EuroDry Ltd. Q2 FY2023 Earnings Call

Ladies and gentlemen, welcome to the EuroDry Conference Call on the Second Quarter 2023 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. There will be a presentation followed by a question-and-answer session. 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 expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide number 2 of the webcast presentation, which has the full forward-looking statement and the statement was also included in the press release. Please take a moment to go through the whole statement and read it. And I now would like to pass the floor to Mr. Pittas. Please go ahead, sir.

Good morning, ladies and gentlemen, and 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 6-month period and quarter ended June 30, 2023. Please turn to Slide 3 of the presentation. Our financial highlights are shown here. For the second quarter of 2023, we reported total net revenues of $10.3 million and a net loss of $1.2 million or $0.43 loss per basic and diluted share. Adjusted net loss was $1.3 million or $0.48 adjusted loss per basic and diluted share. Adjusted EBITDA for the quarter was $2.5 million. Please refer to the press release for the reconciliation between adjusted net loss and adjusted EBITDA. The Board of Directors approved the extension of its share repurchase program, which was originally established in August 2022 for another year. The program provided the company with authorization to purchase up to $10 million. Today, we have repurchased 216,000 of our common shares, about 8% of our total outstanding shares in the open market for about $3.25 million since the inception of the program. The extension of our share repurchase program was approved by the Board of Directors as our stock is trading at a very large discount to our net asset value. Thus, buying our own stock represents an attractive investment opportunity for us. The Board will review the program after 12 months or after the $10 million deployment. Share repurchases will be made from time to time for cash in open market transactions at prevailing market prices or in privately negotiated transactions. The timing and amount of purchases under the program will be determined by management based upon market conditions and other factors. The program does not require the company to purchase a specific number or amount of shares and may be suspended or reinstated at any time at the company's discretion and without notice. We are also very pleased to announce that today we posted our 2022 ESG report on our website. We are committed to launching all three elements of ESG, the environment, our social impact, and our governance. We are certain that the commitment benefits all our stakeholders in more ways than one. Tasos will discuss financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our operational highlights. After recovery early in the second quarter, the dry bulk market turned down again, reaching by July 2023 the very low level last seen in January of this year. This decline in market rates also affected our results for the second quarter. Currently, two of our vessels continue to be employed under index-linked charters until March 2024 and 2025, respectively, at 105.5% of the Average Baltic Kamsarmax index. Two other vessels are fixed at medium-term time charters at currently above-market rates, while the remaining six vessels are employed under short-term charters. You can see the specifics of the various charters concluded in the accompanying presentation, noting the big drop in charter rates since the beginning of the second quarter. During this quarter, we were helped by the two FFA positions we had taken in the prior quarter, as we mitigated the effects of the lower charter rates that are still prevailing. We realized a gain of $2.3 million due to these sales. Regarding write-offs and repairs, our motor vessel Santa Cruz and motor vessel Ekaterini P underwent drydock. The former for almost 24 days starting towards the end of the previous quarter, and the latter for about 20-22 days during the second quarter. Furthermore, motor vessel Molyvos Luck was commercially offhire for two days during the quarter. The incident that occurred during this quarter happened on April 29, 2023, when motor vessel Good Heart was detained by the U.S. Coast Guard at Corpus Christi for certain deficiencies. It took a long time for the deficiencies to be rectified, plus EuroDry had to provide a corporate guarantee on behalf of the owner and the managers, each of which posted the security of $2 million for alleged MARPOL violations. The vessel was able to sail on June 7 after these actions. At the moment, there is no litigation, no claims or allegations against us or the manager. We believe that if there are any, the majority of the costs will be covered by insurance. Nevertheless, we have taken a $500,000 provision in our Q2 accounts. The vessel was technically offhire for about 35 days during this period, which unfortunately resulted in the loss of the vessel's laycan period and the cancellation of a $25,000 per day charter, thus forcing us to seek alternative employment. The vessel was finally chartered at $18,500 per day until August 2023, although she had to incur an additional 13 days of waiting. At the completion of this current voyage, she will proceed to her scheduled drydock. Please turn to Slide 5, which shows the main particulars of the 10 vessels in our fleet, which includes 5 Panamax, 2 Ultramax, 2 Kamsarmax, and 1 Supramax dry bulk carriers with a total cargo capacity of approximately 730,000 deadweight tons, and another at the age of around 13.5 years. Now please turn to Slide 6, which graphically shows our fleet employment. As you can see, our current fixed rate coverage for 2023 stands at around 31%. This figure excludes ships on index charter, which are open to market fluctuations that have secured employment. We currently trade our vessels on short-term charters reflecting the current state of the market. As these rates increase, we will aim to secure longer-term charters for some of our vessels. Turning to Slide 7, we go over the market highlights for the quarter ended June 30, 2023. In the second quarter, we saw a much weaker dry bulk market across all sectors, with the rates taking a tumble towards the end of the second quarter. During the second quarter of 2023, the average Panamax spot rate was around $10,500 per day. By June 30, spot rates dropped to approximately $7,900 per day, and currently, we have increased a little bit to $8,700 per day. The one-year time charter for Panamax was approximately $14,100 per day during the second quarter, while the rates started trending lower to about $11,900 per day by June 30 and are currently standing at $10,725 per day. We witnessed a similar development with Supramaxes with declining rates. However, we have seen this slight uptick in recent days as we currently do in the Panama spot market. Please turn to Slide 9. In its latest update in July 2023, the IMF's latest forecast is modestly higher than its prior predictions in April, however, still weak by historical standards. Global growth is projected to fall from an estimated 3.5% in 2022 to 3% in both 2023 and 2024, down from previous predictions of 2.8% for 2023 and 3% for 2024. A much slower global activity is anticipated in the second half of 2023 and first half of 2024, but not a recession, with a look for a gradual stabilization in the second half of 2024. The latter supported by rate cuts in many areas around the world and the expectation that inflation will continue to fall. The recovery appears to be uneven and volatile, even stalled some might say. New softness in the housing market, growing concerns on local government financing risks, and an uncertain external environment for the export sector weigh on the economy's near-term growth path. Still, China's growth forecast of 5.2% in 2023 and 4.5% in 2024 remains unchanged, while growth in other emerging and developing countries is projected to defy the overall global economic slowdown. There is strong demand from India, which has delivered the biggest upside price so far this year, with high GDP growth in Q1 that exceeded expectations. This was driven by strong government CapEx and services, with exports standing out against other parts of the world. Despite the general global slowdown, the U.S. economy is expected to moderately grow by 1.8%, which, compared to the previous IMF growth forecast of 1.6%, seems to suggest that the U.S. can potentially avoid the recession concerns in the second half of 2023. However, the IMF has lowered its growth projections for the U.S. for 2024 down to 1% from its previous growth forecast of 1.1%. On the other side of the world, the Russian economy is faring better than expected. We have revised the estimate for 2023 up to 1.5% from just 0.7% previously, despite the effects of sanctions from the Western financial markets and many export markets for Russian companies and commodities being closed. Europe is slow and will continue to be slower than earlier predicted, with nearly 0.9% growth in 2023 and 1.5% growth in 2024. Finally, according to the IMF, in important areas for shipping, India, China, and ASEAN-5 will all continue to grow at rates between 4.5% to 6.3% during both 2023 and 2024, suggesting that dry bulk cargo demand could hold up well. This view is reflected in the latest Clarksons forecast, and despite the slightly slower overall global growth expectations, dry bulk trade demand is expected to return to steady growth of 3.3% this year and 2.4% in 2024. The dry bulk trade growth is improving, driven by the Far East and the geopolitical tensions, which boost tonne-mile growth. Please turn to Slide 10. The order book continues to fuel positive market sentiment as it remains one of the lowest in history. As of July 2023, the order book as a percentage of the total fleet stands at just 7.4%. This suggests minimal fleet growth over the next 2 to 3 years, potentially leading to higher markets even when historically other demand grows. Additionally, over the next couple of years, environmental regulations could further influence supply growth, even by forcing some vessels to retire or adjust their operational speed. Turning to Slide 11, let us now look into supply fundamentals in a little bit more detail. According to Clarksons' latest report, new deliveries as a percentage of the total fleet are expected to be 3.8% in 2023, 3% in 2024, and 2.4% in 2025. As of July '23, the total dry bulk vessel operating fleet was 13,350 vessels, but the actual fleet growth is expected to be lower than the aforementioned figures due to scrapping and slippage. 8% of the fleet is older than 20 years old and a good candidate for scrapping, especially if the market remains at current levels. Please turn to Slide 12 to summarize our outlook for the dry bulk market. The dry bulk market drifted downwards for most of Q2 2023, while geopolitical uncertainties remain. Weaker trends in key regions such as European coal imports and the Chinese real estate sector, coupled with lower port congestion, have contributed to this market weakness across the sector. Aside from lower port congestion, slower speeds are moderating this active supply growth because newly introduced emission regulations will result in slow speeds. Also, the macroeconomic environment improved during the quarter as inflation started coming down in many countries around the world, and analysts revised the economic outlook forecast upwards. Nevertheless, uncertainty remains over the scale and timing of potential market improvements with a range of scenarios surrounding key factors including the global and Chinese economy, and therefore mentioned supply impacts from regulations. On balance, though, some improvement in earnings is expected to materialize in the coming quarters as supply-demand fundamentals appear more balanced for the remainder of 2023. We drive trade volumes up, especially for iron ore and coal, and with modest cancellations in fleet growth on the supply side, we would expect to have a strong foundation for rates to increase further in 2024, provided the global economy continues to grow as per recent analyst focus. Let us now turn to Slide 13. The left side of the slide shows the evolution of 1-year time charter rates for Panamax dry bulk vessels since 2002. As of August 4, the 1-year time charter rate for a Panamax vessel with a capacity of 75,000 deadweight tonnes stood at $10,725 per day, lower than the median. On the other hand, you can see the historical price range for a 10-year old Panamax vessel, which has a current price of $21.5 million. Over the past year, dry bulk prices have been gradually coming down from the previous high levels, yet they are still higher than historical average and median prices. The different development of vessel prices and market rates has become notable. The former remained at relatively high levels, while charter rates have declined significantly. As prices have started to retreat, we are conservatively positioning the company to take advantage of a probable improvement in rates in the following quarters. Our strong balance sheet will continue to be used for further stock repurchases and potential vessel acquisitions. Let me now pass the floor over to our CFO, Tasos, to go over various financial highlights in more detail. Tasos, the floor is yours.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. Over the next four slides, I will give you an overview of our financial highlights for the second quarter and first half of 2023, in comparison to the same period last year. Let's turn to Slide 15. For the second quarter of 2023, the company reported total net revenues of $10.3 million, representing a 50.7% decrease over total net revenues of $21 million during the second quarter of last year. The decrease was mainly the result of the lower time charter rates for vessels served during the second quarter of this year compared to last year, and secondly, the increase of idle period of vessel Good Heart as Aristides mentioned. The company reported a net loss for the period of $1.2 million as compared to a net income of $10.6 million for the same period last year. Interest and other financing costs for the second quarter of 2023 amounted to $1.4 million compared to $0.8 million for the same period of 2022. Interest expense during the second quarter of this year was primarily due to the increased amount of debt that we carry and the increased LIBOR and SOFR rates on our loans during the period compared to last year. Interest income for the second quarter of this year stood at about $140,000 compared to practically no interest income during the same period of 2022. Adjusted EBITDA for the second quarter of 2023 was $2.5 million compared to $13.7 million during the second quarter of 2022. Basic and diluted loss per share for the second quarter of 2023 was $0.43, calculated on about 2.76 million weighted average number of shares outstanding compared to earnings per share of $3.66 basic and $3.61 diluted on about 2.9 million weighted average number of shares outstanding for the second quarter of 2022. Excluding the effect of the loss from unrealized gain on derivatives, the adjusted loss for the quarter ended June 30, 2023, would have been $0.48 per share basic and diluted, compared to the second quarter of 2022 where we had $3.43 basic and $3.38 diluted income per share respectively. As secured channels do not include the unrealized part of the earnings in the segment, that's why we adjust our results as well. Let's now look at the numbers for the corresponding six-month periods ending June 30, 2023, and 2022. For the first half of this year, the company reported total net revenues of $21.7 million, representing a 44.8% decrease over total net revenues of $39.3 million during the first half of 2022, again the result of lower time charter rates for our vessels during the first half of this year. The company reported a net loss for the period of $2.7 million as compared to a net income of $21.1 million during the first half of 2022. Interest and other financing costs for the first half of 2023 amounted to $2.9 million compared to $1.4 million for the same period last year. This increase is again due to the increased amount of debt and higher benchmark rates compared to the same period of the previous year. For this period, our interest income amounted to almost $0.4 million compared to practically no interest income during the same period of 2022. Adjusted EBITDA for the first half of this year was $4.8 million compared to $26.4 million achieved during the first half of 2022. Basic and diluted loss per share for the first half of this year was $0.98, calculated on 2.8 million weighted average number of shares outstanding, compared to gains of $7.35 basic and $7.25 diluted for the same period, first six months of 2022. Excluding the effect from the loss for the first half of this year, the unrealized loss of derivatives, the adjusted loss attributable to common shareholders for the six months ended June 30, 2023, would have been $0.33 basic and diluted, as compared to a gain of $6.77 basic and $6.68 diluted for the first half of 2022. Let's now move to Slide 16 to review our fleet performance. As usual, we will start our review by looking at our fleet utilization rate for the second quarter of 2023 compared to the second quarter of 2022. Our fleet utilization rate is broken down into commercial and operational. During the second quarter of 2023, our commercial utilization rate was 98.3%, while our operational utilization rate was 95% compared to 99.4% commercial and 99% operational for the second quarter of last year. On average, 10 vessels were owned and operated during the second quarter of 2023, earning a time charter equivalent rate of $12,179 per day compared to 10.79 vessels that we owned and operated during the second quarter of last year and an average of $23,490 per vessel per day. Our total daily operating expenses, including management fees, averaged $6,780 per vessel per day during the second quarter of this year compared to $5,806 per vessel per day for the second quarter of 2022. General and administrative expenses, expressed on a per day per vessel basis, amounted to $876 for the second quarter of 2023 compared to $695 for the second quarter of last year. If we move further down in this table, we can see the cash flow breakeven level we had to pay for the second quarter of this year, which takes into account drydocking expenses, interest expenses, loan repayments, and dividends paid in cash. We had no dividends for this period. Thus, for the second quarter of 2023, our cash flow operative rate was $14,120 per vessel per day compared to $11,980 per vessel per day for the same period of last year. Now let's go to the right part of this table to look at the figures for the first half of 2023 and compare them with the equivalent period of last year. During the first half of 2023, our commercial utilization rate was 99%, and our operational utilization rate was 99.7%, compared to 97.4% commercial and 99.3% operational for the same period of last year. On average, 10 vessels were owned and operated during the first half of the year, having a time charter equivalent rate of $11,393 per vessel per day, compared to about 10.17 vessels we operated during the same period of 2022 and an average of $24,025 per vessel per day. Our vessel operating expenses, again, including management fees, were $6,424 per vessel per day for the first half of '23, up from $5,860 per vessel per day for the same period of last year. General and administrative expenses, expressed on a per day per vessel basis, were $882 this year compared to $778 for the first six months of 2022. Similarly, looking at the bottom of this table, we can see the cash flow breakeven rate for the first half of 2023, which, as I mentioned, accounts for drydocking expenses, interest expenses, and loan repayments. In 2023, we had $13,661 per vessel per day compared to $12,387 per vessel per day for the same period of last year, as we paid higher operating, dry docking, and interest expenses, partly offset by lower loan repayments. Let's now turn to the next slide, Slide 17, to review our debt profile. As of June 30, 2023, we had an outstanding bank debt of about $78 million. Looking at the chart on the top of the slide, you can see that our debt repayments during the first half of this year amounted to about $17.8 million, including the balloon payment, which was subsequently refinanced with $5.7 million scheduled for the second half of 2023. In 2024, our debt repayments are set to decrease to $9.7 million, excluding any balloon payments, followed by further decreases down to $6.76 million in 2025 and 2026, respectively. As of June 30, 2023, the average margin on our debt is about 2.64%, with a SOFR rate of approximately 5.37%, and a portion of our debt covered by our interest swap contracts. We estimate that the total cost of our senior debt at the end of the quarter stands at about 7.7%. At the bottom of the table, we can see our projected cash flow breakeven rate for the next 12 months, breaking down its various components. Overall, we expect the customer breakeven level to be around $12,815 per vessel per day. In the same chart in the mid, you can see our EBITDA breakeven rate, which includes our operating expenses, general and administrative expenses, and drydocking costs. We expect about $8,139 per vessel per day. Let's now move to the next slide, Slide 18, the last slide of my brief overview of our financial results. You can see in this slide some highlights from our balance sheet in a simplified way. As of June 30, 2023, cash and other assets stood on our balance sheet at about $48.6 million. The book value of our vessels was approximately $134 million, resulting in a total book value of our assets of about $192.6 million. On our liability side, our debt as of June 30, 2023, as I mentioned earlier, was around $78 million, representing 54.2% of the book value of our assets, while other liabilities amounted to $4.1 million or 2.7% of the book value of our assets, which in turn resulted in book shareholders' equity of about $110.7 million, translating to $39.1 per share. However, based on our own estimates and market transactions, we estimate that the market value of our vessels exceeds their book value and stands at about $173 million, suggesting that our NAV per share is in excess of $49 per share. Recently, our share price has been trending around $14, representing a steep discount to our net asset value, which presents significant appreciation potential for our shareholders and investors. And with that, I conclude my remarks, and I turn the floor back to Aristides to continue the call.

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

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Tate Sullivan with Maxim Group.

You mentioned a strong foundation for higher rates and positioning the fleet. Is that mainly moving off of more FFAs? Are you repositioning ships? Or what did you imply by that?

Mainly, we are trading our ships spot at this stage because freight rates are low in anticipation of higher freight rates. So we will be able to capture the market. Of course, we are not taking out any FFAs to hedge the positions at these levels. We are really preparing ourselves to be ready to capitalize on the strengthened market if that happens.

And you gave a lot of detail on the Good Heart and the MARPOL violation. Did that possibly reflect more stringent regulations in that specific port? Or can you give detail to start there, please? And was that the first MARPOL violation for your fleet?

Yes, I spent some time discussing it because it was a significant incident. The vessel was out of service for 48 days, and we incurred some expenses as a result, which was likely the main reason we didn't achieve the profitable quarter we expected, even with the two dry dockings during that time. That's why I elaborated on it. There haven't been any specific allegations of wrongdoing, though that could change. We are insured for this situation, and I don’t believe it indicates any major changes; it was just an unfortunate incident that occurred.

What does the commentary about the potential future $2 million payments reflect? Did you say you set aside a reserve of $500,000 for that? Does insurance cover the $2 million? Can you provide some context for those numbers?

We had to post a guarantee for $2 million for EuroDry and another $2 million for the managers, totaling a guarantee of $4 million. This represents the maximum we might need to pay if it comes to that, and we are coordinating with the Department of Justice. In previous cases, payments of up to $1.5 million have occurred in similar situations. We believe this will be covered by insurance, although some costs won't be insured, which is why we set aside a reserve of $500,000 in our accounts. We do not anticipate needing to pay anything beyond that amount.

Okay. And then, I mean, with the cash breakeven level, you said around 14,000, that number excludes the Good Heart? I mean, would it have been closer to 12, 12.5? Do you have that number handy here? Maybe we can take it offline.

That number, the cash breakeven includes loan repayments and everything.

It includes a bit of elevated expenses from Good Heart.

Okay. I'll address that. Regarding potential slow steaming, you mentioned energy efficiency, the existing ship index, the EEXI, and the CII carbon intensity indicator rating. You also talked about possible changes with the EU carbon tax in the future. Are you preparing for any financial impacts related to these regulations? Has anyone in the fleet experienced any financial implications, or could they? This might also be a topic for a more detailed discussion later.

Yes. No, this is a nice topic for a general discussion. Very briefly, the EU ETS regulation that will come into effect as of next year will affect financially the charterers who want to bring goods into Europe or out of Europe. So it won't really affect us. In particular, it will affect Europe. The other regulations, the main effects that they will have is that they will result in us needing to go at lower speeds. If ships go at lower speeds, it's positive for the market because it effectively reduces supply vessels. Of course, all companies are taking measures to try and reduce the carbon footprint, and we are doing the same. This is done through modifications on the vessel, technological developments, and the use of digitalization.

Thank you for all the comments.

Our next question comes from Kristoffer Skeie with Arctic Securities.

Thanks a lot for running through the market, and I appreciate all the color on the numbers. Just want to sort of first touch upon the market. What do you see as a sort of near-term catalyst for any improvement in the rates? It seems like it's a bit sluggish and not that directional currently. Do you believe that we might see any revival of congestion during the second half? I mean you've seen the Panama Canal, the restrictions there have led to some improvement, at least for the container liners. Do you think that will translate to dry bulk vessels as well?

I think that congestion has been extremely little during the last couple of months, abnormally little. There are bound to be effects; I think that will increase it. Also, there is historically an increase in the demand for certain cargoes during the third and fourth quarters. So this historical increase, I think, will happen again. And we are coming out of the seasonally quiet period. Thus, we think that we will see improving rates. But as I said, there are various conflicting views now and possibilities that can happen. So it's really difficult to call the market at this stage.

And with regards to that, I mean, you have had this great overview of 1-year time charter rate versus asset values. And it seems like values are disconnected now from rates. What's your view on that? I mean, you touched upon it, but do you believe that values are set to come down or that this disconnect typically doesn't last that long from my experience?

Yes. You're absolutely right. That's why one has to give; values have to drop significantly or charter rates need to improve further. Currently, charter rates are not improving, so we have started to see values dropping a little bit. We will have to see how this whole thing plays out. But the values in July did see some headwinds and they are on a dropping mode. We will have to see what will happen. There is an expectation by most owners that because of the very low order book, at some point when demand picks up, we should see a significant revival in charter rates. I think this is a valid expectation.

Yes, I completely agree. Looking at 2024 and 2025, the growth appears very promising, which should support asset values. With that in mind, how do you view share buybacks in relation to vessel acquisitions?

We are currently considering vessel acquisition because if prices decrease slightly, we could identify profitable projects in the market. However, one of the most profitable moves remains buying back our own stock, which is significantly undervalued compared to our net asset value. Therefore, we will continue our stock repurchase plan and are also exploring the potential of acquiring one more vessel.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Aristides for closing comments.

Well, thank you all for listening in to our today's conference call. We will be back to you in 3 months' time. Enjoy the rest of the summer.

Thanks, everybody, for attending.

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