EuroDry Ltd. Q1 FY2024 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Limited Conference Call on the First Quarter 2024 Financial Results. We have 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 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 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 now I'd 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 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, 2024. Please turn to Slide 3 of the presentation. Our financial highlights are shown here. For the first quarter of 2024, we reported total net revenues of $14.4 million and the net loss attributable to controlling shareholders of $1.8 million or $0.65 loss per basic and diluted share. Adjusted net loss attributable to controlling shareholders for the quarter was $3.2 million or $1.18 loss per basic and diluted shares. Adjusted EBITDA for the period was $2.1 million. Please turn to the press release for a reconciliation of adjusted net income and adjusted EBITDA. Our CFO, Tasos Aslidis will go over our financial highlights in more detail later on in the presentation. As of May 21, 2024, we had repurchased a total of about 300,000 shares of our common stock in the open market for a total of $4.7 million under our share repurchase program of up to $10 million announced in August 2022. The plan renewed in August 2023 for another year. Please turn to Slide 4 for an overview of our sales and purchase, chartering and drydocking highlights. On the chartering side, most of our vessels are employed in short-term charters, whilst motor vessel Ekaterini continues to be employed under an index-linked charter until March 2025 at 105.5% of the average Baltic Kamsarmax index, the index based on the five Kamsarmax time charter routes. You can see the specifics of the various charters we fixed in the accompanying presentation. We plan to continue trading spot for the time being, but if charter rates firm further, we will consider securing a portion of our vessel's earnings via time charter or FFAs. Regarding dry-dockings and repairs, during the quarter, we had two vessels undergoing dry dock, Motor Vessels Blessed Luck and Molyvos Luck. Motor Vessel Starlight underwent its dry dock in April. In addition, Blessed Luck was operationally off-hire for 17 days due to the damage of the auxiliary boiler. The cost of the repairs will be covered by the ship's Hull & Machinery underwriters in full, but unfortunately, the time lost is not. The cost of the two dry docks and the resulting idle time, together with the idle time of the Blessed Luck during the repairs, are the primary factors for the loss we incurred during this quarter. Please turn to Slide 5. EuroDry fleet consists of 13 vessels, including five Panamax dry bulk carriers, five Ultramax vessels, two Kamsarmax and a Supramax dry bulk carrier. Our 13 dry bulk carriers have a total cargo capacity of about 1 million deadweight tons and an average age of 13.5 years. At this point, I'd like to remind you, as previously announced in our last earnings call, that EuroDry owns 61% of the entities that own motor vessels Christos K and Maria. The remaining 39% is owned by owners represented by NRP Project Finance, otherwise referred to as the NRP investors. Please now turn to Slide 6 for a further update on our fleet employment. As you can see, fixed rate coverage for the remainder of 2024 stands at around 27%. Turning to Slide 7, we go over the market highlights for the first quarter ended March 31, 2024, and up until recently. Spot rates continued their momentum from late 2023 and experienced an unusually strong first quarter, supported by key commodity exports and the Red Sea and Panama Canal disruptions, counter to the typical seasonal trends. In the first quarter of 2024, the average spot market rate for Panamaxes hovered around $13,600 per day. By May 17, the spot rates have increased to approximately $15,000 per day. In parallel, the one-year time charter rates for Panamaxes were around $15,600 per day during the first quarter, rising to $16,150 by May 17, versus about $14,300 last year. Including one-year rates relative to spot prices may suggest that, overall, the sector seems set for a more positive 2024 than 2023. Please now turn to Slide 9. The IMF's latest update in April 2024 projects that the global economy will continue to grow at 3.2% in 2024, the same pace as in 2023, and this growth rate is expected to continue into 2025. This is largely due to a sizable improvement in the economic outlook for the United States, offset by a more modest slowdown in emerging and developing economies. In one of the biggest changes, Russia's 2024 growth forecast was increased to 3.2% from the 2.6% projected by the IMF in January 2024 due to continued strong oil exports amid higher global oil prices, despite the price cut mechanism imposed by Western countries as well as strong government spending and investments related to more production, along with higher consumer spending in a tight labor market. The IMF also upgraded Russia's 2025 growth forecast to 1.8% from 1.1% previously. Clearly, the sanctions imposed by the West do not seem to be working. The forecast for the next five years globally is at its lowest in decades at 3.1%. Global inflation is declining steadily and is projected to lower from 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation target sooner than emerging markets and developing economies. The global economy remains surprisingly resilient despite significant central bank interest rate hikes to repair price stability. Most banks now anticipate that the three Federal Reserve rate cuts projected for the end of 2024 will be reduced to one due to this persistent inflation. For shipping, we continue to closely monitor China's economy, which is affected by the enduring downturn in its property sector. The Chinese economy is forecast to grow by only 4.6% in 2024 and 4.1% in 2025. However, China's economic growth may further intensify due to trade tensions in an already weakened geopolitical environment and stability may take even longer to be restored. On the other hand, though, growth in India is projected to remain strong at 6.8% in 2024 and 6.5% in 2025, with robustness reflecting strong domestic demand and the rising working-age population. Finally, the ASEAN-5, according to the IMF, will continue to grow quite strongly in the next couple of years, providing significant shipping support. According to Clarksons, demand for dry bulk trade is presently expected to grow by 2.4% in 2024, slightly below the fleet growth. This includes about a 0.6% uplift for the full year 2024 due to the Red Sea and Panama Canal disruptions. A longer duration of disruptions in these regions will potentially drive demand higher. In addition, the combined effect on demand due to slower average speeds and increased congestions could lend further support for stronger dry bulk demand in 2024. Demand in 2025 is projected by Clarksons to grow by about 1.5%, assuming the Red Sea disruption has eased by the end of this year. Please turn to Slide 10. Uncertainty about the future of fuels and high new building prices have led to the low order book continuing. As of May 2024, the order book as a percentage of total fleet is at only 9.3%, near the lowest historical levels. This suggests low fleet growth over the next 2 to 3 years. Complementing this low fleet growth, we also have the effect of increased slow steaming and expected scrapping due to the introduction of the new environmental regulations. This could reduce the effective available bulk supply even further. Turning to Slide 11. Let us now look into the supply fundamentals in a bit more deeply. As of May 2024, the total dry bulk vessel operating fleet was 13,700 vessels. According to Clarksons' latest report, new deliveries as a percentage of total fleet are expected to be 3.6% in 2024, 3.2% in 2025, and 3.5% in 2026 onwards. The actual fleet growth is, of course, expected to be lower than the aforementioned figures due to scrapping and slippage. Also note that 9% of the fleet is older than 20 years old and therefore, a good candidate for scrapping, especially if the market remains at current levels or lower. Please turn to Slide 12 where we summarize our outlook for the dry bulk market. Dry bulk shipping showed a modest decline during the first quarter of 2024, following a peak in December. Despite this decrease, Q1 of 2024 marks the highest marked level for this typically slow season since 2010 with the exception of 2022, primarily due to the geopolitical and weather-related disruptions as discussed previously. The outlook for the remainder of 2024 suggests a robust bulk carrier market with rates around current levels. The recent strength in market conditions is largely attributable to tensions in the Suez Canal, which have significantly increased tonmiles. As and when these disruptions begin to ease or resolve, demand patterns are anticipated to normalize, although this adjustment may take a considerable amount of time to fully materialize. Clarksons assumes Red Sea rerouting is currently adding 1.2% to dry bulk tonmile demand. Assuming half a year of rerouting due to these disruptions, which will then ease back to normal, this adds 0.6% to the full year of 2024 tonmile demand growth. Assuming subsequent easing, this will subtract a similar figure from 2025 tonmile demand growth. It is all quite uncertain, though, and will largely depend on the geopolitical developments, so it is possible that disruption could be as quickly or could take a significant amount of time. In any event, in 2025, bulker earnings are expected to be softer as diminished fleet and fleet inefficiencies and the cumulative growth of the fleet in recent years have offset the strong trade rebound. On the other hand, the decarbonization process is expected to affect trade lines and dry bulk volumes going forward positively by resulting in slower speeds and more scrapping, but negatively if less coal is transported. The overall effect from the market is hard to predict. On the supply side, though, the ordering of new ships has been very limited due to the lack of available slots at shipyards and uncertainty about the fuel of the future, despite significant orders for methanol fuel ships. The order-book-to-fleet ratio remains nearly historically low levels, as said before, setting the stage for a potential recovery in charter rates should demand increase. Furthermore, the introduction of emissions regulation related measures could further curtail supply via increased scrapping or slower operational speed for a portion of the fleet. EEXI, CII, EU ETS, FuelEU are all new acronyms the industry will need to cope with, and more are to come. Let's turn to Slide 13. The left side of the slide shows the evolution of one-year time charter rates of Panamax dry vessels over the last 20 years. As of May 17, 2024, the one-year time charter rate for Panamax ships with a capacity of 75,000 deadweight tons stood at $16,150 per day, which is about 20% above the historical median of around $13,500 per day. On the other hand, 10-year-old Panamax vessel prices have reached the maximum price seen in the last 10 years, around $29.5 million, as can be seen in the right-hand side graph. This is significantly higher than the 10-year historical average price of $16.8 million and the median price of $14.75 million. At current secondhand prices, we are reluctant to purchase more vessels. We are happy to keep on running the fleet at market rates, strengthening the balance sheet, reducing debt, and waiting for new opportunities to present themselves. Let me now pass the floor over to our CFO, Tasos Aslidis, to go over the various financial highlights in more detail.

Thank you very much, Aristides. Good morning to everyone. In the next four slides, I will present an overview of our financial highlights for the first quarter of 2024 and compare those results to the same period from last year. Let's begin with Slide 15. In the first quarter of 2024, the company reported total net revenues of $14.4 million, which is a 27.2% increase from the $11.3 million in the same quarter last year. This increase was driven by higher time charter rates for our vessels and a greater number of vessels operated this quarter compared to the same quarter last year. However, the company reported a net loss of $1.9 million, with a net loss attributable to controlling shareholders of $1.78 million, compared to a loss of $1.54 million for the same period in 2023. The net loss attributable to noncontrolling shareholders was $0.13 million, reflecting the 39% ownership represented by the NRP investors, as Aristides mentioned earlier. Interest and financing costs, including interest income, increased to $2.04 million this quarter from $1.23 million last year. Interest expenses rose mainly due to higher debt and increasing benchmark rates, while interest income fell due to lower cash balances compared to the prior year. Adjusted EBITDA for this quarter was $2.07 million, down from $2.36 million last year. The basic and diluted loss per share attributable to controlling shareholders was $0.65, based on approximately 2.8 million shares, compared to a loss of $0.55 for the same period last year, also based on about 2.8 million shares. Excluding the unrealized gain on derivatives, the adjusted loss for the quarter was $1.19 per share, compared to adjusted earnings of $0.14 per share for the same period last year. Now, let’s shift to Slide 16 to review our fleet performance. We’ll start with the utilization rates for this quarter compared to last year. This quarter, our commercial utilization rate was 100%, and our operational utilization rate was 98.1%, compared to 99.8% commercial and 99.7% operational last year. On average, we operated 13 vessels this quarter, earning an average time charter equivalent of $12,455 per day, up from 12 vessels earning an average of $10,674 per day last year. Our total daily operating expenses, which include management fees and other costs excluding drydocking, were $6,867 per vessel per day this quarter, compared to $6,953 per vessel per day last year. Looking at the cash flow breakeven levels, which account for drydocking expenses, interest expenses, and loan repayments, our daily breakeven level for 2024 was $12,440 per vessel per day, compared to $13,186 last year. Now on Slide 17, let's review our debt profile. As of March 31, 2024, our outstanding bank debt, including balloon payments, was $101.47 million, projected to decrease to about $67.5 million by the end of 2026. For the remainder of this year, total debt repayments, including balloon payments, amount to around $14.7 million, totaling about $18 million for the year. In 2025 and 2026, loan repayments are expected to drop to about $9.7 million annually, significantly lowering our cash flow breakeven level. The average margin of our debt is around 2.45%, and assuming a soft rate of about 5.32%, the total cost of our debt, considering the reduced interest from swaps, is approximately 7.56%. At the bottom of this slide, we present the projected cash flow breakeven level for the next 12 months, where we anticipate a breakeven of around $12,535 per vessel per day and an EBITDA breakeven of approximately $8,513 per vessel per day. Finally, let me conclude my brief financial presentation with Slide 18, which highlights our balance sheet. As of March 31, 2024, cash and other current assets amounted to approximately $27 million. The book value of our vessels was around $200 million, resulting in a total book value of our assets of about $227.4 million. On the liabilities side, as mentioned earlier, our debt stood at approximately $101.5 million, representing about 44.7% of our assets' book value, while other liabilities totaled $8.8 million, around 3.7% of the book value of our assets. The remaining book value of $116.8 million pertains to minority interests of the NRP investors at about $9.6 million, while $107.4 million is attributed to our common shareholders, resulting in a book value of $38.35 per share. However, based on market transactions and reports, we estimate that the market value of our vessels is above their book value, at approximately $262 million. This is about $62 million higher than the book value, equating to roughly $20 per share, bringing our NAV per share to over $60. Our recent share price trading around $22 indicates a significant discount relative to our NAV, presenting a 65% discount, which highlights considerable upside potential for shareholders and investors.

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

Our first question comes from Tate Sullivan with Maxim Group.

First, regarding the debt repayment profile on Slide 17. Tasos, are you planning to refinance the existing loan repayment before the end of the year, or will you prioritize using cash flow to pay down that debt?

I don't think we are planning to refinance any of our debt in the near future. I believe we will make the payments that are due for the remainder of the year from the cash flow we expect to generate. As shown in the slide, the repayments will significantly decrease next year and the following year, which will reduce our cash flow breakeven point. We have loan payments due in 2027, and I expect that we will refinance those at that time.

And then on the Blessed Luck in the quarter and the boiler damage, did that happen while in dry dock, in voyage? And the expenses to repair, is that within dry docking costs? Can you go into more detail on that, please?

No. This damage happened when we left the shipyard, it was the fault of the crew and the shipyard was the cause that this happened. But it happened just after we had left the shipyard. It's an insurable cost and all the repairs are covered. Unfortunately, the loss of time is not covered. So we lost 17 days of employment.

Can you approximate or ensure that approximate cost to repair that should be insurable?

I think it's about $900,000. It's not a cheap repair. But as I said...

It is not included in the numbers because it's fully insured. So you will not find it, only the dry docking or operating expenses.

Okay. And then going forward, scheduled dry docks for the rest of the year, can you review that?

In this quarter, we only have one dry dock, which has already taken place, which is the Starlight. And we have three dry docks in Q3, I haven't looked as far as Q4, but...

There's no dry docks. Nothing scheduled for Q4 of this year.

Nothing for Q4. So it's the three dry docks in Q3 really that are still to come.

Our next question comes from Poe Fratt with Alliance Global Partners.

I had a question, Aristides, about your 2025 outlook. If things, like you're trying to signal, less congestion next year, less disruption, a little bit more in supply growth and demand just slowing a little bit modestly, would potentially create a softer rate environment, would you categorize your outlook as conservative or do you think it's sort of a base case? Or do you think it's sort of a conservative case and that you potentially get, if some of these things linger, it's a little bit better than you think?

Yes. We generally try to be quite conservative. However, it is extremely challenging to predict market movements given the current geopolitical situations, as they impact trade and economic growth, and it’s hard to determine the outcomes. There are some positives, like low supply growth and the slower increase in vessel numbers due to environmental regulations. If demand is strong in 2025, the market could improve significantly. However, the FFA market currently suggests a slightly lower market in 2025 compared to 2024. This information is difficult to analyze and decide upon. If geopolitical tensions continue but the global economy performs well, we may have a strong market despite longer trade routes. Still, our baseline expectation remains conservative.

Yes, I understand. Given that context, I'm not certain if I can provide any updates on FFA hedging for the remainder of the year. Do you have any in place? Additionally, with one time charter in the mid- to high teens, would that be appealing considering your forecast for 2025 or the latter part of 2024 and early 2025?

Yes. Currently, all our ships are on spot charters trading in the market. If we see strengthening in the next couple of months, we will likely fix a portion of our fleet at these higher rates, whether through normal time charters or FFAs. We do not have any open FFA positions at the moment. However, if we encounter levels that are even more favorable than today’s market levels, we recognize that the current levels are still profitable overall. This quarter, we had a loss primarily due to dry docks and the off-hire of the Blessed Luck. We also incurred a loss on the FFAs we executed. However, for the next quarter, we are cautiously optimistic about returning to profitability.

Understood. And then Tasos, could you just sort of give some guidance for OpEx? So just OpEx should be just slightly up for the rest of the year relative to what you've reported in the first quarter?

Yes. I think we're pretty much on budget for the first quarter. So I mean, we would be plus or minus 2% to 3%, I believe. It's hard to say. It's hard to say, but we haven't seen any surprises on the OpEx so far.

Our next question comes from the line of Lars Eide with Arctic Securities.

So I guess on the last quarter kind of touched upon my question. But as you noted in your report this morning, you're positioning your fleet for more market exposure moving forward. I guess in that context, your market view should be positive, I assume, as you strategize with this.

Sure. I mean, our base case is that for the next few months, the market should be quite positive.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Well, thank you all for listening in on today's presentation. We will be back to you with Q2 results in about three months' time. Thank you.

Bye, everybody.

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