Euroseas Ltd. (NASDAQ:ESEA) Q1 2023 Earnings Call Transcript May 16, 2023

Euroseas Ltd. beats earnings expectations. Reported EPS is $3.09, expectations were $2.73.

Operator: Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas Conference Call on the First Quarter 2023 Financial Results. 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 a listen-only mode. There will be a presentation followed by a question-and-answer session. 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 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 now, I’d like to pass the floor to Mr. Pittas. Please go ahead, sir.

Aristides Pittas: 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 months period ended March 31, 2023. Let us turn to slide 3 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 $28.8 million, or $4.10 per diluted share. Adjusted net income attributable to common shareholders was $21.7 million, or $3.09 per diluted share. Adjusted EBITDA for the period stood at $26 million.

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 9, 2023. This is the fifth consecutive $0.50 dividend that we are paying. As of May 16, 2023, under our share repurchase plan of up to $20 million, which was announced in May 2022, we had 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 4 where we discuss a 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 from Hyundai Mipo Dockyard in South Korea. The vessel is EEDI Phase 3 compliant and equipped with a Tier III engine and other sustainability linked features including installation of AMP, an alternative maritime power system. The acquisition was financed with a combination of own funds and a sustainability-linked loan provided by Eurobank S.A. Following its delivery, motor vessel Gregos commenced a 36 to 40 month charter with Asyad Lines at the gross daily rate of $48,000 per day.

Two of our vessels whose contracts that were due in April and May 2023 were expanded at the rate, but also duration that were better than anticipated, reflecting the resilience of the market and the apparent belief of charters that feeder vessels will be in short supply. Motor vessel Synergy Keelung was fixed for a period of 24 to 26 months of the daily rate of $23,000 per day, whilst EM Kea charter was extended for a period of 36 months, plus or minus 45 days at $19,000 per day. Earlier during this period, motor vessel Aegean Express was fixed between the minimum four and the maximum six months period at $13,000 per day and EM Hydra time charter contract was extended for a period of 12 months — 12 to 14 months at the gross daily rate of $15,000 a day.

They Aegean Express completed its drydocking on February 8th and then experienced idle time of approximately 29 days, whilst we were with Continental Shipping Line of Singapore, CSL, who repudiated its charter. going 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 5, where you can see our current fleet profile. Euroseas’ current fleet is comprised of 18 vessels on the water, including 11 feeder containerships, and 7 intermediate container carriers with a carrying capacity of about 56,000 TEU and an average age of 16.5 years old. Turning to slide 6, we present our vessels under construction, which consist of 8 eco feeder containerships, 5 with a carrying capacity of 2,800 TEU each, and 3 with a carrying capacity of 1,800 TEU each expected to be delivered between Q2 2023 and Q4 2024.

With 8 feeder containerships, we have a capacity of 19,400 TEU. After the delivery of these new buildings, the fleet will consist of 26 vessels with a total carrying capacity of about 75,000 TEU. Let’s now turn to slide 7 for the graphical presentation 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 uncharted days. Turning now to slide 9, we review how the 6 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 median levels. As of last Friday, the 6 to 12-month time charter rate for 2,500 TEU containership stood at 18,750 per day whilst the rate for the 4,400 TEU containership is 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% to 15% compared to the low levels of each for all segments during February 2023.

The average daily charter rate during the first quarter of 2023 was down by 18% compared to the fourth quarter of 2022 as shown in 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 eased a little over recent months in some sizes but generally remain elevated amid cost inflation and extended yard forward cover. The ideal containership fleet as of April 24, 2023 stood at about 1.4% of the fleet, which peaked in February 2023 at 3%, which has been trending down ever since.

Recycling activity has picked 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 ton. 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 vessels reactivation. Please turn to slide 11. With latest update in April 2023, the IMF slightly lowered this global GDP growth estimate 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, slowing economic activity, as well as the ongoing war between Russia and Ukraine and growing geopolitical tensions.

However, the U.S. and EU seem quite resilient, despite the recent economic shocks, primarily in financial sector. Quite noticeably, 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 term 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 this trend. Also Russia’s economic growth on base, it was revised higher for 2023 to 0.7% from 0.3%, the longer term outlook versus — from 2.1% to 1.3% for 2024. According to the latest Clarksons estimates, container trade is projected to contract by 2.1% in 2023.

However, in 2024, trade should improve as economic headwinds start to ease with trade growth projected at 3.3%. Rate 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 containership orderbook. The containership fleet is relatively young with most vessels under 15 years or old and only 10% of the fleet over 20 years old, the largest percentage of which though lies within feeder vessels, suggesting high potential recycling for this type of fleet. The orderbook as a percentage of total fleet stands at the high of 28.7% as of May 2023. Clarksons expects new deliveries of about 9.7% for the current fleet to be delivered versus 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 now to slide 13, we go over the fleet age profile and orderbook for ships in the 1,000 to 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 orderbook here stands just 12% as of May 2023. Together with the fact that 23% of this sized vessels is older than 20 years old suggests that the fleet could even decline for feeder containerships in the insurance figures. 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, totaling the strong projection 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 the recent months. Further softening is possible though for the remainder of 2023 as deliveries of newbuilding vessels is expected to pick up pace in the second half of the year. In any event, time charter rates still are standing at 165% above pre-COVID 10-year regions. The container freight index also reversed course during the last couple of months and recovered a bit compared to January 2023 levels lately. It now stands at the level 8% lower than the January of 2022 peak but still 5% to 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 vessel slowdown has offset the increase in supply at the end of the congestion brought. There are still large challenges ahead, mainly on the supply side but also due to the 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 does not already happen 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 speeds and a range of other inefficiencies, such as congestion that could alleviate pressure to some extent.

The energy transition is another unknown that will affect the containership sector, probably positively. While it’s evident that a shift is taking place, in the short-term we can expect lower speeds thus shrinking vessel availability. The long-term outlook is intricate 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 size vessels, the segments 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 distances to an extent.

Let’s move to slide 15. The left chart shows the evaluation of one-year time charter rate to 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 rate currently standing $18,750 per day. As I said, this is a much higher level than the historical median and a very profitable level too. The right hand chart shows the historical range for newbuilding and 10-year old containerships with a capacity of 2,500 TEU. Total contracting activity over the past two years distributed between relatively few ship yards concurrently with rising inflation moves newbuilding prices up solidly. Even though we believe contacting activity has been hampered so far this year, newbuilding prices remaining at very high levels on the backs of the inflation of environment.

Prices for 10-year old second hand containerships skyrocketed in May 2022 to $56 million have since eased to around $20.5 million, a level still significantly higher than the $13 million. In recent 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 sole contracted revenue coverage throughout 2023 and 2024 at healthy rates will also allow us to take delivery of the remaining eight new building vessels and at the same time, continue to evaluate investment opportunities with low risk that will incrementally increase our earnings and growth.

And with that, I will pass the floor to our CFO, Tasos Aslidis to go over our financial highlights in further detail.

Tasos Aslidis: 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 were $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 financial costs for the first quarter of 2023 amounted to $0.9 million, partly offset by imputed interest of $1.1 million, which is capitalized and it is due to the self financing of the pre-delivery installments of our newbuilding program.

In addition, we set $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 diluted earnings per share for the first quarter of 2023 were $4.11 and $4.10, respectively, calculated on about 7 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 charters acquired, the depreciation charged due to the increased value of the vessel acquired with below market charters and the gain on the sale of vessel, the adjusted earnings per share for the quarter ended March 31, 2023 would have been $3.10 per share basic and $3.09 per share diluted, compared to adjusted earnings of $3.71 and $3.7 basic and diluted, respectively, for the same period of last year, after excluding — after making similar adjustments for the previous year. Usually, security 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 in comparison to last years. 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 and at an average time charter equivalent rate of $29,231 per day, compared to 16 vessels owned and operated in the same period the first quarter of 2022, earning on average $36,986 per vessel per day.

Our total daily operating expenses per vessel including management fees, general and administrative expenses, averaged $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 set 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 the table, you can see the common dividend that we pay 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 dividend declared for the first quarter — paid for the first quarter of 2022. Let’s now move to slide 19 to review our debt profile. As of March 31, 2023, our outstanding debt was $121 million that includes debt for our newbuilding, which we do before the end of the quarter. At the same time — as of the same date, 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. With this balloon payment, we have already repaid two for $13.3 million and $6.2 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 also our debt repayment scheduled for the following years beyond 2023. As you can see, our debt repayment is expected to decline — debt is expected decline three years. And we have additional balloon payments in 2025 amounting to about $22 million. If we look here above the cost of our debt, the average margin on our debt is about 2.79% and assuming to LIBOR rate of about 5.34% on top of it, we can estimate the total cost of our senior debt to be 8.05%. However, if we include it in our cost of debt calculation, the part of our debt the interest of which is not for interest rate swap holders, the cost of our debt will drop to about 6.25% as about 50% of our debt is hedged at the cost of around 1.7%.

As is noted on the top part of the slide, we expect to assume additional debt to finance the remainder of our newbuilding program, the 8 vessels Aristides mentioned earlier. And we estimate that debt to be around $190 million to $200 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, big part of which is our loan repayments $4,073 per vessel per day correspond to the payments of loans. To conclude our presentation, let’s move to slide 20 to review our — some balance sheet highlights. As of March 31, 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, resulting in a total book value for our assets of about $361 million. On the liability side, our debt as of March 31, 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 amounted to about $10.7 million or 3% of our total book value of our assets. It would be noted though that the market value for our fleet including the value for 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 for our newbuilding contracts is approximately worth $328 million as of the end of the month as compared to the book value of our vessels less the fair value of below market charters of about $180 million. And 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 to $19 per share, thus representing a significant discount — to our net asset value and provide good appreciation potential for our shareholders and investors based on these measures. With that I would like to close my remarks and turn the floor back to Aristides to continue the discussion.

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

Q&A Session

Operator: And our first question is from the line of Climent Molins with Value Investor’s Edge. Please proceed with your questions.

Unidentified Analyst: Good morning. Thank you for taking my questions. I wanted to start by asking about the tender. So, the vessel was initially scheduled to be delivered in the second quarter of 2023, but it seems — expecting 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: I’m not sure that that vessel was ever scheduled for the second quarter. It was scheduled for the fourth quarter and 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. But it’s minor delays of one to two months. I don’t expect them to be huge delays.

Tasos Aslidis: We have vessels TERATAKI scheduled for the second quarter of 2023 and — TC to early July 2023.

Aristides Pittas: Yes, correct.

Unidentified Analyst: Most of your newbuild program remains open. And how should we be seeing about securing new contracts? Are you comfortable employing them on short-term charters or you still be looking for medium term employment?

Aristides Pittas: It will really depend on what the market environment is towards the end of the year. Because the TERATAKI, which will be delivered at the beginning of July, instead of end of June, as was the initial plan is already fixed was Asyad Lines at $48,000 per day for three years together with 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 and trying to fix them today. So, we will wait for the right opportunity to fix them. We know that these are very modern and efficient vessels, much more economical when similar sized vessels that were built 10 and 15 years ago. So, we are pretty confident they will be fixed at very good rates, but how good, it will really depend on the market.

Unidentified Analyst: Yes, makes sense. And regarding the Aegean Express, you mentioned you expect to win the proceedings, but that the execution may be difficult as a charterer is hiding its assets. How should we think about the timing for the resolution of the proceedings?

Aristides Pittas: I think that within the next couple of months, certainly within — by our next call, this will have been resolved, the legal issues will have been resolved, and we will know we if we had won the award, which we think is a no brainer. But when you’re in arbitration, you’re never 100% sure. But 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 charters that we have in all our other ships. So, we have to see how that will go.

Operator: At this time I’ll turn the floor back to Mr. Pittas for closing remarks.

Aristides Pittas : Thanks everybody for listening to us today. And we will be back in three months’ time with the Q2 results.

Tasos Aslidis : Thanks everybody. Have a nice day.

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