EuroDry Ltd. Q1 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the First 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. 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 over to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, EuroDry will be making 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 the current management's expectation that involves risks and uncertainties that may result in such expectations not being realized. I can draw your attention to Slide 2 of the webcast presentation, which has the full forward-looking statements 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 I would now like to pass the floor over to Mr. Pittas. Thank you. 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 Mr. Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the three-month period ended March 31, 2022. Please turn to Slide 3. Our income statement highlights are shown here. For the first quarter of 2022, we reported total net revenues of $18.3 million and a net income of $10.5 million. Adjusted net income attributable to the common shareholders was $9.5 million or $3.3 per share. Adjusted EBITDA for the period stood at $12.7 million. Our CFO, Tasos Aslidis, will go over the financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our operational highlights. Motor vessel Ekaterini charter has been extended until February 2023 at 105% of the average Baltic Kamsarmax Index. While the motor vessel Xenia charter has also been extended until March '24 at again 105% of the average Baltic Kamsarmax Index. Motor vessel Alexandros has been fixed for a trip of about 20 to 25 days at $29,000 a day during the quarter. Then it was fixed at $26,250 per day for the next 20 to 25 days, and thereafter, it was fixed for about 55 to 65 days at $28,000 a day. Motor Vessel Pantelis was fixed also from approximately a 20 to 25 days trip at $18,250 per day, and thereafter, it was fixed from 80 to 100 days at $20,500 per day. The Motor Vessel Tasos was fixed for 57 days at $18,750 per day, and thereafter, it was fixed for about 90 days at $20,600 per day. The Motor Vessel Molyvos Luck, which was delivered to the company on February 11, 2022, was fixed at $25,750 per day for a minimum period of 10.5 months and a maximum of 13.5 months. Finally, the Motor Vessel Starlight was extended at 98.5% of the Baltic Panamax Index for a minimum period until October 2022. As previously announced, on April 19, 2022, the company acquired Motor Vessel Santa Cruz, a 76,000 deadweight Japanese built drybulk vessel built in 2005 for $15.75 million. The company also assumes the existing charter of the vessel of $14,800 per day until July 2022. The acquisition was financed with own funds, and the vessel was delivered to the company on April 20, 2022. Regarding the drydockings, Motor Vessel Pantelis had a 7-day repair while Motor Vessel Starlight went into dry dock for 27 days. During the quarter, the company was also active on the FFA market and sold 90 days of forward freight agreements, the equivalent of one Panamax vessel at a rate of $28,000 per day. Please turn to Slide 5 to see the summary of our current fleet. The company's operating fleet has increased to 11 units. Our current fleet has an average age of 13.5 years, with a carrying capacity of about 800,000 deadweight tons. Let's move to Slide 6, which shows the current vessel employment schedule. As you can see, fixed rate coverage for the remaining of 2022 stands at about 30%. This figure excludes the six ships on index charters, which have secured employment that have opened to market fluctuations. Moving to Slide 7. We shall go over the market highlights for the quarter ended March 31, 2022, up to now. Despite the challenging global economic and geopolitical environment during the first quarter of 2022, drybulk rates remain at healthy levels. As seen here, the average spot market rate for Panamax 6 was approximately $21,400 a day in the first quarter, and by March 25, the price had increased to $28,500 per day. Overall, the BPI index started picking up towards the end of the quarter as increased ore and coal quantities were shipped and increased ton miles and grain rates were noticed due to the Russian-Ukraine conflict, which offset, of course, the decrease in grain trades from those areas. Please now turn to Slide 9. Global growth is expected to slow significantly in 2022, largely as a consequence of the war in Ukraine and the pandemic in China. In its latest report, the IMF logged its previous global GDP estimates from 4.4% growth to 3.6% for this year and from 3.8% to 3.6% in 2023. A deep contraction is projected for Russia due to the sanctions and also European countries' decision to scale back energy imports. Larger than expected slowdown in China remains a key risk to growth for emerging markets, but its impact depends on the drivers of sales slowdown as well as the ensuing policy reaction. Prospects for emerging markets and developing economies are also generally for lower growth in '22 than in '21. From the developed economies, Japan and the ASEAN-5 should do better than 2021. Tighter policy and an anticipated halt in further stimulus spending by Congress, the IMF has reduced its growth forecast for the U.S. for 2022 by 1.7% to 3.7%. Looking at the drybulk trade and according to Clarkson's Research, demand is expected to grow by 2.3% in '22 compared to 4.6% for the previous year. For 2023, we expect drybulk trade to grow at a moderate pace of 2.5%. Rate and growth projections are being continuously revised as the effects of geopolitical tensions between Russia and Ukraine on world growth and trade are being continuously assessed. Please turn to Slide 10. The order book as a percentage of total fleet up until May 2022 stands at 6.6%, which is around the lowest levels we've seen in the last 25-plus years. Now please turn to Slide 11 for our drybulk fleet overview. Whilst Clarksons expects new deliveries of about 3.1% of the current fleet to be delivered in 2022 and 2.8% in 2023, we expect a net fleet growth of around 2% during 2022 and below 1% in 2023, after also taking into account scrapping, slippage and other possible removals. New vessel ordering continues to be muted given concerns over environmental regulations and as a result, supply should remain tight for the foreseeable future. Please turn to Slide 12 where we summarize our outlook in the drybulk market. As previously mentioned, the Ukraine-Russia war adds to uncertainty and inflation while the widening of lockdowns in China causes a delay in the easing of global supply bottlenecks and the normalization of supply-demand balances. We expect earnings to remain volatile at high levels as the short-and medium-term outlook are generally positive and supported by one of the lowest order books ever and disruptions from port congestion and changing trade flows. Indeed, demand has been affected lately due to a number of factors, including changes in trade flows due to reduced production levels in China, resulting in lower steel production as well as a reduction of bulk exports originating from Russia and Ukraine. However, alternative trade routes are increasing ton mile demand for coal and other drybulk commodities as they shift away from Russian ports. Overall, fundamentals remain positive for 2022, barring any immediate severe recession. While many unknown factors like congestion easing, the effect of the war in demand, and the introduction of new regulations will play a dominating role in creating the forward supply and demand balances. Ordering for new ships for 2023 deliveries is expected to be nonexistent due to lack of available slots in shipyards. In addition, the lack of clarity regarding the fuel of the future remains an unknown, something that makes placing a new order even from a later delivery a very risky option. On the other hand, normalization of trade routes and congestion easing will probably increase effective supply at some point. Please turn to Slide 13. The left side of the slide shows the evolution of one-year time charter rates of Panamax dry bulk vessels since 2002. As of the end of last week, the one-year time charter rate for Panamax ships with a capacity of 75,000 deadweight tons stood at $27,125, having recovered from the big drop we saw at the beginning of the year. On the right-hand side of the slide, you can see the historical price range for a 10-year-old Panamax vessel, which has a current price of around $28 million. This is the highest of the last decade. Over the past year, drybulk prices have gradually been increasing, exceeding the historical medium and average levels. However, prices have still been significantly lower than what we have seen in the beginning of 2008. Whilst continuing to reap the benefits from the current strong charter market, we are also closely monitoring market developments for any opportunities that may arise furthering shareholder value. And with that, let me now pass the floor over to our CFO, Tasos Aslidis, to go over the various financial highlights in more detail. Thank you.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. Over the next 5 slides, I will give you an overview of our financial highlights for the first quarter of 2022 and compare them to the same period of last year. For that, let's turn to Slide 15. In the first quarter of 2022, the company reported total net revenues of $18.3 million, representing a 113% increase from the total net revenues of $8.6 million during the first quarter of 2021. This was the result of both higher charter time to operate our vessels during the first quarter of this year and the increased number of vessels we owned and operated compared to the first quarter of 2021. The company reported net income attributable to common shareholders for the period of $10.5 million as compared to a net income attributable to common shareholders of $0.9 million and $0.4 million, respectively, for the first quarter of last year. Interest and other financing costs for the first quarter of 2022 amounted to about $0.65 million, slightly increased compared to $0.6 million for the same period of 2021. Interest expenses during the first quarter of this year were higher due primarily to the increased LIBOR rates on our loans compared to the first quarter of 2021. Adjusted EBITDA for the first quarter of this year was $12.7 million compared to $4 million achieved during the first quarter of 2021, representing a 217% increase. Basic and diluted earnings per share attributable to common shareholders for the first quarter of 2022 were $3.69 and $3.64, respectively, calculated on 2.85 million basic and 2.88 million diluted weighted average number of shares outstanding compared to basic and diluted earnings per share of $0.19 for the first quarter of 2021, calculated on about 2.3 million basic and diluted weighted average number of shares outstanding. Excluding the effect on earnings attributable to common shareholders for the quarter of the unrealized gain on derivatives, the adjusted earnings attributable to common shareholders for the quarter ended March 31, 2022, have been $3.34 and $3.30 per share basic diluted, respectively, compared to adjusted earnings of $0.55 basic diluted in the first quarter of last year. Usually, security analysts do not include the above items in their published estimates of earnings per share %. That's why we do the adjustment. Let's now turn to Slide 16 to review our fleet performance. We will start our review by looking first at our fleet utilization rates for the first quarter of 2022 and 2021. As usual, our fleet utilization rate is broken down into commercial and operational. During the first quarter of 2022, our commercial utilization rate was 100%, while our operational utilization rate was 99.6% compared to 100% commercial and 100% operational for the first quarter of last year. On average, 9.5 vessels were owned and operated during the first quarter of 2022, adding another time charter equivalent rate of $24,636 per vessel per day compared to 7 vessels in the same period of 2021, where the average rate was $14,924 per day. Our total operating expenses, including management fees and general and administrative expenses, but excluding the total cost of the drybulk, averaged $6,610 per vessel per day during the first quarter of 2022 compared to $6,571 per vessel per day for the first quarter of last year. If we move further down in this table, we can see the cash flow breakeven rate for the first quarter of 2022, which also takes into account drybulk expenses, interest expenses, and loan repayments, excluding our balloon repayments, and preferred dividends if they are paid in cash. Thus, during the first quarter of 2022, our daily cash flow breakeven rate was $12,821 per vessel per day compared to $11,064 per vessel per day for the same period in the first quarter of 2021. Let's now move to Slide 17. We give you this slide as a calculation tool that enables our shareholders and investors to assess the earnings potential of our fleet in the current year and under the current environment. The table shown in the slide refers to our fixed rate contracts. As you can see, our contract coverage in fixed rate contracts is about 45% for the year. It is about 56% in the second quarter, but it declines to 24% and 11% in the third and fourth quarters respectively. This chartering strategy reflects our expectation that the market will be quite strong, as is indicated by the current forward freight market rates. The rest of our vessels are employed in contracts linked to the Baltic Dry Index or are yet to be contracted. Our calculator indicatively shows the second part of the table, the Supramax and Panamax Baltic forward rates as of May 13, 2022, which also shows how this index levels get translated to rates for our ships. We actually displayed the final blended rate for the open date of our fleet, which you can see right below the Supramax and Panamax operatives in the table, and which as you can see, is roughly similar in terms of levels to the rate that we have contracted. Based on these assumptions and by further assuming for simplicity, $7,500 per day per vessel, the OpEx and G&A costs, and a 5% commission rate, one can estimate the EBITDA contribution of the day get to be fixed. The final result is additionally adjusted at the bottom of the table for our preliminary debt expense estimate during the year. This overall exercise is meant to provide a tool to calculate our EBITDA for 2022. Obviously, one can end piece of their own assumption about their rates to do that. Growth objective that the assumed FFA rates, an annualized EBITDA estimate for 2022 would be in excess of $50 million. Final figures, I mentioned, will obviously depend on the rates materializing over the rest of the year and possibly on the timing of any charters we book. One can also easily estimate from this table the dependence of the EBITDA to the average rate earned by our open days. For example, a change of $4,000 per day in the average rate earned would result in about a $2 million change in our 2022 EBITDA estimate. Let's now move to Slide 18 to review our debt profile. As of May 31, 2022, we had an outstanding bank debt of about $75.6 million. By looking at the chart, we can see that our debt repayments over the next three years range between $10 million and roughly $14 million and then drop to $2.8 million and $3.6 million in 2025 and 2026. Our next balloon payment is towards the end of 2023 for about $11.3 million, and the first one for Kamsarmax vessels. We would expect to be able to refinance that balloon payment, if we choose so, as we have done on numerous occasions previously. A quick note on this slide about the cost of our debt. The average margin of our debt is about 2.8%, and assuming a LIBOR rate of about 1.25% on top of it, we can estimate the cost of our debt to be around 4.1%. At the bottom of the slide, we can also see a projection for cash flow breakeven rate for the next 12 months, and we can see in the projection that the cash flow breakeven level is at about $13,000 per vessel per day, which includes about $38,000 per vessel per day of loan repayments. Let's now move to Slide 19, where we can see some highlights from our balance sheet in a simplified way. This slide shows a snapshot of our assets and our liabilities. On our asset side, you can see the cost that we have and other assets are the liquid assets that account for about $21 million. The book value of our vessels is approximately $148 million, resulting in the total book value of our assets of about $169 million. On the liability side, our debt as of March 31, as I mentioned earlier, equals about $75.6 million, which approximately represents about 45% of the book value of our assets. Accounting for other liabilities at the same time comes to about $4.6 million, approximately 2.7% of our total assets, leaving shareholders' equity, essentially our net book value to be approximately $89 million, which translates to $29.8 per share book value. However, we estimate as of the end of March 2022, that the market value of our vessels to be around $215 million, about 46% higher on the respective of their expected book values suggesting an NAV per share in excess of $52. Our shares consistently traded around $35 or about 65% of our net asset value, subjecting significantly for appreciation of our stock if it were to approach our NAV levels. And with that, I would like to turn the floor back to Aristides to continue the call.

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

Thank you. We will now take the first question. The line is now open. Please go ahead and ask your question.

Yes. It's Tate Sullivan from Maxim Group. Good day. If I may, just starting on new builds and Aristides, can you review some of your conversations with shipyards? Last week, we saw a new build announcement for delivery in the first half of '24 in the drybulk industry. And I've heard that maybe now the conversations are focusing on '25 delivery. Is that the case? And why such a long timeline?

Yes. Tate, you are right. The good shipyards are mostly full for 2024. So it is difficult to place orders within 2024. So most likely, you will be looking for a delivery in 2025 these days. Of course, for smaller drybulk vessels, I think that in China, you can still have 2024 deliveries, but the best shipyards really are quite full.

Can you comment on whether there are discussions in the industry about expanding shipyard capacity, considering it takes two to three years to receive delivery of a new ship? What are the barriers to doing so?

If you remember, this was done back in 2005 when, again, the markets were going through a boom and suddenly people wanted ships. And we saw, especially in China, new shipyards being opened. It takes time to build a shipyard; it's a couple of years. And most of them, by the time they opened, the market had corrected, and there was no need for them. So there was a lot of suffering by people that tried to build new shipyards. And I don't see any movement right now to increase the shipyard capacity significantly at all.

Okay. Looking ahead, in terms of potential environmental regulations, are clients beginning to request newer and cleaner ships? What is the anticipated enforcement of future environmental regulations? Are you noticing any demand from customers for newer ownership?

I think that everybody would like to use newer ships and whatever is available, which is more efficient. But one has to live with what exists and everybody is having to live with what vessels exist. It will be quite some time until we see much more fuel-efficient vessels being built. So I anticipate that whilst we all want to do what we can to help the environment, the practicalities today are such that we will continue with the conventional ships that we have for quite some time.

Great. Thank you very much, Aristides.

Thanks, Tate.

Thank you. And we will now take the next question. The line is now open. Please go ahead and ask your question.

Hi, it's Poe Fratt from Alliance Global Partners. Aristides, if you could talk about the other side of the equation on new builds. You talked about delivery times being extended potentially into '24 and '25. What would drive you to order a new build? There's no visibility in the market. Contracts are still fairly short. Would you consider building something on spec without any confidence that you might see longer-term contracts develop over the next couple of years?

Well, I think you hit the nail there. We are seeing newbuilding orders in container ships where people can get long-term charters at higher rates and therefore can justify the investment. In dry bulk, we do not have charters taking ships for longer periods, and that's why you see that not only us, but everybody is reluctant to order dry bulk vessels today at prices which are 25%, 30% higher than what they were a couple of years ago. So I think this is the main reason that you see this discrepancy between container ordering and dry bulk ordering.

Great, that's helpful. Can you provide more specifics on your fleet and what steps you're taking between now and 2023 to prepare for the new environmental regulations?

Well, obviously, we are going to fully comply with the new regulations. Even existing ships will be able to comply with new regulations with various initiatives to reduce resistance. The most important thing that will help comply with the regulations will be to reduce the speed of the vessel, and indeed, this is what everybody will be doing in this market. They will reduce the maximum speed of the ships, which, of course, is a good thing for the market as a whole because effectively, it reduces the supply of vessels. Small things are being done in optimizing the routes, in trying to make the engines a little bit more efficient, but these are small numbers. They are not very significant improvements. The biggest improvement comes when you dry dock your ship and you paint it nicely and reduce significantly the resistance, and of course, when you cut your speed.

Okay. If I calculate correctly, in the first quarter, your operating expenses were around $6,600 per day, and you are forecasting an increase to about $6,938 a day over the next 12 months. Can you explain the factors driving that? Is it due to higher bunker fuel prices? Additionally, should we expect a gradual increase, or will there be a sudden change in the second quarter?

I think it's an increase, partly due to inflation, obviously. It partly depends on exchange rates, and that works for us at the time being because we pay management fees in euros and is getting cheaper. And also certain things are becoming more expensive, like the lubricants and the like. So I think we expect the increase to settle pretty much in the right now over the next quarter and to see overall higher levels compared to 2021. Crewing costs continue to be a challenge, both in getting crew and positioning them. I think there are increases across the board, primarily coming from overall inflation and tightness in the market that we see.

Okay. And then if we could broadly talk about capital allocation in the context. You continue to find some opportunities for second-hand assets, but arguably, you're paying close to NAV for those assets and your stock is trading at a fairly reasonable discount or wide discount to what you said your NAV might be. Can you walk us through whether at some point in time you'd consider implementing the share buyback program or potentially, like other companies, returning cash to shareholders in the form of a dividend? Or can you just talk about broadly what we might expect over the next 12 months from a capital allocation standpoint?

That’s a very good question, and this is something we are continually discussing at the Board level. As you mentioned, we are trading at a significant discount to our NAV, which might suggest that buying back stock would be a wise investment. However, our challenge is that we are a small company, particularly in the capital markets. As an operating company, our current size allows us to maintain similar operating costs as larger companies while being more efficient. Yet, from a capital markets viewpoint, reducing our size through stock buybacks would impact the company’s size and stock liquidity. We are focusing on enhancing our share price towards NAV by improving our marketing efforts to better convey who we are, what we do, and our company’s prospects. This is why we have not yet pursued a policy of paying dividends or executing share buybacks, though we continually review this option.

Yes. Understood. Just your stock is so volatile; even a small share buyback might set a higher floor than what we've seen over the last couple of quarters. It just seems like every once in a while, there's an air pocket. And if the stock buyback were in place, maybe that would help minimize or dampen that sharp drawdown? Just some thoughts.

Appreciate it.

Thank you. And we have a follow-up question from Tate Sullivan.

Hi, thank you for taking my follow-up. Tasos, regarding the drydocking costs you are forecasting, they seem higher compared to what was reported this quarter and in the first quarter. Is this connected to painting the halls that Aristides mentioned earlier? Are there additional measures you can take while the ships are in dry dock to enhance their fuel efficiency? Should we anticipate an increase in drydocking costs over the next couple of years as well?

I think, probably, it's fair to say that the dry bulk costs, especially for our older vessels, will increase over the next 12 months or three years to pass this deal with issues like that. Part of the deal and with the fact that the ships are aging and if they have to go through a dry dock at a later age, they cost a little more.

But also the unit cost in all the shipyards has increased significantly. So a replacement of the ton of steel has increased by 50%. So every unit cost in the shipyard has been increasing over the last year, every component.

Every component.

Okay. Great. And then following up on the capital allocation question. With the ship purchases in the last quarter, you purchased the ship mostly with almost all cash and reduced debt. Are you expecting to finance or add financing secured financing stewardship and the ship you're buying this quarter?

We are exploring options for bringing our recent acquisitions to market and assessing which banks can offer the best terms. We are looking into financing both acquisitions, which were initially purchased with our own funds. Consequently, we have some available funding capacity that we can utilize if we need to secure additional financial resources.

Okay. Can you discuss how you evaluate the current rates and feel confident about paying higher prices for second-hand ships compared to your recent acquisitions?

Sure. That's why we have not been purchasing very modern ships. The last ship we acquired was quite old, but we secured a one-year time charter at that time, which allowed us to bring the value down to a reasonable level by the end of the charter. These considerations are part of our process for selecting ships to buy. We need to ensure there's a high charter, even if it's just for a year, to help us reduce the price to a level that is close to the historical median price at the end of the charter.

And also, Tate, I think a fundamental reason to be optimistic about the market is, when you look at Slide 10, the order book-to-fleet ratio, I would say, it's almost four times lower than it's not at all-time lows and that definitely provides a fair amount of comfort for the next couple of years to leverage the target below in good levels, so to say.

Thank you for taking my call.

Thank you.

Thank you. And no further questions as of the moment. I will now pass the floor over to Aristides Pittas. Please go ahead, sir.

Thank you all for taking the time to listen to our call. We'll be with you again in three months' time. Bye.

Thanks, everybody.

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