EuroDry Ltd. (EDRY) Earnings Call Transcript & Summary

Thank you for standing by, ladies and gentlemen, and welcome to the EuroDry Conference Call on the Third Quarter 2022 Financial Results. We have with us today Mr. Aristides Pittas, Chairman and Chief Executive Officer; and Mr. Tasos Aslidis, Chief Financial Officer of the company. [Operator Instructions] I must advise you that this conference is being recorded today. Please be reminded that the company announced its results through the press release that has been publicly distributed. Before passing the call to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, EuroDry will be making forward-looking statements. These statements are within the meaning of the federal securities laws. Matters discussed may be forward-looking statements, which are based on current management expectations that involve risks and uncertainties that may result in such expectations not being realized. I kindly draw your attention to Slide 2 of the webcast presentation, which has 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 I would now like to pass the floor over to Mr. Pittas. Thank you, sir. Please go ahead.

Hello, ladies and gentlemen. Good morning, and thank you for joining us for the scheduled conference call. I have with me Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the third quarter and 9-month period ended September 30, 2022. Please turn to Slide 3. Our income statement highlights are shown here. For the third quarter of 2022, we reported total net revenues of $15.8 million and net income of $6.2 million or $2.10 per diluted share. Adjusted net income attributable to common shareholders was $5.7 million or $1.93 per diluted share. Adjusted EBITDA for the period was $9.5 million. As of November 10, 2022, we have repurchased 108,963 of our common shares in the open market for about $1.5 million, under our share repurchase plan of up to $10 million announced in August. Our CFO, Tasos Aslidis, will go over our financial highlights in more detail later on in the presentation. Please turn to Slide 4 for our operational highlights. Motor Vessel Pantelis was sold for $9.675 million and delivered to her new owners, an unaffiliated third-party, on October 17, 2022. On the chartering front, we continued renewing all 8 of our vessels, which came open for single trips, thus practically keeping our exposure to the spot market. You can see the specifics of the various charters in the accompanying presentation. We have 2 vessels that are fixed on longer but index-based charters. So practically, only one vessel, which is on an agreed longer-term time charter rate till the end of Q1 '23. The average revenues of our fleet in Q3 '22 was $20,600 per day approximately. Regarding dry docks and repairs, we had 3 vessels Motor Vessel Alexandros P, Eirini P and Tasos, which were in dry dock for approximately 22, 54 and 35 days, respectively. The released dry dock commenced in Q3 that ended in Q4, so 20 days of the 54 will be accounted for in Q4. There was no idle period or commercial offhire this quarter. Please turn to Slide 5. After the sale of Motor Vessel Pantelis, the company has a fleet of 10 vessels, including 5 Panamax, 2 Ultramax, 2 Kamsarmax and 1 Supramax dry bulk carriers. EuroDry's 10 drybulk carriers have a total carrying capacity of 728,000 deadweight approximately with average age of 12.6 years. Turning now to Slide 6. Let's review our current vessel employment schedule in a bit more detail. As you can see, fixed rate coverage for Q4 2022 stands at around 54% and comes down to about 10% in Q1 2023. This figure excludes the 2 ships on index charters, which are open to market fluctuations that have secured employment. Moving to Slide 7. We go over the market highlights for the quarter ended September 30, 2022, and where it currently stands. The average spots or market rates for Panamaxes was approximately $16,000 per day in the third quarter of 2022. By September 30, there was an uptick to $17,300 per day, but currently, it has dropped to around $14,900 per day. The 1-year time charter rate for Panamaxes was about $16,300 per day, dropping to $14,950 per day by September 30 and currently standing at $14,565 per day. Despite a slight uptick towards the end of Q3 2022, both BDI and BPI indices show a precipitous drop from the second quarter of 2022 of about 20%. This was mainly caused by lower shipping demand due to the economic slowdown across the globe because of energy supply in certain different [indiscernible] and the increasing interest rates to combat rising inflation. Please turn to Slide 9. The global GDP growth is forecast to slow from 6% in 2021 to 3.2% in '22 and 2.7% in 2023 according to the IMF. This is the weakest growth profile in the last 15 years apart from the global financial crisis and the critical phase of the COVID-19 pandemic. Russia's invasion of Ukraine, China's 0-COVID policy, soaring energy prices and global inflation all weighed down heavily on the drybulk outlook. China's growth is projected to slow to 3.2% in 2022, significantly lower than the pre-pandemic years, marking one of the worst performances in almost half a century. In 2023, the IMF expects a flight for Chinese standards, strengthening to 4.4%. GDP growth for the United States was revised downwards to 1.6% for '22, from 2.3% in previous projections and is now projected to inch down further to just 1% in 2023. On the other hand, European growth projections have increased to 3.1% from previous of 2.6%, but the risks remain on the downside. And in 2023, GDP growth is expected to be just 0.5%. Growth in emerging markets is forecast to be slow in 2022, while the only country with a better forecast seems to be Brazil with an anticipated growth of 2.8% from 1.7% previously forecasted due to the robust recovery in Latin America. For 2023, all other developing countries are expected to do a little bit worse than in 2022 except Russia, which should improve relatively to 2022 but still face a negative growth of 2.3%. Looking at the drybulk trade. According to Clarksons, demand growth is expected to be marginally negative in 2022, compared to plus 1.2% in the previous corporate projections. For 2023, drybulk trade rate is expected to grow by a near 1.4%. As we noticed, trade and growth projections are being continuously revised as we factor the political tensions between Russia and Ukraine on world growth and trade are being continuously assessed and the efforts to combat rising inflation are still not producing significant results. Please turn to Slide 10. The single most positive driver for optimism about the drybulk market is the low drybulk orderbook. In the last 18 months, it has been kept at very low levels, and it currently stands at 6.9% of the existing fleet. Now please turn to Slide 11 for the bird's eye view of the supply fundamentals. Based on Clarksons' latest report, the new deliveries as percentage of total fleet is expected to be 3.7% by the end of 2022, 3.4% in 2023 and 2.2% in 2024. As for fleet growth will, of course, be lower due to scrapping. 8% of the fleet is older than 20 years old and the candidate for scrapping if the market is soft. Please turn to Slide 12, where we summarize our outlook in the drybulk market. The drybulk market and predominantly the Capesize sector has significantly softened year-to-date primarily due to the huge demand for steel in China, which has led to less iron ore imports. The real estate sector, which accounts for about 30% of China GDP, faces significant uncertainties going forward. Indicatively, the aggressive monetary policies, including interest rate hikes, being pursued by various central banks weighed on global commodity demand and freight rates. Strong demand for coal, which is further supported by the current energy crisis, has helped keep strong rates in sub-Capesize vessels, which has provided some support in the Capesize sector, too. On the supply side, port congestion, which resulted in supply constraints, has seen major improvement this quarter with the supply chain starting to normalize and bringing a lot of tonnage back into the market. The negative pressure recorded in the drybulk freight market has acted as a main contributor in increasing the number of demo candidates coming into the market and especially in the bigger size segments. Ordering of new ships for 2023 and 2024 deliveries has been practically nonexistent due to lack of available slots in shipyards and the lack of clarity for the fuel of the future, something that makes placing a new order a very risky option. Despite the above said low expected fleet growth for 2023 and 2024, the overall direction of the market remains uncertain. It will be determined by the developments in the Chinese economy and in particular, the real estate sector, the outcome of the war between Russia and Ukraine and the efforts of the global economy to fight inflation with the least possible negative consequences on the world growth. The last couple of days, we have seen 2 positive pieces of news regarding inflation lowering in October and China possibly abandoning the 0-COVID rule. Let's hope this will not be reversed during the next few days and weeks. Please turn to Slide 13. The left side of the slide shows the evolution of 1-year time charter rates of Panamax drybulk vessels since 2002. As of November 4, the 1-year time charter rate for Panamax ships with a capacity of 75,000 deadweight tons stood at $14,745 per day and remains just above the average rate level observed during the decade before the COVID pandemic started. On the right-hand side of the slide, you can see the historical price range for a 10-year-old Panamax vessel, which has a current price of around $23 million. While these prices are slightly reduced from the previous quarter valuation, they are still significantly higher than historical median or medians. Our balance set has strengthened considerably, and we are sitting on significant free liquidity. If the market continues to correct and charter rates and prices grow further, we will consider further vessel acquisitions. But barring such a development, we believe the most investor-friendly strategy is to continue implementing conservatively our share repurchase program. Our share price is trading with a huge discount to our NAV, so we will practically be buying vessels at which discount to current market prices. And with that, let me now pass the floor over to our CFO, Tasos Aslidis, to go over the various financial highlights in more detail. Thank you.

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. Over the next 4 slides, I will give you an overview of our financial highlights for the third quarter and 9-month period ended September 30, 2022, and compare the results to the same periods of last year. So with that, let's turn to Slide 15. For the third quarter of 2022, the company reported total net revenues of $15.8 million, representing 18.8% decrease from total net revenues of $19.5 million during the third quarter of last year. And that was primarily the result of the lower time charter rates, our vessels earned in the third quarter of this year compared to last year and also of the increased schedule offhires during the third quarter, during which our vessels not earn revenue. And that's despite the larger number of vessels we operate. The company reported net income and net income attributable to common shareholders for the period of $6.2 million as compared to a net income of $12.1 million and the net income attributable to common shareholders of $11.8 million for the same period of 2021. Interest and other financing costs, including interest income, for the third quarter of this year amounted to approximately $1 million compared to $0.6 million for the same period of 2021. The increase is due to higher levels of debt and higher LIBOR days that we got paid. Adjusted EBITDA for the third quarter of 2022 was $9.5 million compared to $13 million achieved during the third quarter of last year. Basic and diluted earnings per share attributable to common shareholders accounted -- for the third quarter of 2022 were $2.1 basic and $2.10 diluted, calculated on about 2.9 million base diluted weighted average number of shares outstanding compared to $4.47 basic and $4.41 diluted earnings per share calculated on about 2.6 million and 2.7 million basic and diluted, respectively, weighted average number of shares outstanding for the third period -- third quarter of last year. Excluding the effect on the earnings attributable to common shareholders for the quarter of the change in the realized gain derivatives, the adjusted earnings attributable to common shareholders for the quarter ended September 30, 2022, which has been $1.94 basic and $1.93 diluted compared to adjusted earnings of $3.84 to $3.79 per share basic and diluted, respectively, for the same period third quarter of last year. Usually, security analysts do not include the above items in their public segment of earnings per share. Let us now look at the numbers for the corresponding 9-month period ended September 30, 2022, and compared to the same 9-month period for last year. For the first 9 months of 2022, the company reported total net revenues of $55.1 million, representing a 30.7% increase over total net revenues of $42.1 million during the first 9 months of last year. And that increase is mainly due to the increased number of vessels we operated and the slightly higher time charter rates our vessels earned during the 9 months of this year compared to last. The company reported a net income and net income attributable to common shareholders for the 9 periods of $27.3 million, as compared to a net income of $15.1 million, and net income attributable to common shareholders of $14.2 million for the 9-month period of 2021. Interest and other financing costs for the first 9 months of 2022 amounted to $2.4 million compared to $3.3 million for the same period of 2021, a figure low, which also includes loss from debt extinguishment of about $1.65 million. Interest expense for the period was higher due to the increased amount of debt that we have and the increase in LIBOR rates to be set pace for our loans during the year. Adjusted EBITDA for the 9 months of 2022 was $35.9 million compared to $26.3 million during the first 9 months of last year. Basic and diluted earnings per share attributable to common shareholders for the first 9 months of 2022 was $9.43 basic and $9.34 diluted, calculated on about 2.9 million weighted average number of shares outstanding compared to $5.84 basic and $5.74 diluted, calculated from about 2.4 million and 2.5 million, respectively, for the same period of last year. Excluding the effect on the earnings attributable to common shareholders for the first 9 months of this year of the change in the fair value of derivatives, the realized gain. The adjusted earnings attributable to common shareholders for the 9-month period -- the 9-month period ending September 30, 2022, which have been $8.69 basic and $8.60 diluted compared to adjusted earnings per share of $7.42 basic and $7.29 diluted for the same period, the 9 months of 2021. Let me now turn to Slide 16 to review our fleet performance. As usual, we'll start our review by looking first at our fleet utilization rate for the third quarter of 2022 in comparison to the third quarter of 2021. As shown here, and as always, our fleet utilization rate is broken down to commercial and operational. So during the third quarter of 2022, our commercial utilization rate was 100%, while our operational utilization rate was 98.9% compared to 100% commercial and 99.4% operational for the third quarter of last year. On average, 11.0 vessels were owned and operated during the third quarter of this year, having another time charter equivalent rate of $20,637 per day compared to 8.1 vessels that we operated in the same period of last year, having on average $28,103 per day. Our total operating expenses, including management fees, general and administrative expenses, but not including the total cost of dry docking was $6,593 per vessel per day in the third quarter of this year compared to $6,495 per vessel per day for the third quarter of 2021. If we move further down in this table, we can see the cash flow breakeven rate for the third quarter of 2022, which also takes into account drydocking expenses, interest expenses, the loan repayments and preferred dividends if there were any to be paid in cash, but excludes any balloon payments. Thus, during the third quarter of 2022, our daily cash flow breakeven rate was $13,984 per vessel per day compared to $9,992 per vessel per day for the same period of last year. And the increase mainly, as you can see, attributed to higher drydocking costs that we paid this year and to higher loan repayments. Let's now go over -- let's now look for the 9-month period. Let's start again with our utilization rate. During the 9-month period of 2022, our commercial utilization rate was 99.8% and our operational utilization rate, 99.1% (sic) [ 99.2% ] compared to 100% commercial and 99.6% operational during the same period, the first 9 months of last year. We operate -- we owned and operated an average 10.5 vessels, adding another time charter equivalent rate of $22,876 per day compared to 7.5 vessels that we owned and operated during the first 9 months of 2021, which earned on average $22,232 per day. Our total operating expenses, again, including management fees, G&A expenses, but excluding diverting costs, were $6,587 per vessel per day for the first 9 months of this year, compared to $6,510 per vessel per day for the same period of 2021. Again, looking at the bottom of the table, we can see the cash flow breakeven rate for the period. And for the 9-month period of 2022, that was $12,961 as compared to $10,456 for the same period of last year. The increase, again, attributed to higher drydocking expenses paid and higher loan repayments. Let's now turn to Slide 17, and let's review our debt profile. As of September 30, 2022, we had an outstanding bank debt of about $88 million. Looking at the chart on the top part of this slide, we can see that our debt repayments, excluding balloon payments over the next 2 years, are around $11 million per year and then dropped to $5.7 million in 2025 and $4.9 million in 2026. Our net balloon payment of about $11.3 million is due in 2023, and we expect to be able to refinance this payment [indiscernible] as we've done in all the cases that we have balloons in the past. A quick note here about the cost of our debt. The average margin for our debt is about 2.75% and assuming a LIBOR rate of about 4.55% on the top of it, we can estimate to the total cost of our senior debt as of the end of the quarter to be around 7.3%. Actually, though, the cost of our debt is about 110 basis points lower. That is about 6.2%, if we account for the amount of debt, the LIBOR cost of which we have set via interest rate swaps. At the bottom of the table, we can see a projected cash flow breakeven rate for the next 12 months, broken down to each components. You can see that we expect to have a cash flow breakeven rate of around $13,550 per vessel per day. In the same chart to the bottom of the slide, you can see our EBITDA breakeven, which includes our operating expenses, G&A expenses and drydocking costs and which is estimated at around $7,564 per vessel per day. This figure can help analysts and investors assess our EBITDA over the next 12 months by making an assumption about the earnings to be earned by our vessels. On the basis of our current 10-vessel fleet, we would have about [ 35,000 ] vessel days available for hire over the next 12 months. Almost all of our vessel days [Indiscernible] with this scenario are exposed to the spot market. So if you say it is straightforward to make an assessment of our EBITDA for the next 12 months, for example, if our vessel -- if we assume that our vessels earn on average for the sake of simplicity, $17,564 per vessel per day net of commission, the result in $10,000 per day excess over the EBITDA breakeven rate would translate to about $35 million EBITDA for the upcoming 12-month period. Let's now move to Slide 18, where we can see some highlights from our balance sheet in a simplified way. This slide shows a snapshot of our assets and liabilities. Our assets consist of our cash and other short-term assets and the value of our vessels. As of September 30, 2022, cash and other assets stood at about $43.7 million. The book value of our vessels was approximately $158.2 million, resulting in total book value of assets for about $201.8 million. On the liability side, our debt, as we mentioned earlier, as of September 30 was about $88 million, representing 43.6% of the book value of our assets. Additionally, other liabilities amounted to $6.6 million or 3.3% of our total book -- the book value of our assets, resulting in book shareholders equity of about $107.2 million, which translates to a book value of $37.27 per share. However, based on our own estimates and based on market transactions as of the end of September, we estimated that the market value of our vessels was above their book value and stood around $192.5 million, suggesting our NAV per share to be in excess of $49 per share. With our [indiscernible] and trading around $15, there obviously appears to be a size that we've got to our NAV, suggesting significant appreciation potential for our shareholders and investors. And with that comment, let me turn back the floor to Aristides to continue the call.

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

[Operator Instructions] Our first question is from Tate Sullivan with Maxim.

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

Tate, that was just an indicative calculation to -- because our EBITDA breakeven was $7,564, I assumed a net -- to just demonstrate the calculation, I assumed a net time charter earnings of $17,564. So the difference to be around $10,000. That was all an assumption. You should make your own assumption about the rate for the next 12 months. But if the rate was that, the EBITDA book have been $35 million.

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

So we had 2 unencumbered vessels, and we thought that it was a good idea to put a conservative 50% debt on them so as to have the liquidity to be able to use it firstly for our share repurchase program, but also to be able to move quickly at some point if we want to make a new acquisition. It feels good to have the cash in the bank.

And then, Tasos, I think you gave detail on the rising rate going forward, and we can make our own calculations on that, too. And then also on the sources of support for the market, I mean, is the primary source of support if rates have some more pressure, the lack of -- or relatively low historical balance of the new builds coming into the market? Or any other sources of demand we should -- or potential sources thereof that we should keep an eye out for, please?

I think what we need to do is to keep an eye open to the geopolitical and economical developments. Demand depends a lot on global GDP growth, and this is really what we should be trying to understand what it will be. And of course, this is a very difficult task.

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

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

I think we figured that we would like to have some liquidity on our balance sheet for the reasons that Aristides explained earlier. So that's why we took a relatively cheap -- I think the margin on the debt that we got was near 2%. So it was relatively -- actually less than 2%. So it was a relatively cheap debt, of course, LIBOR costs are higher. So gaining something on the margin, reversed by the increase in LIBOR. But in any case, having the extra increase in our balance sheet gives us flexibility to pursue the debts program and also be ready to pull the trigger, as people say, in case opportunities come around.

Also -- okay, the cost of the debt because LIBOR is increasing is higher. But on the other hand, you now do get some interest on your deposits. So the overall cost of having this free liquidity is actually very small.

Yes. So it's basically the margin, which not in that particular case was the low rates we have achieved recently. So regarding the balloon that you mentioned, that is due sometime in the second quarter of next year. We will decide closer to that date whether we will just repay to refinance it. We have -- we consider ourselves right enough to have the flexibility to make that decision and not be forced to refinance.

Yes, that's what I was sort of alluding to. And then you -- if you pull the trigger on some new assets, that means that asset values have come down. Just to reiterate on the stock buyback program, can you walk us through some of the math that you're looking at? On the current stock price at 15, that would imply that asset values are below the median average that you show in your presentation, probably to the tune of about 20%. So am I -- should I be looking at -- even if the asset values go down to the median level that you're still buying your stock currently at a discount to long-term asset values?

Yes, clearly right now, the best investment for us is to buy back our stock. That is trading significantly below NAV, and that's why we're doing it because compared to buying it back within NAV, that is 75% discounted or whatever the EBITDA. If the market becomes weaker then opportunities might appear also. We just sold one VELVET vessel. And it was always in our mind, it is in our mind to renew our fleet so swapping new investments for all, that is part of our strategy.

And with rates lower, are you seeing any customers think about locking in, trying to lock in or approach you with more longer-term commitments? Not to say that you would agree to longer-term commitments at these levels, but are customers starting to think about that?

Not really. We don't see any significant pressure from the market to get long-term charters at today's rate. I think that the fact that it's so difficult to predict what will happen makes everybody more conservative and not willing to take longer exposure.

[Operator Instructions]

I presume there is no more questions?

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

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

Thanks, everybody. Thank you to our American friends.

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