Euroseas - Q4 2022

Transcript

Operator (participant)

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas conference call on the fourth quarter 2022 financial results. We have with us Mr. Aristides Pittas, Chairman and Chief Executive Officer, and Mr. Tasios Aslidis, Chief Financial Officer of the company. At this time, all participants are on a 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 with 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'd like to pass the floor over to Mr. Pittas. Please go ahead, sir.

Aristides Pittas (Chairman and CEO)

Good morning, ladies and gentlemen. Thank you all for joining us today for our scheduled conference call. Together with me is Tasios Aslidis, our Chief Financial Officer. The purpose of today's call is to discuss our financial results for the quarter ended and full year December 31st, 2022. Tasios will go over our financial highlights in more detail later on in the presentation. Let's turn to slide three. Our income statement highlights are shown here. For the fourth quarter of 2022, we reported total net revenues of $42.9 million and net income attributable to common shareholders of $20.3 million or $2.86 per diluted share. Adjusted net income attributable to common shareholders was $17.7 million or $2.50 per diluted share.

Adjusted EBITDA for the period stood at $22.9 million. Please refer to the press release for the reconciliation of adjusted net income attributable to common shareholders and Adjusted EBITDA. As part of the company's common stock dividend plan, our board of directors declared the quarterly dividend of $0.50 per common share for the Q4 2022, which will be payable on or about March 16th to the shareholders of record on March 9th, 2022. 2023, sorry. As of February 14, 2023, we had repurchased 251,685 of our common stock in the open market for a total of about $5.3 million under our share repurchase plan of up to $20 million, which was announced in May 2022.

For the full year of 2022, our net revenues were $183.3 million. Net income attributable to common shareholders was $106.2 million or $14.78 per share diluted. Adjusted net income attributable to common shareholders for the period was $95 million or $13.23 and $13.22 per share basic and diluted, respectively. Adjusted EBITDA for the period stood at $114.4 million. Our CFO, Tasios, will go over the details in more, the highlights in more detail later on. Please turn to slide four, where we discuss our recent sale and purchase, chartering, and operational developments.

Following the announcement to sell the motor vessel Akinada Bridge on December 29th, 2022, at a gross price of $14.2 million, the vessel was delivered to its buyers on January 9th, 2023. Moving on to our more recent chartering developments. Motor vessel Joanna's charter was extended from 5-7 months at $14,500 per day. Unfortunately, we had one incident whereby the charterers of one of our vessels, motor vessel Aegean Express, repudiated its charter as the vessel was completing a scheduled dry dock. The charterer is Continental Shipping Line, CSL. While we are pursuing legal action, we have also entered into negotiations to find a replacement charter for the vessel. There were no item or commercial off-hire periods this quarter.

For the dry dock in France, two vessels passed their special survey with dry dock during the fourth quarter of 2022. 1 is the Aegean Express, which I touched upon earlier, which underwent repairs from mid-October to the beginning of February 2023. The other vessel undergoing dry dock during the quarter was motor vessel Spetses for a period of approximately 29 days. Please turn to slide five, where you can see our current fleet profile. You will see current fleet is comprised of 17 vessels on the water, including 10 feeder containerships and 7 intermediate container carriers with a carrying capacity of about 63.3 thousand TEU and another age of 17.5 years. Turning to slide 6, we present our vessels under construction, which consists of 9 ECO Feeder containers expected to be delivered during 2023 and 2024.

The first of which is expected to be delivered by the end of next month. Six of the newbuildings will have a carrying capacity of 2,800 TEU each, while three will have a carrying capacity of 1,800 TEU each. The nine feeder containerships will have a capacity of 22.2 thousand 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 to see our vessel employment chart. As you may see, we have a strong charter coverage throughout the next two years, with about 80% of our fleet being fixed for 2023 and almost 54% for 2024.

These figures have also taken into consideration the first two new building deliveries, which have been fixed at $48,000 per day from the date of their respective deliveries. Turning now to slide nine, we review how the 6-12 month time charter rates have developed over the past 10 years. In the last two years, the container market registered all-time high in terms of time charter rates, owing to a combination of shifting of demand patterns and preferences, and also a tight supply situation, which in turn prompted significant spikes. Following this market strength, the containership charter market started softening, dropping significantly since their peak levels in the summer of 2022.

As the graphs clearly show, 6-12 month time charter rates across all containership segments have dropped significantly since mid-2022, with the feeder sizes of rates close to the 10-year average rate, while intermediate sizes are currently even below historical rate averages. Rates in all categories are still higher than their 10-year median level. Let's move to slide 10, where we go over the main underlying market themes. During the fourth quarter, one year time charters experienced a sharp decline of 70% compared to Q3 2022, and fell by a further 15%-25% in January. During the last couple of weeks, rates seems to be stabilizing at still profitable levels. The secondhand price index decreased on average by 46% in the fourth quarter of 2022 over the third quarter of 2022 according to Clarksons.

The containership secondhand sales activity was much quieter during the fourth quarter of 2022 as the major microeconomic uncertainty and weak demand trends diminished appetite for any investments. The new building price index decreased by just 1.2% in the fourth quarter of 2022 over the previous quarter, confirming that despite the negative market sentiment, the cost of building ships can't easily move lower. The idle containership fleet as of January 16th stood at about 2.2% of the fleet and has been gradually increasing since the middle of last year. There was a knock pick in the containership recycling activity towards the end of the year, which is expected to increase in 2023 and 2024 amid weaker market conditions, supply pressure for fleet growth and the introduction of new environmental regulations.

Despite scrapping, prices softening in the Q4 2022 to about $550 per lightweight ton, they are still about 35% above the $219 average. Finally, the containership fleet grew by approximately 4% in 2022, without accounting for idle vessels reactivation of course the rising in general. Please turn to slide 11. The IMF revised its global growth projections for 2023 and 2024, signaling some positivity in world economic growth and greater than expected resilience in a number of economies. The IMF now projects world growth to slow from 3.4% in 2022 only to 2.9% in 2023, and then rebounds to 3.1% in 2024.

The rise in central bank rates to fight inflation and Russia's war in Ukraine appears to be working without leaving the world to the previously feared recession. The rapid spread of COVID-19 in China dampened growth in the second half of 2022, but the recent reopening has paved the way for a faster rebound, with a projected GDP growth of 5.2% in 2023 and 4.5% in 2024. In 2023, GDP growth for the United States will slow to 1.4% and 1% in 2024 as the Federal Reserve work on interest rate hikes to tame inflation set to screw the economy.

Overall, the European growth forecast for 2023 is up by 0.2% from the previous IMF report, expected at a still positive 0.7% for the year, thanks in part to signs of resilience to high energy costs, a milder than expected winter, and gradual tightening of the ECB's monetary policy. A growth rebound of 1.6% is expected in 2024. Growth in emerging and developing countries is expected to bottom out at still positive levels during 2023 at lower levels than in 2022 and recover in 2024. The Russian economy has also recently been upgraded to 0.3% for 2023, whilst the previous quarter, the IMF expected it to be -2.3%. For 2024, it is now expected to recover to 2.1%.

India is expected to grow at the fastest pace by 6.1, 0.1% in 2023 and 6.8% in 2024. While Brazil's economy is now projected to grow 1.2% in 2023 and 1.5% in 2024. According to Clarksons estimates, containerized freight demand reacted aggressively downwards, contributing to the market slowdown in the second half of 2022. Containerized trade is also expected to be marginally negative in 2023, but a significant rebound of 3.1% is expected in 2024, in line with the expected global GDP recovery. Trade and growth projections are being continuously revised as the effects of geopolitical tensions between Russia and Ukraine on world growth and trade are being continuously assessed and changed.

Please turn to slide 12, where you can see the total fleet age profile and order book data. The container ship fleet is relatively young, with most vessels under 15 years old and only 10% of the fleet over 10, 20 years old. The order book as a percentage of total fleet stands at 28.8% as of February 2023, up 2.7% from the previous quarter. Demolition volumes look likely to pick up in 2023-2024 with an impetus from the softer charter markets and the upcoming environmental regulations. Turning on to slide 13, we will also go over the fleet age profile and order books for containers in the 1,000-3,000 TEU range, which is quite different than for the total.

These sizes of vessels are the backbone of our operations and the primary focus of our new building program. About 23% of the 1,000-3,000 TEU fleet is overage, meaning many of these will be scrapped and help lower the order book. The order book as a percentage of the fleet stands at only 13.2% as of February 2023. The balance is quite good at this point and seems to be quite good for this size range. Let's move to slide 14, where we discuss an outlook summary for the container ship market. Political and economic insecurity affected container shipping, with freight rates dropping dramatically in November and December 2022, with time charter rates returning towards more normal levels from the exceptional highs seen between 2021 and the first half of 2022, as already said.

The container freight index continued to weaken, falling 80% from the January 2022 peak and just 6% above the pre-COVID-19 10-year average. Container shipping market is under clear pressure, with trade volumes falling by 9.4% year-on-year. This pressure has been amplified by excess retail inventories, which have reduced new shipments alongside underlying economic headwinds and impacts on consumer activity from inflation and the cost of living crisis. At the same time, port congestion that grew during the pandemic years has reversed significantly, increasing effective supply. In 2023, market conditions are generally expected to soften further, with rates expected to continue to fall and potentially below typical historical average levels, while new vessels that will be delivered into the market in the next 6-24 months will likely increase the pressure.

From 2024 onwards, though, the outcome of a number of issues could significantly affect the overall demand for container ship trade. Firstly, the geopolitical developments around the Ukraine-Russia war and its aftermath, as well as other global tensions. Secondly, the economic conditions resulting from the global fight against inflation through interest rate rises across the globe. Thirdly, the new environmental regulations about greenhouse gas emissions, which will probably result in more slow steaming within 2023 and 2024, effectively removing capacity from the market, therefore improving market fundamentals. The spread between charter rates achieved by eco vessels is expected to further increase. Finally, the smaller sized vessels in the range of 1,000-5,000 TEU are expected to perform relatively better due to their healthier supply situation. As mentioned, many overage ships will be scrapped and the order book is much lower.

Without doubt of course, the flow of larger vessels to trades currently served by midsize group three could mitigate on any rate losses to an extent. Let's move to slide 15. The left side of the slide shows the evolution of one-year time charter rates for containers with a capacity of 2,500 TEU since 2010. It is visibly clear that the one-year time charter rates have continued to slide gradually as the rates have come down from an average of about $19,900 a day in the fourth quarter of 2022 to around $17,000 per day as of the end of last week. The right-hand side of the slide shows the historical price range for new building and 10-year-old container ships with a capacity of 2,500 TEU.

Prices of course are still at levels which can't be considered as bargain. However, it is uncertainty to be able to wreck significantly further on during the year. Especially new building prices due to the inflationary environment and the gradual fall of the dollar's value may even increase. Having taken the full advantage of the rise of charter rates over 2021 and the first half of 2022, we have secured a revenue stream of $450 million, which is sufficient to allow us to reward shareholders by paying a steady 10% dividend quarter after quarter, repurchase shares through our share buyback program, fund our eco new building program, and still have sufficient liquidity to pursue other attractive opportunities that will arise in the upcoming 18 months.

With that, I will pass on the floor to Tasios to go through our financials in more detail.

Tasos Aslidis (CFO and Treasurer)

Thank you very much, Aristides Pittas. Good morning from me as well, ladies and gentlemen. As usual, over the next few four slides, I will give you an overview of our financial highlights for the fourth quarter and full year of 2022. Compare them with our results in the equivalent periods of 2021. Let's start by turning to slide 17. For the fourth quarter of 2022, the company reported total net revenues of $42.9 million, representing a 12.1% increase over total net revenues of $38.3 million during the fourth quarter of 2021. That increase was the result of the higher average number of vessels we operated in the fourth quarter of last year compared to the fourth quarter of the year before.

The company reported a net income attributable to common shareholders for the fourth quarter of 2022 of $20.3 million, as compared to a net income attributable to common shareholders of $22.8 million during the fourth quarter of 2021. Interest and other financing costs for the fourth quarter of 2022 amounted to $1.6 million, compared to $0.8 million during the same period of 2021. This increase is due to the increased amount of debt and the increase in the average LIBOR rate that we paid in the most recent period compared to last year. In 2022, we also had interest income.

Aristides Pittas (Chairman and CEO)

Tasios, we lost you.

Operator (participant)

Okay, our speaker accidentally disconnected, but he is back with us.

Aristides Pittas (Chairman and CEO)

He's back with you? Good. On the webcast, he's not. Is he on? Can you hear him?

Tasos Aslidis (CFO and Treasurer)

Yes, he's on.

Aristides Pittas (Chairman and CEO)

Nikolaos, you're live.

Tasos Aslidis (CFO and Treasurer)

Yeah. I'm, I can hear you. I just wanted to make sure that. Let's see. Oh, and I'm being heard. Can you mute my line, please? Basic earnings per share attributable to common shareholders for the fourth quarter of 2022 were $2.87, calculated on 7.08 million weighted average number of shares outstanding. While diluted earnings per share were $2.86, calculated on 7.1 million weighted average number of 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 consideration 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 period. Usually, security analysts do not include the above items in their published estimates of earnings per share.

Let's now move to the right part of this slide to review the same figures for the full year of 2022. The company, for the full year, reported total net revenues of $182.7 million, representing a 94.6% increase over total net revenues of $93.9 million during 2021. As a result of both the increased number of vessels owned and operated and also other charters that our vessels earned during last year compared to 2021. The company reported a net income attributable to common shareholders for the year of $106.2 million, as compared to a net income of $43 million. Net income attributable to common shareholders of $42.4 million 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. This increase is due to the increased amount of debt we carried 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 after so many 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 approximately 7.2 million weighted average number of shares outstanding compared to basic earnings per share of $6.07 and diluted of $6.06 for 2021, calculated on average on about 7 million weighted number of 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. As usual, 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, earning an average time charter equivalent rate of $29,400 per day compared to about 15 vessels in the same period, the fourth quarter of 2021, earning on average $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 break-even rate, which we paid during the fourth quarter of this year, which takes into account also dry docking expenses, interest costs, loan repayments and preferred dividends, if any of those preferred dividends were paid in cash. For the fourth quarter of 2022, our cash flow break-even 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, 98.4% compared to 100% commercial and 98.5% operational during 2021. On average, in 2022, we own 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, again including management fees and G&A expenses, but excluding docking, dry docking costs, averaged about $7,548 per vessel per day compared to $7,212 per vessel per day during 2021.

At the bottom of the table, we can see our daily cash flow break-even 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. In the very last line of this slide, we can see the common dividend that we paid expressed in dollars 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's $1,689 per vessel per day. Let's now move to slide 19 to review our debt profile. As of December 31st, 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. A figure that 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 while again, at this point, we're planning to refinance the last portion of our balloon payments at the end of 2023 of $17.4 million. Clearly, our low leverage and the large...

The increasing number of unencumbered vessels that we have increase our flexibility and our ability to raise debt to fund investment opportunities should they appear. Looking at the chart on the bottom of the slide, we can see that our cash flow break-even level over the next 12 months, and that amounts to about $14,119 per vessel per day, of which $4,170 are contributed from loan repayments. The final comment before we leave this slide has to do with 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 can estimate the total cost of our senior debt to be around 7.65%. However, if we include in the cost of our debt the portion of the debt whose interest payments are locked via our interest rate swap contracts, the overall cost of our debt would drop to about 5.16%. We expect to assume additional debt to finance our new building program, which is estimated to be in the tune of $200 million-$220 million. To sum 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. That includes also other current assets. Advances that we made for our new building program stood at about $59 million, and the book value of our vessels stood at around $225.5 million, and that includes the one vessel that we held for sale, resulting in 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 and a half percent of our assets, and also other liabilities of about $17 and a half 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 own estimates and using charter adjusted values for our fleet and market value changes for our new building pro-contracts, and here have taken into account the developments regarding Aegean Express that Aristides mentioned earlier.

The estimated market value for our fleet is approximately $366 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 offer a good appreciation potential for our shareholders and investors based on the above measure. With that final note, I would like to close my part of the presentation and turn the floor back to Aristides to continue the discussion.

Aristides Pittas (Chairman and CEO)

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

Operator (participant)

Perfect. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the questioning queue. You may press star two if you'd like to remove your question from the queue. For participants 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. Our first question comes from Tate Sullivan with Maxim Group. Please proceed with your question.

Tate Sullivan (Managing Director and Senior Research Analyst)

Hello. Thank you. Good day both. On the Continental Shipping Line news, was the Aegean Express the only ship 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 charterer. This is a small charterer 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. We hoped that it wouldn't, but it has, and now we are taking legal action against the charterer who has defaulted. We will see what the outcome will be on that. All our other vessels are fixed to much bigger and stronger names, so I don't really anticipate any issue with those charters going forward.

Tate Sullivan (Managing Director and Senior Research Analyst)

Thank you. Related to the new builds coming into your fleet and the two coming in the next 3, 4 months, you already have contracts for, and then the third schedule for delivery, I believe in Q4 2023. Can you talk about the recent new build contracting environment for similar-built ships? I mean, what your, what the potential level for that ship is or have there been any similar-sized ships entering the market recently?

Aristides Pittas (Chairman and CEO)

There haven't been any orders as far as I know of for similar type ships, but the area around which these would be secured, if they were, would be around the prices that we've paid. We have not seen new building prices generally drop dramatically, and this is for two reasons. This is, one thing is the dollar is dropping a little bit, compared to where it was a few months ago. Secondly, due to the global inflation, the cost of building a ship is becoming more expensive. 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. That is concerning the prices. Concerning chartering of our remaining seven vessels.

The first one is to be delivered in December 2023, and the last one December 2024. 7 vessels that we will get sometimes in 2024. We are not in any hurry to fix them at this point in time. We are very confident that we will be able to easily employ them and to employ them at decent levels. Of course, not as high as the levels that we fixed our first couple of vessels, but still at very profitable levels, but we will do that much closer to the delivery time.

Tate Sullivan (Managing Director and Senior Research Analyst)

Okay. Thank you. My last is on, I think you announced some contract developments with the Joanna for $14,500. What is the current contract expire, or does that match your slide deck on page 7 as well, please?

Aristides Pittas (Chairman and CEO)

Sure. It expires in two and a half months from today, which is the earliest it can expire, and it can last for another two, three months. We did that maybe three, four weeks ago, I can't remember. The level is a decent level, giving us a decent profit on the ship. The charter market is still above, is still at profitable levels for all ships despite the huge drop. We tend to think that, oh, this is a disaster what has happened, but it's not really. Take away the super cycle which was extraordinary. It's still good levels that we are seeing.

Tate Sullivan (Managing Director and Senior Research Analyst)

Okay. Thank you very much. Have a great rest of the day.

Aristides Pittas (Chairman and CEO)

Thank you, Tate.

Tate Sullivan (Managing Director and Senior Research Analyst)

Thanks.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions. There are no questions at this time. At this point, I'd 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 back in 3 months' time for our Q1 results. Have a good day. Thanks, everybody.

Operator (participant)

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