Earnings Call Transcript - EDRY Q1 2023

Operator, Operator

Thank you for joining us today for the EuroDry Conference Call regarding our First Quarter 2023 Financial Results. Present with us are Mr. Aristides Pittas, Chairman and Chief Executive Officer, and Mr. Tasos Aslidis, Chief Financial Officer. This conference is being recorded. The company has released its financial results in a publicly distributed press release. Before I hand over to Mr. Pittas, I want to remind everyone that during today's presentation and call, EuroDry will be sharing forward-looking statements as defined by federal securities laws. These discussions may include forward-looking statements based on current management expectations which carry risks and uncertainties that may lead to those expectations not being met. I encourage you to review Slide number 2 of the webcast presentation, which contains the full forward-looking statement, also found in the press release. Please take a moment to read it thoroughly. Now, I will hand it over to Mr. Pittas. Please proceed, sir.

Aristides Pittas, Chairman and CEO

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 3-month period ended March 31, 2023. Please turn to Slide 3 of the presentation. Our financial highlights are presented here. For the first quarter of 2023, we reported total net revenues of $11.3 million and a net loss of $1.5 million or $0.55 loss per basic and diluted share. Adjusted net income, though attributable to common shareholders was $0.4 million or $0.14 earnings per basic and diluted share, respectively. The main difference to our net income was the unrealized portion of the change of value in our derivative contracts. Adjusted EBITDA for the period was $2.4 million. A reconciliation of adjusted net income attributable to common shareholders and adjusted EBITDA is presented in the press release. As of May 15, 2023, we had repurchased 198,721 shares of our common stock in the open market, around 7% of our total stock for about $3 million under our share repurchase plan of up to $10 million announced in August 2022. We will continue to execute the share purchase program at management's discretion. Tasos will go on with our financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our operational highlights. On the far-end side, we have new charters on 8 of our vessels, the majority of the ships we are employing in short-term charters, while two vessels, the Blessed Luck and Eirini P were fixed for previous 6 to 9 months. You can see the specifics of the various charters we faced in the accompanying presentation. I remind you that two of our vessels are employed for a minimum of 3 to 24 months, respectively, on index-linked charters at 105.5% of the average bulk rates. Additionally, at the end of '23, once the market started to recover, we saw 90 days of FFA contracts for the equivalent of one Panamax vessel in the second and one in the third quarter of 2023 at $16,500 and $16,250 per day. In March, we also sold another 90 days at $7,700 per day and $17,500 per day for Q2 for the corresponding quarters of Q2 and Q3. Thus, we practically covered another two of our vessels for this period at aforementioned rates. Regarding dry docks and repairs, motor vessel Santa Cruz and motor vessel Ekaterini underwent dry dock, the former for almost 24 days and the latter for 17 days. Finally, please note that motor vessel Good Heart is undergoing minor repairs since May 3 in Texas and is currently expected to leave by the end of the week. Please turn to Slide 5. The company has a fleet of 10 vessels, including 5 Panamax to Ultramax carriers with a total current capacity of approximately 730,000 deadweight tons and an average age of approximately 3.5 years. Moving on to Slide 6. We provide the graphical update on our fleet employment. As you can see, fixed rate coverage for 2023 stands at around 46%, if we include both FFAs and fixed charters. This figure excludes ships on index charters, which are open to market fluctuations that have secured employment. Turning on to Slide 7. We go over the market highlights for the quarter ended March 31, 2023, up until last Friday. The average spot rate for Panamaxes kicked off the first quarter of 2023 at approximately $10,200 per day, having passed a low of $6,200 a day in mid-February. By March 31, the spot rates had increased to approximately $13,000 per day. The added 1-year time charter rate for Panamaxes was about $14,500 per day during the quarter, rising to $16,000 per day by March 31, currently standing at $14,375 per day. Consequently, both the BPI and BPI indices were off to a rough start, hitting the lowest levels by mid-February. However, the recovering sales seen mainly in March indicated that the dry bulk market looks upbeat, driven by China's reopening, ongoing demand for iron ore, and limited supply growth. However, during the last 2 months, we have seen the market lose steam, but rates continue to fall comfortably at profitable levels. Please now turn to Slide 9. With the latest update in April 2023, the IMF slightly lowered its global GDP growth estimate to 2.8% for this year before settling at 3% in 2024. This is primarily due to the effects of high inflation, tighter monetary policies, strong economic activity, as well as the ongoing war between Russia and Ukraine and growing geopolitical tensions. However, the U.S. is showing considerable resilience despite the recent economic shocks, mainly in the financial sector. Additionally, China seems to be on track to achieve an estimated growth rate of 5.2% for this year, followed by a moderate growth of 4.5% for 2024. Growth in emerging and developing countries is expected to be well below long-run trends in 2023 and 2024, with the IMF lowering growth projections more than previously expected. Asia is poised to grow by 5.9% in 2023 and 6.3% in 2024, which is below trend. Russia's economic growth estimate was revised higher for 2023 to 0.7% from 0.3% during the last IMF estimates. However, the long-term outlook diminished from 2.1% to 1.3% for 2022. Despite the slightly slower global growth expectations, according to the latest Clarksons estimates, dry bulk trade demand is expected to return to steady growth of 2.5% in both this year and in 2024. Please turn to Slide 10. The order book continues to fuel positive market sentiment as it remains at the lowest historical levels. The order book as a percentage of total fleet as of May 2023 stands just below 7% at 6.88%. This suggests minimal fleet growth over the next 2 to 3 years, likely leading to higher rates in 2023, as any rate increases will be sustained at just historically average levels. Additionally, environmental regulations could further influence supply growth by forcing some vessels to retire or reducing their operational speed. Turning to Slide 11. Let us now look into supply fundamentals in a bit more detail. According to Clarksons' latest report, new deliveries as a percentage of total fleet are expected to be 3.9% as of the start of 2023, 2.7% in 2024, and 1.2% in 2025. The actual fleet growth is, of course, expected to be lower than the aforementioned figures due to scrapping and slippage. 8% of the fleet is older than 20 years and is a candidate for scrapping, especially if the market will not be strong. Please turn to Slide 12, where we summarize our outlook in the dry bulk market. The dry bulk market was under significant pressure at the beginning of the year. Sales were influenced mostly by traditional seasonality. However, as of mid-February and owing to the Chinese reopening post-COVID, we saw a significant rebound, especially in the smaller sizes. Average freight rates stood at $8,500 per day across January and February 2023 before picking up in mid-March to $13,900 per day, the highest level since December. During this time, we were fortunate enough to have 8 of our vessels employed on short-term charters, therefore able to deploy these vessels with higher rates. Even the two vessels on index-linked charters were open to market conditions and were able to benefit from a rebounding market. However, things could change. Over the past two months, we have observed lower rates due to the absence of high congestion and slower-than-expected economic growth, coupled with continued weakness in Mainland China's real estate sector. We continue to believe in an improvement in bank revenues through 2023 as the market moves past this typical seasonal weak first quarter. Of course, the market is heavily dependent on the recovery of China's real estate sector and the use of global macroeconomic headwinds. On the other hand, the newly introduced emission regulations, namely EXI and CII, will positively contribute to essential slow steaming. Additionally, the persistent buildup of new ships would create supply constraints in the next few years. There is a shortage of available slots currently in shipment in 2026 and still a lack of clarity on the fuel of the future. Consequently, due to the conflicting forces at play today, uncertainty remains regarding the timing and scale of potential market improvements. However, the fundamentals are encouraging. Finally, let's turn to Slide 13. The left chart shows the evolution of 1-year time charter rates of Panamax dry bulk vessels since 2002. As of May 12, 2023, the 1-year time charter rate for Panamax ships with a capacity of 75,000 deadweight tons stood at $14,375 per day, which is very close to the historical median. In the right chart, you can see the historical price range for a 10-year-old Panamax vessel, which has a current price of about $25 million, aiming to be more than the highest price levels seen in the last 12 to 20-plus years, although higher than the historical average of median prices. Certainly, current vessel prices are not justified by current charter rates. In the medium to long term, the prices will need to either fall or charter rates must increase. We believe that due to the fundamentals described and a return to global inflation, charter rates will eventually have to rise. We are closely monitoring the situation to decide when to invest in further acquisitions. During the last couple of years, we have deleveraged the company and built significant liquidity. In the meantime, we will continue our stock repurchase program, which we consider an excellent investment, as we are trading at around 35% of our market adjusted NAV. Let me now pass the floor over to our CFO, Tasos Aslidis, to go over various financial highlights in more detail. Tasos, the floor is yours.

Tasos Aslidis, CFO

Thank you very much, Aristides. Good morning from me, ladies and gentlemen. I will use the next 4 slides to give you an overview of our financial highlights for the first quarter of 2023 and compare those results to the same period from last year. For that, let's turn to Slide 15. For the first quarter of 2023, the company reported total net revenues of $11.34 million, representing a 38% decrease from a total net revenue of $18.20 million achieved during the first quarter of last year. In spite of the result, of the lower time charter rates our vessels earned during the first quarter this year, which was partly offset by the increased average number of vessels we operated and the one-time charter rate revenue recognized in respect of one of our vessels. The company reported a net loss for the period of $1.451 million as compared to a net income of $10.49 million for the same period of 2022. The interest and other financing costs for the first quarter of 2023 increased to $1.47 million as compared to $0.65 million for the same period of last year. At the same time, we recognized during the first quarter of this year, interest income of about $0.27 million as opposed to very minimal interest income for the same period of 2022. Adjusted EBITDA for the first quarter of this year was $2.36 million as compared to $12.71 million achieved during the first quarter of 2022. Basic and diluted loss per share for the first quarter of 2023 was $0.55 calculated on about 2.8 million basic and diluted weighted average number of shares outstanding compared to basic and diluted earnings per share of $3.69 and $3.64, respectively, for the first quarter of 2022, calculated on approximately 2.8 million and 2.9 million weighted average number of shares outstanding. Excluding the effect of the unrealized loss on derivatives for the quarter ended March 31, 2023, the adjusted earnings per share were $0.14 basic and diluted, compared to adjusted earnings of $3.34 and $3.40 per share basic and diluted for the same quarter of last year. Typically, security analysts do not include the aforementioned unrealized losses or earnings in the published estimates of earnings per share. Let's now turn to Slide 16 to review our fleet performance. We will start our review by looking at first our utilization rates for the first quarters of this and last year. Our fleet utilization rate is broken down to commercial operations. During the first quarter of 2023, our commercial utilization rate was 99.8%, while our operational utilization rate was 99.7% compared to 100% commercial and 99.6% operational for the first quarter of 2022. On average, 10 vessels were owned and operated during the first quarter of 2023, earning an average time rate of $10,674 per day compared to 9.54 vessels that we owned and operated during the first quarter of last year, earning approximately $24,636 per day. Our total daily operating expenses, including management fees and G&A expenses, but excluding financing costs, averaged $6,953 per vessel per day during the first quarter of 2023 compared to $6,600 per vessel per day for the first quarter of last year. If we move further down on this table, we can see the cash flow breakeven rate, which factors in operating expenses, interest expenses, and loan repayments. For the first quarter of 2023, our total cash flow breakeven rate was $13,186 per vessel per day compared to $12,815 per vessel per day in the first quarter of last year. Let's move now to Slide 17 to review our debt profile. As of March 31, 2023, we had outstanding bank debt of about $67 million. Looking at the chart on the top part of this slide, you can see that our debt repayments, excluding the payments over this and next year, are between $11 million and $20 million per year and then drop to between $5 million and $6 million in 2025 and 2026. As of March 31, 2023, our debt repayments, including balloon repayments over the next 12 months, amounted to about $8.5 million. If you look here at the interest costs of our debt, the average margin of our debt is about 2.68%, pursuant to a LIBOR rate of 5.25% on top of that and including the cost of the portion of our debt covered by our interest rate swap, we estimate that the total cost of our senior debt versus the end of last quarter to be around 7.7%. In the bottom of this table, you can see a projected cash flow breakeven rate for the next 12 months broken down into right components. On a quarterly basis, we expect to have a cash flow breakeven rate of around $12,405 per vessel per day. The same chart also displays our EBITDA breakeven rate in the middle of the chart, which includes breakeven expenses, G&A expenses, and dry bulk costs, estimated to be around $7,902 per vessel per day. Let's now move to Slide 18 to continue our presentation, where we can see some highlights from our balance sheet in a simplified way. This slide offers a snapshot of our assets and liabilities. As of March 31, 2023, cash and other assets stood at about $34.8 million. The book value of our vessels was approximately $146.5 million, resulting in a total book value for our assets of about $181.3 million. On the liability side, our debt as of March 31, 2023, was about $57 million, representing about 37% of the book value of our assets. We had other liabilities amounting to about $2.3 million, which is just below 2% of the book value of our assets, resulting in a book value of approximately $111.7 million, translating to a book value per share of $39.26. However, based on our own estimates and market comparables, we estimate that the market value for our investors is above the book value and actually stands around $179 million, suggesting our NAV per share to be in excess of $50. With our share prices staying around $15, there appears to be a significant discount to our NAV, suggesting that our stock offers significant appreciation potential for our shareholders and investors. And with that, I would like to turn the floor back to Aristides to continue the call.

Aristides Pittas, Chairman and CEO

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

Operator, Operator

Thank you. Our first question is from Tate Sullivan with the Maxim Group. Please go ahead with your question.

Tate Sullivan, Analyst

Starting on your comments about the slower-than-expected economic growth in China and the real estate market really not picking up, what could be catalysts for the dry bulk market in the near term in terms of data points from China that we might see? Or do you think it just might settle around current rates going forward, please?

Aristides Pittas, Chairman and CEO

Yes. I think that there are two aspects here. One is China, which is, as we all know, the most significant dry bulk stimulus that one can have, particularly its iron ore requirements, which primarily drive the capesize sector, but also the smaller sizes to an extent. So what happens with the real estate sector in China and its general growth is of paramount importance here. So this is one aspect. But China is not a norm in this world. This is a globe that has many constituents, and what is happening in the rest of the world is also extremely important. So global growth generally and China, especially, are the two things to watch.

Tate Sullivan, Analyst

Can you provide comments on the new build market and the hesitancy to place new build orders? Is there a limited number of new builds coming out of the yards? Do they already have contracts? Do you see any opportunities to purchase ships currently under construction, or would you prefer new builds?

Aristides Pittas, Chairman and CEO

I think there are very few ships coming out of the shipyards at this point; a few of them have fixed charters. There are very few that are built with the capacity to run on LNG or methanol, which have been making headlines and are done in combination with charters. But the vast majority of the ships that are being built are coming out without charters, and the owners will have to face the market. Of course, they are very economical ships, so they should have an advantage over older vessels. But we will see; I don't see currently any particular deal that we are looking at. We are generally monitoring the market and will likely take our decisions within the summer period.

Tate Sullivan, Analyst

I apologize if I missed the comment on the repurchase plan. Tasos, can you remind me when the current plan expires? I believe you still have about $7 million of capacity remaining under the plan. Is that correct?

Tasos Aslidis, CFO

Yes. I believe we approved the repurchase plan late last year, and we have built up a good two quarters now. So we have approximately two quarters before our growth has maximized the plan. We can use it to the level we believe is appropriate for the government sector regarding our share trading. We've spent $3 million, leaving us with approximately $7 million remaining in the plan.

Operator, Operator

Yes. I believe we approved the repurchase plan late last year, and we have accumulated a good amount over the last two quarters. So we have about two quarters left before our growth reaches the maximum allowed under the plan. We can utilize the remaining capacity to the extent we find suitable for the government sector concerning our share trading. We've used $3 million, leaving us with roughly $7 million left in the plan.

Aristides Pittas, Chairman and CEO

I presume there are no more questions.

Operator, Operator

Yes, there are no more questions at this time. I'd like to hand the floor back over to Mr. Aristides Pittas for any closing comments.

Aristides Pittas, Chairman and CEO

Well, thank you very much for standing by for our conference call today. We will be back to you in a quarter's time to discuss the latest developments. Good day.

Tasos Aslidis, CFO

Thank you, everybody.

Operator, Operator

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