Earnings Call Transcript - ESEA Q4 2022

Operator, Operator

Thank you for joining us, and welcome to the Euroseas Conference Call on the Fourth Quarter 2022 Financial Results. We have with us Mr. Aristides Pittas, Chairman and CEO, and Mr. Tasos Aslidis, CFO of the Company. All participants are currently in listen-only mode. There will be a presentation followed by a question-and-answer session. I must inform you that this conference is being recorded. The Company has announced its results through a press release that has been publicly distributed. Before I hand it over to Mr. Pittas, I want to remind everyone that today’s presentation and conference call will include forward-looking statements. These statements are defined by federal securities laws and are based on current management expectations that involve risks and uncertainties. These risks may cause actual results to differ from those expectations. I encourage you to refer to Slide number 2 of the webcast presentation for the full forward-looking statement, which is also included in the press release. Please take a moment to review the entire statement. Now, I would like to turn it over to Mr. Pittas. Please go ahead, sir.

Aristides Pittas, Chairman and CEO

Good morning, everyone, and thank you for joining us today for our conference call. I am Tasos Aslidis, the Chief Financial Officer. The goal of today's call is to review our financial results for the quarter and the full year ending December 31, 2022. I will provide more detailed financial highlights later in the presentation. Let’s move to Slide 3, which outlines our income statement. For the fourth quarter of 2022, we reported total net revenues of $42.9 million and net income attributed to common shareholders of $20.3 million, or $2.86 per diluted share. The adjusted net income for common shareholders was $17.7 million, or $2.50 per diluted share, with adjusted EBITDA for the period at $22.9 million. Please check the press release for the reconciliation of adjusted net income and adjusted EBITDA. As part of our stock dividend plan, our Board of Directors declared a quarterly dividend of $0.50 per common share for the fourth quarter of 2022, which will be paid around March 16 to shareholders of record as of March 9, 2023. As of February 14, 2023, we have repurchased 251,685 shares of our common stock in the open market for a total of approximately $5.3 million under our $20 million share buyback plan announced in May 2022. For the entire year of 2022, we generated net revenues of $183.3 million, with net income attributable to common shareholders amounting to $106.2 million, or $14.78 per diluted share. The adjusted net income was $95 million, translating to $13.23 and $13.22 per share for basic and diluted, respectively, with adjusted EBITDA of $114.4 million. Tasos will touch upon the highlights in more depth later. Let’s proceed to Slide 4 to discuss our recent charters and operational developments. We sold the motor vessel Akinada Bridge on December 29, 2022, for a gross price of $14.2 million, and the vessel was delivered to the buyers on January 9, 2023. In recent chartering developments, we extended the charter of the motor vessel Joanna for five to seven months at $14,500 per day. Unfortunately, we faced an incident where the charterer of our vessel Aegean Express repudiated the charter while the vessel was in dry dock. The charterer, Continental Shipping Line, is currently under legal scrutiny, and we are negotiating to secure replacement charters. There were no idle or off-hire periods this quarter. Regarding drydocking, two vessels completed special surveys during the fourth quarter of 2022. One was Aegean Express, which was repaired from mid-October to early February 2023, and the other was the motor vessel Spetses, which underwent drydocking for approximately 29 days. Please refer to Slide 5 for our fleet profile. Euroseas currently operates 17 vessels, including 10 feeder containerships and seven intermediate container carriers, with a total capacity of about 53,300 TEU and an average age of 17.5 years. Moving on to Slide 6, we present our vessels under construction: nine feeder containers expected to be delivered in 2023 and 2024, with the first delivery anticipated by the end of next month. Six of these new vessels will carry 2,800 TEU each, while three will have a capacity of 1,800 TEU. The total capacity for these nine new vessels is 22,200 TEU. Following their delivery, our fleet will expand to 26 vessels with a total capacity of about 75,000 TEU. Turning to Slide 7, you'll see our vessel employment chart. We have strong charter coverage for the next two years, with about 80% of our fleet fixed for 2023 and nearly 54% for 2024. These figures include the newbuilding deliveries fixed at $48,000 per day from their respective delivery dates. Let’s examine Slide 9, which reviews the development of the 6- to 12-month time charter rates over the past decade. Recently, the container market has seen a record high in time charter rates due to changing demand and tight supply, leading to significant spikes. However, since the summer of 2022, the containership charter market has softened, with rates dropping sharply. The graphs display that charter rates across all segments have decreased significantly since mid-2022, with feeder rates nearing the 10-year average and intermediate rates even below historical averages. All categories are still above the 10-year median levels. Now, let’s move to Slide 10 to analyze the leading market themes. In the fourth quarter, one-year time charter rates slightly declined by 70% compared to Q3 2022, followed by a further drop of 15% to 25% in January. Fortunately, rates appear to be stabilizing lately at still profitable levels. The secondhand price index fell by an average of 46% in Q4 2022 compared to Q3. The activity for secondhand containership sales was much quieter in the last quarter of 2022 due to significant macroeconomic uncertainty and weak demand impacting investment appetite. Conversely, the new building price index decreased by just 1.2% in Q4 2022 against the previous quarter, indicating that despite a negative market atmosphere, construction costs remain stable. As of January 16, the idle containership fleet was about 2.2% and has gradually risen since mid-2022. An increase in containership recycling was observed toward year-end, expected to rise further in 2023 and 2024 due to weaker market conditions and regulatory pressures. Despite a drop in scrapping prices to about $550 per lightweight ton in Q4 2022, they're still above 35% of 2019 levels. The containership fleet size increased by roughly 4% in 2022, excluding idle vessel reactivation. Now, let’s move to Slide 11. The IMF has revised its global growth forecasts for 2023 and 2024, showing some positive expectations for world economic growth. According to the IMF, global growth is set to slow from 3.4% in 2022 to 2.9% in 2023, rebounding to 3.1% in 2024. Central Bank rate hikes amid inflation and the Ukraine war are proving effective without leading to the anticipated recession. Although COVID-19 spread in China hampered growth in late 2022, the country’s recent reopening is expected to contribute to GDP growth of 5.2% in 2023 and 4.5% in 2024. In the U.S., GDP growth is expected to decline to 1.4% in 2023 and further to 1% in 2024 as the Federal Reserve implements interest rate hikes. Europe’s growth forecast for 2023 has improved by 0.2% from the previous IMF report, with an expected 0.7% growth for the year attributed to resilience against high energy prices, along with a gradual tightening of monetary policy. A rebound of 1.6% is anticipated in 2024. Emerging and developing nations are expected to see growth at positive levels in 2023, albeit below 2022 rates, before recovery in 2024. The Russian economy's growth forecast has been upgraded to 0.3% for 2023, significantly better than the previous estimate of a 2.3% decline. Forecasts for 2024 remain at 2.1%. India is projected to have the fastest growth at 6.1% in 2023 and 6.8% in 2024, while Brazil's economy is expected to grow by 1.2% in 2023 and 1.5% in 2024. According to Clarksons, demand for containerized freight dropped significantly, contributing to a market slowdown in the latter half of 2022. A marginal decline is expected in 2023, but a considerable rebound of 3.1% is forecasted for 2024 in line with global GDP recovery. Trade and growth projections are also being revised as geopolitical tensions between Russia and Ukraine continue to impact world growth and trade. Please turn to Slide 12 to view the fleet age profile and orderbook data. The containership fleet is relatively modern, with most vessels under 15 years old and only 10% over 20 years old. As of February 2023, the orderbook stands at 28.8% of the total fleet, an increase of 2.7% from the previous quarter. Order volume is likely to increase in 2023 and 2024, influenced by a softer charter market and upcoming environmental regulations. Let’s look at Slide 13, where we review the fleet age profile and orderbook for containers in the 1,000 to 3,000 TEU range, which differs from the total fleet. These vessels are vital to our operations and newbuilding program focus. Approximately 23% of the 1,000 to 3,000 TEU fleet is overage, leading to scrapping and a lower orderbook. As of February 2023, the orderbook as a percentage of the fleet is only 13.2%. Therefore, the current balance looks strong. Moving to Slide 14, we will summarize the outlook for the containership market. Political and economic uncertainties are impacting container shipping, with freight rates plummeting in November and December 2022, approaching normal levels from the exceptional highs of 2021 and early 2022. The container freight index has dropped 80% since its peak in January 2022 and is currently only 6% above the pre-COVID 10-year average. The container shipping market is experiencing pressure, with trade volumes down 9.4% year-over-year. This situation has been exacerbated by excess retail inventories affecting new shipments and ongoing economic headwinds linked to inflation and living costs. Moreover, port congestion from the pandemic has reversed, increasing supply. In 2023, market conditions are forecasted to soften further, with rates likely falling below historical averages, while new vessels entering the market in the next 6 to 24 months may apply more pressure. However, several factors could significantly influence the demand for containership credits from 2024 onwards, such as geopolitical developments relating to the Ukraine-Russia situation and other global tensions, as well as the economic conditions emerging from inflation-fighting measures through interest rate increases. Additionally, new environmental regulations regarding emissions are anticipated to lower vessel speeds in 2023 and 2024, effectively reducing capacity in the market and enhancing fundamentals. The gap between charter rates of eco-vessels is expected to increase further. Lastly, smaller vessels ranging from 1,000 to 5,000 TEU may perform better due to a more favorable supply situation. Many older ships are set to be scrapped, and the orderbook is slowing. Nonetheless, the influx of larger vessels into trades currently handled by the midsized fleet may mitigate these differences. Finally, let’s look at Slide 15. On the left side, we can see the evolution of one-year time charter rates for containers with 2,500 TEU capacity since 2010. It's evident that these rates have gradually declined from an average of about $19,900 per day in Q4 2022 to around $17,000 per day recently. On the right side, the historical price range for new buildings and 10-year-old containerships with a capacity of 2,500 TEU shows that prices remain high. However, this uncertainty may adjust significantly in the coming year, especially newbuilding prices, as inflation and the dollar's decreasing value might increase costs. We have utilized the spike in charter rates from 2021 and early 2022 to secure a revenue stream of $450 million, enabling us to consistently reward shareholders with a steady 10% dividend each quarter, repurchase shares through our buyback program, support our eco newbuilding initiative, and maintain sufficient liquidity for other opportunities that may appear in the next 18 months. I will now hand the floor to Tasos for a more detailed review of our financials.

Tasos Aslidis, CFO

Thank you very much, Aristides. Good morning to everyone. Over the next four slides, I will provide an overview of our financial highlights for the fourth quarter and full year of 2022, comparing them to the results from the same periods in 2021. Let's begin with Slide 17. For the fourth quarter of 2022, the Company reported total net revenues of $42.9 million, which is a 12.1% increase from total net revenues of $38.3 million in the fourth quarter of 2021. This increase was driven by a higher average number of vessels operated in the fourth quarter of last year compared to the previous year. The Company reported net income attributable to common shareholders for the fourth quarter of 2022 at $20.3 million, down from $22.8 million in the fourth quarter of 2021. Interest and other financing costs for the fourth quarter of 2022 were $1.6 million, up from $0.8 million during the same period in 2021, due to a larger amount of debt and a rise in the average LIBOR rate during the amortization period compared to last year. In 2022, we also earned interest income. Our speaker experienced a technical issue but has rejoined us. Basic earnings per share attributable to common shareholders for the fourth quarter of 2022 were $2.87, calculated on a weighted average of 7.08 million shares outstanding, while diluted earnings per share were $2.86, calculated on 7.1 million weighted average shares outstanding, compared to basic and diluted earnings per share of $3.16 and $3.14, respectively, for the fourth quarter of 2021. Excluding the effect on the income attributable to common shareholders for the quarter of the unrealized gain on derivatives, the amortization of below market time charters acquired, and the vessel depreciation on the portion of the reconciliation of vessels acquired with attached time charters allocated to below market time charters, the adjusted earnings per share attributable to common shareholders for the quarter ended December 31, 2022, would have been $2.50 per share basic and diluted, compared to adjusted earnings per share of $3.19 basic and $3.18 diluted for the quarter ended December 31, 2021, after making similar adjustments for the year. Generally, security analysts do not include the above items in their published estimates of earnings per share. Let's now review the same figures for the full year of 2022. The Company reported total net revenues of $182.7 million for the full year, representing a 94.6% increase over total net revenues of $93.9 million during 2021, again, as a result of both an increased number of vessels owned and operated and also higher average charters that our vessels earned during last year compared to 2021. The Company reported net income attributable to common shareholders of $106.2 million, as compared to $43 million, which was attributable to common shareholders for the 12 months of 2021. Interest and other financing costs for 2022 amounted to $5.1 million compared to $2.8 million for 2021. Again, this increase is due to the larger amount of debt we had and increased LIBOR rates that we had to pay during the year. I would like to note again as well here that in 2022, for the first time I saw in periods, we had interest income of about $0.27 million. Adjusted EBITDA for 2022 increased to $114.4 million compared to $52.7 million during 2021, primarily as a result of higher revenues and the higher daily rates earned. Basic earnings per share attributable to common shareholders for 2022 was $14.79, while diluted earnings per share were $14.78, calculated on an average of about 7.2 million weighted shares outstanding, compared to basic earnings per share of $6.07 and diluted earnings of $6.06 for 2021, calculated on an average of about 7 million weighted shares outstanding. Excluding the effect on the income attributable to common shareholders for 2022 of the unrealized gain on derivatives, the amortization of the below market charters acquired, and the vessel depreciation attributed to the acquisition of below market charters. The adjusted earnings attributable to common shareholders for the year 2022 would have been $13.23 and $13.22 basic and diluted, respectively, compared to adjusted earnings of $6.03 and $6.02 per share basic and diluted for 2021, with the same adjustments made, as I mentioned above. Let's now turn to Slide 18 to review our fleet performance. We will start our review by looking at our fleet utilization rates for the fourth quarter and full year of 2022 and 2021. Our fleet utilization rate is broken down into commercial and operational. In the fourth quarter of 2022, our commercial utilization rate was 100%, while our operational utilization rate was 95.1% compared to 100% commercial and 98.5% operational for the fourth quarter of 2021. On average, 18 vessels were owned and operated during the fourth quarter of 2022, at a time charter equivalent rate of $29,400 per day compared to about 15 vessels in the same period, the fourth quarter of 2021, and an average of $30,068 per day. Our total daily operating expenses, including management fees and general and administrative expenses, averaged $7,937 per vessel per day during the fourth quarter of 2022 compared to $7,708 per vessel per day for the fourth quarter of 2021. If we move further down this table, we can see at the bottom, the cash flow breakeven rate which we paid during the fourth quarter of this year, which takes into account drydocking expenses, interest costs, loan repayments, and preferred dividends, if any were paid in cash. Thus, for the fourth quarter of 2022, our cash flow breakeven rate was $15,574 per vessel per day compared to $11,950 per vessel per day during the fourth quarter of 2021. Looking now on the right part of the slide, we can review the same figures for the full year. During the full year of 2022, our commercial utilization rate was 99.9% and our operational utilization rate was 98.4% compared to 100% commercial and 98.5% operational during 2021. On average, in 2022, we owned and operated 17.12 vessels, earning an average time charter equivalent rate of $31,964 per day compared to 14.25 vessels during 2021, earning on average $19,327 per day. In the middle of the table, our daily operating expenses, including management fees and G&A expenses, but excluding direct working costs, averaged about $7,548 per vessel per day compared to $7,212 per vessel per day during 2021. Again, at the bottom of the table, we can see our daily cash flow breakeven rate for the year, which amounted to $14,426 per vessel per day in 2022 compared to $10,782 per vessel per day in 2021. Finally, in the very last line of this slide, we can see the common dividend that we paid per day, for the fourth quarter was $2,165 per vessel per day, while for the full year, where only three dividends are accounted, it was $1,689 per vessel per day. Let's now turn to Slide 19 to review our debt profile. As of December 31, 2022, our outstanding debt was $108 million. As of the same date, our scheduled debt repayments over the following 12 months, that is during 2023, amounted to about $56 million, a little more than half of our debt. This figure includes about $31 million of balloon payments, of which $6.2 million were already made last week, resulting in three more of our vessels becoming unencumbered. We currently intend to make the next balloon payment of $7.1 million during the second quarter of 2023 from our own funds, rendering two more of our vessels unencumbered. At this point, we are planning to refinance the last portion of our balloon payments at the end of 2023, which amounts to $17.4 million. Clearly, our low leverage and the increasing number of unencumbered vessels have enhanced our flexibility and ability to raise debt to fund investment opportunities should they arise. Looking at the chart on the bottom of the slide, we can see that our cash flow breakeven level over the next 12 months amounts to about $14,119 per vessel per day, of which $4,170 is contributed from loan repayments. The final comment before we leave this slide, just to address the cost of our debt. The average margin of our current debt is about 2.85%, assuming a LIBOR rate of 4.8% on the top of it. We estimate the total cost of our senior debt to be around 7.65%; however, if we include the cost of our debt, the portion of the debt whose interest payments are locked by our interest rate swap contracts,the overall cost of our debt would drop to about 5.16%. Of course, we expect to assume additional debt to finance our newbuilding program, which is estimated to be in the range of $200 million to $220 million. To sum up our presentation, let's move to Slide 20 to review our balance sheet. Again, as of the end of last year, our assets included cash and other cash equivalents amounting to about $38 million, along with other current assets. Advances made for our newbuilding program stood at about $59 million. The book value of our vessels stood at around $225.5 million, including the one vessel that we held for sale, resulting in a total book value for our assets of about $328.6 million. On the liability side, as I mentioned earlier, our debt stood at $108 million, representing about 33% of the book value of our assets. We also had the fair value of our recently acquired charters, below market charters, which stood at about $35 million for about 10.5% of our assets and also other liabilities of about $17.5 million or about 5.3% of the book value of our assets. However, it should be noted here that the market value of our fleet is much higher than its book value. Based on our estimates and using charter-adjusted values for our fleet and market value changes for our new building contracts, and having taken into account the developments regarding Aegean Express that Aristides mentioned earlier, the estimated market value for our fleet is approximately $666 million as of the end of last year, which translates to a net asset value for our company of about $344 million, or in excess of $48 per share. Recently, our shares have been trading around $19 per share, thus representing a significant discount to our net asset value and offering good appreciation potential for our shareholders and investors based on the above measure.

Aristides Pittas, Chairman and CEO

Thank you, Tasos. Let us open up the floor now for any questions that we may have. Operator, please proceed.

Operator, Operator

Thank you. We will now open the floor for a question-and-answer session. Our first question comes from Tate Sullivan with Maxim Group. Please go ahead with your question.

Tate Sullivan, Analyst

On the Continental Shipping Line news, the Aegean Express only chartered by CSL, please to start.

Aristides Pittas, Chairman and CEO

Yes, of course, I was expecting this question. And indeed, this is the only ship that is chartered to this charter. This is a small charter with whom we have had quite a long relationship, having had the vessel on his charter for quite some time. It is very unfortunate what has happened, and we hope for a positive resolution, but it has been unfortunate. We are taking legal action against the charter who has defaulted, so we will see what the outcome will be. All our other vessels are fixed to much larger and stronger names, so I don't anticipate any issues with those charters going forward.

Tate Sullivan, Analyst

Can you discuss the recent newbuild contracting environment for ships similar to those entering your fleet, which you already have contracts for in the next three to four months? Additionally, what are the potential levels for those ships, and have any similar size ships recently entered the market?

Aristides Pittas, Chairman and CEO

There haven't been any, as far as I know, for similar type ships. However, the area around which this would be secured, if they were, would be around the prices that we've paid. We have not seen newbuilding prices generally drop dramatically, primarily for two reasons. One is that the dollar is dropping a little bit compared to where it was a few months ago. And secondly, due to global inflation, the cost of building a ship is becoming more expensive. So, I do not think that we will see significantly lower prices for new ships that may be ordered. In fact, it could be even higher at some point. This concerns prices. Regarding chartering our remaining seven vessels, the first one is to be delivered in December '23, and the last one in December '24. We are not in any projects to fix them at this point in time. We are very confident that we will be able to easily employ them at decent levels. Of course, not as high as the levels that we fixed for our first couple of vessels, but still at profitable levels. We will determine those much closer to the delivery time.

Tate Sullivan, Analyst

Okay. My last question is about the contract developments you mentioned with Joanna for $14,500. When does that current contract expire? Does it match what you have on Page 7 of your slide deck?

Aristides Pittas, Chairman and CEO

Sure. It can expire in about 2.5 months from today. It might last for another two or three months. We finalized it maybe three or four weeks ago; I can't remember exactly. The level is decent, giving us a reasonable profit on the ship. The charter market is still above, still at profitable levels for all ships, despite the significant drop. We tend to think that all this is a disaster due to what has happened, but it does not really take away from the super cycle, which was exorbitant. It is still good levels that we are seeing.

Operator, Operator

There are no questions at this time. I would like to turn the call back over to Euroseas CEO, Mr. Pittas. Thank you. You may close the call.

Aristides Pittas, Chairman and CEO

Thank you very much, everybody, for listening in to our Q4 and end of year results. We will be with you again in about three months for our Q1 results. Have a good day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.