EuroDry Ltd. Q3 FY2021 Earnings Call

Thank you for joining us today for the EuroDry Conference Call on the Third Quarter 2021 Financial Results. With us are Mr. Aristides Pittas, Chairman and Chief Executive Officer, and Mr. Tasos Aslidis, Chief Financial Officer. This conference is being recorded. The company has released its results through a public press release. Before handing it over to Mr. Pittas, I want to remind everyone that we will be making forward-looking statements during this presentation and call. These statements, as defined by federal securities laws, are based on current management expectations and involve risks and uncertainties that could affect their realization. I encourage you to view Slide 2 of the webcast presentation, which contains the full forward-looking statement, also included in the press release. Please take a moment to review it. Now, I will turn it over to Mr. Pittas. Thank you.

Good morning, everyone, and thank you for being with us today for our conference call. I'm here with Anastasios Aslidis, our Financial Officer. The goal of today's call is to go over our financial results for the third quarter and the nine months ending September 30, 2021. Please take a look at Slide 3, where we present our income statement highlights. In the third quarter of 2021, we reported total net revenues of $19.5 million and a net income of $11.8 million. The adjusted net income attributable to common shareholders was $10.1 million, or $3.77 per share diluted. Our adjusted EBITDA for the quarter was $13 million. For the nine-month period, our net revenues reached $42.1 million, with an adjusted net income of $18 million, or $7.29 per share diluted. These results reflect an improvement compared to our Q2 results from last year when we first felt the impact of the pandemic on our business. Our CFO, Tasos Aslidis, will provide more detail on our financial highlights later in the presentation. Now, please turn to Slide 4 for our operational highlights. On September 22, 2021, we announced the acquisition of Motor Vessel Good Heart for $24.5 million, partially financed through our own funds and partly through a $22 million bank loan secured by this new acquisition and our Motor Vessel Starlight. There were no dry dockings or major repairs during the third quarter of 2021. To support this acquisition, we raised $9.2 million through the issuance of about 316,000 shares via our ATM process as of September 30, 2021. In terms of chartering, our Motor Vessel Alexandros P was fixed for a trip of approximately 80 to 90 days at $25,250 per day for the first 65 days, increasing to $31,000 per day thereafter. Following the delivery of Motor Vessel Good Heart, it was fixed for an initial trip period of about 40 to 50 days at $32,750 per day for 47 days, and $42,000 per day thereafter. After that trip, it was fixed for a smaller trip lasting 16 to 18 days at $33,000 per day. The M/V Pantelis secured a time charter for about 5 to 7 months at $30,250 per day, while the M/V Tasos was fixed for a trip of about 80 to 90 days at $28,500 per day. Finally, Motor Vessel Starlight's charter was extended to 98.5% of the BPI index for at least until October 2022. During the third quarter of 2021, the company settled 90 days of previously sold forward freight agreements, equivalent to one Panamax vessel, sold at a rate of $12,550 per day, resulting in a loss of $1.7 million. In October, we sold 90 days in Q1 2022 of FFAs at $31,500 per day, which we later closed at $23,200 per day for a gain of about $700,000. As of September 30, the remaining 90 days sold at $12,550 per day for Q4 2021 had a negative valuation of about $2.7 million. Last Q3 was very profitable for us. Our Board decided in the third November meeting to redeem all outstanding Series B preferred shares in Q4, using approximately $13.6 million from our funds. Moving forward, our balance sheet will be simplified to consist solely of equity and chief bank debt, which is about 3.8% of LIBOR, significantly lower than the LIBOR hedge we applied at around 1%. Please refer to Slide 5 for a summary of EuroDry's current fleet. With the acquisition of Motor Vessel Good Heart, our fleet now comprises 9 units, enhancing our cluster of newly built vessels, including our Japanese-built Panamax fleet. Our current fleet averages 12.4 years in age, with a total carrying capacity of approximately 670,000 deadweight tons. Slide 6 illustrates our current employment strategy. Currently, about 56% of our fourth-quarter fleet is fixed under rate contracts, with about 10% coverage in 2022. This does not include ships on index charters that have fixed employment but are open to market fluctuations. Our performance will significantly depend on market developments in the coming months. We are confident about our forward cargo provisioning and remain optimistic about the market fundamentals that I will delve into later in the presentation. Let's now proceed to Slide 7, where we analyze the market highlights for the quarter ending September 30, 2021. During the third quarter, dry dock rates continued to rise through September but reversed sharply in October. The average spot market rate for Panamax vessels was $31,700 per day in Q3, with prices reaching around $34,200 per day by September 30. Adjusted average spot rates for Panamax ships were $27,230 per day in Q3, increasing to $29,250 by the end of the quarter. However, by last week, one-year time charter rates had dropped to around $31,500 per day. According to Clarksons, secondhand bulk carrier prices during Q3...

You are now reconnected.

Hello, we apologize for the interruption. We will resume from where we left off. We were discussing the market highlights for this quarter on Slide 7. After a strong third quarter, we experienced a notable decline in the charter market last month, with Panamax vessel rates dropping to about $21,500 per day. In the second-hand market, Clarksons reported a 17% increase in second-hand bulk carrier prices during Q3, while newbuilding prices rose to over $37 million for Kamsarmax vessels and $34 million for Ultramax vessels. Year-to-date, the fleet has expanded by 3.4%. Now, let’s turn to Slide 9. The global recovery is ongoing, though slightly weaker than the IMF's earlier July forecast. The October IMF report shows a slight downward revision in growth projections, with global growth for 2021 at 5.9%, down from 6% in July, while the 2022 forecast remains unchanged at 4.9%. Beyond 2022, the IMF predicts moderate global growth at 3.3%. This downward adjustment for 2021 reflects more challenging near-term conditions for advanced economies due to supply chain disruptions from rising commodity prices and persistent inflation expectations. Emerging markets and developing economies have also been revised down for 2021, particularly in emerging Asia. The U.S. is expected to grow 6% in 2021, compared to a 7% expectation for the July quarter. This revision points to a slowdown in economic activity due to rising COVID-19 cases, delayed production from supply shortages, and accelerating inflation. China's economy is anticipated to grow 8% this year, slightly less than previously forecast due to reduced public spending and energy challenges, while India's growth forecast remains at 9.5%. In terms of dry bulk trade growth, Clarksons projects a 4.6% increase in demand for 2021. For 2022 and 2023, dry bulk trade growth is forecasted to be more moderate at 2.3% and 2.5%, respectively. Please proceed to Slide 10. The percentage of the total fleet as of November 21 is at 6.8%, which remains at some of the lowest levels seen in over 25 years. With the current order book and ongoing demand trends, we anticipate a continued recovery in the dry bulk market over the next few years. Let’s now look at Slide 11 for our dry bulk fleet overview. Clarksons projects net fleet growth at 2.6% for 2021. Based on the current overall growth in the bulk fleet, low levels are expected to persist into 2021 and 2022. The changes in 2021 and 2022 are anticipated to align closely with this year's low levels. Higher trade activity and low bunker prices limit scrapping incentives for older vessels. Importantly, the 2023 order book is increasingly being established, with deliveries likely to fall to about half of normal levels. Now, turning to Slide 12, we summarize our dry bulk market outlook. The global recovery is progressing, although affected by the transmissibility of the Delta variant and rising commodity and energy prices, which have begun to slow economic growth and create inflationary pressures. The dry bulk market has shown strong growth, reaching 11-year highs in Q3 2021. Recently, however, growth has slowed, particularly concerning steel demand in China, largely due to logistical challenges from the pandemic. We believe the Chinese government can stabilize the situation, and we anticipate revenues will be volatile but high in the short and medium term. The outlook remains positive, bolstered by one of the lowest order books in history. Additionally, future ship orders for 2023 are expected to be limited due to scarce capacity in shipyards and uncertainty regarding future fuel sources. Overall, a steady recovery in dry bulk volumes, combined with limited supply growth and positive global economic conditions, should lead to substantial improvements in 2022 and potentially beyond. Nevertheless, market dynamics could remain unstable due to ongoing risks related to iron ore and coal trade and the long-term impacts of the COVID-19 pandemic. Key factors to watch include the easing of congestion and the implementation of new iron ore environmental regulations beginning January 2023. Now, moving to Slide 14, the left side illustrates the changes in 1-year time charter rates and pandemic impacts for dry bulk vessels since 2020. As of November 5, 1-year time charter rates for Panamax vessels with a capacity of 75,000 deadweight tons were around $21,500, maintaining a profitable level despite a recent 30% production drop. On the right side of the slide, the market value of a 10-year-old Panamax vessel is about $25 million. Over the past year, dry bulk prices have generally been rising, surpassing historical averages, though still significantly lower than prices from 2010. Our strong market positioning has enabled us to achieve considerable revenues and improve our balance sheets. As liquidity significantly increases in the coming quarter, we are assessing the best ways to utilize it for our shareholders, which could include further debt reduction, share buybacks, dividends, or acquisitions supported by favorable charters that minimize risks. Most likely, our approach will involve a combination of these strategies. We remain optimistic and enthusiastic about EuroDry's future and are continuously seeking investment opportunities or operational improvements using our publicly traded platform. Let me now hand it over to our CFO, Tasos Aslidis, to discuss our financial highlights in greater detail. Thank you, Tasos.

Thank you, Aristides, good morning everyone. I will now provide an overview of our financial highlights for the third quarter and the nine-month period ended September 30, 2021, and compare them to the same period last year. For the fourth quarter of 2021, the company reported total net revenues of $19.5 million, which is a 186% increase from $6.8 million in the third quarter of 2020. This increase was primarily driven by higher time charter rates our vessels earned this quarter, as well as an increased number of vessels operated during the quarter. The company recorded a net income of $12.1 million and a net income attributable to common shareholders of $11.8 million, compared to a net income of $0.5 million and a net income of $0.1 million for the same quarter in 2020. Interest and other financing costs for the third quarter of 2021 were approximately $0.6 million, remaining stable from last year due to an increase in outstanding debt being offset by lower LIBOR rates for our loans. Adjusted EBITDA for the third quarter was $13 million, up from $2.8 million in the same quarter of 2020, signifying a 362% increase. Basic earnings per share attributable to common shareholders were $4.47 from 2.6 million basic shares outstanding, with diluted earnings at $4.39 from about 2.7 million diluted shares, while the third quarter of 2020 had basic diluted earnings per share of $0.06 from approximately 2.3 million shares. Excluding the impact of unrealized gains on derivatives, adjusted earnings per share for the third quarter of 2021 were $3.84 basic and $3.77 diluted, compared to adjusted earnings per share of $0.05 for the same quarter last year. Typically, analysts do not factor these items into their earnings per share estimates. Now, let’s review the nine-month results. For the first nine months of 2021, total net revenues were $42.1 million, reflecting a 165% increase over $15.9 million during the same period in 2020, a result of more vessels operating and higher charter rates. We had a net income of $15.1 million and a net income of $14.2 million attributable to common shareholders, compared to a net loss of $5.6 million and a net loss of $6.7 million in the first nine months of 2020. EBITDA and other financing costs for this nine-month period were $1.7 million, down from $1.9 million last year due to lower LIBOR rates. In 2021, we recorded a noncash expense of about $1.7 million related to the conversion of certain debt into equity. Adjusted EBITDA for the first nine months of 2021 stood at $26.3 million versus $1.8 million during the same period of 2020, marking a 1,326% increase. Basic earnings per share for the first nine months were $5.84 calculated from about 2.4 million shares, while diluted earnings were $5.73 with approximately 2.5 million shares outstanding, compared to a basic diluted loss per share of $2.97 in the same period of 2020. Excluding unrealized losses on derivatives and the loss on debt extinguishment from last year’s results, adjusted earnings per share for this period were $7.42 basic and $7.29 diluted, compared to a loss of $2.7 per share for 2020. Analysts typically exclude these extraordinary items from public earnings estimates. Let’s move to Slide 16 to review our fleet performance. We'll begin by looking at our utilization rates for the third quarter of 2021 and compare it to the previous year. Our commercial utilization rate was 100%, with our operational utilization rate at 99.4%, compared to 100% and 98.9% respectively last year. On average, we owned and operated 8.1 vessels during the third quarter of 2021, earning an average time charter rate of $28,103 per vessel per day, while last year we operated 7 vessels at $11,873 per day. Our total daily operating expenses averaged about $6,495 per vessel per day in the third quarter of 2021, compared to $6,397 per vessel per day for the same quarter last year. We also established a cash flow breakeven rate for the quarter, factoring in drydocking, interest, loan repayments, and preferred dividends, which was about $9,991 per vessel per day, slightly higher than $9,974 per vessel per day from the third quarter of 2020. Looking at our nine-month figures, our commercial utilization rate was 100%, with operational depreciation at 99.6%, consistent with the same period last year. An average of 7.49 vessels were owned and operated during this timeframe, earning a time charter rate of $22,232 per vessel per day, compared to 7 vessels in the same period of 2020. Our total daily operating expenses for this nine-month period amounted to $6,510 per vessel per day, compared to $6,195 per vessel per day for the prior year. The cash flow breakeven level for this period was $10,451 per vessel per day, down from $11,209 for the first nine months of 2020. Moving to Slide 17, the slide from our last two earnings calls offers shareholders and investors insight into the earning potential of our fleet for the next two to three quarters. The slide contains two sections; the first references our fixed-rate contracts, with a small percentage of our available days under these contracts, particularly in the first two quarters of 2022. These are seen as future opportunities given the market's current strong performance. The remaining vessels are involved in contracts tied to their size value index. Our projections for Supramax and Panamax bulk forward rates as of November 30, 2021, indicate how this index translates into rates for our ships. We show a stable blended rate for our fleet's open days, which aligns with index levels. Based on certain assumptions, we estimate the contribution to our EBITDA, with the anticipated fourth quarter results adjusted for a 90-day FFA contract. This information is intended to facilitate EBITDA calculations for the upcoming quarters, specifically for the fourth quarter of 2021 and the first half of 2022. The current FFA rates, approximately 30% lower than two weeks ago, support expectations for EBITDA contributions in 2022 to surpass those of 2021. Let’s proceed to Slide 18 to examine our debt repayment profile. As of September 30, 2021, we had an outstanding debt of about $73.9 million. Over the next three years, we have an annual repayment rate of about $12 million, translating to roughly $1.2 million per vessel or around $4,000 per vessel per day. Our next major payment is due towards the end of 2023, amounting to $11.3 million for one of our Kamsarmax vessels, which will be five years old by then. We aim to finance this as we have done in previous instances. The annualized margin for our debt is around 2.8%, with a projected LIBOR rate of 0.3%, bringing the cost of our senior debt to about 3.1%. In November, our Board decided to use some of our earnings to redeem all pending series B preferred shares at par, thereby reducing our funding costs. This action is expected to increase earnings per share for our common shareholders by $4.8 in 2022. Beginning in 2023, we will continue repaying our obligations. At the bottom of this slide, we provide projections for our cash flow breakeven level over the next 12 months, expected to be around $12,678 per vessel per day. On Slide 19, we present highlights from our balance sheet, offering a simplified view of our assets and liabilities. As of September 30, 2021, our total cash and other assets were approximately $26.1 million, while the book value of our vessels was about $130.6 million, leading to a total asset book value of $156.7 million. Our debt stands at $73.9 million, which is approximately 47% of the book value of our assets. Preferred equity amounted to $13.6 million, accounting for 8.6% of our assets, and other liabilities were around $7.5 million or roughly 4.8% of our book assets. This results in a net book value of $61.7 million, equating to $22.3 per share. However, the market value of our fleet is significantly higher than its book value, necessitating adjustments to better estimate the company's value. As of the end of September 2021, we estimate the market value of our nine vessels to be 50% higher than their book value, suggesting an NAV per share of around $47. With our recent share price movement between $25 and $32 per share, this indicates that investing in our company presents a significant upside potential. I will now turn the floor back to Aristides to continue the call.

Hello. We now welcome any questions you may have.

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

This is Tate Sullivan from Maxim Group, and just a little macro to start. I mean, it seems like shares for a lot of the dry bulk companies are following what the indices have done recently coming down from peaks and your comments earlier about steel demand in China flagging recently, but I've heard various comments from dry bulk companies on that. Can you give a little more about how that might be just a temporary factor and the seasonal considerations as well, please?

The levels of iron ore inventories and steel in China have decreased significantly, leading to a drop in prices. China is very decisive when it comes to buying and selling iron ore, so when they recognize that prices are low enough and feel the need to stimulate the economy, they have the ability to start ordering iron ore again. This has happened repeatedly, and when it does, we will see a notable increase in the volumes of iron ore sold. This trend can also be observed in the variations of Capesize vessel trade rates throughout the year.

Great. I apologize for the interruption, but I understand that in previous cycles, when this has occurred, there is usually a timeline of about 4 to 5 months. I think the freight rates are reflecting that for the first 6 months of 2022.

Yes, it is breaking up a little bit, but I believe we will see these unabated rates again within the first half of 2022. Definitely, we think we will.

And Tasos, regarding the redemption of preferred equity, it's a positive move and reduces our cost of funding. Can you clarify the accounting treatment for this in the fourth quarter, when we redeem those at par for $13.6 million compared to the previous carrying value of $13.1 million? Will this result in a loss in the fourth quarter? Also, could you update us on the conversion price for that preferred equity? We initiated a share program seven years ago that allowed the company to redeem them after five years. Since we pay 8% on that funding, which will increase to 14% in 14 months, we determined that it was a prudent decision to use our revenues to pay down the full amount of the preferred equity and maintain dividend returns for other holders.

Charles Fratt, NOBLE Capital Markets. Can you hear me?

Yes, we can hear you.

Okay. I hate to do this, so since you broke up a lot on your last answer, can you highlight what you're going to redeem, how much cash you're going to use to redeem the preferred in this fourth analyst quarter?

I think we're going to use $13.6 million, which is exactly the outstanding amount of preferred equity at par. So we will pay that plus any accrued dividends. I believe, by the time we're going to do the retail redemption, there will be something like $400,000 accrued dividends, the majority of which is already in our results for Q3, so we would pay them that. So I estimate that there will be about $3 million of cash needed to repay the sales part of the accrued dividends.

Okay. Can you share your thoughts on trading in the first quarter 2022 FFA market and whether you plan to implement any FFAs for the first half or even the full year of 2022?

So we don't use FFAs speculatively; we only use FFAs to hedge our position. Because we have all our ships in the spot market, rather than fixing a time charter, we decided to fix at the beginning of October FFA contracts for Q1, essentially covering one vessel for Q1 at the level which was $31,000 something, which we deemed very satisfactory at that time. So it was done as a hedge against one of our open vessels, and as the market moves down, we felt the move was very abrupt. We thought that it would correct sooner than what it has proven to have been corrected. So we closed that position at that point, taking a profit of $700,000 and the outcome sees our ship open and exposed in Q1 this coming year. You will never see us engaging in speculative FFAs. You will never see us buying FFAs when we have ships that are open in the market because that would increase our exposure, which we don't want to do. We only want to use FFAs to cover our position. And of course, if at some point, we think that we have overcovered, we might close some positions to reduce the cover or take some profit.

Okay. And has the FFA market moved back up to where you would be potentially looking at selling again and creating cover or some hedges for the first half of the year?

It hasn't moved up that much yet. It's around the level that we closed our position, maybe even a little bit lower than the levels that we closed our position at this point. So it's not at $30,000; it's again at around low 20s, very low 20s. Yes, not the level that we think that we would like to take additional cover. We do believe in the market that we should see higher rates happening and transpiring, so we are not ready to fix our vessels out at $20,000 less.

Yes, I see. Sorry.

Yes. We'd rather keep them a little bit, we'd rather keep them short. If we do see them approaching $30,000 again, we will take some additional cover through either by fixing them on time charter or through FFA, you will see.

Yes. Maybe today is a pretty abrupt day, but I see the FFAs for Panamax is down in the first quarter, down under 20 or closer to 19. That's helpful. With Tasos, can you talk about the drydocking activity? It looks like drydocking expenses are going up for the next 12 months, and they potentially total close to $4 million. Can you just highlight how much downtime or idle base would be associated with those products?

Yes, I have the drydocking schedule for the vessels in front of me. In the first nine months of the year, we had very little drydocking, which is why you noticed a significant reduction in drydocking expenses. I believe we may have one or two drydockings planned for next year. Typically, it takes about 20 to 25 days for a drydock, and we budget between $500,000 and $700,000 for each drydock, with costs nearing $1 million for the Panamaxes. I can provide more details offline if needed, that's what I remember off the top of my head.

Yes, that would be helpful. And then Aristides, can you talk about the S&P market and just what you're seeing there and sort of your stance right now on additional moves to either enhance the fleet or expand the fleet?

I think we need to first see how this settles down after this vibrant move in the market. I mean, the very strong improvement in charter rates that we saw in September and the subsequent drop in October from how that affects values. If we do see the market correcting as far as values are concerned, we haven't seen that yet, and it doesn't really happen unless the market is low for quite some time or relatively for quite some time. So we want to see how things develop before we decide on a particular move like acquiring another ship or even selling an older one to replace it with a younger one, which is something that is also a thought that we have had, but we are not ready to implement any of these options at this point. We are more in a wait-and-see situation at this current moment.

Great. That's helpful. And I'd be remiss if I didn't say it looks like the Europe Seas acquisition this morning looks pretty interesting. Congratulations on that.

Yes, that's a very good move, but that's a different company.

We have no further questions. I will now hand back to Mr. Pittas for closing remarks.

Thank you, everybody, for participating in today's call, and we'll be back with you next year with the end of the year results, which you all know will be great. We will take it from there. Let's see what 2022 will bring. Bye-bye.

Thank you. That concludes the conference for today. Thank you for participating. You may now disconnect.