Costamare Inc (CMRE) 2012 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare Conference Call on the First Quarter 2012 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer.

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, Wednesday May the 9th, 2012.

This presentation contains certain forward-looking statements of such terms as defined in Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts that address activities, events or developments that the Company expects, projects, believes or anticipates will or may occur in the future, including without limitation future operating or financial results and future revenues and expenses; future, pending, or recent acquisitions.

General market conditions and shipping-industry trends, the financial condition and liquidity of the Company, cash available for dividend payments, future capital expenditures and dry-docking costs and new board vessels and expected delivery dates are forward-looking statements.

Although the Company believes that its expectations stated in this presentation are based on reasonable assumptions, actual results may differ from those projected in these forward-looking statements.

Important factors that, in our view, would cause actual results to differ materially from the future results discussed in the forward-looking statements include without limitation global supply and demand for container ships, the financial stability of the Company's counterparties and charters, global economic weakness, disruptions in the world financial markets, the loss of one or more customers, a decrease in the level of Chinese exports, the availability of debt financing, the ability to expand through new buildings and secondhand acquisitions, delay in the delivery of newbuildings, rising crew and fuel costs, increases in capital expenditure requirements or operating costs, a decrease in container ship values, increased competition in the industry, re-chartering risk, fluctuations in interest rates, actions taken by governmental and regulatory authorities, potential liability for future litigation and environmental liabilities, the availability of adequate insurance coverage, potential disruption of shipping routes due to accidents or political conditions, and the other factors discussed in the Company's annual report on Form 20F, file number 00134934, under the caption Risk Factors.

All forward-looking statements reflect management's current views with respect to certain future events and the Company expressively disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in the Company's views or expectations or otherwise.

And I now pass the floor to your speaker today, Mr. Zikos.

Thank you and good morning. During the first quarter of the year, the Company continued to deliver positive results. Since the beginning of 2012, we have been prudently renewing our fleet by taking advantage of attractive steel prices inside of peak values.

At the same time, we have reduced our re-chartering risk with only four vessels coming out of charter during the year, excluding two ships for which the charter has the option to extend. The charters for those four vessels account for less than 2% of our 2012 contracted revenues.

In March we completed the follow-on public equity offering with net proceeds of approximately $100 million. The Konstantakopoulos family participated by buying 10% of the shares. We will be selective in our investments, as we have been in the past. We remain returns-oriented and we will not seek growth or unjustified prices by assuming excessive market risk.

Finally, on April 19th, we declared a dividend for the first quarter of $0.27 per share. Consistent with our dividend policy, we continued to offer an attractive dividend, which we consider to be sustainable based on the quality of our charterers and their prudent amortization of our debt.

Going forward, we value optionality. Our contracted cash flow combined with our conservative capital structure put us in a position to execute quickly should attractive opportunities arise in a down market or to remain firm and benefit from the upside of a healthy market environment. And now let's move to the presentation slides.

On slide three, you can see the first quarter 2012 results versus the same period of 2011. During the first quarter of 2012, the Company generated revenues of $100 million, EBITDA of $66.5 million, and net income of $24.5 million.

For the same period of 2011, the revenues amounted to $86 million and the EBITDA and net income to $57 million and $18 million, respectively.

Consistently with our previous press releases, we feel, however, that the EBITDA and net income figures need to be adjusted for the following items.

First, the accrued charter revenues and the resulting discrepancy between revenues received on a cash basis and revenues accounted for based on a straight-line amortization schedule; secondly, the gains or losses resulting from derivative instruments; and thirdly, the accounting gains and losses resulting from [mass] disposals.

Adjusting for the above, the first quarter EPS amounts to $0.41 versus $0.37 for the same period of last year. And the first quarter EBITDA grew $67 million versus $61 million for the same period of 2011.

As you can see from the above, the Company generated strong results during the quarter based on solid fundamentals.

Moving on to the next slide -- on the next slide, we're showing the revenue contribution and coverage of our fleet. Our revenues come from first-class charters. Including our contracted newbuildings, we have $3.1 billion of fixed revenues. More than 90% of our contracted cash comes from Maersk, MSC, Evergreen, and Cosco.

The TEU-weighted average remaining time charter duration of the fleet is 5.7 years. We have pretty much eliminated the near-term re-chartering risk and on the right-hand graph you can see the revenues from re-chartering, assuming same rates versus the contracted revenues through 2015.

The reason for that is that the backbone of the fleet -- mainly the larger and younger vessels -- including the newbuildings -- is chartered out long. As you can see, we have a solid cash-flow base.

Moving on to the next slide -- slide five is dealing with the re-chartering exposure of the Company in 2012. And it is actually an update from a similar slide we used in last quarter's results. Given our recent re-chartering arrangements and based on our [bad] assumptions, the Company expects a 2012 cash EBITDA of $283 million, if all six ships coming out of charter during the year are re-chartered at the same rate.

You can see the cash sensitivity. For a 30% discount on all 2012 re-chartering, the cash effect is less than $6 million, which goes up to $11 million for a 60% discount. So even at this level, the cash EBITDA effect is pretty manageable.

If one goes one step further and assumes that ships coming out of deployment during the year and built prior to 1995 are sold for demolition -- assuming a scrap price of $400 per ton -- cash proceeds of $18 million more than offset the cash shortfall.

We feel that in order to assess the Company's real re-chartering risk, someone needs to focus on cash, since cash is what is servicing the Company's debt obligations; the cash available for distribution is what is paying the dividend; it allows for further growth.

Based on the above, we feel that the market in 2012 may be more of an opportunity for us rather than a challenge.

Moving on to the next slide -- on this slide we are showing, on the left side, our expected cash flow per share, excluding the amortization, but including payment of interest. As you can see, this reaches close to $3 in 2013 and close to $4 in 2014, whereas we are currently paying a cost on dividend of $1.08 per year, per share. The increase in the cash flow is due to the newbuildings that will hit the water from 2012 onwards.

On the right-hand side, you can see the EBITDA contribution of the newbuildings. Based on the cash EBITDA of $275 million in 2011, on a pro forma basis, this would reach $393 million, assuming delivery of all newbuildings as per current schedule. As you can see, the Company's cash-flow potential is substantial.

Moving on to the next slide -- on slide seven, we discuss our balance-sheet management and we are providing some performance ratios. Our debt-repayment schedule is smooth and evenly spread to the coming years and is not back-loaded and showing no refinancing risk. Hence, our distributable cash flow on a post debt service basis is not artificially enhanced.

Our loan portfolio is hedged at a weighted-average rate of 4.1%, which adds to the cash-flow visibility. Liquidity currently stands at $321 million in cash and $18 million in undrawn credit facilities.

At the same time, we have four unencumbered vessels and a moderate fit leverage estimated at around 55% as of yearend 2011.

As we have mentioned, we are returns-oriented and this shows in the relevant ratios. Return on equity comes at approximately 30% for the last four quarters, while the return on assets stands at 14%. If someone goes back to our historical financials, we have been pretty consistent in delivering similar returns.

Moving now to the last slide -- on the last slide we are discussing the market. The consensus is that we will have a balanced market in 2012. The number of idle ships has moved down and, in terms of capacity, represents 3.9% of the total fleet. This number must be compared to idle ships representing 5.8% in early March. The fall is mainly caused due to new summer services in light of the upcoming big season.

As we mentioned, however, numerous times in the past, our business model is based on optionality, meaning that we are in a position to act whichever way the market goes.

Thank you very much. This concludes our presentation, and we can now take questions.

(Operator Instructions). Fotis Giannakoulis, Morgan Stanley.

Can you please give us a little bit background of the latest acquisition? You bought two ships; you sweep the charters of two older ships. How did you manage to find these vessels? There are some articles that are talking about these vessels were sold from MISC that is exiting the container-ship sector. What is going on with players facing financial difficulties if there are other similar transactions out there, particularly from KGs -- that they might be in the phase of liquidation?

First of all, regarding these transactions, we bought two ships for 3,800 TEUs each for $12.45 million each. These ships are 1998 built. And we sold two ships -- each were 1984 built and 2,900 TEUs. We bought for $12.45 million, as mentioned, and we scrapped each vessel for $6.1 million. So we had a net cash outflow of $6.3 million per vessel.

And this $6.3 million net cash outflow was funded by 60% leverage from a currently undrawn committed credit line.

So practically what we did -- we have extended the useful life of two vessels by 14 years. We have bought larger ships with better specs with $6 million equity, which was in itself funded with 60% leverage. So practically we put out of our pocket today $3.6 million. We have partly renewed our fleet.

We consider this to be a very good transaction, which is definitely -- and I think it's obvious -- that it is generating value for the Company. At the same time, these two vessels, they had their charter parties, which were expiring by the end of the year. I am referring to the two vessels we disposed of. The new vessels have substituted the two vessels scrapped in their respective charter party obligations.

And on top of that, the charter has granted to us an 18-month extension for its charter party at an average rate of $11,150 per day. So we have extended the coverage. We pulled net cash equity of $3.6 million per vessel. And we have extended the useful life of two assets by 14 years.

So that was the transaction and the ships were bought from a MISC which has come out public. They have announced that they are exiting the line of business. They are in the process of disposing of the whole of their fleet. We found these ships to be at a relatively attractive acquisition price. At the same time, we scrapped two vessels for close to $450 per ton, which is, generally speaking, relatively high steel price. So we put these two together and we think that this is a deal that makes sense.

Now, to the second part of your question -- up to now, we haven't seen any meaningful size of transactions coming out of KGs or coming out of German financial institutions as you know has been speculated in the past. Now, this doesn't mean that these deals may not come forward in the future, but for the time being, we haven't seen something meaningful. It may have to do with the fact that lenders may not be willing to ride accounting losses yet or it may happen to be the fact that lenders may not be willing to accept an equity stake and be partly ship owners.

As you can imagine, we are in close contact with all the relevant parties and it remains to be seen what's going to happen.

Continuing from that -- how is the debt-financing market and how do these lenders behave given the fact that they have a very suppressed portfolio and a lot of potential losses -- the asset looks like. Is there any availability of debt right now? How do you think you can finance new acquisitions? Does it have to be fully with equity, or you think that you can get debt financing; and at what terms?

What we have all seen over the last months -- and we have seen articles -- we've seen press releases mentioning that the commercial-bank debt for shipping transactions is not as available as it used to be, which may be the case.

But as far as we're concerned, we feel that when we have a transaction which is rightly structured with Costamare as the ship owner, providing its corporate guarantee, and with a credit-worthy charterer -- and if the cash flows work and the deal is based on solid fundamentals -- we don't consider debt to be an issue.

It may not be as cheap as it used to be. However, we feel that it will still be in terms that, commercially, will make sense to leverage the deal.

Now, the fact that debt is not as available as it used to be -- to some extent it is a healthy sign because we have all seen where excessive leverage has led this sector. Let me add that in October and in November 2011, we concluded funding for newbuilding transactions at a leverage of 80% with US, European, and also Asian financial institutions, at terms which can be considered as very competitive.

So debt is not as it used to be. It's not as cheap. However, for the right deal, we feel that the debt is not an issue and the feedback we have received from some of bankers we have been dealing with is that they have advantage to meet and for the right transaction, they will be there.

And when you say it's not as cheap compared to the previous quarter, have you seen any difference in the margin -- I assume? At what rates are we seeing the debt financing -- the margin of the debt financing of the latest acquisition?

We haven't done anything ourselves during the first quarter of the year or up to now. So I cannot tell exactly. We hear values figures. But the margin is also a function of the leverage. Lever is also a function of the whole amortization provided in the balloon. It is a function of the credit worthiness of the ship owner and the charterer; of the age of the vessel. So it's not something that I can give you a complete answer.

But if the deal makes sense, I don't think that 10 or 20 basis points are going to make it unworkable. If that's the case, then I guess you don't have the right deal in the first place.

I want to jump in one of the calculations that you have presented in your slides. I'm talking about the sensitivity of EBITDA, but mostly I'm trying to understand the sensitivity of your cash flow per share. How have you calculated that? I see that the range assumes re-chartering at between 60% and 100%. Does this mean that you do not see that the market might move above the current rates?

No, not at all. But first of all we take some advice from our lawyers. And at the same time, as a Company, we tend to be conservative. So we have shown two variations here -- a 60% re-chartering or a 100% re-chartering. This does not mean, of course, that the re-chartering cannot be higher than 100%, especially for ships that were fixed during the 2011; or especially the last months of 2011.

But what we show here is that for people to have a better picture of our cash-earnings potential -- so without any new business, and assuming a 60% or 100% re-chartering, we see how much the cash flow per share goes up. And the cash flow per share is defined as revenues minus all kinds of expenses, minus interest expense.

Starting from 2012 and moving to 2014 -- you can see that in 2014 we come close to a cash flow per sale of close to $4; whereas now we are paying a dividend of $1.08 per share per year. So I think it's obvious that the cash earnings potential of the Company is substantial. Let me repeat that this excludes any new business. This excludes the possibility of a higher re-chartering which, as you rightly pointed out -- this may not be the case. This is a rather conservative scenario assuming OpEx escalations or escalation in other types of expenses.

The point is to show, from a big picture, how is the Company progressing -- leaving aside any new business.

Michael Webber, Wells Fargo.

Just wanted to follow up on a couple of questions. First, on growth -- you guys kind of parsed through it a little bit already -- but we're not really seeing a whole lot of newbuilding activity in the market right now outside of Evergreen and some other one-off deals.

It seems like you're focused more on older tonnage and sale leaseback. Can you give the lay of the land in terms of what you're looking at and what you're seeing? Are there a lot of newbuild opportunities out there right now -- it certainly doesn't seem so from our end -- give some return profiles associated with the kinds of deals that are coming across your desk right now.

We are looking at deals similar to the ones we did recently. We have some older ships built in the 1980s, which have charter parties in place. Steel prices are still holding relatively well. So we are looking to renew the fleet with some transactions similar to the ones we did -- so buy some ships charter-free; substitute them in the charter deployment of vessels which we're going to be scrapping. That's one focus.

Then of course we are looking at secondhand vessels with a time charter attached. Up to now we haven't seen something we thought it really made sense. The fact that we have cash on balance sheet doesn't mean that we need to grow for the sake of growth. Five or 10-year-old ship prices probably do not fully reflect today's earnings potential; or we haven't come across something that really makes sense.

As you have seen from our track record, we are not afraid of operating older vessels, like 15-year-old or 20-year-old ships, because these assets can generate pretty good returns. So, again, this is not an area we're excluding.

Regarding newbuildings -- as you rightly pointed out, newbuildings activity is quite subdued -- or someone can argue that it's really nonexistent today. But to do a newbuilding, it's not only the newbuilding price that counts; it's also the time charter you're going to attach, what's going to be the rate, what's going to be the quality of the charterer; and, finally, what's going to be the term of the charter party. So, we need to put all these three together and build something that we'll look as well -- but we cannot say that we have seen something that, today, would probably make sense.

The point is that, overall, we are flexible. As you've seen in the past, we've done all kinds of transactions; so we don't want to restrict ourselves.

Going back to the newbuilds though -- the one deal we have seen get done recently was done at a $1 per TEU level that was pretty low. Do you think that's a fair characterization of where the market is here? And is the problem that they're -- are you seeing pushback from shipyards and the building at that price? I'd imagine top-line demand for new ships right now is pretty low, but I'm just trying to get a read on your view on that data point specifically because it was so far below market.

The latest big transactions we saw that you can argue that from a historical perspective, the newbuilding prices, however you define per TEU or sort of the whole delivery cost was at relatively attractive levels. However, as I said, you also need to work out the numbers -- what is the daily charter rate charge, and sort of what is the duration, and whether there are some sort of charter (inaudible) options at the end of the charter party.

So by putting this together, you may get a different view. Yes, prices seem to be down. We hear that financial institutions from Asia -- as in the past, they may be willing to subsidize simply the industry of their country. But from our side, we're starting to pay attention to the charter rate or the charterer and to the duration.

Now, in our case, the (inaudible) transactions we did bought back figures -- we bought at $95 million. We chartered at $43,000 per day for periods between 7 to 10 years. We found it was leveraged ranging between 70% to 80%. The way the numbers work, the ships will be close to debt-free at the expiring of the charter party.

So you have a debt-free asset with a lot of upside and you have earned a very good yield on your equity during the charter-party period; this is the type of deal we're looking at.

As you mentioned in your deck, we've seen some vessels being pulled back into service heading into peak season. Idle vessels are down -- basically cut in half from about 8% to 4%. When you look at day rates, how much more capacity needs to be pulled back on line before we can actually start seeing day rates move higher?

If you go back and look historically, it seems like we bottomed out at about 1%. Is that the right way to think about that before we could actually start seeing some meaningful charter rate upside? How do you guys think about it internally?

First of all, regarding charter rates, we think that for some specific asset sizes, charter rates have worked out considerably. We've seen 5,500 TEU ships chartered for a period of nine to 12 months -- at $22,000 per day; whereas like four or six months ago, you would see a rate at around half -- then sort of $11,000 per day; also, 8,500 TEU ships. They may command between $30,000 and $35,000 per day for periods of nine months to 12 months.

So I think that it's fair to say that overall, for the bigger sizes, charter rates have moved up -- this is the trend in the latest figures we've seen. The question is whether this is going to be filtering down to the smaller sizes -- the 3,000 to 4,000 TEU ships. And this remains to be seen.

At same time, smaller sizes -- 1,000; 2,000; 3,000 TEUs -- you can argue that the rates there still remain a bit depressed. However, for the bigger ships -- partly because [not a lot] of companies need them, especially in light of the figures -- we have seen quite a decreasing charter rate.

Going back to you guys, specifically -- I know you talked a little bit about this in a previous answer, but I just wanted to zero back in on your dividends. You mentioned your payout ratio, but the number you guys give in the deck don't include amortization of your debt, which is a good $2 to $3 a share over the next couple of years.

How do you think about increasing that distribution throughout the course of the year? Maybe you can relate it to that payout ratio. I know you touched on it a little earlier -- maybe just a little bit more clarity there and a little bit more of your vision for how you think the dividend kind of trends throughout the course of the year.

The dividend is the Board's decision. But let me be more specific. Where the dividend is going to be in the end of 2012 and 2013 and 2014, et cetera -- at any given time, where we need to assess internally what is the situation in the m arket -- we can potentially employ our cash -- or whether we feel that it is time to move forward with a dividend increase.

Today, the Company is offering dividend yields a little bit lower than 8%, which we consider to be a very attractive dividend yield; bearing in mind the quality and how (inaudible) that is. I cannot tell now that -- because the cash flow per share is increasing -- that we're going to be prepared to raise the dividend by an X-amount starting from this quarter or from the next quarter, forward, because this is something that we need to consider at this point in time.

But I repeat myself that the family owns 70% of the Company with our interests, which are fully aligned. We are not in the business of managing other people's money. We manage our own private wealth. We're not dividend shy and we take the dividend increase issue very seriously.

In the appendix to your deck, you have the assumptions on your forecasts or projections and you throw out 3% inflation for OpEx and 4% for management fees on a year-over-year basis. Is that what we should be looking at in terms of guidance? If not, how should we be thinking about those things; and then G&A as well?

Regarding the OpEx, every year we give out an OpEx budget which, in some cases, it may be 3% higher than the previous year or less or more. For purely legal reasons, we were advised that we need to put an OpEx escalation of something, which is generally considered as a benchmark in the industry.

In some instances, OpEx may go down or may go up by just 1%. I don't feel comfortable giving a guidance now of how much OpEx escalation is going to be in two years' time. So every year this is something -- we put a new budget; we discuss this internally, and then we give it out to all the analysts and to the other parties involved.

This one's out for the sake of this example, because we needed to put a number there. But whether you put 2%, 3%, 4% or 5%, the picture doesn't change. The companies cash (inaudible) go up substantially. So I wouldn't use this appendix which, as I said, is there mainly for legal reasons. In order to draw conclusions regarding the direction of the OpEx.

Now, the same applies for the G&A. We are a Company with 50-plus vessels. And the G&A we have is for $5 million. It is pretty low. Whether you escalate it by 3% or 5% or 10% -- these numbers are not really meaningful. It doesn't change the whole picture, I think.

We want to be as accurate as possible. We can move back after the call. I'm going to ask one more, actually, and then turn it over. Going back to what we were talking about -- some of these container lines pulling assets back into service -- we've really seen these container alliances have much more of a meaningful impact than I think a lot of people thought in terms of keeping -- finding some pricing stability and having you guys kind of toe the line in terms of competitive balance in that space.

But we are starting to see vessels being pulled back on line. It seems like top-line volumes are not that robust. In your day-to-day dealings with the container lines, are you noticing any particular cracks in those container lines at all? Are you noticing any meaningful discord or anything? Do you think that dynamic could potentially change at all as we move into the back half of the year?

What we have seen is that liner companies, for instance, in the trans-Pacific trade, they are sort of willing, and they have also come out publicly mentioning that they are going to be implementing more general rate increases because they are anticipating stronger demand in that trade, for instance.

The same applies for the Europe-Asia trade. At the same time, the number of idle ships have moved down practically for two reasons; first of all, for a better accelerated demolition class. Liner companies -- they are pulling back capacity, especially some larger vessels which were deactivated. And now they're being put into service again.

So I guess from their perspective -- and I'm not a liner company -- I cannot speak for themselves -- but I guess it would be logical to say that they view it as an opportunity to implement rate increases. And it seems that they have quite a positive outlook for the coming months which is traditionally peak season in container shipping.

At the same time, if you look at the historical patterns, the number of idle ships historically goes a bit up between the months September to November. So this is something we may see at the end of the year. But this is a very volatile industry, so I'm not sure I can be more specific than that.

(Operator Instructions). Brandon Oglenski, Barclays.

This is [Keith Morrey], filling in for Brandon. A question on the two vessels to ZIM -- have you had a dialogue with them regarding the option extensions?

No. The agreement with ZIM is the following -- if ZIM does not get back to us, the ships are automatically extended for three years at the rate of $23,150 per day, per vessel. During this three-year period, ZIM has the right to put the ships back to us with a six-month notice. If this happens, let's say, at the end of the first year, they need to pay us proportionally the two thirds of an amount which is $6.9 million per vessel.

I hate being so technical and specific, but this is a very specific question. And we had a very structured charter party. So practically, should they put the vessels back to us now, they need to pay us $6.9 million per vessel. Should they extend for three years, they're going to be extending for $23,150 per day. Should, during this three-year period, put the vessels back to us, they're going to be paying us proportionately back a fraction of the $6.9 million, depending on the days of cancellation.

The situation today -- they haven't come back to us at all so the vessels now are being employed at $23,150 per day. So it's up to them with a six month notice either to re-deliver the ships and pay us this fraction of the $6.9 million or keep those ships employed.

One additional one regarding vessel operating expense. You're going to improve the fleet by adding these newer vessels per say on the secondhand purchases. How should we think about that line item? Should we see some efficiencies coming out of those acquisitions in the coming quarters? Or how would you suggest --

These vessels are younger, as you rightly said. They're like 14 years younger. At the same time, they are slightly bigger. The vessels we disposed of were 2,900 TEUs. These are like 3,800 TEUs.

Normally, what we do, because we haven't yet accepted delivery of those ships, we accept delivery and then we put together a budget for those vessels which is going to be communicated to you as soon as we accept delivery. I wouldn't expect any significant deviation from the current OpEx for the other vessels. But bear in mind that these are bigger assets.

There are no further questions at this time.

Thank you very much for being with us today and for your interest in Costamare. We are excited with the opportunities that lie ahead and our goal remains to deliver superior returns to our shareholders. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.