Euroseas Ltd. (ESEA) Earnings Call Transcript & Summary

Welcome to Capital Link company presentation series.

Good day to everyone. I'm Nicolas Bornozis of Capital Link, and I would like to welcome you to Capital Link's company presentation series. We have with us today the senior management of Euroseas, Mr. Aristides Pittas, Chairman and CEO; and Dr. Anastasios Aslidis, Chief Financial Officer. A quick mention of the disclaimer that this presentation is for informational purposes only. It is not meant to be investment advice or advice of any kind, and it is not meant to be solicitation to transact in any securities. In terms of the logistics, we start with a brief company presentation followed by a live Q&A session. [Operator Instructions] And in closing, this session will be available for replay upon demand after -- very shortly after the live session. So thank you very much, everybody. I turn the floor over to Mr. Pittas, Chairman and CEO. Thank you.

Thank you, Nicolas, for this introduction. I am very happy to be here to present our company today. The job that you are doing with this nice brief interviews is really useful, I think, to the industry as a whole. So today, Anastasios Aslidis, our CFO, will be making the presentation and then we will answer the questions that you will have sent us and hope to give you as much clarity as we can on what's going to happen in the future. So Tasios, without further ado, please get done with the presentation.

Thank you very much, Aristides. Thank you, Nicolas, and let me add my thanks also to Capital Link for organizing this series and inviting us to participate. Before we start, I would like for a brief moment to draw your attention to this slide with state that we'll be making in this presentation forward-looking statements within the meaning of Federal Securities Laws. Please bear that in mind as we'll go through the rest of our discussion. I will start giving you a very brief overview of how we started. I believe most of you know that already, but for completeness of our presentation, I would like to introduce our Euroseas again. Euroseas is a provider of worldwide ocean-going transportation services. We provide services for the containerized trade. The company was established by Aristides and his family 18 years ago. Aristides and his family have been involved in shipping for ages clearly, that's the family history spans 3 centuries. We have records of them being involved in shipping since 1817. Euroseas has a fleet of 17 vessels on the water, 10 Feeder ships and 7 Intermediate containerships with a cargo capacity of about 53,261-foot equivalent units or TEUs and also has a 9 vessel newbuilding program with deliveries scheduled to be this year and 2024. And after the delivery of these vessels, our the total carrying capacity will increase to 75,000 TEU about. We pride ourselves for our long involvement in shipping and experience in shipowning and ship management. As I mentioned, we accessed the capital markets in 2005 and listed to NASDAQ in 2007. Aristides and myself, we might be called veterans of the industry, we have more than 30 years experience in the sector. Our Chief Administrative Officer, Symeon Pariaros is also more than 20 years experience in shipping, and we all have been with the company since inception. Also, the members of our Board, all the members of our Board, called leading -- not only the whole leading positions in their respected industries where they have long investment experience in shipping. We manage our vessels through Eurobulk, an affiliate company was established in 1995 by a series and -- a player and the manager well respected in the industry for its efficient and safe operating track record. We consider our group to be vertically integrated. We provide services along the entire range of ship management, and we have developed strong relationships with charterers, suppliers, bankers and other industry players. Giving that quick introduction of Euroseas. Let's talk first about the sector -- about the Containers sector. And let's start doing that by taking a snapshot at where we stand in terms of rates and prices. This slide, Slide 6, shows on the left side, the development of containerized -- container charter rates over the last 20 years and on the right side, the same thing for a 10-year-old vessel prices. What is striking from this chart is that over the -- in the last 2 years, we registered all-time highs for both rates and prices. Previously that the highest levels in the industry were observed almost 20 years ago during 2004 and 2005. And after that, after the financial crisis, there is a long period from 2011 to 2020 for about 10 years of pretty miserable [indiscernible] level of rates. The pandemic, to some extent, surprisingly, but easily explainable, provided the point where a new level has been registered for rates and prices, a combination of changing demand patterns and preferences and the supply situation from a tight supply created that significant spike in the sector. Starting at the end of last year, in the fall of 2022, we've seen the markets correcting heavily, the same pace as they increased, and we are now at trades that are above pre-pandemic levels, but having come close to that levels. Clearly, level -- rates are formed by the interaction of 2 forces in the market, supply and demand, and we'll take the next 3 or 4 slides to talk in a little more detail about the trends that are emerging on those 2 components. Let's start with demand. This slide here, Slide 7 shows the world economic growth on the top line and tries to correlate it with a containerized trade growth. If you plot those 2 lines, and you can see the chart at the bottom of the slide, at least visually, there is a pretty strong correlation between the world economic growth and the level of the containerized trade. In 2022, we've seen trade World demand growth to drop to 3.2% according to IMF as compared to 2021, with containerized trade growth, reacting even more aggressive downwards. We expect to register according to Clarksons, a 5% decline in containerized trade. In 2023, Clarkson expects little change in containerized trade, about negative 0.3%, essentially flat, while we expect to see containerized trade increased again in 2024. That's the half of the equation on the demand side. Let's look now on the supply side. This slide takes a snapshot of the current fleet -- container fleet situation. At the bottom of the slide, we show the order book of the fleet as a percentage of the fleet. You can notice here that just before the pandemic started, the order book as a percent of the fleet was at the lowest level ever, creating a tight supply situation. During the high rates of the pandemic, our owners started ordering again, driving the order book-to-fleet ratio to a very respectable and quite high 28.3% of the fleet. Typically, order books are delivered over the next 2 to 3 years, and that means that you can see that on the top right part of the slide, that the expected deliveries in 2023 and 2024, are between 9% and 10% of the fleet. Imagine about 0% demand growth against the 10% potential increase of the fleet, how much more pressure on the rate it put [indiscernible]. The fleet may not grow 10%, might grow less because certain ships might find it uneconomical to continue operating in such an environment. And that comes in place the age profile of the fleet that we saw on the top left part of the slide here. It's a rather young fleet, although still there is a good 10% of the fleet that is above 20 years of age and these vessels are prime candidates for potential removal if at the end of the current charter, they find economic conditions that are not worth continue operating. In addition to the pure economics, there is environmental related regulation that comes into play this year that could affect the decision about continuing to operate or not. We'll talk a little bit about this a little later. Another point that one should make on looking at this slide is if you look at the 20-plus year old chunk of the fleet -- segment of the fleet, the majority of that are vessels in the lower size groups, the Feeders and the Intermediates, the 2 vessels that our fleet primarily operates. Thus, it is worth digging a little bit into further detail in the smaller segments of the fleet, and this is what we'll do in the next couple of slides. First, the Feeder sector of the fleet, the vessels between 1,000 and 3,000 TEU. This is the segment in which our new buildings are -- belong. You can see here that although the entire fleet has an order book of about 28%, this segment is an order book of about 15%. In addition, the percentage of the fleet that is more than 20 years of age is 25%. The fleet is more evenly distributed age-wise here. And that is very likely, that segment of the fleet to not grow as much, potentially not to grow at all if the majority of the 20-plus year on vessels find [indiscernible] to continue operate, thus, providing a little better supply trend for this subsegment. Something similar is true from the -- what we call Intermediate vessels, the 3,000 to 6,000 TEU vessels, we have 6 vessels operating, almost 7 that is operating in this sector, almost 7 because the 1 is -- the other 1 is 6,500 TEU. Here, the order book is even smaller. It's only 6.7% of the fleet. And again, there is a good chunk of vessels which are more than 20 years of age. So that segment of the fleet to might face very limited supply growth and potentially no supply growth. It is undeniable though that the overall picture is safe by the relatively big order book for the larger vessels, and those vessels moving down into trades currently served by Feeders and Intermediates might be a trend that we need to keep an eye on. Supply is affected not only by the number of ships that are out but also by what those ships are do and whether they are tied up in nonproductive activities. This slide here shows an attempt to measure the poor congestion and the more ships are tied up in ports. Obviously, the less ships are available for trade, and that creates increases in charter rates. We can see in this slide, the percent of ships tied up in ports across various shipping segments, containers is the light blue line, the top line through most of the chart. We have seen that the congestion index of container ships hit a high about 37% in the middle of last year and it has come down to close to 31% -- 33% sorry, at the beginning of this year. This 4% decline of the fleet that is import is 4% more fleet available to trade and carry cargo. So that is another factor that has contributed to rates declining so quickly in the last 4 months of 2022. And how that will develop obviously will affect the future availability of supply. Trying to summarize our quick review of the segment. It is clear that 2022 has created 2 interesting points, an all-time high and also a significant drop. Political economic insecurity affected container shipping in the latter part of the year and freight rates dropped significantly. The reversal also a core congestion created effective more supply, and that contributed to, as we just mentioned. In 2023, market conditions are generally expected to soften even further. As we discussed, demand is expected to be flat, and we expect significant supply to hit the market and rates, thus are expected to continue to move towards the historical average levels and also even break them downwards. In 2024, there is a number of developments that are emerging, which are very -- which are quite difficult to assess yet. For one thing, geopolitical developments like the -- hopefully, by then ending the war of Russia-Ukraine and its aftermath and other global tensions will play a role as well as the overall economic conditions will affect demand for containerized trade. And in addition, as I say, a potential sell for rates could be if new environmental regulations result in more slow steaming, effectively removing capacity from the market and moderating the impact of deliveries. One thing that seems to be emerging is that the difference of the eco-vessels and all our newbuildings are eco and fuel-efficient vessels with an older ship, that spread between charter rates is expected to increase. A final point here before we switch to review our own -- the Euroseas position in the market is that the smaller-sized vessels where we operate between 1,000 and 6,000 TEU are expected to perform relatively better because they have a healthier supply situation with much smaller order book and much longer current fleet. I mean without doubt, of course, cascading of larger vessels to trades currently served by the Feeders and Intermediate ships could mitigate any difference of supply/demand between that sector and the larger vessels. Having talked and characterized the market segment we operate. I think it's time to spend a little bit of time to review how Euroseas is positioned in that environment. A very quick look first at our fleet. This slide shows you our current fleet on the water, 17 vessels, 53,000 TEUs, 17.5 average age. And we have our newbuilding vessels that are -- will start being delivered in March this year and continue the deliveries throughout '24. These are Feeder vessels, 9 of them, total TEU 22,000 of capacity. Six of them are 2,800 TEU vessels and 3 of them are 1,800 vessels. Our fleet is charter, and this slide shows that chartering profile of our fleet. We use the opportunities offered to us during the last 2 years to charter the majority of our fleet in long-term time charter range. For 2023, for this year, more than 80% of our available days have secured our currently charter at an average rate of more than $30,000 per day, contributing an EBITDA of $136 million. Even for 2024, more than 50% of our available days are chartered again at a rate with an excess of $32,000 per day. Amongst the vessel charter are the first 2 of our buildings with charters and extend even beyond 2025. Very quickly, we can review some of our financial highlights. For the first 9 months of last year that we have published results, I mean those 9 months were very profitable. We had revenues almost -- net revenues of almost $140 million, contributing earnings of more than $10, almost $11 per share on an adjusted basis for our shareholders. EBITDA for the 9 months was about -- it was more than $90 million. And during the period, the average rate that our fleet earned was more than -- almost $33,000 per day. We have instituted in 2022 a quarterly dividend, and we have declared and paid $0.50 per share for each of the first 3 quarters of last year. 2023 starts from a rate level as we saw that is still above pre-pandemic levels, but clearly has challenge ahead. Our own contract coverage, which, as I mentioned, is more than 70%, more than 80% in 2023 and more than 50% in 2024, we largely sealed our earnings from the current environment of low rates and for sure will allow us to fund our dividend and the equity portion of our newbuilding program. Of course, part of our newbuilding program will be financed with debt. Looking forward, we expect to have a cash flow breakeven level for the next 12 months of about $14,000 per day. And as I mentioned for 2023, the contracted revenues are in excess of $30,000 per day. So we're well within cash generation range for 2023 and very likely for 2024. And if we will look at our balance sheet, we can -- the point we can make here that is that we have very low debt compared to the value of our ships. We have about $108 million debt at the end of last year. This is debt for the existing ships, doesn't include our newbuildings. We estimate the market value -- charter-adjusted value of our vessels -- of our 17 vessels at $330 million. So our debt-to-value ratio is about 33%. Even the scrap value of our existing fleet of 17 vessels is $130 million, and that is higher than our debt level. So we are very low leveraged. The light blue bar on the -- light blue section on the bar that you see here is the contract value of our newbuildings or the market value of our [indiscernible]. The contracted EBITDA in 2023 amounts to about $120 million, and that would likely increase if we charter the remaining open days for the year. Let me conclude our remarks here about the market and about Euroseas by providing some reasons why Euroseas is an interesting investment opportunity for you to look at. For run, we have insulated ourselves to a great degree from the current market by having secured long-term charters for the majority of our fleet. Each of the next 2 years are expected based on the contract what we have secured to be comparably profitable to 2022 and where conservative finance as I mentioned, the fact that further minimizes any risks and increases our future funding flexibility. Our strategy is to grow the company and modernize it, and we are doing that organically, having embarked on a significant newbuilding program with 9 vessels, modern eco-friendly vessels. Our newbuilding program has a price up of around $360 million. We're also continuously target selective acquisitions, especially ones that are fully -- they have fully covered downside, and we might be able to find more such opportunities if the market weakens. More important than that or on the top of all that, we are rewarding our shareholders. Not only we have sealed the market and we are growing, we are -- we have instituted a dividend that provides approximately a 10% annualized yield. And in addition, we have established in executing on a share repurchase program when we believe our share price is a good investment for us. More than any of the above, we have an interesting opportunity to look at because our stock trades at a significant discount to our current NAV, more than 50% discount. It also creates a significant discount to the value of our contracted earnings during the next 3 years and the scrap value of our existing fleet, even if we ignore the net value of our newbuilding program and air potential learnings from the open days of the fleet. I think for all those reasons, we at Euroseas an interesting investment opportunity for new investors and our shareholders to look and stay with. And with that, let me open the floor for questions and let Aristides lead that part of our presentation.

Thank you, Tasois, for the presentation. Let's jump directly to the various questions that we have. The first question is how confident are we about being paid from the contracted charters, which should be above market right now? We are quite confident that the very big majority of our charterers will pay. We are fixed -- we have fixed the majority of the ships with top class charterers which have made a lot of money during the last couple of years, a very strong. So I would think that all or nearly all of our charterers will perform during the next couple of years because as Tasois correctly said, we have covered a lot of our ships for 2023, 2024 and even 2025 at rates that are higher than the market today. The second question is, congratulations. So far how safe is the dividend? Well, exactly because we have concluded all these charters, I think that for the remainder of 2023 and 2024 the dividend is very safe. It yields about 10% of the current stock price and I expect it to remain around those levels, except if we see fantastic opportunity and we need to jump in and not pay a dividend or whatever. But this is not the intention. Right now, only a fraction of our revenue is used to repay the dividends. So I think that the intention is to keep the dividend stable. The next question is how much leverage is there on the new build vessels? And how does the price we paid for those vessels compared to current newbuilding prices? Although secondhand prices have dropped tremendously, newbuilding prices have not. And in fact, the cost of ordering a newbuild vessel today is very similar to the cost that we paid when we put the orders. And in fact, one cannot place orders for vessels delivered in 2023 and 2024 right now. So if somebody was to order, he would go for 2025, 2026 delivery. So we are confident that the price that we've secured is the current market price and nobody can really order more ships at those prices today. So I'm not worried about the value within the ships that we order. We have financed the first vessel, which we will take delivery of in March this year, so in a couple of months' time. That is fully financed with 65% financing. We expect to easily finance with similar levels of financing the other vessels that are the other 2 vessels that are due for delivery in 2023. And we will probably be able to do the same in 2024. I feel very confident about that. 65% financing and with the spreads around 2%, 2.5% maximum over this offer. Next question is, again, the same one, do you worry about financing the new buildings about chartering them? I just talked about the financing of newbuildings. It should not be any problem at all. Chartering them -- chartering them. Again, I'm not worried about. Of course, I don't think I will be able to fix the newbuilds at the $48,000 per day that we have fixed for 3 years, the first 2 vessels. The market is not there right now, which has corrected tremendously. It's down to $25,000 per day for such a vessel per year, still $25,000 per day if we were to fix that is a great level. It leaves a very, very significant profit. I remind you that the first 2 vessels, we will repay them in totality in 3 years. So this seems to be a fantastic deal if everything goes as planned. Next question, container freight prices are on the way down this year besides container vessel charter prices are also on the way down. In this case, newly container vessel charters that have just entered into the sector can be negatively affected. Thanks in advance. I think I answered this question already. Indeed, current charter rates are much, much lower than where they were but even today's levels are profitable levels, not as profitable as we saw during the last 2 years, where our stock price increased 10x. I don't expect us to see such a return, but I do expect us to see a very stable market for our company during the next couple of years, stock wise [indiscernible] wise. Finally, question I see, there's a couple more. They keep on coming. However the newbuilds being financed, are there plans to sell vessels currently on the water to free up cash? There is absolutely no need to sell any vessel to finance the newbuilds. The cash flow generation from the existing ships is more than enough to finance the newbuildings. In fact, there should be enough equity left there for us to continue both our dividend policy, our buyback program and perhaps even by an additional 1 or 2 vessels if we see very attractive prices developing within the next months. Who is your choice of technical manager and what are your views on OpEx inflation? Well, technical management is done by my family company which has expertise in running these ships and has been running them for so many years. Keeping OpEx well within the threshold of where the other shipping companies are but at the same time, being able to keep the vessels in tip-top condition despite our old fleet being quite older. Of course, we are renewing the fleet these days and the 9 new vessels will be the most modern in the small container sector around and the most economical ones, and we do expect to see the future based on more modern vessels. What is your plan for retiring your older ships? Again, most of the older ships have been fixed for long-term charters. The assumption is that at the end of the charters when the ships will be over 20 years old, the ships that are over 20 years old, will be scrapped. This is what we put in our models. It can only be better than that, not worse than that -- depending on how the markets develop in 1 or 2 or 3 years when these charters expire. If we are good, we're going to pass on to a further special segment. But our main assumption in our model is that these vessels will be scrapped. Overall, you have very different positions from all other shipping companies operating out of Greece, even your webcast presentation. Are you also [indiscernible] play in your webcast over the past few years? Thanks. Well, thanks for the comments. I take that as a compliment. Thank you. Thank you. With new -- next question. With new environmental regulations, who do you see is approximately the maximum age of ships before they must be scrapped? I think the maximum age is -- continues to be somewhere between 20 and 25 years, based on the new regulations. Ships can trade after that date. It will be more -- it continues to be more of a commercial consideration. If the markets are good, the ships can last a little bit longer. If the markets are bad, you're bound to scrap the revenue. And I think this was the last questions, so I don't see any other questions.

I don't see any other questions here, either.