Euroseas - Q1 2023

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas conference call on the first quarter 2023 financial results. What we have with us Mr. Aristides Pittas, Chairman and Chief Executive Officer, and Mr. Tasos Aslidis, Chief Financial Officer of the company. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today. Please be reminded that the company announced their results with a press release that has been publicly distributed. Before passing the floor to Mr. Pittas, I would like to remind everyone that in today's presentation and conference call, Euroseas 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 number two 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. Now I would like to pass the floor to Mr. Pittas. Please go ahead, 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 Tasos Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the three-month period ended March 31st, 2023. Let us turn to slide three of the presentation. Our first quarter financial highlights are shown here. For the first quarter of 2023, we reported total net revenues of $41.9 million and net income attributable to common shareholders of $38.8 million or $4.10 per diluted share. Adjusted net income attributable to common shareholders was $31.7 million or $3.09 per diluted share.

Adjusted EBITDA for the period stood at $26 million and a reconciliation of adjusted net income attributable to common shareholders and adjusted EBITDA is presented in the press release. As part of the company's common stock dividend plan, our board of directors declared a quarterly dividend of $0.50 per common share for the first quarter of 2023, which is payable on or about June 16th to the shareholders of record on June 9th, 2023. This is the fifth consecutive $0.50 dividend that we are paying. As of May 15, 2023, under our share repurchase plan of up to $20 million, which was announced in May 2022, we have repurchased 348,000 of our common stock in the open market, representing about 5% of our stock for a total of about $7 million.

Our CFO, Tasos Aslidis, will go over the financial highlights in more detail later on in the presentation. Please turn to slide four where we discuss our recent sale and purchase, chartering and operational developments. As previously announced on April 6, 2023, the company took delivery of its first newbuilding vessel, motor vessel Gregos, an Eco 2,800 TEU feeder containership built at Hyundai Mipo Dockyard in South Korea. The vessel is EEDI phase III compliant and equipped with a Tier III engine and other sustainability-linked features, including an installation of AMP, an alternative maritime power system. The acquisition was financed with a combination of our own funds and a sustainability-linked loan provided by Eurobank SA. Following its delivery, motor vessel Gregos commenced a 36- to 40-month charter with Asyad Line at a gross daily rate of $48,000 per day.

Two of our vessels with contracts that were due in April and May 2023 were extended at rates but also duration that were better than anticipated, reflecting the resilience of the market and the current belief of charterers that feeder vessels will be in short supply. Motor vessel Synergy Keelung was fixed for a period of 24-26 months at a daily rate of $23,000 per day, whilst EM Kea charter was extended for a period of 36 months ±45 days at $19,000 per day. Earlier during this period, motor vessel Aegean Express was fixed between a minimum of four and a maximum of six-month period at $13,000 per day.

EM Hydra times out contract was extended for a period of 12 months, 12-14 months at a gross daily rate of $15,000 a day. The Aegean Express completed its dry docking on February 8th and then experienced idle time of approximately 29 days whilst we were dealing with Continental Shipping Line of Singapore, CSL, who repudiated its charter. Arbitration is ongoing against CSL, which we expect to win, but we expect to then face difficulties in enforcing the award as the charterer seems to be trying to hide its assets. Please turn to slide five, where you can see our current fleet profile.

Euroseas current fleet is comprised of 18 vessels on the water, including 11 feeder containerships and seven intermediate container carriers with a carrying capacity of about 56,000 TEU and an average age of 16.5 years old. Turning to slide six, we present our vessels under construction, which consists of eight eco feeder containerships, five with a carrying capacity of 2,800 TEU each, and three with a carrying capacity of 1,800 TEU each, expected to be delivered between Q2 2023 and Q4 2024. The eight feeder containerships will have a capacity of 19,400 TEU. After the delivery of these newbuildings, the fleet will consist of 26 vessels with a total carrying capacity of about 75,000 TEU. Let's now turn to slide seven for a graphical representation of our vessel employment.

As you may see, we have very strong charter coverage throughout the next two years, with about 91% of our fleet being fixed for 2023 and almost 66% for 2024. These figures also take into consideration the newbuilding deliveries. Our contracted revenues over the next two years are expected to generate in excess of $20 per share, which will be further boosted by the revenues from the rest of our unchartered days. Turning now to slide nine, we review how the six to 12-month time charter rates have developed over the last 10 years for the segments in which we mostly operate.

While the container charter market saw a soft start to the year following the market weakness during the final months of 2022, charter rates started improving across all containership segments during the first quarter through mid-May 2023, with rates sitting at healthy levels higher than the 10-year average and medium levels. As of last Friday, the six to 12-month time charter rate for 2,500 TEU containership stood at $18,750 per day, while the rate for a 4,400 TEU containership stood at $26,750 per day. Moving on to slide 10, we go over some further market highlights. During the first quarter of 2023, one-year time charters continued to ease but have increased since by about 10%-15% compared to the low levels reached for most segments during February 2023.

The average daily charter rates during the first quarter of 2023 were down by 18% compared to the fourth quarter of 2022, as shown in the table. The general sentiment remained negative throughout the first quarter, as many parties remained apprehensive about entering into new transactions given the current macroeconomic headwinds and uncertainty due to the impact of the environmental regulations. Newbuilding prices were roughly stable in Q1 2023 compared to Q4 2022, and have raised a little over recent months in some sizes, but generally remain elevated amid cost inflation and extended yard forward cover. The idle containership fleet as of April 24, 2023, stood at about 1.4% of the fleet, which peaked in February 2023 at 3%, but has been trending down ever since. Recycling activity edged higher during Q1, with 30 vessels being scrapped.

This trend is anticipated to continue for the remainder of 2023 and 2024. Scrapping prices showed a modest improvement in the first quarter of 2023 to about $560,000 per Lightweight Tonnage. This is about 40% above the 2019 average. Finally, the containership fleet has grown by approximately 1.8% year-to-date, without accounting for idle vessel situation. Please turn to slide 11. With latest update in April 2023, the IMF slightly lowered its global GDP growth estimates to 2.8% for this year before settling to 3% in 2024. This is primarily due to the effects of high inflation, tighter monetary policies, slow economic activity, as well as the ongoing war between Russia and Ukraine and growing geopolitical tensions.

The U.S. and EU seem quite resilient despite the recent economic shocks, primarily in financial sector. Notably, 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 markets and developing countries is expected to be quite below longer-run trends in 2023 and 2024, with the IMF lowering growth projections more than previously expected. India is poised to grow by 5.9% in 2023 and 6.3% in 2024, which is under its trend. Russia's economic growth, albeit it was revised higher for 2023 to 0.7% from 0.3%, the longer-term outlook worsened from 2.1% to 1.3% for 2024.

According to the latest Clarksons estimates, container freight is projected to contract by 2.1% in 2023. In 2024, rates should improve as economic headwinds start to ease, with trade growth projected at 3.3%. Trade and growth projections are being continuously revised as the effects in the financial sector, inflation, and geopolitical tensions on world growth and trade are being assessed. Please turn to slide 12, where you can see the total fleet age profile and container supported. The containership fleet is relatively young, with most vessels under 15 years old and only 10% of the fleet over 30 years old. The largest percentage of which though lies within feeder vessels, suggesting high potential recycling for this type of ships.

The order book as a percentage of total fleet stands at a high of 28.7% as of May 2023. Clarksons expects new deliveries of about 9.7% of the current fleet to be delivered as of the beginning of 2023 for 2023, 10% in 2024, and 6.4% in 2025, with the majority of the deliveries scheduled for delivery in the second half of 2023 and the first half of 2024. Turning on to slide 13, we go over the fleet age profile and order book for ships in the 1,000 TEU-3,000 TEU range in more detail. These sizes of vessels are the backbone of our operations and the primary focus of our newbuilding program. The order book here stands just 12% as of May 2023.

Together with the fact that 23% of this size vessels is older than 30 years old suggests that the fleet could even decline for feeder containerships in the ensuing two to three years. According to Clarksons', new deliveries for 2023 are expected to be 9.4%, 2.5% has already been delivered, 5.6% in 2024, and 0.8% in 2025. Let's move to slide 14, where we discuss our outlook summary for the containership sector. Container markets remain significantly below last year's boom, following a strong correction in the second half of 2022. Despite the fall in volumes, easing of congestion and relative bottlenecks, as well as increasing deliveries, the container time charter market has shown admirable resilience and even some gains in recent months.

Further softening is possible though for the remainder of 2023, as deliveries of newly invested is expected to pick up pace in the second half of the year. In any event, current charter rates are still standing at 165% above pre-COVID 10-year median. The Containerized Freight Index also reversed course during the last couple of months and recovered a bit compared to January 2023 levels made. It now stands at a level 8% lower than the January 2022 peak, but still 5%-10% above the pre-COVID 10-year average. Container volumes have fallen by 7.5% year-on-year. The reversal of port congestion also released a good portion of the fleet, increasing effective supply. However, the vessels slowed down has offset the increase in supply at the end of the congestion port.

There are still large challenges ahead, mainly on the supply side, but also due to macroeconomic developments which are hard to predict and quantify. Thus, determining the future shipping volumes and overall demand is very difficult. From 2024 onwards, market conditions are expected to remain challenging as the rates may decline again if this has not already happened in the second half of 2023, due to a second consecutive year of substantial fleet expansion. Market performance will remain sensitive to capacity management, vessel speed, and the range of other inefficiencies such as congestion. That will alleviate pressure to some extent. The energy transition is another unknown that will affect the containership sector, probably positively.

While it's evident that the shift is taking place and in the short term we can expect lower speeds, thus shrinking vessel availability, the long-term outlook is intricate and uncertain. One thing that is probably sure is that the spread between charter rates achieved by eco vessels relative to the older vessels is expected to further increase. Smaller sized vessels, the segment we mainly operate in, are expected to perform relatively better due to potential scrapping of overaged vessels and the lower number of new deliveries. All these pointing to a healthier supply situation. Without doubt, though, the cascading of larger vessels to trades currently served by this size could mitigate any differences to an extent. Let's move to slide 15.

The left chart shows the evolution of one-year Time Charter Equivalent rates for containers with a capacity of 2,500 TEU since 2010. Following the industry's exceptional highs in 2022, the market has now normalized with one-year Time Charter Equivalent rates currently standing at $18,750 per day. As aforementioned, this is still a much higher level than the historical median and a very profitable level too. The right-hand chart shows the historical range for newbuildings and 10-year-old containerships with a capacity of 2,500 TEU. Strong contracting activity over the past two years distributed between relatively few shipyards concurrently with rising inflation pushed newbuilding prices up sharply.

Even though newbuilding contracting activity has been hampered so far this year, newbuilding prices remaining at very high levels on the backstop of the inflationary environment. Prices for 10-year-old secondhand containerships which skyrocketed in May 2022 to $56 million have since eased to around $20.5 million, a level still significantly higher than the historical median. In this environment, we will continue to reward our shareholders through our steady quarterly dividend, which currently yields about 10% annually, and by executing on our share repurchase program, which we believe represents a very attractive investment opportunity since our shares trade at 40% of their intrinsic value.

Our strong contracted revenue coverage throughout 2023 and 2024 at healthy rates will also allow us to take delivery of our remaining eight newbuilding vessels and at the same time continue to evaluate investment opportunities with low risk that will incrementally increase our earnings and growth. With that, I will pass the floor to our CFO, Tasos Aslidis, to go over our financial highlights in further detail.

Tasos Aslidis (CFO)

Thank you very much, Aristides. Good morning from me as well, ladies and gentlemen. Over the next four slides, I will give you an overview of our financial highlights for the first quarter of 2023 and compare the results to the same period of last year. Let's turn to slide 17. For the first quarter of 2023, the company reported total net revenues of $41.9 million, representing a 7.6% decrease over total net revenues of $45.4 million during the first quarter of 2022. The company reported net income for the period of $28.8 million as compared to net income of $29.9 million for the first quarter of 2022.

Interest and other financing costs for the first quarter of 2023 amounted to $1.99 million, partly offset by imputed interest of $1.1 million, which is capitalized and is due to the self-financing of the predelivery installments of our newbuilding program. In addition, we had $0.23 million of interest income. For the same period of last year, the interest and finance costs amounted to $1 million. We had no imputed interest and practically no interest income last year. The increase in the top line of our interest expense is due to the increased amount of debt and the increase in the weighted average LIBOR/SOFR rate in the current period compared to the same period of 2022.

Adjusted EBITDA for the first quarter of this year was $26 million, compared to $31.1 million achieved during the first quarter of 2022. Basic and diluted earnings per share for the first quarter of 2023 were $4.11 and $4.10 respectively. Calculated on about seven million basic and outstanding and diluted weighted average number of shares outstanding compared to basic and diluted earnings per share of $4.15 and $4.13 respectively, calculated on 7.2 million shares for the same period of last year.

Excluding the effect on the income for the quarter of the unrealized loss on derivatives, the amortization of below market time charter acquired, the depreciation charged to the increased value of the vessels acquired with below market charters, and the gain on the sale of a vessel, the adjusted earnings per share for the quarter ended March 31, 2023 would have been $3.10 per share basic and $3.909 per share diluted, compared to adjusted earnings of $3.71 and $3.70 basic and diluted respectively for the same period of last year excluding after making similar adjustments for the previous year's period. Usually, securities analysts do not include the above items in their published estimates of earnings per share. That's why we provide you with the adjusted figures.

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 first quarter of 2023 and compare them to last year's. As usual, our fleet utilization rate is broken into commercial and operational. In the first quarter of 2023, our commercial utilization rate was 98.1%, while our operational utilization rate was 100% compared to 99.6% commercial and 99.5% operational for the first quarter of last year.

On average, 17.1 vessels were owned and operated during the first quarter of this year, earning an average Time Charter Equivalent rate of $29,231 per vessel per day compared to 16 vessels owned and operated in the same period, the first quarter of 2022, earning on average $33,986 per vessel per day. Our total daily operating expenses include per vessel, including management fees, general and administrative expenses, other $8,074 per day during the first quarter of this year compared to $7,329 per vessel per day for the first quarter of 2022.

If we move further down this table, we can see the cash flow breakeven rate, which we had to meet during the first quarter of this year, and which takes into account also drydocking expenses, interest costs, and loan repayments. Thus, for the first quarter of 2023, our cash flow breakeven rate was $14,160 per vessel per day compared to $14,059 per vessel per day during the first quarter of 2022. Finally, in the very last line of this table, you can see the common dividend that we paid expressed in dollars per day. In the first quarter of 2023, we paid the equivalent of $2,292 per vessel per day in dividends.

We had no dividends declared for the first quarter, paid, I should say, for the first quarter of 2022. Let's now move to slide 19 to review our debt profile. As of March 31st, 2023, our outstanding debt was $121 million. That includes debt for our newbuilding, which we drew before the end of the quarter. At the same time, on the same day, as of the same day, our scheduled debt repayments for 2023, including the amount we paid in the first quarter, would amount to $27.14 million, while our balloon payments amount to $30.73 million in 2023. Of these balloon payments, we have already paid two for $13.3 million and $6.3 million and we're in the process of financing the other one.

Looking at the chart on the top left part of the corner of the slide, we can see our also our debt repayment schedule for the following years beyond 2023. As you can see, our debt repayment is expected to decline or existing debt is expected to decline no levels in three years. We have additional balloon payments in 2025 amounting to about $22 million. A quick note here about the cost of our debt. The average margin on our debt is about 2.771%.

Assuming a LIBOR rate of about 5.34% on the top of it, we can estimate the total cost of our senior debt to be 8.05%. If we included in our cost of debt calculation, the part of our debt, the interest of which is locked through our interest rate swap contracts, the cost of our debt would drop to about 6.25% as about 50% of our debt is hedged at a cost of around 1.7%. As it's noted on the top half of the slide, we expect to assume additional debt to finance the remaining of our newbuilding program, the eight vessels that I previously mentioned earlier, and we estimate that debt to be around $190 million-$100 million.

Looking now at the bottom of the table, we can see our cash flow breakeven level projected for the next 12 months, and that level is expected to be remain similar to what we had in the first quarter and be around $14,251 per vessel per day. A big part of which is our loan repayments, $4,073 per vessel per day correspond to repayments of loans. To conclude our presentation, let's move to slide 20 to review our balance sheet, some balance sheet highlights. As of March 31st, 2023, our assets included cash and other current assets that amounted to about $51.3 million. We have made advances for our newbuilding program, which at the end of the quarter stood at about $98 million.

The book value of our 17 vessels in the water as of March 31st stood at around $211.8 million, resulting in a total book value for our assets of about $361 million. On the liability side, our debt as of March 31st, 2023, as previously mentioned, stood at $121 million, representing 33.5% of the book value of our assets. The fair value of our recently acquired charters, below market charters, is about $31.1 million, and that is reported in our balance sheet. Other liabilities also amount to about $10.7 million, or 3% of our total book value of our assets. It should be noted, though, that the market value of our fleet, including the value of our charters, is much higher than its book value.

Based on our own estimates, the charter adjusted value of our fleet, plus change in the market value of our newbuilding contracts, is approximately worth $328 million as of the end of the month. Compared to the book value of our vessels, less the fair value of below market charters of about $180 million. This translates to a net asset value for our company of about $346 million or a little more than $49 per share. Recently, our shares have been trading in the range of $18-$19 per share, thus representing a significant discount that I previously mentioned earlier to our net asset value and provide good appreciation potential for our shareholders and investors based on this measure.

With that, I would like to close my remarks and turn the floor back to our speakers to continue the discussion.

Aristides Pittas (Chairman and CEO)

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

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question at this time, please press star one on your telephone keypad, and a confirmation tone will indicate your line in the question queue. You may press star two if you'd like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Again, that's star one. Thank you. Thank you. Our first question is from the line of Climent Molins with Value Investor's Edge. Please proceed with your questions.

Climent Molins (Head of Shipping Research)

Good morning. Thank you for taking my questions. I wanted to start by asking.

Aristides Pittas (Chairman and CEO)

Hello.

Climent Molins (Head of Shipping Research)

Hi. I wanted to start by asking about the Tender Soul. The vessel was initially scheduled to be delivered in the second quarter of 2023, but it seems the delivery is now expected in the first quarter of 2024. Could you provide some commentary on the reason behind the delays and whether we should expect any financial impact?

Aristides Pittas (Chairman and CEO)

I'm not sure that that vessel was ever scheduled for the second quarter.

Climent Molins (Head of Shipping Research)

The fourth quarter.

Aristides Pittas (Chairman and CEO)

It was scheduled for the fourth quarter. It has been delayed by a month or so to be delivered in the beginning of 2024. We have seen some small delays in some of the ships in the region of a month or two because of issues in South Korea with the shipyards. They had some labor issues and some difficulties in sourcing material and equipment. It's minor delays of one to two months. I don't expect there to be huge delays.

Tasos Aslidis (CFO)

We had vessel Terataki scheduled for the second quarter of 2023, and that slipped to early July 2023.

Aristides Pittas (Chairman and CEO)

Yes, correct.

Climent Molins (Head of Shipping Research)

All right, that's helpful. Most of your newbuild program remains open. How should we think about securing new contracts? Would you be comfortable employing them on short-term charters, or will you still be looking for medium-term employment?

Aristides Pittas (Chairman and CEO)

It will really depend on what the market environment is towards the end of the year, because the Terataki, which will be delivered beginning of July instead of end June, as was the initial plan, is already fixed to a Asyad Line with $48,000 per day for three years, together with the Gregos some time ago at the peak of the market. The remaining vessels, which are all going to be delivered in 2024, we are not in a hurry to fix now because we would get extremely discounted rates if we wanted and insisted in trying to fix them today. We will wait for the right opportunity to fix them. We know that these are very modern and efficient vessels, much more economical than similar sized vessels that were built 10 and 15 years ago.

We are pretty confident they will be fixed at very good rates. How good it will really depend on the market.

Climent Molins (Head of Shipping Research)

Yeah, that makes sense. Regarding the Aegean Express, you mentioned you expect to win the proceedings but that the execution may be difficult as the charter is hiding its assets. How should we think about the timing for the resolution of the proceeding?

Aristides Pittas (Chairman and CEO)

I think that within the next couple of months, certainly within, you know, by our next call, this will have been resolved. The legal issues will have been resolved, and we will know if we have won the award, which we think is a no-brainer. When you're in arbitration, you're never 100% sure. As I said, the most difficult thing is to recover from a charterer who is hiding and indeed was the smallest charterer from all the charterers that we have on all our other ships. We have to see how that will go.

Climent Molins (Head of Shipping Research)

All right. Thanks for the call.

Aristides Pittas (Chairman and CEO)

Yeah. Okay.

Climent Molins (Head of Shipping Research)

Sorry. Go ahead.

Aristides Pittas (Chairman and CEO)

No, no. That, that's fine. I think this is enough for now.

Climent Molins (Head of Shipping Research)

All right. Thank you.

Aristides Pittas (Chairman and CEO)

Thank you. Bye-bye.

Operator (participant)

Thank you. If you'd like to ask a question at this time, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. We'll pause a moment to assemble a queue. Once again, that is star one. Thank you. Thank you. At this time, I'll turn the floor back to Mr. Pittas for closing remarks.

Aristides Pittas (Chairman and CEO)

Well, thanks, everybody, for listening to us today. We will be back in three months' time with the Q2 results.

Tasos Aslidis (CFO)

Thanks, everyone. Have a nice day.

Operator (participant)

Thank you, everyone. This will conclude today's call. You may disconnect your lines at this time. Thank you for your participation.