as a result of the increased number of vessels we operated during 2022. The company reported a net income and a net income attributable to common shareholders for the period of $33.5 million as compared to a net income of $31.2 million and a net income attributable to common shareholders of $29.4 million during 2021.

Interest and other financing costs for the -- during 2022 amounted to $3.9 million compared to $2.3 million for the same period of last year. Adjusted EBITDA for the 12 months of 2022 was $43.2 million compared to $42.3 million achieved during 2021.

Basic earnings per share attributable to common shareholders for the 12 months of 2022 were $11.66, calculated 2.9 million weighted average number of shares outstanding. And diluted earnings per share were $11.61, calculated again on about 2.9 million weighted average number of shares outstanding, compared to basic and diluted earnings per share attributable to common shareholders of $11.63 and $11.54 basic and diluted, respectively, for last year.

Excluding the effect on the earnings attributable to common shareholders for the year of the change in deferred value derivatives, the loss on debt extinguishment in 2021 and the gain on sale of a vessel in 2022, the adjusted earnings per share attributable to common shareholders for last year 2022 would have been $9.90 basic and $9.85 diluted compared to $11.63 (sic -- see press release, "$11.98") basic and $11.54 (sic -- see press release, "$11.88") diluted for 2021. As I mentioned, typically security analysts do not include the above items in their published estimates of earnings per share.

Let's now turn to slide 16 to review our fleet performance. We will start our review by looking at our fleet utilization rate for the fourth quarter and the full year of 2022 and 2021. Let's start with the fourth quarter first.

As usual, our fleet utilization rate is broken down to commercial and operational. In the fourth quarter of this year, our commercial utilization rate was at 100%, while our operational utilization rate was 99.7% compared to 99.8% commercial and 99.5% operational for the fourth quarter of last year.

On average, 10.1 vessels were owned and operated during the fourth quarter of 2022, earning an average time charter equivalent rate of $16,688 per day compared to 9 vessels that we own and operated during the fourth quarter of 2021, earning on average $29,157 per day. Our total daily operating expenses including management fees, general and administrative expenses averaged $7,035 per vessel per day during the fourth quarter 2022 compared to $6,324 per vessel per day for the fourth quarter of last year.

If we move further down this table, we can see the cash flow breakeven rate which we paid during the fourth quarter of this year, which takes into account also drydocking expenses, interest costs, nominal payments, and preferred dividends if any of them were paid in cash. Thus, for the fourth quarter of 2022, our paid cash flow breakeven rate was $13,063 per vessel per day compared to $11,625 per vessel per day during the fourth quarter of 2021.

Let's now look on the right part of the slide to review the same figures for the full year. During the entire 2022, our commercial utilization rate was 99.8%, while our operational utilization rate was 99.3% compared to 99.9% commercial and 99.6% operational for 2021. On average, we owned and operated 10.4 vessels earning an average time charter equivalent rate of $21,304 per day compared to 7.9 vessels in the year 2021 earning [the numbers] $24,222 per vessel per day.

Our total daily operating expenses including management fees, general and administrative expenses, but excluding drydocking costs are at $6,699 per vessel per day in 2022 compared to $6,456 per vessel per day in 2021. Again, looking at the bottom of this table, we can see our daily cash flow breakeven rate for the year, which amounted in 2022 to $12,989 per vessel per day, and that compares to $10,739 in 2021.

Let's now move to slide 17, where we can review our debt profile. As of December 31, 2022, we have an outstanding bond debt of about $81.9 million. Looking at the chart on the top of the slide first, we can see that our debt repayment and balloon payments over the next four years. As of December 31, 2022, again, our scheduled debt repayments, including balloon repayments over the next 12 months during 2023, amounted to about $23 million, an amount which includes an $11.3 million balloon payment related to the loan of our newest vessel, Ekaterini.

Our balance sheet allows us to comfortably make the balloon payment. Nevertheless, we intend to refine asset like we have done in similar cases in the past. Both of debt repayments in 2024 amount to about $14 million, inclusive of a $3 million balloon and blocked to about $5.7 million in each of 2025 and 2026.

A quick note here about the cost of our debt. The average margin for our debt is about 2.7%. And assuming the LIBOR rate of about 4.8% on the top of it, we can estimate that our total cost of our senior debt to be around 7.5%. However, if we included in our cost of debt calculation the interest rate locked, we are -- our interest rate swap contracts, the cost of our debt would drop to about 6.25%.

At the bottom of this table, we can see a projected cash flow breakeven rate for the next 12 months broken down for each component. As you can see, we expect another cash flow breakeven rate level of around $12,725 per vessel per day. Also in the middle of this chart in the bottom of the slide, we can see our EBITDA breakeven rate, which amounts to about $7,637 per vessel per day over the next 12 months.

Let's now move to the last slide, slide 18. Here we can see some highlights from our balance sheet in a simplified way. This slide shows -- offers a snapshot of our assets and liabilities. As of December 31, 2022, cash and other current assets stood at about $50.5 million in our balance sheet. The book value for vessels was approximately $149 million, resulting in a total book value for our assets of about $200 million.

On the liability side, our debt as of the end of last year, as I mentioned, was about $81.9 million, representing about 41% of the book value for our assets. And we also had other current liabilities amounting to about $4.3 million or about 2.2% of the book value of the assets. That leaves us with a book value of shareholders' equity of about $114 million, which translates to a book value per share of $39.35.

However, based on our own estimates and market transactions, we assess that the market value of our vessels as of the end of last year was above a book value and stood at about $168 million -- about $19 million more than their book value, suggesting that our NAV per share to be in excess of $45 per share -- close to $46 per share -- and that indicates that with our share trading in the range of $16 to $17 recently that our shares -- that investing in our shares provides a significant upside for our shareholders and investors.

This concludes my brief review of our results and balance sheet. I would like now to pass the floor back to Aristides to continue the call.

Thank you, Tasos. Let us open up the floor for any questions you may have.

Thank you. (Operator Instructions)

Tate Sullivan, Maxim Group.

Hello. Good day. Good day, both. In the press release, you mentioned maybe using this current environment as an opportunity to buy ships or merge -- use your public shares as a merger. What are incentives for other ship owners to sell currently or to consider a merger, please?

First of all, we need to find out incentives to buy ourselves because as I said during the discussion, prices are still quite high relative to where the current charter rates are. And I think we would see -- we would need to see prices softening a little bit before we were able to act on these expansion plans that we have.

Okay. Right. And then you mentioned -- you gave some commentary about positioning of the ships and -- I've seen the slide in terms of your spot rates for this current quarter. Is there a potential for more positioning after the current contracts expire in this current quarter? Should we factor that into our estimates for 1Q 2023?

Well, half of our vessels are practically fixed throughout Q1. The other half will come up for re-chartering within the next 40 days till the end of the quarter. So we will be obviously fixing those ships as well. Because the market is at these low levels, we do not anticipate in fixing longer-term charters now. We think that there is a correction. The usual cyclicality that we have in dry bulk trade where Q1 is the lowest quarter -- everything else being equal, of course -- we think that this will transpire this year as well, and we will see recovery rates within Q2.

Okay. And then, Tasos, on the voyage expenses -- a bit volatile with the gain on bunkers and going back to expenses as opposed to a negative $2 million in 3Q 2022. Will this be consistently an expense or what has to happen to have a gain on bunkers going forward, please? Or should we just -- should I just continue to factor in about $1 million of voyage expenses every quarter?

It depends on -- voyage expenses depends on the style of fixing. With this time charter -- so obviously, we don't have significant voyage expenses other than voyage expenses result from buying and selling fuel and delivered between charters. If we fix on a [project] basis -- and I think we do have a voyage charter in Q1, which will be shown in the Q1 results -- then of course, both revenues and voyage expenses would be high.

So the best way to model is to -- my opinion, at least -- is to model the time charter equivalent basis and assume a level of voyage expense. But possible gains from voyage expenses that you see occasionally is because of the gains that wins -- that we realized when we buy at a lower price and sell to the next charter at the higher price. We shouldn't count of these continuing. It is sort of one-off situation.

Yes, absolutely. Voyage expenses are very much affected by fuel prices -- not the actual fuel prices, but if fuel prices are going up or fuel prices are going down because we buy from charter -- we buy from the market sent to charterers and vice versa. And it all depends on how that is going. So this is a difficult thing to model, as Tasos rightly said.

Understood. Okay. Well, thank you. Thank you for the background and the commentary. Have a good rest of the day.

Thanks for that, Tate.

Thanks, Tate. Bye.

(Operator Instructions) There are no further questions. I would like to hand the conference back over to management for closing comments.

Thank you, everybody, for listening in to our results of this quarter. We will be back to you at the end of Q1 with the results of the first quarter of 2023. Have a great day.

Thank you, everyone.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.