EuroDry Ltd. Q3 FY2022 Earnings Call

Thank you for standing by, ladies and gentlemen. And welcome to the EuroDry Conference Call on the Third 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. At this time, all participants are in a listen-only mode. I must advise you that this conference is being recorded today. Please be reminded that the company announced its results with the press release that has been publicly distributed. Before passing the call 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 expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide 2 of the webcast presentation, which has a 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 third quarter and 9-month period ended September 30, 2022. Please turn to Slide 3. Our income statement highlights are shown here. For the third quarter of 2022, we reported total net revenues of $15.8 million and a net income of $6.2 million or $2.10 per diluted share. Adjusted net income attributable to common shareholders was $5.7 million or $1.93 per diluted share. Adjusted EBITDA for the period was $9.5 million. As of November 10, 2022, we had repurchased 108,963 of our common shares in the open market for about $1.5 million under our share repurchase plan of up to $10 million announced in August. Our CFO, Tasos Aslidis, will go over our financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our operational highlights. Motor Vessel Pantelis was sold for $9.675 million and delivered to the new owners and an affiliated third party on October 17, 2022. On the chartering front, we continued renewing all 8 of our vessels, which came open for single trips, thus practically keeping our exposure to the spot market. You can see the specifics of the various charters in the accompanying presentation. We have 2 vessels that are fixed on longer, but index-based charters. So practically only one vessel, which is on an agreed longer-term time charter that rates until the end of Q1 23. The average daily rate of our fleet in Q3 '22 was $20,600 approximately. Regarding dry docks and repairs, we had 3 vessels, Motor Vessel Alexandros P, Eirini P, and Tasos, which were in dry dock for approximately 22, 54 and 35 days, respectively. The Eirini dry dock commenced in Q3 but ended in Q4, so 20 days of the 54 will be accounted for in Q4. There was no idle period or commercial off-hire this quarter. Please turn to Slide 5. After the sale of Motor Vessel Pantelis, the company has a fleet of 10 vessels, including 5 Panama, 2 Ultramax, 2 Kamsarmax, and 1 Supramax dry bulk carriers. EuroDry's 10 dry bulk carriers have a total cargo capacity of approximately 728,000 deadweight with a nominal range of 12.6 years. Turning now to Slide 6. Let's review our current vessel employment schedule in a bit more detail. As you can see, fixed rate coverage for Q4 2022 stands at around 54% and comes down to about 10% in Q1 2022. This figure excludes the 2 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 September 30, 2022, and where it currently stands. The average spot market rate for Panamaxes was approximately $16,000 per day in the third quarter of 2022. By September 30, it rose to $17,300 per day, but currently, it has dropped to around $14,900 per day. The 1-year time charter rate for Panamaxes was about $16,300 per day, dropping to $14,950 per day by September 30 and currently standing at $14,565 per day. Despite a slight uptick towards the end of Q3 2022, both BBI and BPI indices show a precipitous drop from the second quarter of 2022 of about 20%. This was primarily due to lower shipping demand resulting from the economic slowdown across the globe stemming from energy supply disruptions and the Ukraine-Russia war, along with increasing interest rates to combat rising inflation. Please turn to Slide 9. The global GDP growth is forecast to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023 according to the IMF. This is the weakest growth profile in the last 15 years, apart from the global financial crisis and the critical phase of the COVID-19 pandemic. Russia's invasion of Ukraine, China's zero-COVID policy, soaring energy prices, and global inflation are all significant challenges weighing down heavily on the dry bulk outlook. China's growth is projected to slow to 3.2% in 2022, significantly below pre-pandemic levels, marking one of the worst performances in almost half a century. In 2023, the IMF expects a slight improvement in Chinese growth to 4.4%. GDP growth for the United States has been revised downwards to 1.6% for 2022 from 2.3% in previous projections and is now projected to inch down further to just 1% in 2023. On the other hand, European growth projections have increased to 3.1% from 2.6%, but the risks remain on the downside, with 2023 GDP growth expected to be just 0.5%. Growth in emerging markets is forecasted to be slow in 2022, with Brazil as the only country expected to improve, projecting growth of 2.8% from 1.7% previously forecasted due to robust recovery in Latin America. For 2023, all other developing countries are expected to perform slightly worse than in 2022, except for Russia, which should improve relatively to 2022 but still face negative growth of 2.3%. Looking at the dry bulk trade, according to Clarksons, demand growth is expected to be marginally negative in 2022 compared to positive growth of 1.2% in the previous quarter's projections. For 2023, dry bulk trade rate is expected to grow by nearly 1.4%. As you noticed, trade and growth projections are continuously being revised due to the ongoing impacts of geopolitical tensions between Russia and Ukraine on world growth and trade and the efforts to combat rising inflation still not producing significant results. Please turn to Slide 10. The single most positive driver for optimism about the dry bulk market is a low dry bulk order book, which has been kept at very low levels for the past 18 months and currently stands at 6.9% of the existing fleet. Now please turn to Slide 11 for the bird’s eye view of the supply fundamentals. Based on Clarkson's latest report, new deliveries as a percentage of the total fleet are expected to be 3.7% by the end of 2022, 3.4% in 2023, and 2.2% in 2024. Actual fleet growth will be lower due to scrapping, with 8% of the fleet being older than 20 years and a candidate for scrapping if the market remains soft. Please turn to Slide 12, where we summarize our outlook in the dry bulk market. The dry bulk market, particularly the Capesize sector, has significantly softened year-to-date, primarily due to reduced demand for steel in China, which has led to fewer iron ore imports. The real estate sector, accounting for about 30% of China GDP, faces significant uncertainties going forward. Indicatively, aggressive monetary policies, including interest rate hikes from various central banks, weigh heavily on global commodity demand and freight rates. Strong demand for coal, further supported by the ongoing energy crisis, has helped maintain solid rates in sub-Capesize vessels and provided some support in the Capesize sector too. On the supply side, port congestion that had resulted in supply constraints has seen significant improvement this quarter, with the supply chain starting to normalize, bringing more tonnage back into the market. The negative pressure observed in the dry bulk freight market has contributed to an increasing number of demolition candidates entering the market, especially in the larger size segments. Ordering of new ships for 2023 and 2024 deliveries has been almost non-existent due to a lack of available slots in shipyards and uncertainty regarding the fuel of the future, which makes placing new orders quite a risky option. Despite the projected low fleet growth for 2023 and 2024, the overall direction of the market remains uncertain, largely determined by developments in the Chinese economy and especially the real estate sector, the outcomes of the war between Russia and Ukraine, and the global economy's efforts to fight inflation with the least possible negative consequences on world growth. Recently, we've seen two positive pieces of news regarding inflation lowering in October and China possibly abandoning the zero-COVID rule. Let's hope this will not be reversed over the coming days and weeks. Please turn to Slide 13. The left side of the slide shows the evolution of 1-year time charter rates of Panamax dry bulk vessels since 2002. As of November 4, the 1-year time charter rate for Panamax ships with a capacity of 75,000 deadweight tons stood at $14,745 per day and remains just above the average rate level observed during the decade before the COVID pandemic. 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 $23 million. While these prices have slightly reduced from previous growth on valuation, they are still significantly higher than historical averages. Our balance sheet has strengthened considerably, and we are sitting on significant liquidity. If the market continues to correct and charter rates and prices drop further, we will consider further vessel acquisitions. However, barring such developments, we believe that the most investor-friendly strategy is to continue implementing conservatively our share repurchase program. Our share price is trading at a substantial discount to our NAV, so we will essentially be purchasing vessels at this discount to current market prices. 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 4 slides, I will give you an overview of our financial highlights for the third quarter and 9-month period ended September 30, 2022, and compare the results to the same periods of last year. With that, let's turn to Slide 15. For the third quarter of 2022, the company reported total net revenues of $15.8 million, representing an 18.8% decrease from total net revenues of $19.5 million during the third quarter of last year. This was primarily the result of the lower time charter rates for vessels earned in the third quarter of this year compared to last. Additionally, we had increased scheduled hires during the third quarter, during which our vessels were not earning revenue, despite the larger number of vessels we operate. The company reported net income and net income attributable to common shareholders for the period of $6.2 million as compared to a net income of $12.1 million and net income attributable to common shareholders of $11.8 million for the same period of 2021. Interest and other financing costs, including interest income for the third quarter of this year, amounted to approximately $1 million compared to $0.6 million for the same period of 2021, the increase being due to higher levels of debt and increased LIBOR rates we have been paying. Adjusted EBITDA for the third quarter of 2022 was $9.5 million compared to $13 million achieved during the third quarter of last year. Basic and diluted earnings per share attributable to common shareholders for the third quarter of 2022 were $2.10 basic and $2.10 diluted, calculated on about 2.9 million basic diluted weighted average number of shares outstanding, compared to $4.47 basic and $4.41 diluted earnings per share calculated on about 2.6 million and 2.7 million, respectively, for the third quarter of last year. Excluding the effect on the earnings attributable to common shareholders for the quarter of the change in the realized gain from derivatives, the adjusted earnings attributable to common shareholders for the quarter ended September 30, 2022, was $1.94 basic and $1.93 diluted, compared to adjusted earnings of $3.84 to $3.79 per share basic and diluted, respectively, for the same period in the third quarter of last year. Usually, security analysts do not include the above items in their public estimates of earnings per share. Let us now look at the numbers for the corresponding 9-month period ended September 30, 2022, compared to the same 9-month period for last year. For the first 9 months of 2022, the company reported total net revenues of $55.1 million, representing a 30.7% increase over total net revenues of $42.1 million during the first 9 months of last year. This increase is mainly due to the increased number of vessels we operated and slightly higher time charter rates for vessels earned during the 9 months of this year compared to last. The company reported net income attributable to common shareholders for the 9-month period of $27.3 million as compared to a net income of $15.1 million and net income attributable to common shareholders of $14.2 million for the 9-month period of 2021. Interest and other financing costs for the first 9 months of 2022 amounted to $2.4 million compared to $3.3 million for the same period of 2021, but this figure also includes a loss from debt extinguishment of about $1.65 million. Interest expense for the period was higher due to increased debt levels that we carry and the increased LIBOR rates that we have been paying for loans this year. Adjusted EBITDA for the 9 months of 2022 was $35.9 million compared to $26.3 million during the first 9 months of last year. Basic and diluted earnings per share attributable to common shareholders for the first 9 months of 2022 were $9.43 basic and $9.34 diluted, calculated on about 2.9 million weighted average number of shares outstanding compared to $5.94 basic and $5.74 diluted calculated on about 2.4 million and 2.5 million, respectively, for the same period of last year. Excluding the effect on the earnings attributable to common shareholders for the first 9 months of this year from the change in the fair value of derivatives, the adjusted earnings attributable to common shareholders for the 9-month period ending September 30, 2022, were $8.90 basic and $8.60 diluted compared to adjusted earnings per share of $7.42 basic and $7.29 diluted for the same period, the first 9 months of 2021. Let me now turn to Slide 16 to review our fleet performance. As usual, we'll start our review by looking first at our fleet utilization rate for the third quarter of 2022 and compare it to the third quarter of 2021. As shown here, and as always, our fleet utilization rate is broken down into commercial and operational. During the third quarter of 2022, our commercial utilization rate was 100%, while our operational utilization rate was 98.9%, compared to 100% commercial and 99.4% operational for the third quarter of last year. On average, 11.0 vessels were owned and operated during the third quarter of this year, earning another time charter equivalent rate of $2,637 per day compared to 8.1 vessels that we operated in the same period of last year, which earned an average of $28,103 per day. Our total operating expenses, including management fees and general and administrative expenses, but excluding the total cost of dry docking, stood at $6,593 per vessel per day in the third quarter of this year compared to $6,495 per vessel per day for the third quarter of 2021. If we move further down this table, we can see the cash flow breakeven rate for the third quarter of 2022, which takes into account divesting expenses, interest expenses, loan repayments, and preferred dividends if any, to be paid in cash that excludes any value payments. Thus, during the third quarter of 2022, our daily cash flow breakeven rate was $13,984 per vessel per day compared to $9,992 per vessel per day for the same period of last year, mainly attributed to higher dry docking costs we have to pay this year and increased loan repayments. Let's now look for the 9-month period. During the 9-month period of 2022, our commercial utilization rate was 99.8% and our operational utilization rate was 99.1% compared to 100% commercial and 99.6% operational during the same period, the first 9 months of last year. We operated an average of 10.5 vessels, earning another time charter equivalent rate of $22,876 per day compared to 7.5 vessels that we owned and operated during the first 9 months of 2021, which earned an average of $22,232 per day. Our total operating expenses were $6,587 per vessel per day for the second half of this year compared to $6,510 per vessel per day for the same period of 2021. Again, looking at the bottom of the table, we can see the cash flow breakeven rate for the period, which for the 9-month period of 2022 was $12,961 as compared to $10,456 for the same period of last year, again, attributed to higher dry docking expenses paid and increased loan repayments. Let's now turn to Slide 17 and review our debt profile. As of September 30, 2022, we had an outstanding bank debt of about $88 million. Looking at the chart on the top part of this slide, our debt repayments, excluding balloon payments over the next 2 years, are around $11 million per year, dropping to $5.7 million in 2025 and $4.9 million in 2026. Our net balloon payment of about $11.3 million is due in 2023, and we expect to be able to refinance this payment as we have done in all instances with balloon payments in the past. A quick note about the cost of our debt. The average margin for our debt is about 2.75%, and assuming a LIBOR rate of about 4.55% on top of it, we estimate the total cost of our senior debt as of the end of the quarter to be around 7.3%. Actually, the cost of our debt is about 110 basis points lower, approximately 6.2%, if we account for the amount of debt, the LIBOR cost of which we have set via interest rate swaps. At the bottom of this table, we can see projected cash flow breakeven rates for the next 12 months, with components displayed. We expect a cash flow breakeven rate of around $13,550 per vessel per day. On the same chart at the bottom of the slide, you can see our EBITDA breakeven, which includes our operating expenses, G&A expenses, and dry docking costs, estimated at around $7,564 per vessel per day. Analysts and investors assess our EBITDA over the next 12 months by making assumptions about the earnings generated by our vessels. Based on our current sensitivity, we expect to have around 3,500 investment days available for hire over the next 12 months. Almost all our vessel data, as shown earlier, are exposed to the spot market, making it straightforward to assess our EBITDA for the next 12 months. For example, assuming our vessels earn an average of $7,564 per vessel per day, net of commission, the result in $10,000 per day above the EBITDA breakeven rate would translate to about $35 million EBITDA for the upcoming 12-month period. Let's now move to Slide 18, where we can see some highlights from our balance sheet in a simplified manner. This slide shows a snapshot of our assets and liabilities. Our assets consist of our costs, other short-term assets, and the value of our vessels. As of September 30, 2022, costs and other assets stood at about $43.7 million. The book value for our vessels was approximately $158.2 million, resulting in a total book value of assets of about $201.8 million. On the liability side, our debt, as mentioned earlier, as of September 30, was about $88 million, representing 43.6% of the book value of our assets. Additionally, other liabilities amounted to $6.6 million or 3.3% of our total book value of our assets, resulting in book shareholders' equity of about $17.2 million, which translates to a book value of $37.27 per share. However, based on our own estimates and market transactions, as of the end of September, we estimate that the market value for our vessels was above their book value and stood around $192.5 million, suggesting that our NAV per share is in excess of $49 per share. Given that our shares are currently trading at $15, there obviously appears to be a sizable gap to our NAV, indicating significant appreciation potential for our shareholders and investors. And with that comment, let me turn back the floor to Aristides to continue the call.

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

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Tate Sullivan with Maxim. Please proceed with your question.

Okay, thank you. Good day. Tasos, to start, you mentioned - I think I heard correctly, $35 million EBITDA for the upcoming 12-month period with the $13,558 breakeven. But what was the assumed time charter equivalent rate you used? Was it the 1-year contract today of around $14,500? Can you repeat that, please?

Tate, that was just an indicative calculation to demonstrate our EBITDA breakeven of $7,564. I assumed a net time charter revenue of $17,564 to illustrate the calculation. You should make your own assumption about the rate for the next 12 months. But if that rate held, the EBITDA would be $35 million.

Okay. Thank you. And then strategically, I mean, the increase in debt from 2Q to 3Q, can you talk about the decision to add debt by roughly $15 million or $16 million?

So we had two encumbered vessels and we thought that it was a good idea to use a conservative 50% debt on them, to have liquidity available for our share repurchase program and to be prepared to act quickly if we want to make a new acquisition. It feels good to have cash in the bank.

Okay, thank you. And then Tasos gave details on the rising rate going forward, and we can make our own calculations on that as well. And also on the sources of support for the market, I mean is the primary source of support if rates have some more pressure, the low historical relative of new builds coming into the market, or are there other potential sources of demand we should keep an eye on?

I think we need to keep an eye on geopolitical and economic developments. Demand depends a lot on global GDP growth, which is challenging to predict.

Absolutely. Okay. Thank you, both.

Thank you, Tate.

Thank you. Our next question is from Poe Fratt with Alliance Global Partners. Please proceed with your question.

Good morning, Aristides. Good morning, Tasos. I have a question more on the financing side. You have $11.3 million of debt that's due next year, which is potentially going to be refinanced. Can you give me an idea of what you're expecting as far as the refinance rate? And conversely, since you did encumber some of the vessels in the third quarter, would we expect to pay that debt down with cash if the rates are too high and wait for a better financing environment?

I think we decided that we would like to maintain liquidity on our balance sheet for the reasons Aristides explained earlier. That is why we took relatively cheap debt, with a margin near 2%. Of course, LIBOR costs are higher, so any savings on the margin are offset by the increase in LIBOR. But having extra liquidity gives us the flexibility to pursue the repurchase program and also be ready to act when opportunities arise.

Also, while the cost of the debt is high due to rising LIBOR, we are able to earn interest on our deposits, which keeps the overall cost of holding that liquidity quite low.

It's basically the margin that is not particularly high. In this case, the margin on the debt we obtained is one of the lowest we have achieved recently. Regarding the balloon due in the second quarter of next year, we will decide closer to the date if we will repay or refinance. We believe we have enough flexibility to make that decision without being forced to refinance.

Yes, that's what I was sort of alluding to. And then if you do acquire new assets, it indicates that asset values have decreased. Just to reiterate on the stock buyback program, can we walk through some of the math regarding the current stock price at 15%, that would imply asset values are below the median average that you show in your presentation, likely by about 20%. Should I be looking at - even if the asset values decline to the median level, wouldn't you still be buying your stock currently at a discount to long-term asset values?

Yeah, that's clearly positive. Right now, the best investment for us is to buy back our stock trading significantly below NAV. We are doing this because this is a better option than acquiring vessels within a market that is 75% discounted. If the market weakens, opportunities might arise. Additionally, we just sold one RL vessel, and it's always been in our mind to renew our fleet. Swapping new vessels for older ones is part of our strategy.

And with rates lower, are you seeing any customers think about locking in longer-term commitments? I understand you might not agree to new long-term contracts at these levels, but are customers beginning to approach you with that?

Not really. We don't see significant pressure from the market to engage in long-term contracts at today's rates. The unpredictability of future conditions makes everyone more cautious and less willing to commit long-term.

Okay. Great. Thanks for your time.

Thank you, Poe.

Thank you, Poe.

I presume there's no more questions. There are no more questions at this time. I'd like to turn it back to management for any closing comments.

Thank you all for being with us for our call this quarter. We will be back with you early next year to discuss how the whole year faired. Thank you.

Thanks, everybody. Happy Thanksgiving to our American friends.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.