Costamare Inc (CMRE) 2012 Q3 法說會逐字稿

Welcome to the Costamare Inc. conference call on the third 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, October 24, 2012. This presentation contains certain forward-looking statements. Please take a moment to read slide number 2 of the presentation. 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 third quarter of the year the Company continued to deliver positive results. In August we accepted delivery of two secondhand vessels, which were acquired through distressed sales. Both vessels have been subsequently chartered for periods ranging between six and 18 months.

As part of our fleet renewal process we have sold for demolition a 1,100 TEU 1999-built ship. In a challenging market we have fixed all the vessels that were coming out of charter during the remainder of the year. At the same time we have minimized our re-chartering risk. The charters for the vessels opening in 2013 and 2014 account for 4% and 3% of our 2013 and 2014 contracted revenues respectively.

On October 5 we declared a dividend for the third quarter of $0.37 (sic -- see press release) 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 charterers and the prudent amortization of our debt.

Finally on October 19, we closed the offering of 7 million shares of common stock that was priced at $14 per share. Members of the founding family have purchased 700,000 shares in the offering. In today's environment the Company has a strong cash position coupled with low leverage and unencumbered assets.

We believe that going forward we are well positioned to pursue new business opportunities in a market environment that favors well-capitalized players. And now let's move to the presentation slides.

On slide 3 we are providing a summary of our recent transactions. As you can see, we accepted delivery of two secondhand vessels both of which have been chartered and we have entered into chartering arrangements for two more secondhand vessels already in the fleet. In a challenging market we have no laid up vessels.

Moving on to the next slide. On October 19 we closed the offering of 7 million shares of common stock that was priced at $14 per share. This represents an 8% discount from the last reported sale price of our stock. Members of the founding family have purchased 700,000 shares. The net proceeds of the offering after the underwriting discount and related expenses are approximately $93.5 million.

Our intention is not to opportunistically access the capital markets whenever the stock appreciates irrespective of our review on the shipping market. On the contrary, we raise equity when we think that over the coming quarters we will be in a position to put the fund into work and deliver superior returns to our shareholders.

Moving to the next slide. On this slide you can see the third-quarter 2012 results versus same period of 2011. During the third quarter 2012 the Company generated revenues of $95 million, EBITDA of $54 million and net income of $12.5 million. For the same period of 2011 the revenues amounted to $100 million and EBITDA and net income to $59 million and $17 million respectively.

[Coincidently] 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 of shipping on a cost basis and revenues accounted for based on a straight line amortization schedule. Secondly, the gains or losses resulting from derivatives. And thirdly, the accounting gains and losses resulting from asset disposals.

Adjusting for the above the third-quarter EPS amounts to $0.31 versus $0.51 for the same period of last year and the third-quarter EBITDA to $62 million versus $73 million for the same period of last year.

Moving to the next slide. On this slide we are showing the revenue contribution for our fleet. Our revenues come from first-class charterers. More than 90% of our contracted costs come from Maersk, MSC, Evergreen and COSCO. As you can see on the right hand chart, we currently have charters with all of the top six charters, but we have operated in the past with most of the liner companies which are in the top 20 list.

Slide 7 provides information on our cash flows, our charter coverage, but also on the built-in growth of the Company. We have $3 billion in contracted revenues while the TEU weighted average remaining time charter duration of the fleet is 5.4 years. We have pretty much eliminated the near term re-chartering risk and, as you can see in the bottom chart, our fleet coverage is high.

As the new buildings will start hitting the water they will generate significant revenues, adding estimated annual revenues of approximately $152 million and EBITDA of approximately $120 million upon delivery of all vessels, up 37% and 43% from 2011 full-year revenues and EBITDA respectively.

Moving to the next slide, slide 8 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, peaking at $469 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, ships coming out of charter in 2013 will have contributed only 4.4% of this year's contracted revenues. By the same token the number goes down to 3% in 2014.

What this slide tells you is that the backhaul of the fleet, meaning ships younger and of [ladder] 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 flows provides us with the ability to offer what we consider to be a safe dividend with further upside.

On slide 9 we discuss our balance sheet management. The debt repayment schedule is smooth and evenly spread in the coming years, it is not back loaded and showing no refinancing risk. The distributable cash flow on a post debt service basis is not artificially enhanced.

The loan portfolio is hedged at a weighted average rate of 4.1%. Liquidity as of the end of the quarter stands at $265 million in cash and equivalents. At the same time we have four unencumbered vessels and a moderate fleet leverage. Finally, we have an additional $93.5 million in cash from the offering.

And now moving to the last slide. On the last slide we are discussing the market. Both box rates and charter rates are under pressure as a result of market conditions, especially in Europe. The amount in the Asia/Europe trade route has been below expectations, at the time when new building capacity is being added. At the same time the number of idle vessels has increased over the last weeks and now stands at 3.7%.

Asset values closely correlated to charter rates follow the same downward trend. Commercial banks will with ship lending portfolios are looking for ways out providing soft landing. At the same time shipyards wishing to fill their berth cover are more flexible in negotiating new deals.

A volatile market as such is what well capitalized companies see as an opportunity to grow rather than as a challenge. As already mentioned, we think that we are in a position to act and deliver superior returns in such a volatile environment. Thank you very much. This concludes our presentation and we can now take questions. Operator?

(Operator Instructions). Morgan Stanley, Fotis Giannakoulis.

Can you please go through the rationale of the latest follow-on offering? Why now especially since you had raised some funds back in March? Do you think that right now you have sufficient funds in order to finance your expansion plans?

Yes, first of all, let me say that we will not proceed with an additional offering unless we have exhausted the funds, which are currently available or unless there is something out there, businesswise, that would justify such a transaction.

And I also need to note here that the founding family is buying alongside with other investors and that there are no other shipping interests outside of the (inaudible). So frankly what this means is that we are all on the same boat as far as dilution and carry costs are concerned.

Now we have done deals since the previous offer of close to $45 million. Now I agree that this may not be a huge amount for the size of the Company, but I am sure you will agree that we have never sat back since going public, not to mention the years before then.

Now regarding the rationale of the latest transaction, we think that today it is prudent to be well capitalized and ready to seek opportunities in a low market environment. Now I guess you will not be surprised to hear that we receive a lot of proposals from people who know that we do have the capacity to move fast if required. And the intention is definitely to put the money into work, as we have done in the past, in deals that provide high returns with low residual risk assumed.

Can you please explain how is the current market environment? What do you see these acquisition opportunity coming from? And most importantly, is that a chartering market right now if you acquire a ship? Will you be able to find employment that will give returns?

Okay now, that is a couple of questions together. Now first of all, regarding the market environment. Today we are in a market where both box rates and charter rates are under pressure, demand I guess is nowhere near where it was expected to be. And although liner companies are managing supply in varied ways, box rates have been sliding.

And I guess it remains to be seen whether the November 1 announced GRIs will hold through and to what extent. The number of idle ships is picking up in some asset classes, especially the smaller vessels, the 2,000 to 2,500 TEUs and the non-geared one; these are difficult to find employment.

Now regarding Costamare, I can tell you that from our side today we have no ships that are laid up and that we have a high coverage ratio over the coming years. Now whether it is easy to charter a ship today, I guess this depends on this -- I mean on the particular size and to the condition of the vessel.

Up to now whatever we have bought one way or the other we have managed to find employment. And in some instances let me tell you that if you buy something which the acquisition cost is close to scrap value, or a couple of million higher than that, and the vessel has 10 or 12 more years to go of useful life, it is a no-brainer to buy the vessel and if you are strong enough you can sit and wait. More probably you will be making money rather than losing money.

And what kind of returns are you looking for right now? What kind of a cash yield do you think that they are feasible in the current environment -- assuming a normal financing?

Yes, I mean, you know our returns regarding the new buildings. We have an unlevered EBITDA yield of close to 14%, which [adding leverage] on a cash flow yield this could go up to 18%. However, let me clarify that in secondhand vessels we also look at what is our residual value at risk when the charter expires.

A higher EBITDA yield for a couple of years only may leave unamortized some investment cost which is at risk. And this is not made -- this may not be a good deal for someone who takes a long-term approach. In the future you may be seeing transactions of relatively high yield for short periods for ships that have been bought expensively.

And the question is what is going to be happening in two or three year's time when the charter expires. These transactions may be dividend accretable, cash accretive over the next couple of years, but then what is going to be happening in year two or in year three? Someone will have bought an expensive vessel with relatively high leverage. And if the market is not there, then that is maybe becoming a problem.

Now this is not the type of the deals we have in mind. Regarding secondhand vessels, up to now we haven't seen ships in the five or 10 year old with a time charter attached where the risk assumed was not excessive. Now I am not saying that we are not looking at such type of transactions, but the numbers need to make sense.

So I think I covered the new buildings. The secondhand vessels, it is not only the yields, it is also the risk. And in some instances you may be finding a better deal with a 12 or 15 or sort of even an 18 year old vessel with a shorter time charter coverage, but with the same returns and with a lower risk assumed.

So is there a hurdle rate and IRR assuming some normalized residual that you have in mind or it's case-by-case?

I think the big picture -- I mean the principal is that the ship needs to be paid back or the cash investment needs to be amortized close or at the expiry of the charter party. This is how we look at it now. As a rule of thumb, you can assume that this can be an IRR of 14% or above. But as I said, a high sort of EBITDA yield for a year or two which is not sustainable is not something we would be doing.

We are long-term by -- I mean our strategy is long-term. We have been in shipping for 37 years; we are not going to be in a position where we're going to put ourselves under pressure in order to show transactions if the risk assumed by our shareholders is excessive. So the long story short, it is going to be an IRR of 14.5% or above, but assuming risk which we feel is manageable.

Thank you very much. It seems that now is the time to grow. Thank you.

Wells Fargo, Michael Webber.

I want to jump back and talk a little bit about the equity rate, because I just want to make sure I am clear here. Now you mentioned you had two criteria for raising equity -- one, that you use all the proceeds you had; or two, that there was something large and imminent on the horizon you needed the money for.

You came into the raise already with a significant amount of cash. You did spend some on smaller deals, but you still had a fair amount there. So I'm trying to figure out what changed in the market between early October and today that you need another $100 million to go out and make acquisitions with? So maybe just more color around that.

I understand there is a good history and there is a lot floating around out there, but are there larger blocks of deals being floated right now that you need another $100 million of equity for? Maybe just a little bit of color around that.

Okay. First of all, the $100 million of equity is not something that we may be spending overnight. So give us a quarter or two. And we feel that this is a logical time frame. Now practically since March both the charter market and the freight market, they have been sliding, they have been under pressure. And we don't see why this trend is going to be reversed over the coming months.

At the same time, as I said, we feel that it is -- that raising equity now -- and there are not a lot of companies who can do it -- is a wise thing. Bearing in mind that we don't expect the market to turn upside down over the next months.

It is difficult to predict what exactly amount of equity someone is going to be needing because this has to do with leverage, this has to do with whether the sort of assets bought are going to be with time charter or not or sort of whether they're going to be new buildings where in this instance you are going to be tying up more capital without any cash accretion from day one.

So we did some transactions. I agree that we have not exhausted the $100 million raised in March. At the same time it is impossible to exactly predict the market and at what point you're going to need additional cash in order to opportunistically tap the markets.

So bearing in mind what our view on the market is and we feel that over the couple of quarters there will be some opportunities and that we will put the money into work. From our side we know that the sooner the better, no question about it, we are all on the same boat. However, if something doesn't make sense tomorrow morning we are not going to be doing it. We are long-term and I think up to now we have delivered. And we will try to keep it the same way.

Right. No, I mean, look, that makes sense. I just want to make clear that this is a safety issue kind of heading into what is going to be kind of a weak market for the next three to six months. And you are not seeing a change in the opportunity set between now and October that makes you need more capital, you just think the market is going to remain weak and you are raising equity because you can.

Yes, I think that -- I mean, the market the last month has been going down. And this is a trend which -- it could continue. So I mean in the meantime no one knows whether that capital markets are going to be there or not. And since we see opportunities, we felt that this was the right thing to do. We understand that we sort of dilute both ourselves and the rest of the shareholders. But it is for a good cause and the intention is to grow. Nothing else.

I think that is fair. Your operating expenses came in a little bit below where we thought they were going to be, especially considering where you were thinking there was going to be some more FX and other gains -- inflationary aspects during the quarter. Can you talk a little bit about that and how you are able to kind of hold the line on operating expenses better than you or the Street thought in the quarter?

Yes, now regarding operating expenses, we have come a little bit below the budget. It is a couple of things. I think that to some extent it has got to do with FX movements. At the same time, being big we sort of capitalize on some economies of scale. However, this is not something that we can count on and no one knows where the euro dollar is going to be trading over the next quarter or the quarter after.

Although we have heard there is -- this is not a perfect (inaudible) and sort of we still have a little exposure there, which could be a couple of cents up or down. I think this is pretty much it, nothing more in there. Generally speaking, we try to keep operating expenses close to the budget and that is it. I am afraid I cannot give more light here.

Well, that is fine. And it is just nice to see the cost coming down and better than expected. One more and I'll turn it over. I want to jump back to the acquisitions. And forgive me if you mentioned this in your remarks or in an answer or question, I didn't pick up on it.

But with regards to this opportunity sub set you are seeing right now in terms of charter -- owners -- or excuse me, container lines looking to do sale lease backs and/or bring in new tonnage. Can you quantify that investment subset right now? How many lines are looking to add additional tonnage?

Despite the fact that freight rates are coming down, it seems like someone is looking to add capacity in certain lines. And just kind of quantify that so we have an idea about what the opportunity set is out there right now for you guys.

Regarding (inaudible). I guess you mean new buildings, right, or not? Or sort of just sale lease back?

Well, either really. I mean maybe help quantify the investment subset that you guys could be using that money on right now and then what you are hearing could develop into spring, but kind of a hard number today would be nice.

Yes, look, regarding new buildings, and you know this is [public] news. There are a couple of liner companies that came out and said that as of now they are not willing to enter into new building transactions. Because the way the market is and the way they see the future and their current CapEx commitment they are fine.

However, at the same time, there is other liner companies who may have been more sort of prudent in the past and they are now looking for expansion. Now I cannot go into more detail for obvious reasons. But still new buildings would be a possibility and a way forward.

Also bearing in mind that newbuilding prices have fallen substantially over the coming -- the last month. Shipyards may be more than willing to discuss favorable payment terms and at the same time debt funding can be subsidized by local banks.

Now regarding sale and lease backs, traditionally liner companies may be managing their sort of owned fleet during the last quarters of the year where they have a better view of the next year. And they may be willing to shrink their balance sheet and probably also write some accounting gains. There are sale and lease back transactions in the market, we from our side, we have inspected dozens of ships.

Now whether those will materialize as far as we are concerned, I think I was very clear that if the risk assumed is too high, and that is our view, then we are not going to be doing a transaction because it may offer a different cash flow for the next coming of years, which may give a signal to investors that you know there is a higher dividend potential. But this cash flow may not be sustainable. However, sale and lease back transactions, it's also a possibility.

Now regarding distressed sales and your question has to do whether we expect something to come out from financial institutions. Up to now we haven't seen as much as people were thinking that would come to the market over the last two years, there has been more talk than real substance. We did a couple of transactions which you can argue that they were under distress [than others], but they were both small and nothing more than that.

Of course, we look at stuff, we are in close relationship with financial institutions. People know that we have both the expertise and we can execute fast and, more importantly, we have the financial muscle to move ahead. And should something happen, then I can tell you that of course we are going to have a look at it.

That is helpful. But if I just jump back to just the newbuild capacity for container lines right now, and without getting into specifics, I know you can't, but maybe just a cumulative number -- if this is the number of lines that are looking to add capacity ball park and/or this is the number of ships that we think are out there to be added without getting into details on the projects would be helpful.

I am not sure I can give you a number, but I can tell you there are liner companies today who may be willing to discuss new building projects together with a ship owner so they don't have to raise the debt and they don't have to go hold the asset in their books, and this could be a possibility.

Let me repeat myself and say that shipyards, you know they would be more than happy to discuss a new building project with much more favorable terms compared to the terms they were offering some years ago. But I am not sure that I can go into more detail for obvious reasons.

Okay, no, that is fair. I will turn it over. Thanks for the time.

Barclays, Brandon Oglenski.

Greg, I just want to stay on this topic a little bit longer. So when we look at the equity requirements on your newbuilding program over the next few quarters as well as your amortization schedule, what are you going to be comfortable with going out and deploying equity? Are we talking $100 million, $150 million? What should we be thinking going forward?

Look, I mean, we can talk about the next three to four quarters and I can give you some numbers and you can draw your own conclusion. So I can tell you that over the next three quarters our equity CapEx requirements regarding the current newbuilding project is close to $100 million and that's it. The debt has been in place, so over the next three quarters we aim to pay close to $100 million to the shipyards.

We have cash on balance sheet as of the end of the third quarter $265 million. Out of that you need to subtract close to $50 million, which is restricted cash. So this makes it close to $215 million. And on top of that you need to add the $93.5 million net cash proceeds out of the formal offering.

And plus we have cash flow from operations which over the next three quarters, let's say, it's going to be a positive number. I don't want to give predictions, but you have the charter rate and you can see that the vessels are profitable.

On top of that we have four ships today which are debt-free. Again, I don't want to give you an exact number of how much debt we could raise on those vessels because we don't have something definitive today. But one of those vessels, it is an [8,500] TEU ship built in 2010 which just today debt-free.

So the liquidity is quite substantial. And this after subtracting commitments for 10 newbuildings on order. Now whether we can do deals in the range of $200 million, $300 million or $350 million or $400 million this depends on the structure of the deal whether it is with debt or not, whether it is with a time charter attached which means cash flow from day one, or whether it is a new building where for a couple of years we just tie up some capital and you have zero returns.

So [it lies], that is why I am not willing to give a specific number for the same reason that I don't know that myself. But these are the facts and from those you can draw your own conclusions. I hope I was helpful.

No, it was. And I guess around that, you were saying that there were some opportunities to get local bank financing on potential newbuilds. What type of leverage ratio should we be thinking those banks would be willing to pay?

Look, I can tell you what we did in the past. I cannot tell you exactly what we may be doing in the future, but I can tell you that in October 2011, like last year, we closed loan -- we sort of signed loan agreements with [Taiwanese] banks, for instance, with a participation of also a European bank where the leverage was 80%.

At the same time we also signed loan agreements with China export/import (inaudible) for another project where the leverage was, if I recall correctly, 71% or 72%. So it varies. But the things that are -- we can go up to 80% if the cash flows of the transaction justify the leverage. But we have done it in the past.

And you are still pretty confident that with these transactions you are going to be able to maintain the current return profile of the portfolio?

Look, I have not predicted any new trends for the future, I just told you what we have done in the past. I think that if you talk about newbuildings, newbuilding prices have fallen. At the same time one could argue that charter rates have followed the same trend. But even assuming the same sort of EBITDA yield I think in principle buying lower and chartering lower it is a better deal rather than buying higher and chartering higher.

No, and we would agree. All right, thanks for the commentary, Greg.

Bank of America-Merrill Lynch, Ken Hoexter.

Was there a -- when you did the -- decided to proceed with the equity offering was there an acquisition you had in mind that you were proceeding with or was it just to raise capital in advance?

There was nothing identified in the prospectus and the truth is that we don't have -- we didn't have anything which was close to being materialized. So we have a view about the market going forward, but if you asked whether there was any transaction we had in mind which may be closing over the next weeks, there is none.

So when you think about using the capital, do you and [Kostas] think about preferring used vessels versus new and just understanding if you could talk about how you view the return differentials between the two?

I think, yes, look, I think that we have shown that we are 100% returns driven. Now if it is a newbuilding transaction where you sort of for the first couple of years you don't get any cash, on the contrary you pay commitment fees, up-front fees and supervision costs.

Then the way we look at the transaction is that the expiry of the charter party whether this is -- which is going to be on a back to back basis with the shipbuilding contract. Whether the charter party 7, 10 or 12 years it doesn't matter.

Then the whole investment we need to be more or less paid back, meaning that the vessel must be close to debt-free or the loan outstanding must be close to the scrap value. Plus at the same time we will have earned a good yield on our equity. I think this is the type of transaction we would consider to be a good transaction for the shareholders.

Now secondhand vessels, this could be like 15 or 17 years old and also on a charter free basis, which you know we can buy that with equity, even if the acquisition cost is close to scrap value and the vessel has like five or 10 or 12 more years to go. Again, we would consider this would be a good transaction bearing in mind that we have no laid up ships, we feel that we have strong relations with the charterers and if the vessel works for a couple of years based on historical rate then this can generate huge returns.

Now regarding sale and lease back transaction of younger (inaudible) five or 10 years old, we may be a bit skeptical if the price is high. And I think everybody knows that liner companies are trying to sell something higher than market and charter in at a higher than market rate for the simple reason that they get more cash up front.

But from the ship owners point of view this is not a good transaction because by default you have a level asset, which is leveraged at a level which is higher compared to today's market value. And there may be a lot of risk at the expiry of the charter party. So although we like younger (inaudible) there we may be a bit skeptical and (inaudible) if the numbers don't make sense then someone else may go and do those transactions but not us.

And then -- thanks for that. And then lastly, when you think about the vessels that you go dressed -- do you care in terms of you have obviously got a lot of newbuilds hitting the market on the larger scale size, do you want to balance them out with smaller vessels, do you want to keep increasing the scale and size for long-term efficiency? How do you think about --?

I think that, look, on average -- I mean if you take a snapshot of our fleet, our fleet has an average age of close to nine years which is close to the industry average and our ship also on average is close to 5,500 TEUs which is bigger than the average fleet size today which is close to 3,300 TEUs.

So I think our fleet is quite -- it is a mixed bag with everything smaller, bigger vessels, younger, older new buildings. We are 100% returns driven. We know -- I mean before going public we knew that we needed to renew the fleet and in 2008 -- I'm sorry, in 2010 our fleet had an average age of about 12 years.

Two years later now the age is below 10 years. So bearing in mind the fact that we need -- we know that the ship -- the fleet needs to be renewed and we have done a lot of stuff there. Then we are quite flexible and we are 100% returns driven. If something makes sense and the numbers work we are going to do it irrespective of the size and irrespective of the age of the vessel.

Wonderful. Appreciate the time. Thanks.

(Operator Instructions). Mr. Zikos, there appear to be no further questions at this time, so I pass the floor back to you for closing remarks.

Sure. Thank you for being with us this morning and for your interest in Costamare. As already mentioned, we remain committed to delivering superior results in a market environment that can definitely provide substantial opportunities in the near-term. Thank you.

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