EuroDry Ltd. Q2 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Second 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 current management’s expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide 02 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 I would now like to pass the floor over to Mr. Pittas. Thank you, Sir. Please go ahead.

Hello, ladies and gentlemen, good morning, and thank you for joining us for the scheduled conference call. I have with me Tasos Aslidis, our Chief Financial Officer. The purpose of today’s call is to discuss our financial results for the six months period and quarter ended March 30, 2022. Please turn to Slide 3. Our income statement highlights are shown here. For the second quarter of 2022, we reported total net revenues of $21 million and a net income of $10.6 million or $3.61 per diluted share. Adjusted net income attributable to the common shareholders was $9.9 million or $3.38 per diluted share. Adjusted EBITDA for the period was $13.7 million. With positive release in the dry bulk market that is still anticipated to remain firm for the second half of the year, we believe our stocks will be trading at much higher levels given the net asset value of the company as well. We believe these factors create cultivating opportunities for us and therefore the Company’s Board of Directors has approved the share repurchase program up to a total of $10 million of the Company’s common stock to be used at management's discretion. The Board will review the program after a period of 12 months. Share repurchases will be made from time to time for cash local market transactions at prevailing market prices, all in dry bulk negotiated transactions. The amount of purchases under the program will be determined by management based on market conditions and other factors. The program does not require the Company to purchase any specific number of or amount of shares and may be suspended at any time at the Company's discretion. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in the presentation. Please turn to Slide 04 for our operational highlights. Motor vessel Ekaterini charter was extended for a minimum period until February 2023, till the maximum period until April 20, 2023 at 105% of the average Baltic Kamsarmax Index. While sister vessel, motor vessel Xenia charter was also extended for a minimum period until March 1, 2024 to a maximum period until May 15, 2024, also at an annual 5% of the average Baltic Kamsarmax Index. Motor vessel Eirini was fixed for a trip of approximately 20 to 30 days at $14,000 per day and both operations will undertake their scheduled dry-dock. Motor vessel Blessed Luck was fixed for a trip of approximately 20 to 25 days as well at $15,750 per day after completing its dry-dock for approximately 23 days during the second quarter. Furthermore, motor vessel Santa Cruz was fixed again for a small trip of about 15 to 25 days at $11,500 per day. And motor vessel Pantelis for a trip of 55 to 65 days at $13,000 per day. Our motor vessel Alexandros was fixed for a trip of about 55 to 65 days at $28,000 a day earlier in the quarter, which was followed by scheduled dry-dock from where it sailed yesterday. The vessel is now fixed for a trip that will earn a minimum of $15,000 per day for up to 65 days. Finally, motor vessel Tasos was fixed for about 80 to 100 days at $20,600 per day and is also currently undergoing scheduled dry-dock. The idle commercial off-hire for motor vessels Pantelis and Alexandros P were idle for 2.2 days and 3.9 days respectively during this quarter while waiting to commence their next employment due to complications that arose from dealing with the COVID issues. We are very pleased to announce that we have completed our 2021 sustainability report, which is available on our website. Our commitment towards all aspects of ESG is steadfast. Please turn to Slide 05 to review our current fleet. Our current fleet consists of 11 vessels including six Panamaxes, Supramaxes and two Kamsarmaxes with an average age of 13.5 years and a carrying capacity of approximately 800,000 deadweight tons. Moving on to Slide 6, we review the current vessel employment schedule. As you can see, fixed-rate coverage for the remaining quarters of 2022 stands at around 31%. This figure excludes the three ships on index charters which are open to market fluctuations but have secured employment. Moving to Slide 7, we’ll go over the market highlights for the quarter ended June 30, 2022 and its current expenses. The market continues to withdraw by a safety supply and demand balance which is reflected in a very strength in lower and in recent weeks due to the ongoing geopolitical conflicts with volatility surrounding the greater economy, high commodity prices, and inflation. As seen here, the average spot market rate for Panamaxes was approximately $25,400 a day in the second quarter. By July 1, the price dropped to about $21,500 per day and currently stands at around $17,000 per day. Similarly, the one-year bank charter rate for Panamaxes was about $26,000 per day dropping to $20,150 per day by July 1, and currently stands at $16,750 per day. Despite the drop, the BPI index strength has been relatively strong especially considering it comes against a fairly muted diagonal market which has seen flat volumes due to more restrained Chinese steel production and low demand. Please turn to Slide 9. The global GDP growth forecast has been further reduced for 2022 by the IMF in its latest report as several events continue to impact the world economy already strained by the pandemic. The political conflict between Russia and Ukraine has added to existing inflationary pressures that were already mounting due to the economic stimuli provided during the pandemic. The tightening financial policies, including a series of aggressive interest rate hikes to address it, alongside elevated energy prices primarily driven by the Russia-Ukraine conflict and lingering supply chain issues, as well as additional slowdowns in China due to regional COVID-19 lockdowns, have led to a significant reduction in Chinese growth. The IMF has lowered its local GDP estimate from 3.6% in April to 3.2% to date and to 2.9% for 2023. GDP growth for the United States was revised downwards to 2.3% for 2022, a 1.4 percentage point decrease over previous quarters, influenced by lower growth and tight monetary policies. Similarly, European growth has been revised down to 2.6% as a result of the Russia-Ukraine conflict and tighter monetary policies. Growth in emerging markets and developing economies is also expected to sharply decelerate, revised down to 7.4% for '22 and 6.1% for 2023. While we only calculate with better forecasts for Brazil projected at 1.7% in 2022, a decrease from 1.8% previously due to a robust recovery in Latin America. The robust economies in Japan and the Asian sides have also faced revised values for 2022 and 2023 due to concerns about slowing economies following the U.S. interest rate hike and ongoing inflation. Looking at the dry bulk trade, Clarksons Research expects demand growth to decrease to 1.2% in 2022 compared to 3.8% for the previous year, with expected growth of 2.1% in 2023. Trade growth projections are being continually revised as the impacts of geopolitical tensions between Russia and Ukraine on global trade continue to be reassessed. Please turn to Slide 10. Lack of rebuilding order books in recent years poses a favorable mix for the dry bulk sector. The order book remains at just 7.2% of the existing fleet, which has mostly been unchanged over the past 18 months despite the strongest demand in more than a decade for charter rates. Now, please turn to Slide 11 for our dry bulk fleet overview. Clarksons expects deliveries of 90.5% of the current fleet to occur in 2022 and 3.2% in 2023, indicating a fleet growth of around 2.4% in 2022 and below 1% in 2023, as the order book to fleet ratio remains at a record low and contracting circuit. Please turn to Slide 12, where we summarize our outlook in the dry bulk market. The bulker market remains firm, with earnings still above historical averages despite demand-side concerns around the Russia-Ukraine conflict and macroeconomic headwinds. Severe port congestion continues to provide major disruption upside, with the short-term market outlook still positive in anticipation of the traditional second half market seasonality. Beyond the overall risks to the global economy, final demand in the bulk sector is likely to be impacted by a complex mix of upsides and downsides: increasing commodity prices, inflation, and interest rates putting a strain on businesses and consumers, while a shift in trading patterns and slower speeding due to environmental concerns could increase average sailing distances. Congestion remains an issue and so far this year, more ships have consistently been stuck for longer than in 2021. This adds inefficiency to the supply chain and reduces effective supply, thereby tightening the supply/demand balance in favor of owners and operators. Demolition slowed significantly in 2021 as high freight rates encouraged continued trading and we expect it to remain about the same level throughout the year. A few scrapings in the Capesize sector have only materialized this year. Ordering of new ships for 2023 and 2024 deliveries is expected to be non-existent due to a lack of available slots in shipyards. In addition, the lack of clarity for the fuel of the future remains unknown, making placing a new order a very risky option. On the other hand, normalization of trade routes and easing congestion will likely increase effective supply. Overall, the direction of the market will be determined by the outcome of the war between Russia and Ukraine and by the efforts of the global economy to fight inflation with minimal negative consequences for global growth. 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 August 5, the one-year time charter rate for Panamax vessels with a capacity of 75,000 deadweight tons stands at $16,750 per day, reflecting significant levels. On the other 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 $26.5 million. Over the past year, dry bulk prices have gradually increased, exceeding the historical medium and average levels, with growth at the highest levels of the decade, yet still considerably lower than the peaks of 2009. Overall, we remain quite bullish that in the medium-term, the dry bulk market will remain strong and perhaps strengthen further if geopolitical problems resolve. However, given the current dry bulk prices, we are reluctant to make further acquisitions. We will be monitoring the market for any opportunities that may arise as our strong balance sheet provides us with flexibility. And with that, let me now pass the floor over to CFO Tasos Aslidis to provide details on the various financial highlights.

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 second quarter and first half of 2022, and compare them to the same periods of last year. For that, let’s turn to Slide 15. In the second quarter of 2022, the company reported total net revenues of $21 million, representing a 48.8% increase from the total net revenues of $14.1 million during the second quarter of 2021. This increase was driven by higher charter rates for our vessels compared to last year and primarily due to the greater number of vessels we own and operate. It’s worth noting that our fleet in the second quarter of this year is about 45% larger than it was in the same quarter last year. The company reported net income and net income attributable to common shareholders for the second quarter of this year was $10.6 million as compared to net income of $2.2 million and net income attributable to common shareholders of $4.5 million for the same period in the second quarter of 2021. Interest and other financing costs, including interest income and loss on debt extinguishment for the second quarter of 2022 amounted to $0.8 million compared to $0.5 million in the same period of 2021 excluding the $1.7 million loss on debt extinguishment reported last year. Interest expenses for the second quarter of 2022 were higher mainly due to the increased amount of debt incurred during the period compared to the same period last year and the higher underlying LIBOR costs. Adjusted EBITDA for the second quarter of 2022 was $13.7 million compared to $9.2 million achieved during the second quarter of 2021. Basic and diluted earnings per share attributable to common shareholders for the second quarter of 2022 were $3.66 basic and $3.61 diluted, calculated on about 2.9 million weighted average number of shares outstanding compared to $0.83 basic and $0.81 diluted calculated on about 2.4 million weighted average number of shares outstanding for the second quarter of 2021. Excluding the effect on the income attributable to common shareholders for the unrealized gain on derivatives, the adjusted earnings attributable to common shareholders for the second quarter of this year would have been $3.43 and $3.38 for basic and diluted respectively. For the second quarter of last year, excluding the unrealized loss on derivatives and the loss on debt extinguishment, the adjusted earnings attributable to common shareholders would have been $2.81 and $2.76 for basic and diluted respectively. Usually, security analysts do not include the above items in their published estimates of earnings per share. Let us now look at the numbers for the corresponding six-month periods ended June 30 for 2022 and 2021. In the first half of this year, the company reported total net revenues of $39.3 million, representing a 73.1% increase over total net revenues of $22.7 million during the first half of 2021. This was a result of both high time charter rates per vessel during the first half of this year and the increased number of vessels operated. We reported net income of $21.1 million and net income attributable to common shareholders for the first six months was $21.1 million as compared to net income of $3.1 million and net income attributable to common shareholders of $2.4 million for the first half of last year. Interest and other financing costs, including interest income for the first half of 2022 amounted to $1.4 million compared to $1.1 million for the same period of 2021 excluding again the $1.7 million charge on debt extinguishment reported last year. This increase is mainly due again to the increased amount of debt in the current period compared to the same period of 2021 and the underlying LIBOR cost increase. The adjusted EBITDA for the first half of 2022 was $26.4 million compared to $13.2 million achieved during the first half of 2021. Basic and diluted earnings per share attributable to common shareholders for the first half of 2022 were $7.35 basic and $7.25 diluted calculated on 2.9 million weighted average number of shares outstanding compared to $1.03 basic and $1.01 diluted during the same period last year calculated on 2.4 million weighted average number of shares outstanding respectively. Excluding the effect of the unrealized gain on derivatives attributable to common shareholders for the first half of the year, the adjusted earnings would have been $6.37 for basic and $6.60 diluted. For the six-month period ended June 30, 2021, again excluding the unrealized loss on derivatives and the loss on debt extinguishment, the adjusted earnings attributable to common shareholders would have been $3.40 for basic and $3.33 for diluted. Let’s now turn to Slide 16 to review our fleet performance. Our utilization rate is broken down into commercial and operational. During the second quarter of 2022, our commercial utilization rate was 99.4%, while our operational utilization rate was 99% compared to 100% commercial and 99.4% operational for the second quarter of last year. Our overall utilization rate was 98.3% in the second quarter of 2022 compared to 99.4% in the second quarter of last year. On average, we owned and operated 10.79 vessels in the second quarter of this year with another expense charter equivalent rate of $23,409 per vessel per day, compared to 7.37 vessels in the same period of 2021, where earnings were $22,613 per day. As I mentioned earlier, our average fleet during the second quarter this year was up about 45% compared to the second quarter of 2021. Our total operating expenses, including management fees and general administrative expenses but excluding dry dock costs, were $6,462 per vessel per day in the second quarter of this year compared to $6,467 per vessel per day for the second quarter of 2021. Moving further down in this table, we can see the cash flow breakeven rate for the second quarter of 2022, which also takes into account dry docking expenses, interest expenses and loan repayments, as well as preferred dividends to be paid in cash excluding any balloon payments. Thus during the second quarter of 2022, our daily cash flow breakeven rate was $11,986 per vessel per day compared to $10,614 per vessel per day for the same period last year, an increase primarily due to higher loan repayments in the second quarter of 2022. Our commercial utilization rate was 99.7% and our operational utilization rate was 99.3% during the first half of 2022 compared to 100% commercial and 99.7% operational utilization for the same period last year. On average, we owned and operated 10.79 vessels in the first half of this year with a charter equivalent rate of $24,025 per vessel per day compared to 7.19 vessels in the same period last year with an average of $18,879 per vessel per day. Our total operating expenses, including management fees and G&A expenses but excluding dry docking costs, were $6,584 per vessel per day in the first half of this year compared to $6,518 per vessel per day for the same period of 2021. Looking at the cash flow breakeven rate for the first half of 2022, which takes into account dry bulk, interest expenses, loan repayments, and preferred dividends, our daily cash flow breakeven rate was $12,393 per vessel, compared to $10,688 per vessel for the same period last year, due to increased debt. Let’s now move to Slide 17, our EBITDA calculator. As noted in previous earnings presentations, we use this slide as a calculation tool, which allows our shareholders and investors to assess the earnings potential of our fleet in the current year and under the current environment. From the table, our contract coverage in fixed-rate contracts is about 47% in the first quarter of this year, declining to about 13% in the second quarter. The table also shows estimated contributions based on assumptions in OPEX and G&A costs while assuming a 5% commission rate. This enables shareholders to estimate EBITDA contributions based on fixed and expected future rates. Now, moving to Slide 18, we review our debt profile. As of June 30, 2022, we have outstanding bank debt of about $71.8 million. Our debt repayments scheduled over the next three years range from $10 million to about $14 million per year, dropping to $2.8 million and $3.6 million in 2025 and 2026, respectively. The next balloon payment is due towards the end of 2023 for approximately $11.3 million for Kamsarmax vessels. We expect to refinance this payment if needed, as we have successfully done in the past. The average margin for our debt is about 2.7%, assuming a LIBOR rate of about 2.8%, we estimate the total cost of our senior debt at the end of the second quarter to be about 5.7%. Our expected cash flow breakeven for the next 12 months is approximately $13,100 per vessel per day. Moving to Slide 19, we can see some highlights from our balance sheet in a simplified format. This slide shows a snapshot of our assets and liabilities. Our assets consist of cash, short-term assets, and the cost of our vessels. As of June 30, 2022, we have cash and short-term assets of about $17 million and the book value for vessels at approximately $860 million, leading to a total book value of assets of around $875 million. On the liability side, as mentioned, our debt was about $71.8 million, which represents around 40.5% of the book value of our assets. Additionally, other liabilities amounted to $2.9 million, or 1.6% of our total assets, resulting in shareholders’ equity of about $102.5 million, which relates to approximately $30 of net book value per share. However, based on our market estimates and transactions, as of the end of June, the market value for our vessels is around $235 million to $236 million, or about 48% higher than the respective book value, suggesting a NAV per share in excess of $59. Given that our share price has recently traded in the high teens and closed yesterday just below $18 per share, there appears to be a significant gap to our NAV, suggesting substantial appreciation potential for our shareholders. And with that, I’d like to turn the floor back to Aristides to continue the call.

Thank you, Tasos. May I now open up the floor for any questions that you may have.

Thank you. And we’ll pause briefly to allow everyone to signal for questions. We do take our first question from Tate Sullivan of Maxim Group. Please go ahead.

Thank you. Good day. For the share repurchase plan, how did you decide on the initial size of the repurchase plan at $10 million? We’re looking at what you recently generated in free cash flow every quarter. Just to start there, please.

I think we mostly decided on the size by looking at our current liquidity and wanting to establish an initial size for it. We will see how things develop, and we can adjust it larger or smaller based on that. We thought it was a reasonable amount to start with, appropriate to the size of the company.

Is this the first repurchase plan in your history with public shipping companies in the shipping sector? Can you just review the repurchase history?

Yes, we had never done that in the past. But considering how low our share price is, we felt compelled to take action to help support the price and provide a good return for our shareholders.

At this time, to buy a new vessel is quite expensive as asset prices are extremely high compared to where we are trading. So, it makes more sense to buy back our stock rather than purchasing a new vessel.

That’s related to one of my other questions; you mentioned being reluctant to make more acquisitions in this environment, even though you’re positive for the medium-term — is it mainly because asset prices are still high?

Yes, prices remain high since the rate correction, but we anticipate it is seasonal. Still, there are uncertainties. At these prices, we don’t want to make new investments while our stock price is traded around 30%-35% of intrinsic value.

Regarding the refinancing tussles, what facility is due this year, and will it probably be at a higher interest rate than five years ago?

This year, the maturity is for one of our loans, but I believe it matures in the fourth quarter of 2023 and we expect to refinance it as we have done previously. Additionally, we have two vessels that are unencumbered, giving us options.

Next, we move on to the line of Poe Fratt with Alliance Global Partners. Please go ahead.

Yes, good morning, Aristides. Good morning, Tasos. Good move on the stock buyback program. Quick question on it, how quickly can you become active on the program?

We are set up and can be ready to use it within the next couple of days.

Looking at the increased share count over the second quarter, it seems you might have issued a bit of equity under your ATM. The average price I calculated was just above $40. Can you confirm those numbers?

Yes, those numbers are correct. We utilized our ATM during the second quarter, with share price above $40. As reflected in our accounts, this led to an increase in share counts for this quarter, much closer to NAV.

Would you consider a more comprehensive refinancing plan at that point? Can you elaborate on that a bit?

We're assessing our options for refinancing. We will carefully decide whether to extend and refinance as payments become due, focusing on competitive pricing for our debt.

On operating expenses, two other companies in the dry bulk sector have reported higher operating costs. Can you talk about your OpEx regarding the next 12 months?

We expect to see an increase, but no dramatic shifts in our operating expenses. Compared to our 2022 guidance, we are on target, maybe slightly below budget. Higher fuel costs and some services may increase expenses slightly, but not significantly.

You highlighted the three dry docks this quarter. Can you talk about the fourth quarter dry dock activity and possibly plans for 2023?

We don’t have any planned dry docks for Q4 this year. Generally, we expect to have one dry dock per quarter on average, so this quarter's three dry docks were coincidental rather than planned. It helps given the current charter rate decline.

In 2023, we expect about three or four dry docks throughout the year. The next one is planned for the first quarter of '23.

Thank you, Poe.

Thank you very much, Poe.

And we will return to the line of Tate Sullivan with Maxim Group for additional follow-up.

You mentioned the Pantelis undergoing a dry dock in 1Q '23, and some repositioning days for the ship in the second quarter — is this mainly due to the congestion that’s still taking place with imports from China?

Sure. It's primarily due to the COVID-related issues and congestion affecting crew changes and port access, causing delays.

In your market commentary, with the congestion easing, do you foresee any offsets to the tight supply-demand balance?

Yes, easing congestion could lead to supply challenges. However, we expect limited new builds and potential slow steaming regulations to continue tightening the market.

Thank you. Have a great day.

Thank you all for listening to us today. We will be with you again with the next quarter's results. Enjoy the rest of the summer. Goodbye.

Thanks everybody. Goodbye.

Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.