Costamare Inc (CMRE) 2012 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare conference call on the second-quarter 2012 financial results. We have with us Mr. Gregory Zikos, 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 the conference is being recorded today, Wednesday, July 25, 2012.

Before I hand over to Mr. Zikos, I would like to refer you to slide number 2, which includes the forward-looking statement disclaimer. Please take a moment to read it. And I now pass the floor to your speaker today, Mr. Zikos. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. During the second quarter of the year, the Company continued to deliver positive results. In May, we accepted delivery of two 1998 built secondhand vessels, which replaced two 1994 built vessels in their respective charter arrangements. For an incremental cost of circa $6 million per vessel, we extended the useful life of those assets by 14 years.

Last week, we agreed to buy from an insolvency administrator a 2001 built 1078 TEUs container ship. The acquisition will be funded 100% with bank debt and forms part of a broader agreement between the Company and the vessel's current lending bank.

At the same time, we have reduced our re-chartering risk for the coming years. The charters for the vessels coming out of employment during the remaining of 2012 and 2013 account for 2% and 4% of our 2012 and 2013 contracted revenues respectively.

Finally, on July 9, we declared a dividend for the second quarter of $0.27 per share. Consistent with our dividend policy, we continue to offer an attractive dividend, which we consider to be sustainable based on the size of our contracted cash flows, the quality of our charters and the full amortization of our debt. We believe that going forward the Company is well-positioned to pursue new business opportunities in a volatile market environment. And now let's move to the slide presentation.

On slide 3, we are providing a summary of our recent transactions mentioned earlier. Let me start with the acquisition of the 2001 built vessel, which was bought under insolvency proceedings. The Company put no equity and this forms part of a broader arrangement with the lending bank, enhancing our position in the market. The 100% debt funding provided is based on attractive terms while, at the same time, we strengthened our relationship with European financial institutions.

Moving on to the next slide, on the next slide, you can see the second-quarter 2012 results versus the same period of 2011. During the second quarter 2012, the Company generated revenues of $96 million, EBITDA of $60.5 million and net income of $21.1 million. For the same period of 2011, the revenues amounted to $94 million and the EBITDA and net income to $65 million and $26 million respectively.

Consistent with our previous press releases, we feel 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 other disposals.

Adjusting for the above, the second-quarter EPS amounts to $0.32 versus $0.45 for the same period of last year and the second-quarter EBITDA to $61 million versus $65.8 million for the same period of last year. The Company generated strong results during the quarter based on solid fundamentals and a decrease in the EPS is partly due to the increased share count following our secondary offering in March 2012.

Moving on to the next slide, on the next slide, we are showing the revenue contribution and the potential of our cash flow per share. Our revenues come from first-class charters. Including our contracted newbuildings, we have $3 billion of fixed revenues. More than 90% of it comes from Maersk, MSC, Evergreen and COSCO. The TEU weighted average remaining time charter duration of the fleet is 5.6 years.

On the right-hand graph, you can see the effect of re-chartering on our projected cash flow per share. As you can see, leaving aside any new business, the cash flow per share increases substantially from 2012 onwards while the re-chartering risk does not change the upward trend.

In 2014, the cash flow per share reaches $3.45 even with a 40% re-chartering discount, up 23% from the year before. At the same time, you see that our current EBIT is $1.08 per share per year and you can draw your own conclusions regarding the upside.

Moving on to the next slide, slide 6 demonstrates our previous point on the solid cash flow base and the minimal re-chartering risk. Each bar shows our contracted revenues for the coming years. As the newbuilds start hitting the water, our contracted revenues from 2013 onwards increase, picking up $467 million in 2014.

At the bottom of each bar, you can see the contracted revenues contribution of the ships coming out of charter every respective year. For instance, since coming out of charter in 2012, we have contributed 22% of this year's contracted revenues. By the same token, the number goes up to 4% in 2013. What this slide tells you is that the backbone of the fleet, i.e., ships younger and of larger size with a high cash-generating capacity, is chartered out long. Actually none of our vessels currently chartered to Maersk, COSCO or Hapag Lloyd is coming out of charter over the coming years. Hence, the size of our cash flow provides us with the ability to offer what we consider to be a safe dividend with further upside.

Moving to the next slide, on slide 7, we discuss our balance sheet. Our debt repayment schedule is smooth and evenly spread in the coming years assuming no refinancing risk. The distributable cash flow on a posted service basis is not artificially enhanced. Our loan portfolio is (inaudible) at the weighted average rate of 4.1%, which adds to the cash flow visibility.

Liquidity (inaudible) starts are close to $300 million in cash and cash equivalents. At the same time, we have four unencumbered vessels and a moderate fit leverage while our interest coverage 3.3 times significantly higher than the 2.5 times cover we are required to maintain under our loan arrangements.

And now moving to the last slide, on the last slide, we are discussing the market. The consensus is that we will have a balanced market in 2013 with a [modest] oversupply in 2012 given the latest demand growth projections. The number of idle ships is more or less flat at 2.8% over total fleet in the water. Larger ships have outperformed smaller sizes due to the increased economies of scale offered, especially factoring in the bunker prices.

Finally, box rates, although they have been under pressure the last weeks, on a year-to-date basis, they have been maintained at substantially higher levels. A volatile market, however, is what well-capitalized companies see as an opportunity to grow rather than as a challenge. We think that our track record speaks for itself. Thank you very much. This concludes our presentation and we can now take questions. Operator?

(Operator Instructions). Fotis Giannakoulis, Morgan Stanley.

Yes, thank you very much. Hi, Greg and congratulations for that good result. The numbers were above our expectations and I see that operating expenses once again were below (inaudible). Can you give us your view? What are the dynamics which operates expenses? We have seen other sectors like in office supply vessels, there is an upward pressure on OpEx. Do you have any sign that operating expenses might increase in the future?

Look, a couple of things now. Regarding operating expenses, we try to run a tight ship, which what was mentioned in shipping terms. Meaning that it is a bigger company. There are economies of scale. We are operating vessels under Greek flags, under Liberian flags and we try to stick to our budget. We are trying to be efficient and make sure that we definitely meet the budget, if not performing better than that.

Now the operating expenses, I mean guidance going forward, normally we don't like predicting operating expenses, but I can tell you that, as far as we are concerned, first of all, regarding the remaining of 2012, we wouldn't expect any increases. On the contrary from our side, we will try to stick to the budget and if we feel that this is something we can easily achieve, we could always get back to the analysts and to our investors with revised budget, a downwards revised budget. But for the time being, I can tell you that, for 2012 and for 2013, as far as we are concerned, leaving aside any unexpected changes, we don't foresee any hike in the operating expenses.

Thank you for that. I want to ask about the environment with the liners. We have seen in the first half of the year freight rates have increased significantly. How do you see the profitability developing the rest of the year and what is your outlook about the reaction in regards to chartering ships? We see conflicting signals. Last week, Maersk signed seven large vessels for long charters, but, at the same time, the smaller vessels, they are still weak. Can you give us an overview of what is happening in the liners market?

Sure. First of all, regarding the liner company's profitability, I mean liner companies, they haven't yet come out with their second-quarter results. A couple of them have released some trading accounts and we can get a first feeling. But we would expect the second quarter to be much better compared to the first one for a couple of reasons.

First of all, the general rate increases are going to be fully reflected in the second quarter compared to the first one. At the same time, fuel expenses, they have moved lower during the quarter. Needless to say that the liner companies, as we all know, they have been forming alliances. They have been smoothing the supply side of the business and they are making everything they can in order to return to profitability. So overall, I would say that we would expect the second quarter to be much better than the previous one.

Now regarding charter rates, and there may have been a misconception in the market. Larger vessels, those above 5000 TEUs, they have definitely performed much better than smaller vessels. Most indices published by the brokers, they are mainly concentrated on the sizes from 1000 TEUs to 4000 TEUs, which is not the whole market. So although we see smaller vessels being -- charter rates being under pressure, I can tell you that 5500 TEU ships, they have moved up from $16,000 at the beginning of the quarter to sort of $20,000 per day. And at the end of the quarter, there were close to $25,000 per day. The 6500 types, they have moved up to $27,500 per day and the 8500 size and we saw the 1000 vessel has moved up to $36,000 in June from $31,000 at the beginning of the quarter.

So although there are not a lot of fixtures, one can definitely argue that, for larger sizes, we have seen increased demand for the simple reason that it has got to do with economies of scale and the cost per slot for a larger vessel from the liner's perspective is much lower. Now we cannot predict how the future is going to be for each vessel size, but from our side and Costamare's average vessel is 5500 TEU, we feel that there is a market for the larger sizes.

And can you talk about your agreement with the bankers? We were a little bit surprised to see that the banks are giving vessels without any equity investment. Is this a market for distressed opportunities? You mentioned about a broader agreement with the bank. I assume you mean for more distressed acquisitions. Can you explain to us what does this agreement involve and if there are other opportunities out there that will allow you to expand your fleet?

Now regarding this particular transaction, this is a ship, which, as you rightly pointed out, we bought it with 100% debt. The debt is going to be provided by the existing lender of the vessel. The owner was KG, which was under liquidity issues and we were happy to acquire this vessel, which is going to be 100% funded. This funding is going to be included in an existing loan facility, which is going to be amended at more favorable terms from the borrower's perspective.

Now I cannot get into more detail regarding the broader agreement with the bank, but I can tell you that this definitely enhances our position regarding any potential new transactions of that particular type coming out of the German market.

Now there have been discussions about distressed opportunities mainly from the [KTs] over the last three years. I can definitely say that we haven't seen as much as people thought we would see. From our side, that's a company, the only thing we can do is to make sure that, first of all, we have the liquidity, we have the capacity to technically manage additional vessels. Plus we are close to our lenders who may be a source of new transactions of that type in the future.

And right now, I see that you are more on a (inaudible) mode of expanding your fleet and buying cheap assets. Would it be correct to assume that you would have a preference towards growth versus further dividend increases at least for the near future? I mention it mainly because next year, your free cash flow is growing significantly with the newbuildings hitting the water, the EBITDA expanding by 50%. Is this a case that you would prefer to grow rather than increasing your dividend for the next couple of quarters?

Look, it is definitely our intention to grow, but at adjusted terms. We talk about (inaudible) growth at prices which are justified or with a time charter coverage, which makes the whole investment a solid one. It is not going to be growth for the sake of growing because we have a substantial size and we don't need to grow more. What we need is to continuously provide healthy returns to our shareholders. So this is our growth target.

Now regarding the dividend, we have already increased the dividend once. We all know that today Costamare is offering a very safe dividend with upside at an 8% dividend yield. We are not dividend shy and this is something that the Board decides, but, from our track record, we like dividends. This is something we have already proved. So it is always a balance between growth opportunities and returning capital to the shareholders in case we see that the opportunities are not there.

But I would say that, for the time being, we think it is prudent to have cash on the side available and make sure that if there is something, which is for sale or something that makes sense, we will be able to take it.

Thank you very much for your time.

Michael Webber, Wells Fargo.

Hey, good morning, Greg. How are you?

Good morning, Mike. Hi.

I wanted to jump back onto the [Statalubak] quickly. It is one of the first truly distressed deals we have seen, at least within our coverage. Can you give a little bit more color around that process? Did they approach you? Are you guys actively going out and trying to source those kinds of deals? Maybe just a little bit more color just because of the uniqueness of the deal.

Look, we have and we try to maintain very good relationships with lenders. First of all in order to make sure that we can tap the commercial bank lending and at the same time because they can also be a source of new transactions. So this transaction came up as a product of our discussions with German financial institutions. You can assume that we were not in direct contract with the KG. We know and we have been in close contact with the lenders. So this is how this transaction came up.

And from a lender's perspective, who is holding the keys in such an asset, the lender needs to know that the new buyer can service the debt, can employ the vessel, which can eventually at some point pay the loan outstanding.

Got you. That is helpful. Just trying to get a sense of the depth of that market. Obviously, there are a number of assets that are probably qualified as distressed. But, to your point, probably not that many where they are actually ready to hand over the keys. Can you maybe talk about I guess in your all's view, how deep is that distressed market in terms of the things that are probably available in the next six to nine months versus kind of what you guys are seeing from your liner customers in terms of them coming out trying to source capacity? Maybe in terms of -- if you can take a look at the deals that are on your desk right now, how would you break down kind of new capacity additions versus potential distressed deals?

Look, real distressed transactions where the bank is willing to provide 100% debt financing and make the acquisition through an insolvency administrator, there are not many. I can tell you that -- I mean we don't see a lot today. Now this doesn't mean that we are not going to be close should new things come out. But for the time being, there may have been one or two isolated deals, but we don't see the flows someone would expect bearing in mind how deep the KG market is and how much under some of those containership vessels are today.

Now I would say that there are potential deals on a sale and leaseback basis, but there the issue is what is the tenor of the time charter and whether this tenor is long enough in order to make sure that there is no unjustified residual risk assumed. And there may be some charter fee sales, not necessarily distressed, but again at levels which need to make sense in order to buy something, putting some equity and without time charter coverage.

That is very helpful. One more from me and then I will turn it over. If I think back over the last kind of 6 to 12 months, the level of idled capacity within the containership market has moved around quite a bit and moved up to about 6.5%, 7% of the market in kind of January and has certainly been cut in half now.

As you look out towards kind of the back half of this year, what are your expectations just from an industry perspective in terms of how much idled capacity you think we will see once we kind of get through peak season and what you think that means for containership utilization rates on a sector-wide basis? Obviously, you guys are mostly locked up for the balance of 2012, but maybe from a sector-wide basis.

I mean today is 2.8% and it has been pretty stable over the last month or so. It was 2.7% and moved up to 2.8%, but someone might argue in the third quarter of the year the number of idled ships should directly go up rather than down. It is not by itself a bad thing. To some extent, this may create opportunities, this may create some volatility in the charter market, which is what people with liquidity are looking for.

But I mean as a rule of thumb, we would expect the third-quarter idle capacity to move up rather than down. Now if it moves down, it means that we are going to have a much better market compared to today's peak season, but we will be a bit surprised.

Okay, great. Thank you. That is very helpful. Thanks for the time, Greg.

Brandon Oglenski, Barclays.

Good morning, this is Keith filling in for Brandon. Congratulations on a good quarter. Just one question on net interest expense, just thinking about it kind of moved down sequentially a decent amount. How should we think about this line item going forward with the newbuilds coming on and some of the net interest capitalization coming out?

I mean the net interest expense for the third quarter, it is around to $17 million or so. I mean just thinking how this would go moving forward, I mean where the newbuildings are delivered when the debt is peaking, I would expect that the interest expense would proportionately go up as well. And as at the same time, we are using some of our cash liquidity in order to fund part of the equity CapEx commitment for the newbuildings, then the cash balances would go down, which means that the net interest expense on a net basis backing out the interest received again should go a bit up.

Okay, so there was nothing in this quarter particularly that caused that?

No, no. Look, I think there is nothing in this quarter. I can say that overall the interest we have started paying on the newbuilding debt we have started drawing for the newbuilding construction projects. It is at relatively low levels to sort of where it used to be last year or so, but there is nothing extraordinary there.

Okay and then maybe one on the broader market. We are definitely seeing charter rates kind of moving higher here, albeit still at low rates. Do you guys think this is more like short-term gains or are you guys forecasting this to be something maybe more sustainable? I know your outlook said supply being oversupply this year and then maybe more balanced next year, but do you see these gains kind of slowly increasing or are we going to see maybe a drop-off in the back half?

For the charter rates, for the smaller vessels today, they have been under pressure with the rates and this is something that also survives the next quarter. Although you know we don't like predicting the market; there are so many unpredictable parameters that can come up. But for the larger vessels up to now, what we have seen is that there wasn't a lot of availability. Demand was building up for 6500 or sort of 5500 TEUs and the bulk, which led to charter rates picking up.

Now normally it is this quarter where charter rates should follow an upward trend in demand due to the peak season. So theoretically charter rates could stay where they are or sort of move down in the next quarter where the peak season will have been finished.

All right. Thank you. I will pass it on.

Ken Hoexter, Bank of America.

Sorry about that. Hi, Greg. It is actually Wilson sitting in for Ken. Greg, could you just kind of double back to kind of opportune sourcing opportunities? Could you remind me just kind of how much liquidity you guys have available? I think in the press release, you guys mentioned something in the ballpark of $250 million on the balance sheet, but kind of all in any type of revolvers and kind of committed (multiple speakers)?

Sure, sure. Look, there is no revolvers which have not been exhausted, so there is no credit line on the side today as we speak. We have a cash flow balance hit of $296 million as of the end of the second quarter. We have an 8500 TEU vessel, which is debt free and this is a 2010 built, which has a time charter to Evergreen and this can be levered. Then we have three more vessels debt free, plus we have some vessels with very, very low leverage and with charter coverage until 2017, which we feel we can lever as well.

Plus, there is positive cash flow from the ships in the water. Those are 46 ships in the water today, which are all profitable. So there is cash on the side and there is cash that can be easily raised on ships that are debt free. At the same time, you know that we have a newbuilding program in place, but the remaining equity commitment for this newbuilding program until the beginning of 2014 is less than $140 million. So you can see that, from that perspective, there is cash that can be deployed.

Sure. And if I just think about the broader kind of European market, I mean obviously the KGs are a big part of that. Do you get the sense that you might have your other more traditional shipping lenders kind of stepping in more forcefully as they kind of did in this deal that you did for the (inaudible)?

It is up to its individual banks' considerations and these considerations can vary from sort of taking some accounting losses and putting some provisions for those losses or if they proceed with a sale at the lower level, then they may have to mark to market down the whole shipping portfolio, which in itself is going to trigger additional reserve requirements. So it is up to the decision of its bank how it sort of wants to proceed.

The long story short, they either sit on those assets and wait to see whether in the future they can be offloaded to someone or not. Or they move ahead, they bite the bullet. They may decide that, to some extent, they want to exit the shipping, sell those assets and move ahead. But it is up to its individual bank to decide how it wants to proceed.

So just to clarify, the lender that you went through for the (inaudible), you are taking possession of it, it does not trigger -- does not necessitate for them to write down the asset, correct?

I cannot tell now whether they had to write down the asset or not and sort of to what extent or sort of what were the numbers. I don't have this information myself. But what I can tell you is that they thought that it is better if they foreclose on the asset. They sell it under the insolvency proceedings to a third-party operator who can run the vessel, who can take on some debt and eventually put the asset into work in order to repay the loan outstanding rather than having an idle ship with no liquidity, which could not fund its daily booking capital requirements.

Sure. Got it. Thank you.

(Operator Instructions). As there are no further questions at this time, I will now pass the floor back to Mr. Gregory Zikos for closing remarks.

Sure, thank you. Thank you very much for being here with us today. We appreciate your interest in the Company and as a management team, we are committed to delivering results to our shareholders. Thank you very much.

And with many thanks to our speakers today, that does conclude the conference. Thank you for participating. You may now all disconnect.