Euroseas Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the Euroseas Conference Call on the Second Quarter 2024 Financial Results. We have with us today Mr. Atasos 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

I must advise you that this conference is being recorded today. Please be reminded that the company announced the results with a press release that has been publicly distributed. Before passing the floor to Mr. Aslidis, I would like to remind everyone that in today's presentation and conference call, ERCs will be making forward looking statements. These statements are within the meaning of the federal securities laws.

Operator

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. Tasos Aslidis.

Operator

Please go ahead, sir.

Speaker 1

Good morning, ladies and gentlemen, and thank you all for joining us today for our scheduled conference call. I'm Tasos Levy, CFO of Euroseas. Together with me is Simos Pariars, our Chief Administrative Officer our Chairman and CEO, Mr. Aristides Peters, who is usually hosting our earnings calls, is not available for this presentation this quarter due to overlapping engagements. The purpose of today's call is to discuss our financial results for the 6 months and quarter ended June 30, 2024.

Speaker 1

Let's turn to Slide 3 of the presentation to go over our income statement highlights. For the Q2 of 2024, we reported total net revenues of 58,700,000 dollars and a net income of $40,700,000 or $5.84 per diluted share. Adjusted net income for the quarter was $34,300,000 or $4.92 per diluted share. Adjusted EBITDA for the period was $42,300,000 A reconciliation of adjusted EBITDA to net income is presented in the press release that was released earlier today. I will provide you with some further details on our results later in the presentation.

Speaker 1

As part of the company's common stock dividend policy, our Board of Directors declared a quarterly dividend of $0.60 per common share for the Q2 of 2024, which will be payable on or about September 17 to shareholders of record on September 9. The annualized dividend yield of our stock remains at around 6.5% based on the current share price. Our continuing dividend payments not only highlight our stable performance, but also reinforce our commitment to delivering sustained shareholder value. Along with our dividends, we returned funds to our shareholders via our share repurchase program. As of August 6, 2024 and since the initiation of our repurchase program in 2022, we had repurchased 400,705 shares of our common stock in the open market for a total of about $8,200,000 Our share repurchase plan of up to $20,000,000 dollars was extended for a year during 2023 and last month our Board has extended it for yet another year.

Speaker 1

We will continue to use our share repurchase program at management discretion depending on the level of our stock price transcends our ability to increase long term shareholder value. Please now turn to Slide 4, where we discuss our recent sales and purchase, chartering and other operational developments. Starting first on the SAP front, we can report that the previously agreed to be sold vessel, motor vessel, EM Astoria, a 2,780 TEU feeder container ship built in 2,004, was delivered to its new owners. The vessel was sold for approximately $10,000,000 resulting in a gain on sale of about $5,700,000 or $0.82 per share and having contributed to the company total earnings of more than $42,000,000 since its acquisition in 2017. During the last 4 months, there was quite an activity around our newbuilding program.

Speaker 1

On May 13, 2024, the delivery of our 5th newbuilding vessel from a series of 9, MV Monica, took place. MV Monica is a fuel efficient 1800 TEU feeder vessel. Following the delivery, the vessel commands a charter for a minimum of 10 months to a maximum of 12 months at a rate of $16,000 per day. Subsequently, the 6th of our new buildings, MV Stefanie AK, new build fuel efficient 1800 TEU feeder containership from Damshedar, sister to Monica, was delivered on June 24, 2024. Like its sister, this vessel is equipped with a Tier 3 engine and other sustainability linked features, including alternative maritime power installation.

Speaker 1

After its delivery, MV Stefanie AK commands a charter for a minimum of 23 to a maximum of 25 months at the rate of $22,000 per day. Furthermore, on July 19, 2024, we took delivery of our 7th new building, MV Petty Star, a NECOFERMLE 1800 TEU feeder container ship from the same yard like the others. Again, the vessel is EEDI Phase 3 compliant and features a Tier 3 engine along with other sustainability enhancements, including alternative maritime power installation. The acquisition of MZ PayStar was partly financed with a loan from Piraeus Bank. And following its delivery, the vessel commenced the charter for a minimum of $23 to a maximum of 25 months at a rate of $24.250 per day.

Speaker 1

From the above, one can observe the progressive increase of the rates the 3 sister vessels were chartered which fully reflect the market developments during the quarter. There are 2 more vessels remaining in our newbuilding program, 2 2,800 TEU vessels. Their deliveries initially scheduled for November December 2024 have been rescheduled to January 2025. Continuing our report here on the chartering side, MZ EBITDA for charter was extended for a minimum of 10 to maximum 12 months at $13,000 a day starting from May 2024, while NZ Joanna, its charter was extended for a minimum period starting from the beginning of August to a maximum period until August 21 at an average gross daily rate of $13,500 per day. The vessel will then proceed to the Far East to have its 5th special survey in dry dock performed.

Speaker 1

She was then fixed and she will commence a charter for a minimum of 23 to a maximum of 25 months at another 16,500 rate that is staggered. So the first 17 months are at 19,000, dollars the next 6 months at $9,500 while the 2 months of the delivery period at the option of the charter at $16,500 Finally, vessel MV Specials was fixed for a minimum period of 18 months to a maximum period of 20 months at the rate of $18,100 per day starting from mid August. We are happy to report that during the Q2, we had no idle period or commercial off part time. Regarding dry dockings, motor vessel Synergy Killam underwent the scheduled drydock, which lasted approximately 19.5 days during the Q2. Next, please turn to Slide 5 for an update of our current fleet profile.

Speaker 1

Our current fleet consists of 23 vessels in the water, including and in group's 16 feeder container ships and 7 intermediate container carriers with total carrying capacity of just about 67,100 TEU and another at age of about 14 years weighted by TEU. Turning to Slide 6, you can see the 2 remaining vessels that are under construction,

Speaker 2

which are

Speaker 1

to be delivered, as I mentioned earlier, in January, Q1 of 2025. After the delivery of these 2 feeder container ships, our fleet will consist of 25 vessels with a total carrying capacity of just under 73,000 TEU. Let's now turn to Slide 7 for a graphical presentation of our vessel deployment. As you can see in the slide, we have secured very strong charter coverage over the next 2 years with approximately 95% of our fleet fixed for 2024 and nearly 44.5% for 2025. This robust charter coverage, combined with profitable rates for the remaining of our charters, positions us for higher profitable quarters, enhancing our fleet liquidity through 2024 2025.

Speaker 1

Our chartering strategy is crucial in maximizing our revenues across market cycles and ensuring that we will capitalize on favorable market conditions. At this point, let me pass the floor to our Chief Administrative Officer, Mr. Simos Pagaros, to go over recent market developments. Simon, go ahead.

Speaker 2

Thank you, Tacho. Good morning from me as well, ladies and gentlemen. Let's now move to Slide 9 for a broader market review. Let's take a look first on charter rates, focusing on the development of 6 to 12 month time charter rates over the past 10 years. In the Q2, continuing through the end of June 2024, containership charter rates experienced a strong increase across all segments.

Speaker 2

If we look at the reference, the rate of a 2,500 TEU container ship, the 6 to 12 months charter rate stood at about $34,000 per day, much more than triple the almost 9,200 and $50 per day, which the market paid at the end of 2023 and well above the 10 year average of approximately $15,719 per day. These trends are consistent across both smaller larger container ship sizes, showing similar favorable comparisons to median and average rates. Now moving on to Slide 10, we go over some further market highlights. We mainly want to highlight here that after climbing through the beginning of July, the market has shown signs of subs stabilizing in the past 3 to 4 weeks, indicating possibly a temporary pause in the upward trend. Let's hope that this will reverse in the weeks to come.

Speaker 2

The increase up to the end of June is primarily attributed to ongoing disruptions in the Red Sea, return to some degree of cost contention and an early peak season with unexpectedly high volumes from Asia, predominantly to developing economies, leading to a very tight market. Average rates per day during the Q2 of 2024 increased by about 48% compared to the Q1 of 2024, while vessel prices increased as well and are now closer to the peak levels of 2022. The average secondhand price index also increased on average by about 15.5% in the Q2 of this year over the Q1. The newbuilding price index increased by about 1 point 4% in the Q2 of 2024 over the Q1 of the same year. Newbuilding prices continue to stay elevated due to inflation and extended yard forward cover.

Speaker 2

While newbuilding contracting has moderated from the exceptionally high levels observed during the COVID-nineteen pandemic, it still remains relatively robust. This sustained activity is primarily driven by cash rich liner companies eager to renew their fleets with alternative fuel capable vessels. However, this is primarily focused on high on bigger sized ships. As of July 15, 2024, the idle fleet, excluding vessels under repair, stood at a mere 170,000 TEU representing just about 0.6% of the total fleet, and it basically consists of ships that are under sanctions as they are owned or related to Iranian interest. So essentially, we can say that there is no hydro fleet at all.

Speaker 2

I will now give you some figures about container vessel recycling within this year. During 2024, up to now, 39 vessels, accounting for about 54,000 TEU have been scrapped. We expect demolition activity to increase moderately in the remainder of this year after a number of very quiet years due to the very high market. In the Q2 of 2024, scrapping prices softened slightly to approximately $5.45 per light well ton on average, though still remaining above the average observed in the pre pandemic year of 2019 by about 33%. Please now turn to Slide 11.

Speaker 2

The latest update from IMF from July 2024 sees the global economy to experience modest growth over the next 2 years, with basically a cooling activity in the U. S, a stabilization in Europe and stronger consumption and exports in China. Risks to this outlook remain more balanced. However, there are upside risks to inflation and price pressures stemming from the new trade or geopolitical tensions that may appear. Any further escalation of trade tension could raise near term risks by increasing the cost of imported goods along the supply chain.

Speaker 2

As a result, the IMF has maintained this year's growth forecast at 3.2%, consistent with its April projection. In the meantime, the forecast for 2025 was slightly reduced by 0.1% to 3.3%, with China and India bringing the most notable upward revisions. On the other hand, Jaffan's growth has been revised the most downwards for this year to 0.7% from 0.9% and Russia's in 2025, down to 1.5% from 1.8% in their previous forecast and much lower than the 3.2% that is predicted for Oceania for 2024. Overall, we see that the fleet continues to grow at a very fast pace, having expanded by about 6.5% only this year without accounting for idle vessel activation, which has been significant during 2024 as the idle fleet has strength from about 800,000 TEUs about 12 months ago to just 170,000 TEUs today. Now as China's economic momentum is faltering, as the country's economy has further matured, the world is looking for the next tiger or tigers that will lead its economic growth.

Speaker 2

In that respect, India's growth is projected to remain robust at 7% this year. This outlook revision is attributed mostly to improved private consumption. However, the IMF cautioned that growth is expected to slow down slightly in 2025 in India to 6.5%. In the meantime, the Asian five economies remain the main agent for the global economy with the forecast remaining broadly unchanged from April. Now according to Clarksons' forecast, containership trade demand is anticipated to rise by a record 16.7% in TUMile terms in 2024, up from the previous estimate of 9.2% back in April.

Speaker 2

And this is happening due to further eroding through the Red Sea caused by ongoing disruptions in the area and also exceptionally good volumes from Asia to Europe and the U. S, along with the developing countries. However, the effects of the Houthi attacks in the Red Sea that have caused these disruptions are expected to normalize at some point going forward, something that we expect will create significant challenges in the market for a period of time. Now please turn to Slide 12, where you can see the total fleet age profile and containership order book. The containership fleet is becoming older with about 30% of the capacity being older than 15 years, something that will work as a significant buffer in the medium future when these ships enter the historical average scrapping age.

Speaker 2

As a result, 24 of the order book as a percentage starts at around 22%, reduced from a peak of 30%, which we saw last year. Turning on to Slide 13, please take a note that at the fleet 8 profile of the smaller ships of the feeder sector of the 1000 TEU to 3000 TEU range. These sizes of vessels are the backbone of our operations and the primary focus of our newbuilding program. The order book here stands at a mere 4.7% as of the beginning of August 2024. Now according to Clarksons, new deliveries are projected to be approximately 8% within the entire 2024, with the vast majority of these ships already delivered.

Speaker 2

The number dropped to 1.8% in 2025 and 1% 2026 and beyond, suggesting that going forward we will have minimal deliveries of this size segment. With over 50% of the fleet of this size segment being over 15 years old, these favorable fundamentals suggest an anticipated reduction in fleet size in the coming years. Let's now move to Slide 14, where we discuss our outlook summary for the container ship market. Despite the stabilization in July, the container shipping market has seen significant gains throughout 2024. Freight rates have shed the highest level outside the pandemic period, while charter rates have climbed steadily to historically robust levels.

Speaker 2

These strong market conditions are largely driven by disruptions in the Red Sea, as mentioned before, which have forced vessels to divert around the Cape of Good Hope, leading to increased vessel demands and port congestion. Additionally, healthy container volumes are bolstered by a continuously strengthening global economy. Freight rates have surged and charter rates have more than doubled since the end of the year of the previous year, reaching their highest level outside of the COVID-nineteen period and the strong markets of 20 years ago of around 2,004, 2005 period where the market was also at extremely high levels. The context index has increased by 164% since the end of 2023. Looking into the second half of twenty twenty four, the developments in the Red Sea will play a critical role in shaping the sector's immediate outlook.

Speaker 2

The situation remains uncertain, with any resolution heavily dependent on the political landscape. Even if conditions improve, the disruption is expected to continue for several more months. In such a scenario, charters are likely to opt for much shorter duration charters. As we move now into 2025, the container shipping market is anticipated to face challenges, particularly if disruptions in the Red Sea ease. The fleet is projected to expand, creating capacity management challenges due to significant cumulative supply growth.

Speaker 2

Nonetheless, forecasts indicate a respectable year for container trade volume growth. Additionally, potential reductions in the vessel speeds, driven by efforts to reduce emission and adhere to green policies, may help alleviate some of the supply pressures potentially stabilizing the market. The energy transition and the decarbonization process of the world's fleet is steadily gaining momentum in the containership sector and definitely at a much faster pace than the rest of the shipping sectors, creating much more favorable dynamics for the newer eco vessels, something that has worked very well for the new building investment program of U. S. Going forward, we anticipate that the premium for charter rates achieved by Eco vessels will further widen.

Speaker 2

This is because shutters and the industry as a whole are becoming increasingly sensitive to greener transport options, thereby placing a higher value on vessels with lower environmental impact. Furthermore, the introduction of further environmental measures and carbon taxes worldwide will further boost the premium on these kinds of ships. Now moving on to the last side of my part, Slide number 15. Please take a note of the significant increases in both charter rates and asset prices that we have seen during 2024 following the Red Sea developments. What is most interesting though is that the newbuilding price index is almost at the highest historical levels, something that gives further value to our investment program and proves the rightness of our decision to proceed with the vast expansion of our fleet throughout our newbuilding program just a few years ago.

Speaker 2

Euroseas will help the cash balance to fund the remaining equity portion of our newbuilding program. We plan to continue returning money to our shareholders through dividends and share buybacks at management discretion, and we continue to plan the renewal and expansion of our fleet with strategic investments that we believe will create further value to our shareholders. And with that, I will pass the floor back to our CFO, Dassos Aslidis, to go over our financial highlights in further detail.

Speaker 1

Thank you, Jonas. Let me continue And as I indicated in the beginning, I will provide you a little bit more detail on our financial results for the 6 3 month periods ended June 30 and compare them, as I said, with the same periods of last year. So, back, let's turn to Slide 17. For the Q2 of 2024, the company reported total net revenues of $58,700,000 representing a 23.1% increase over total net revenues of $47,700,000 during the Q2 of last year. This was the result of increased time charter rates on average that our vessels earned in the Q2 of this year compared to last, but primarily due to the increase in the average number of vessels we own and operated in the Q2 of 2024 compared to the same period of last year.

Speaker 1

The company reported net income for the Q2 of 2024 of 40,700,000 compared to 28,900,000 for the same quarter of 2023. Interest and other financing costs for the Q2 of 2024 amounted to $3,500,000 partly offset by $1,400,000 of imputed interest income earned because of the self financing of the pre delivery installments of our newbuildings, which in fact we feel it's interest is capitalized. This is to be compared to 2,400,000 dollars of interest expense in the financial cost in the Q2 of 2023, again partly offset by $1,200,000 of imputed interest income. This increase of interest expenses is primarily due to the increased amount of debt we carried in the current quarter compared to the same quarter of last year. Adjusted EBITDA for the Q2 of 2024 was $42,300,000 compared to $30,600,000 achieved during the Q2 of last year.

Speaker 1

Basic and diluted earnings per share for the Q2 of 2024 were $5.89 $5.84 calculated on approximately 6,900,000 base income and 7,000,000 dollars diluted weighted average number of shares outstanding compared to basic and diluted earnings per share of $4.17 $4.15 respectively for the Q2 of last year, calculated from approximately $6,900,000 $7,000,000 basic and diluted weighted average number of shares outstanding. Excluding the effect on the income of the unrealized gain on derivatives, the gain on sale of the vessels, the amortization of below market time charters acquired and the vessel depreciation charged on the portion of the consideration of vessels acquired with the past time charters allocated to the below market charters. The adjusted earnings for the quarter ended June 30, 2024 would have been $4.95 per share basic and $4.92 per share diluted compared to adjusted earnings of $4.19 4.17 dollars per share basic and diluted for the same quarter of last year. We make these adjustments because usually secured analysts not include the above items in their published estimates of earnings per share. Let's look now at the numbers for the corresponding 6 month periods ended June 30, 2024, and compare them with 2023.

Speaker 1

So for the first half of this year, the company reported total net revenues of 105 $1,400,000 to $5,400,000 representing a 17.6% increase over total net revenues of $89,600,000 during the first half of twenty twenty three. The company also recorded a net income for the period of $60,800,000 compared to $57,600,000 for the first half of last year. Interest and other financing costs for the first half of twenty twenty four amounted to $6,600,000 again partly offset by $2,700,000 of restricted interest income compared to $4,000,000 dollars in 2023, the first half of twenty twenty three, offset by $2,300,000 of included interest income. Again, the increase of the interest expense is due to the higher levels of debt that we carried on average this year versus last year. Adjusted EBITDA for the 1st 6 months of this year were $66,900,000 compared to $56,600,000 achieved during the first half of twenty twenty three.

Speaker 1

Basic and diluted earnings per share for the first half of this year were $8.78.77 $8.71 respectively, calculated on approximately $6,900,000 basic $7,000,000 diluted weighted average number of shares outstanding compared to basic diluted earnings of $8.28 $8.25 respectively, calculating about 7,000,000 shares outstanding for the same period, the first half of twenty twenty three. Excluding again the effect on the net income for the first half of the unrealized gain on derivatives, the gain on a sale of a vessel, the amortization of below market time charters acquired and the related vessel depreciation, the adjusted earnings per share for the 6 month period ended June 30, 2024 would have been $7.63 $7.57 basic and diluted respectively compared to adjusted earnings per share of $7.29 basic and $7.26 diluted for the same 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 the fleet utilization rates for the Q2 of 20242023. Our fleet utilization rate is broken down into commercial and operational components.

Speaker 1

During the Q2 of 2024, our commercial utilization rate was 100% and our operational utilization rate was 99.8%. On average, we had 21.3 vessels owned and operated during the second quarter of 2024 and on average again about 36 $39 per day compared to 18 vessels for the same period of 2023 earning on average $30,151 per day. Our total daily operating expenses, including management fees, general and administrative expenses, but excluding direct working costs, were $7,193 per vessel per day during the Q2 of 2024 compared to $7,829 per vessel per day for the Q2 of last year. If we look further down in the table, we can see again the cash flow breakeven rate for the Q2 of 2024, which amounted to almost $13,500 per vessel per day compared to $13,840 per vessel per day for the same period of last year. And finally, if we look at the very last line of the table of this slide, we can see the common dividend that we paid expressed in dollars per day per vessel.

Speaker 1

So for the Q2 of 2024 that amounted to 2,100 and $47 while for the same period of last year it amounted to $2,117 per vessel per day. Half of slide left to discuss, let's now move to review the 6 month figures for 20242023. So during the first half of twenty twenty four, our commercial and operational utilization rate was 99.9% each compared to 99.1% commercial and 90 8.7 Operational for the same period of last year. On average, we owned and operated 20.4 vessels in the first half of this year, earning $29,836 per day compared to 17.5 vessels earning another $29,714 per vessel per day for the same period, the 1st 6 months of 2023. Operating expenses, again including management fees and G and As, but not direct operating costs, other $7,563 per vessel per day in the first half of this year compared to $7,948 for the same period of last year.

Speaker 1

If we look again down to our breakeven levels, for the 1st 6 months of 2024, we had $15,372 per vessel per day breakeven level compared to $13,996 for the 1st 6 months of 2023. And if we include dividends in our breakeven, that on a per day per vessel basis, in 2024, our dividend payments amounted to $2,238 per vessel per day compared to $2,194 for the same period of last year. Let's now move to the next slide, Slide 19, to review our debt profile and our forward breakeven levels. As of June 30, our total debt stood at approximately $208,000,000 and that figure does not include the loan we drew to finance our last delivery, Pepe Star, which we took delivery in July. The chart growth that we sold there, the repayments, shows debt repayments over the next year.

Speaker 1

Those bars do include the repayments that come that are related to the petty stock. As you can see, in 2024, we already made loan payments of approximately $17,000,000 in the first half and we expect to make an additional $17,100,000 of repayments and a balloon payment of about $1,800,000 in the second half of the year for a total loan repayment amount of about $35,900,000 In 2025, our projected loan repayments are about $22,000,000 dollars along with balloon payments of around $17,500,000 And we typically refinance our balloon payments. And in 2026, we do not have any balloon payments due, but we have to make loan repayments of around 15,000,000 dollars We also show in this chart our loan repayments and balloon payments for 2027. Our senior debt carries an average margin of about 2.17 percent and assuming a base rate base off rate of 5% 25%, our senior debt had a total cost as of June 30 of around 7.4%. If we include in the cost of the debt the savings we have achieved by swapping a portion, about 10% of our debt at the base rate of 3.4% instead of I-twenty 5, the overall cost comes down to about 7.1%.

Speaker 1

We expect to assume additional debt for the 2 vessels to be delivered towards the end of the year, beginning of next now, of around $55,000,000 So the $208,000,000 that we had as of June 30 plus the loan we do for Pepe Star plus the loans for the upcoming deliveries will be without our total indebtedness. I'd like to draw your attention to the bottom of this slide, where we present the levels and components of our expected cash flow breakeven for the next 12 months And so the breakeven at various definitions, I will concentrate only on the final one, including interest and loan repayments. Our projected cash flow breakeven level for the next 12 months is expected to be around $12,921 per vessel per day. To sum up our presentation, let's move to the next slide, Slide 20, to review our balance sheet. This slide presents our assets and liabilities in a simplified format.

Speaker 1

Our assets mainly include Carson and other current assets, advances for vessels under construction and, of course, the book value of our vessels in the water shown here. As of June 30, 2024, we had cash and other current assets amounting to about 85,500,000 dollars We had paid advances for our rebuilding program of about $41,500,000 while the book value of our vessels stood at around $420,000,000 resulting in total assets at book value of about 500 and $47,500,000 On the liability side, as I mentioned, as of June 30, our debt stood at $208,000,000 which represents approximately 38% of the book value of our assets. We also get other liabilities like the fair value of below market charters acquired and other liabilities, altogether amounting to about 3.5% of our total assets, leaving the rest to be our net book value. However, it is important to highlight here that the market value of our fleet significantly exceeds its book value. We estimate that the charter adjusted value of our fleet to be around 550,000,000 which translates to a net asset value for the company of about $458,000,000 or around $65 per share.

Speaker 1

Our closing target today was not under $36 a share, a level that indicates a significant discount to our NAV and thus we believe represents a considerable appreciation potential for our shareholders and investors. With that, we'll finish our prepared remarks, and we would like to open the floor for questions, if there are any.

Operator

Thank you. At this time, we'll be conducting a question and answer session. You. And our first question is from the line of Tate Sullivan with Maxim Group. Please proceed with your questions.

Speaker 3

Thank you. Thank you both. My question is on charter coverage. I mean, already 95% for this year and 44% for next year and probably to increase. Can you talk about how you view your counterparties and how your customers honored contracts in the last 5 years?

Speaker 3

I think maybe you had just one customer to pull out of a withdrawal from an existing contract. Can you talk about that?

Speaker 1

Yes. That's correct, Tate. We had pretty much the overwhelming majority of our customers stayed true to their signature and to the contracts. We had only one instance a couple of years ago of a charter that defaulted. So we expect to be able to collect on our charter contracts.

Speaker 1

As the market recovered, the portion of our contracted revenues that represents above market charges has declined. So while at the end of last year we estimated about $150,000,000 worth of contracted revenues that were at above market charters. That number now is significantly lower. It's below $30,000,000 I believe in the last calculation. So as long as the market stays at the current levels, so fluctuates around the current levels, I think that risk is minuscule.

Speaker 2

In any case, the liner companies have extremely strong balance sheets and extremely profitable year this year. It would be a very big surprise to see that request for negotiating all their charters. At the moment, Lyners makes tons of money on the ships, even on expensive ships that they have chartered over the last few years. So I think the question at the moment, it's not much of an issue for us. There is no risk at the moment on that.

Speaker 3

Thank you. And then with the increase in the ship values particularly and then newbuild prices increasing with your leverage level relative to the ship's asset value, would you look to acquire secondhand ships more than possibly place new build orders at this time?

Speaker 1

I think, as I believe we have discussed in the past, we have our antennas out for opportunities that might appear. We try to make sure that we evaluate properly the risk of every acquisition. Prices now that the rates are high, prices are also high. And we would do a secondhand vessel if the residual value risk at the end of the employment of a vessel is acceptable, typically bringing the value of the vessel below historical others or even lower than that. So we are looking, we have the capacity, we have the liquidity, and we're looking both at the 2nd gen market and also on the newbuilding market.

Speaker 1

But for the time being, we're sitting tight, I guess, given the developments.

Operator

Our next question is from the line of Lars Ijat with Arctic Securities. Please proceed with your question.

Speaker 3

First of all, congratulations on a great quarter. I just have a couple of questions. I was wondering your voyage expenses turned positive for the quarter. How large was the bunker gain effect on voyage expenses following the sale of Astoria?

Speaker 1

I guess the voyage expenses have to do really with sale of bunkers when we changed charter. I don't think there was something that was dramatically out of the ordinary. Simply, we typically have very low audit expenses because the vessels are chartered. And in certain cases, we might have some gains because when we sell the fuel to the next charter, we make money on the transaction. And that, I guess, is what is reflected in this quarter.

Speaker 1

So it's a small amount compared to the overall level of revenues in any case. But it doesn't look primarily what I said. Sometimes when we change charters, we sell the fuel that is the inventory that's on the board, and that could result from a small gain or a small loss.

Operator

Yes. Okay.

Speaker 3

Thanks. Additionally, in terms of dry dockings, you had 2 vessels, 2 dry docking during the quarter. How should we or what can we expect for the second half of twenty twenty four? And how should we kind of potential dockings?

Speaker 1

Yes. We had 2 vessels completing the drydock. The one was primarily done in Q1. We had really one drydock that took place this quarter, Synergy Keeling. For Q3, I believe we already said in the presentation, we have Joanna that is going to go through drydock.

Speaker 1

On the top of my head, I don't have any other vessels that we expect, but I can get back to you on that, I mean, about what is we have 7 newbuildings of the 23, so 16 vessels is on the regular drydocking cycle. So on average, 1 to 2 vessels should be going through some form of special survey, either in water or drydock every quarter. I can get more specific about the profile of the upcoming

Speaker 2

drydockings. But from the 9 newbuildings, we don't expect anything.

Speaker 1

That's why I said 16,000,000.

Speaker 3

Okay. Thank you very much. That's all from me.

Operator

Thank you. The next question is from the line of Mark Reichman with NOBLE Capital. Please proceed with your questions.

Speaker 4

Good morning. You know, you know the premium that good morning the premium that eco vessels garner and I was just kind of curious on your thoughts. Where exactly does the container ship market stand in terms of lowering emissions over time? And what are the implications for your fleet? And how are you planning in terms of developing your fleet as the demands for lowering emissions grows?

Speaker 4

So that's the first question.

Speaker 1

Okay. I mean, there are a couple of ways we're looking at that. One thing is we have embarked on a pretty significant fleet renewal through our newbuilding program. These vessels consume a lot less fuel and have a very direct effect on reducing emissions. The second component is that we are pursuing a retrofit program, which have already had 3 vessels gone through that.

Speaker 1

That involves a significant investment from us, which in some cases we share with the charter of the vessels because they benefit as well. And in the cases that we have done it, we have registered reduction of fuel consumption of the order of 25% to 30%. So correspondingly, emissions of the same magnitude have been reduced from those vessels. As we move through our dry docking site of the vessels, Depending on the market conditions, we are judging and with the bias of doing it, of pursuing retrofits for our older vessels. The new buildings, I think, are the best vessels that can be built with today's technology and contribute directly to lower emissions.

Speaker 1

Simo, do you have anything to add?

Speaker 2

Yes. I wanted to add, Mark, that on the retrofits, it. We are trying to share that with some of our clients if they have the interest, which they usually have because they have the vessel under their charter. They make most of their savings, so they have interest to participate and that works well for us as well. Also, I wanted to mention that the new buildings of the same size, of the same capacity, we have noticed that our 2,800 TEU vessels and the 1800 ships that we have gotten delivery of, they perform about 40% lower fuel consumption than ships of the same size that we own or have owned in the past, which is impressive.

Speaker 2

And this is only for the conventional ships. If you add the LNG option or you use the LNG, the savings are even more. So, we are happy with the developments and our actions in terms of renewing our fleet and try to contribute from our side as much as possible to the process, to the decarbonization flow process of the work fleet.

Speaker 4

The second question is, when I look at Slide 10 and I see those shipping rates, it kind of implies that the Q3 should be pretty strong as well with maybe hard to say whether rates have peaked in July or August, but certainly looking at these numbers, seems like the Q3 should be a pretty strong one with good cash flow. So as you think about capital allocation going forward, in your press release, you mentioned evaluating accretive investment opportunities. But with the market values exceeding book values by a fairly large margin, it doesn't seem like the best time to go out and buy secondhand vehicles. So or secondhand vessels. So would you be more inclined to invest in new builds?

Speaker 4

Or will there be the timing will be right where if you can pick up second hand vehicles closer to a book value, so to speak, and then retrofit them? How are you kind of you thinking about new builds versus acquiring secondhand vessels and retrofitting them?

Speaker 1

As I mentioned earlier, I think we are looking always for interesting investment opportunities. We realize that second gen prices are elevated and the deals that we will be willing to the transactions that we will be willing to enter would have to have acceptable residual value risk. That could be the scrap price if the vessel is older or a price that is well within historical averages or below historical averages. So we will not buy, obviously, a vessel without being able to secure a charter. At the same time, that brings down our cost to the levels that I mentioned.

Speaker 1

We do look also at the newbuilding market And we try to create a balance between returning funds to our shareholders, the dividends and the share buyback is approved on that, Retaining second liquidity in case opportunities appear, and of course we still have to complete the funding of our new building program. So our balance sheet starts building more liquidity in the second half of the year and to the next year. And these questions that you're asking will become more pressing than how we can use that extra liquidity. But we're trying to balance it between those three areas.

Speaker 2

But the bottom line, Mark, is that we won't take market exposure today's secondhand prices. As Tassos said, there has to be a very low residual risk and any secondhand project that we may look at needs to be covered with a charter that breaks down the residual value to very manageable levels. At the moment, the market is not offering such projects, so we're not really interested at today's secondhand prices. The new building front has opportunities that we are exploring. The yards are extremely busy and they are offering slots way down the road.

Speaker 2

So this is something that we are evaluating. We feel that newbuilding prices will go high for several reasons, including the very high number that the inflation was in the last 3, 4 years in the world, which has created a trend that cannot go back. And also the fact that modern chips are of different quality and different specifications than older ones, meaning that the cost of building a modern ship of the same size is de facto more expensive today than it was a few years ago simply because of the specifications of the ship, and this can also not reverse. So I think bottom line is that at the moment we're evaluating exactly.

Operator

Our next question is from the line of Clement Mould with Value Edge. Please go ahead with your question.

Speaker 5

Good afternoon. Thank I wanted to start by asking about the vessels coming open later this year, which accepting the synergy Buzan are mostly in the feeder segment. Should we expect some of these vessels to be forward fixed over the coming weeks? Or are you comfortable waiting until closer to redelivery?

Speaker 1

I think we are in the market to look for charter for these vessels. Of course, you cannot dictate on the market your wishes. As you I'm sure you know, the market became a little softer in July compared to June. So I think which is a function of many developments. One is that there is an evolving geopolitical scene with all the travels around the world.

Speaker 1

At the same time, it's a seasonally low period in the summer. So we believe that at the end of the summer, we have a clear picture of how forward we can fix some of these vessels. The market is still there, but is a little softer, we have to admit, in July and on that compared to June. We still have received

Speaker 2

a few indications from this ship that we could have replied and they could have been extremely costly, but we have decided as a company to wait a few weeks and reevaluate things after the summer holidays come closer to an end and as people get back to their work and reevaluate the conditions at the time.

Speaker 5

That's very helpful. Thank you. You also mentioned you expect the spread between modern and older vessels to widen going forward. I was wondering if you could provide some commentary on the EU ETS and whether you expect it to have a significant like to lead to a significant portion of recent newbuilds to be employed in Europe? And if so, do you think this could lead to some inefficiencies?

Speaker 1

Clearly, the more I don't want to use the word penalties, but the more fees are placed on the emissions, which are higher from the older ships, the bigger the difference, the gap will be between young ships and older ships. And that naturally could create on sort of a 2 tier market chartering wise for younger versus older ships. It would make younger ships more attractive, and it would justify our newbuilding program even more so.

Speaker 2

Well, as a company, we anticipated that things will go like that. When we took the decision to invest such a big amount of our capital, especially for the size of our company, to a new building program, which at the time was 50% of our current fleet, The decision was based on these fundamentals that the industry will have to pay for the pollution that it creates. And going forward, this will even intensify. So, we have great belief in those modern ships.

Speaker 5

Makes sense. That's all from me. Thank you for taking my questions, and congratulations for the quarter. Thank you.

Speaker 1

Thank you. We have reached the end of

Operator

the question and answer session. I'll turn the call back over to Mr. Aslidis for closing remarks.

Speaker 1

I would like to thank everybody for your interest and for joining our call today. And I would like to renew our to see each other at least via the earnings call in 3 months' time. Enjoy the rest

Speaker 2

of the summer, everybody. Thank you also very much from my side.

Operator

This concludes today's conference. We disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Euroseas Q2 2024
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