Euroseas Ltd. (NASDAQ:ESEA) Q3 2023 Earnings Call Transcript November 9, 2023
Euroseas Ltd. beats earnings expectations. Reported EPS is $4.65, expectations were $3.01.
Operator: Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas Conference Call on the Third 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. [Operator Instructions] 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 would like to pass the floor to Mr. Pittas. Please go ahead, sir.
A fleet of vessels docking at a busy harbor, signaling the company's presence in global marine shipping.
Aristides Pittas: Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. Together with me Tasos Aslidis, our Chief Financial Officer. The purpose of today’s call is to discuss our financial results for the three and nine-month period ended September 30 2023. Let’s turn to Slide 3 of the presentation to go over our income statement highlights. We are very pleased with our third quarter results, having reported total net revenues of $50.7 million and a net income of $32.2 million or $4.65 per diluted share. Adjusted net income for the period was $28.2 million, or $4.07 per diluted share. Adjusted EBITDA for the period was $34.5 million. Please refer to the press release for reconciliation of the adjusted net income and EBITDA.
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 third quarter of 2023, which will be payable on or about December 16 to shareholders of record on December 9. The annualized dividend yield based on the current share price is above 8%. This is the seventh consecutive quarter of paying substantial dividends since we reinstituted paying them and something that we believe will be able to continue for the quarters and years ahead. As part of our share repurchase program of up to $20 million, which was announced in May 2022 and extended for another year, we have repurchased a total of 410,000 shares of our common stock in the open market for about $8.2 million.
This represents about 6% of our total outstanding sales. Our CFO, Tasos will go over the financial highlights in more detail later on in the presentation. Please now turn to Slide 4 where we discuss our recent sale and purchase, chartering and operational developments. As previously announced, on July 6, 2023, we took delivery of our second newbuilding vessel, M/V Terataki, an Eco EEDI Phase 3, 2,800 teu feeder containership newbuilding from Hyundai Mipo Dockyard in South Korea. On the chartering side, motor vessel Aegean Express was fixed for a minimum of three to four months until December 2023 at $9,000 per day. Additionally, motor vessel Synergy Antwerp was fixed for approximately 40 to 60 days at $18,250 per day and thereafter there was an option which was declared by the charters for another 40 to 60 days until December 2023 with the same daily rate.
As previously announced also, the Emmanuel P and the Rena P commenced their new charters in August 2023 at a daily rate of $21,000 per day for a minimum of 20 to a maximum of 24 months following the mutually agreed termination of their previously existing charters. We had no idle or commercial of higher vessels during this quarter. Please turn to Slide 5 for an update on our current fleet profile. Euroseas current fleet is comprised of 19 vessels in the water, which includes 12 feet of containerships and seven intermediate container carriers with a total carrying capacity of just under 60,000 teu and a teu adjusted average age of just below 16 years. Turning to Slide 6, after taking delivery of the first two of the nine new Eco feeder containerships, we saw our now seven vessels are under construction with a total carrying capacity of 16,600 teu and expected to be delivered within 2024.
Four of these newbuildings have a carrying capacity of 2,800 teu each and three have a carrying capacity of 1,800 teu each. After the delivery of the 7 feet of containership newbuildings in 2024, our fleet will consist of 26 vessels and the total carrying capacity will be in excess of 75,000 teu. Let’s now turn to Slide 7 for a graphic depiction of our vessels employments. As you may see, we have very strong charter coverage throughout the next two years with about 97.5% of our fleet being fixed for 2023, almost 65% for 2024 and more than 25% for 2025. This very high charter coverage at quite profitable rates for the remainder of the year, but also for 2024, suggests that we should continue recording profitable quarters regardless of charter rate environment.
Let’s turn to Slide now 9 now to review how the six to 2-month time charter rates have developed over the last 10 years. During the third quarter of 2023, containership markets were down across all segments compared to June 2023. For the sector we primarily operate in, charters rates are about 28% lower year-to-date. However, they are still significantly higher than their pre-pandemic levels. As of November 3, the six to 12-month charter rate for a 2,500 teu containership stood at $12,500 per day, which is higher than the historical median of $9,500 per day, but lower than the 10-year average rate of $15,500 per day. The comparisons to median and average rates are similar across the smaller and larger containership sizes. The low charter rates are driven by a progressively large number of deliveries, a reduction of inefficiencies caused during the pandemic and a considerable drop in demand growth.
Moving on to Slide 10, we go over some further market highlights. During the third quarter of 2023, one year time charter rate saw declines across all segments and have further declined since by approximately 20% in November 2023 alone. Average rates during the third quarter were down by about 18% compared to the previous quarter as shown in the table. The average secondhand containership index has decreased in line with the market decline. Secondhand containership prices have been gradually dropping throughout the first 11 months of 2023, but are still high nevertheless. The newbuilding price index remained roughly unchanged in the third quarter of 2023 over the previous quarter, whilst newbuilding prices generally stayed at elevated levels due to cost inflation and extended yard forward cover.
While newbuilding contracting has eased from the aggressive level seen during COVID-19, it still remains fairly strong historically with a large line of operators continuing to place orders for larger vessels mainly equipped with dual fuel capability engines. The idle containership fleet excluding vessels under repair stood at about 1.6% of the fleet as of October 23 or 0.45 million teu. The idle fleet peaked in February 2023 at 0.8 million teu and was trending downwards until July, but has increased again since September. Recycling activity edged higher during the third quarter with 68 vessels having been scrapped year-to-date accounting for about 130,000 teu. Demolition remains at low levels compared to historical standards due to the stronger markets earlier in the year and the good charter coverage across the sectors.
The figure is anticipated to increase for the remainder of this year and 2024 as it is driven by weaker markets and increasing environmental regulations. Scrapping prices have softened during the third quarter to about $550 per lightweight ton, which is still about 33% above the 2019 average. Overall, the containership fleet has grown by approximately 6.5% year-to-date without accounting for idle versus reactivations, which is quite a high number. Please turn to Slide 11. With its latest update in October 2023, the IMF forecasts show that the global economy is still slow and uneven, remaining well below the historic average of 3.8% growth between 2000 and 2019. Global GDP growth is estimated to slow from 3.5% in 2022 to 3% this year and 2.9% in 2024.
Global inflation is forecast to decline steadily starting from 2024 due to tighter monetary policy aided by lower international commodity prices. Slow economic recovery has been dominated by post-pandemic geopolitical shocks, including the war in Ukraine, the latest Israeli-Hamas conflict, U.S.-China relations and the Chinese property sector crisis, as well as the effects of monetary policy tightening to reduce inflation. However, important divergences are appearing. The slowdown is more pronounced in advanced economies than in emerging markets and developing economies. Among advanced economies, the U.S. has been revised up due to resilient consumption and investment, while the euro area has been revised down as tighter monetary policy and the energy crisis have taken a toll.
Divergence is also evident among emerging markets and developing economies, with China facing growing headwinds and now expected to grow only by 4.2% in 2024, while Brazil, India and Russia have been revised up recently by the IMF. According to Clarksons estimates, container trade will continue to experience subdued demand for the remainder of the year due to slow global economic growth, combined with the geopolitical events that are creating new challenges to an already fragile economic recovery. As such, container trade growth is expected to grow by a low 1.2%, which has been revised upwards from the 0.9% growth predicted only a month ago. For 2024, demand is expected by Clarksons to return to a decent trade growth level of about 3.8%. Now 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 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 ships. The orderbook as a percentage of total fleet stands at a high of 26.6% as of November 2023. Glaxo's expects new deliveries of about 3% to be delivered for the remainder of 2023, 10.4% in 2024 and 12% in 2025. Turning on to Slide 13, we also go over the fleet age profile and orderbook for ships in the 1,000 to 3,000 TEU range, which is where our new building program is focused. The orderbook here stands at 10.8% as of November 2023. According to Clarksons, new deliveries including what has already been delivered for 2023 are estimated at 9.4%, 6.2% in 2024 and just 1.8% in 2025.
Additionally, over 50% of the fleet is over 15 years old, indicating good fundamentals for this sector as we can expect a decline of the size of the fleet in the next few years. Let's move to Slide 14, where we discuss our outlook summary for the containership market based on the afore discussed demand and supply matters. As we said, charter rates continue to face renewed pressure due to weak demand, leading to the 20% decrease in higher rates since the third quarter. The substantial accumulation of available tonnage in smaller feeder sizes is notably contributing to the downward trend in the charter rates for the smaller vessels. While the container freight index has seen some improvements since July, it remains significantly lower at 80% below its peak in January 2022 and has roughly returned to about the pre-COVID 10-year average.
Container trade volumes grew by 6.6% year-on-year in September and are still above pre-pandemic levels. For the remainder of 2023, there are still considerable challenges ahead. Downward pressure has reemerged in the fourth quarter as supply growth accelerates and an increasing number of charter vessels are redelivered. Slower speeds are expected to play a key role going forward in absorbing some of the excess tonnage. Economic developments amidst the two wars remain very uncertain. Therefore, 2024 will probably be quite a difficult year as well. Market conditions will remain challenging as the rates may decline even further towards the lowest point of the cycle due to the second consecutive year of substantial fleet expansion. Market performance will remain sensitive to capacity management, vessel speed, and a range of other inefficiencies like congestion that could alleviate pressure to some extent.
The energy transition also has continued to gain traction in the containership sector. While it's evident that the shift is taking place, the long-term outcome is still very uncertain. One thing is obvious though that the spread between charter rates achieved by eco-vessels compared to conventional ones is expected to further increase as charterers become even more sensitive to greener transport. For 2025, supply and demand fundamentals seem to suggest that we could see a leveling off in the market and some stabilization. If enough scrapping materializes within the next two years, demand remains relatively resilient and new orders are disciplined, we could possibly see a turning point sometime then. Moving on to Slide 15, the left chart shows the evolution of one year time charter rate to containers with a capacity of 2,500 TEU since 2010.
One year time charter rates are far below their peak in early 2022 and as I previously mentioned, the current one year time charter rate stands at $12,500 per day, which is still at a high enough and profitable level higher than the historical median. At the same time, the right hand chart shows the historical range for new building and 10-year-old containerships with a capacity of 2,500 TEU. Prices are still significantly higher than the 10-year median despite the severe drop. Despite our expectations for the poorer market next year as discussed above, we believe that we are largely insulated from developments in the chartered market during 2024 due to our contracted revenue backlog of more than $400 million, which we have developed during 2021 and 2022.
Our liquidity buildup will allow us to take delivery of the seven remaining containership new buildings while keeping leverage low at around 60%. It will also allow us to continue paying a substantial dividend and executing on our stock repurchase program as our price continues to hover at levels below 50% of our NAV. At the same time, we will be left with ample free cash to acquire further vessels when we deem the timing appropriate. And with that, I will pass the floor to Tasos to go over the 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 third quarter and nine months of 2023 and compare them to the same period of last year. For that, let's turn to Slide 17. For the third quarter of 2023, the company reported total net revenues of $50.7 million, representing a 10.3% increase over total net revenues of $46 million during the third quarter of last year, which was mainly the result of the higher average charter rates our vessels earned in the third quarter of 2023 compared to last year. The company reported a net income for the period of $32.2 million as compared to a net income of $25.2 million for the third quarter of 2022 at 27.7% increase.
This quarter, there are two points that I would like to make regarding entries that affect our financials. The first relates the termination of the charters of Emmanuel P and Rena P that were reported during the last earnings call and Aristides mentioned earlier. Those charters came with the vessels when we bought them and because at the time, they were below market, we recorded the vessels with increased book value corresponding to the below market value of the charters. At the same time, we started recognizing the below market charter value over the life of the charters as per U.S. GAAP guidelines. As these charters were terminated, we had to recognize the remaining a recognized portion of them. Thus, the $16 million gain on charter termination that you see in our income statement.
Incidentally, these charters were terminated with mutual agreement with the charter and replaced by charters with higher rate. The second point that I would like to make relates to recording an impairment charge for our vessel, M/V Jonathan P. Based on our impairment test results, it was determined that its carrying amount was not recoverable and consequently we booked an impairment charge of $13.8 million to reduce the vessel's book value to its market value. I would like to stress that the vessel has been a great contributor to our bottom line. Since we bought it in October 2021, the vessel has been chartered on a highly profitable charter of $26,667 per day net of commissions for three years until September 2024, and has already contributed up to the end of last quarter, $14.4 million of EBITDA, in the remaining year of charter is expected to contribute about another $7 million of EBITDA.
Thus, the impairment charge is a mere accounting requirement rather than a commercial result. In an event, both of the above items are not included in the adjusted earnings per share I will refer to a little later in my presentation. Interest and other financing costs for the third quarter of 2023 amounted to $1.8 million after deducting capitalized imputed interest of $0.9 million, which relates to the self financing of the pre-delivery cost of our new building program for a total interest and other financing cost of $2.7 million, compared to $1.6 million for the same period of 2022, the period during which the imputed interest was only $0.2 million. This increase is due to the increased amount of debt that we carry during the third quarter of this year and increased benchmark rates, LIBOR and SOFR that our loans had to pay compared to the same period of 2022.
Adjusted EBITDA for the third quarter of 2023 increased to $34.5 million compared to $26.2 million achieved during the third quarter of last year, an increase of about 32%. Basic and diluted earnings per share for the third quarter of 2023 were $4.67 and $4.65, respectively, calculated on about $6.9 million basic diluted weighted average number of shares outstanding compared to basic diluted earnings per share of three and a half dollars for the third quarter of 2022 calculated in about $7.2 million basic and diluted weighted average number of shares outstanding. Excluding the effect on the income for the quarter of the unrealized gain on derivatives, the amortization of the fair value of below market charters acquired. The vessel depreciation on the portion of the consideration of the vessels acquired with attached time charters allocated to the below market charters, the gain from the termination of the below market charters and the impairment charge, the adjusted earnings attributable to common shareholders for the quarter ended September 30, 2023 would have been $4.08 basic and $4.07 diluted compared to $2.90 basic and diluted for the same quarter of last year.
[Indiscernible] typically don't include the above items in the public estimates of earnings per share. That's why we're making the adjustments ourselves. Let us now look to the right part of the slide and review the numbers for the corresponding nine month period ending September 30, 2023, and compare it with the same period of last year. So for the first nine months of this year, the company reported total net revenues of $140.3 million, representing a 0.4% increase over total net revenues of $139.8 million during the first nine months of 2022. We reported a net income for the period of $89.8 million as compared to a net income of $85.9 million for the first nine months of last year, an increase of 4.6%. I will not repeat here the same points I made earlier regarding the entries that were in our income statement, but they apply for the nine-month period as well.
Interest and other financing costs for the first nine months of 2023 amounted to $3.9 million after deducting capitalized interest of $3.2 million related to the self financing of the pre-delivery cost of our new building program, resulting in a total interest and other financing cost net of the imputed interest of $7.1 million, compared to $3.8 million for the same period of 2022, a period during which we had a capitalized interest of $0.2 million. Again, this increase is mainly due to the higher interest rates – benchmark interest rates we paid and the higher level of debt we carry. Adjusted EBITDA for the first nine months of 2023 was $91.1 million, compared to $91.5 million for the first nine months of 2022. Basic and diluted earnings per share for the first nine months of 2023 were $12.95 basic and $12.90 diluted calculated on $6.9 million and $7 million, respectively basic diluted shares – basic diluted weighted average numbers of shares outstanding compared to $11.91 basic and $11.86 diluted for the first nine months of 2022.
Again, excluding the effect on the income statement of the items that I mentioned before, the adjusted income for the nine months ended September 30, 2023 would have been $11.37 basic and $11.33 diluted compared to adjusted earnings of $10.71 basic and $10.67 diluted for the same nine-month period of last year. Let's now turn to Slide 18 to review our fleet performance. As usual, we will start our review by looking at our fleet utilization rates for the third quarter of 2023 and compare them to the same period in the third quarter of 2022. Our fleet utilization rate is broken down to commercial and operational. During the third quarter of 2023, our commercial utilization rate was 100%, while our operational utilization rate was 99.2% compared to 100% commercial and 99.5% operational for the third quarter of 2022.
On average, we own and operated 19 vessels during the third quarter, earning an average time charter equivalent rate of $30,074 per vessel per day compared to owning and operating 18 vessels in the same period of last year, earning an average time charter equivalent rate of $30,893 per vessel per day. Our vessel daily operating expenses including management fees were $7,192 per vessel per day for the third quarter of this year, compared to $6,601 per day during the same period of 2022. General and administrative expenses amounted to $500 during the third quarter of this year compared to $579 for the same period of 2022. If we move further down on this table, we can see the cash flow breakeven rate for the third quarter of this year, which also takes into account drydocking expenses, interest costs and loan repayments.
Thus, for the third quarter of 2023, our cash flow breakeven rate was $13,594 per vessel per day compared to $14,466 per vessel per day during the third quarter of 2022. In the last line of the table, we can see the common dividend paid expressed in per vessel per day units. In the third quarter of 2023 the dividend we paid amounted to $2,012 per vessel per day, compared to $2,177 per vessel per day for the same period of last year. Let's now look at the right part of this table and review the figures for the first nine months of 2023. During the first nine months of 2023, our commercial utilization rate was 99.4% and our operational utilization rate was 98.9% compared to 99.9% commercial and 99.6% operational for the same period in the first nine months of last year.
On average, we owned and operated 18 vessels during the first nine months of 2023, earning an average time charter equivalent rate of $29,843 per day, compared to 16.8 vessels in the same period of 2022, earning an average of $32,814 per day. Our vessel operating expenses, again including management fees were $7,210 per vessel per day in the first nine months of this year, compared to $6,771 per vessel per day for the same period of last year. General and administrative expenses for the two periods amounted to $648 and $635, respectively. Let us again move further down on this table where we can see the cash flow breakeven rate for the first nine months of this year, taking into account drydocking, interest and loan repayments. Thus, for the first nine months of 2023, our cash flow breakeven rate was $13,852 as compared to $14,052 per vessel per day during the same nine-month period of 2022.
At the bottom of the table again we can see the contribution to the cash flow breakeven from our dividend payments and for the nine months of 2023 that amounted to $2,134 per vessel per day and in the corresponding nine-month period, which includes one dividend payment less that amount contributed added $1,530 to our cash flow breakeven rate for the period. Let's now move to Slide 19 to review our debt profile and our forward cash flow breakeven level. As of September 30, 2023 our total debt stood at about $138.4 million. On top of the slide, you can see a snapshot of our current debt repayment profile over the next several years. We have already made $61.6 million of loan repayments in 2023, and the remaining for the year we have to make another $7.4 million in loan repayments.
For 2024 and 2025, our loan repayments drop to about $31 million and $35 million, respectively, including value payments, which we later should be able to refinance if we choose to do so, as we did in the past. The debt level that I mentioned earlier refers to the debt that is on our fleet in the water. As previously stated we intend to partly finance the remaining of our new building program with debt and thus we expect to assume an additional approximately $165 million of debt over 2024 and early 2025. A quick point on the cost of our debt; the average margin of our current debt stands at about 2.32% and assuming a software rate of about 5.41%, the cost of our senior debt is approximately 7.73%. This figure, if we include in that figure, that cost of our interest rate swaps it is brought down to about 7.44% is about 15% of our current debt is head at a soft rate of around 3.4%.
I would like to draw your attention now at the bottom of this slide where we present the level and components of our expected cash flow breakeven for the next 12 months. And we show a couple of levels of cash flow breakeven rate for our EBITDA breakeven level is around $9,260 per vessel per day. You can see that in the middle of the bars and in total, including interest and loan repayments, our cash flow breakeven level over the next 12 months is expected to be around $15,100 per vessel per day. This level reflects the number of vessels planned to be drydocked next year and the work that is expected to be done on them. To sum up our presentation, let's move to Slide 20 to review our balance sheet. In this slide, we provide a simplified snapshot of our assets and liabilities.
As of September 30th our assets include cash and other current assets amounting to about $69 million. Also include advances that we paid for our new building program amounting to about $67.8 million, and the book value of our vessels which is around $276.6 million, resulting in total book value of our assets of about $408.9 million. On the liability side, our debt as of September 30th as previously mentioned stood at about $138.4 million, representing amounting about 33.8% of the book value of our assets. The fair value of our remaining below market charters acquired is about $8.4 million, or about 2.1% of our assets, and other liabilities of about $9.3 million, amounting to about 2.3% of the book value of our assets. However, it should be noted that the market value of our fleet is much higher than its book value.
Based on our own internal valuations and comparable market transactions the charter adjusted values for our fleet and new building contracts are about $396 million, which translates to a net asset value for our company of about $385.3 million, or a bit more than $55 per share. Recently, our shares have been trading around $25 per share. Thus in that level represents a significant discount to our net asset value and suggests that there is a good appreciation potential for our shareholders and investors. With that, I would like to turn the floor back to Aristides to continue the call.
Aristides Pittas: Thank you, Tasos. Let's now open up the floor for any questions you may have.
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