Costamare Inc (CMRE) 2012 Q4 法說會逐字稿

Thank you for standing by ladies and gentlemen, and welcome to the Costamare conference call on the fourth-quarter and year ended December 31, 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 this conference is being recorded today, Thursday, January 24, 2013.

We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide 2 of the presentation which contains the forward-looking statements.

I will now pass the floor to your speaker today, Mr. Zikos. Please go ahead sir.

Thank you and good morning ladies and gentlemen.

During the fourth quarter of the year, the Company continued to deliver positive results. On the ship management front, the cooperation agreement between our manager and V Ships provide us both with the resources needed to achieve our growth plans and the flexibility to adjust the size of our fleet depending on market conditions in a highly cyclical industry.

At the same time, we have addressed the potential for companies of interest by outlining the interest of the leasing entity and how we monitor in the structure. The management company will be passing along to the list of entities its entire set of the profits resulting from the cooperation agreement. As a result of this arrangement, we expect that over time the management fees, currently paid by Costamare Inc., can be reduced.

Regarding new transactions, we bought in 2003 build approximately 6000 TEU container vessels for a purchase price of $22.2 million. The vessel has been chartered for a period of 12 to 15 months at the rate using attractive returns with a lot of upside.

At the same time, we took advantage of a strong demolition market and sold a 29-year-old vessel. This transaction resulted in an accounting gain of approximately $3.2 million.

In a challenging market, we have minimized our re-charting risk. The charters for the vessels opening in 2013 and 2014 account for approximately 4% and 3% of our 2013 and 2014 contracted revenues respectively.

Finally, on January 17, we declared a dividend for the fourth 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 charter risk and the prudent amortization of our debt. We believe that, going forward, the containership market under pressure provides us with the opportunity to expand opportunistically in a low rate and (inaudible) environment.

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 have recently agreed to purchase a 10-year-old 6000 TEU vessel for a price of $22 million, a price which is an all-time low. The vessel will be initially and entirely financed with equity. We also agreed to charter the vessel for a period of 12 to 15 months at $14,500 per day while the charterer has the option to extend the charter for an additional year at the daily rate of $28,000.

We agreed to sell for demolition one of our older vessels, the 1984 build, around 3900 TEU vessel MSE Washington for a price of $8.2 million.

Finally, as already mentioned, the cooperation agreement between our manager and V Ships provide us with the operational flexibility needed to respond to changing market conditions while reducing our ship management expenditure. All financial benefits deriving out of this agreement will be passed on by our manager to Costamare Inc. in the form of reduced management fees.

Moving on to the next slide, on this slide, you can see the fourth-quarter 2012 results versus the same period of 2011. During the fourth quarter 2012, the Company generated revenues of $95 million, EBITDA of $62 million and net income of $22.9 million. For the same period of 2011, the revenues amounted to $102 million and the EBITDA net income to $68 million and $26 million respectively. Consistent with our previous press releases, we feel that the EBITDA and net income figures will be adjusted for the following items. First, we 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 derivatives,. And thirdly, the accounting gains and losses resulting from asset disposals.

Adjusting for the above, the fourth-quarter EPS amounts to $0.32 and the fourth-quarter EBITDA to $62.5 million. The Company generated strong results during the quarter based on solid fundamentals.

Moving on to the next slide, on Slide 5, we are showing the revenue contribution for our fleet. Our revenues come from first-class charterers. More than 90% of our contracted cash comes 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 charterers. But we have cooperated in the past with most of (technical difficulty) companies which are in the top 20 list.

Moving onto the next slide, Slide 6 provides information on our cash flows, the charter coverage, and also on the building growth of the Company. We have $2.9 billion in contracted revenues while the TEU weighted average remaining time charter duration of the fleet is 5.2 years. We have pretty much eliminated the near-term rechartering risk, and as you can see in the bottom chart, our fleet charter coverage exceeds 75% over the next three years.

Now, as the new buildings will start shipping in the water, they will generate significant revenues at an estimated final revenues of approximately $152 million, and EBITDA of approximately $120 million upon delivery of four vessels, up 39% and 47% from 2012 full-year revenues and EBITDA respectively.

Moving to the next slide, Slide 7 is dealing with the theoretical re-chartering risk the Company would face in 2013. The long story short here, based on our assumptions, the Company as of today has a 2013 cash EBITDA of $310 million if all ships coming out of charter during the year are re-chartered at the same rate. You can see the cash sensitivity. For a 70% rate being equal to a 30% discount on all 2013 re-chartering, the cash effect is $6 million, which goes up to $10 million for a 50% 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 $35 million more than offset the cash shortfall.

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

Moving to the next slide, Slide 8, here we discuss our balance sheet management. As mentioned in the past, our debt repayment schedule is smooth (inaudible) in the coming years. It's not backloaded and so (inaudible) in risk. Our distributable cash flow is on a cost of service basis and it is therefore not as artificially enhanced.

The loan portfolio is (inaudible) a weighted average rate of 4%, which adds to the cash flow visibility. Liquidity as of the end of the quarter stood at $315 million in cash and cash equivalents.

At the same time, we have six unencumbered vessels and a moderate fleet leverage. We consider the Company to be in a competitive position with a comparatively stronger balance sheet which will allow us to make our target acquisitions in a depressed market.

Moving to the last slide, on the last slide, we are discussing the market. We have seen a slight pickup in bulk rates during the start of the year as many liner companies have pressed on with rate increases before the Chinese New Year. Charter rates are still under pressure as a result of market conditions, especially for smaller vessels.

Supply and demand data for 2012 shows that supply outpaced demand. Demand figures coming out of main lanes such as Asia-Europe and Asia-US have been below expectations. Idle vessels increased over the end of the year and accounts for around 5% of the fleet in the water.

Asset values follow the same downward trend as charter rates and we continue to see depressed levels. 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). Michael Webber, Wells Fargo.

Good morning guys. How are you? I just wanted to jump in and talk about the new management agreement. I guess maybe if you can talk about the genesis of how this came about? Your old management fees are relatively in line to begin with. So before I kind of jump into the nuts and bolts of it, how did this come about and why are you moving forward with it?

First of all, let me say that this is an agreement between our management company, which is a private company, so this is a transaction between Costamare Shipping and V Ships. And the way it works, those companies have put a management cell together, and we'd say we will be also managing third-party vessels. And initially also (inaudible) during 2013, it is expected to manage, say, 22 vessels out of the Costamare Inc. fleet. Now, all the profits coming out of this cooperation are going to be split between V Ships and Costamare Shipping. However, it is the intention that Costamare Shipping will be making no profit. So if, at the end of year X, Costamare Shipping has a prophet of, let's say $1 million, this is going to be paid to Costamare Inc. as a rebate for management fees of Costamare Inc. paid during that year.

All right, so the idea is the private manager makes money on managing other people's vessels and in terms what you're managing from Costamare, the public company, you're going to pay back any sort of profit to CMRE that you make on those assets. Is that just your share of the profit or is that the cumulative profit on the those assets?

This is our share of the profit. V Ships, which is a third party, it is not an affiliated company. It's going to keep its of the profit. And also let me add that the 22 vessels that this sale is going to be managing, which are going to be Costamare Inc. vessels, whatever profit is being made out of the management of those ships, the part from Costamare Inc. -- from Costamare is going to be returned to Costamare Inc. So practically, the long story short, is that we don't -- first of all, we definitely do not expect the management fees to be higher, and we believe that, over time, management fees should go lower.

Okay. That's helpful. Just in terms of what you guys are seeing in the S&P market, obviously you guys have tied up a 5000 to 6000 TEUs. We've seen a couple of those actually change hands in the last couple days. Can you maybe talk about where you're seeing most depth in the S&P market? It seems like there are a lot of those assets floating around. Maybe what are you guys seeing right now, what are you looking at?

Look, first of all, regarding the vessel we bought, this is a 10-year-old or sort of close to 6000 TEU vessel. We bought it for $22.2 million on a capital basis. We believe that, from a historical perspective, if you look at historical S&P data for this type of asset, it is at a historically low level however you look at it. Last year, a vessel like that was selling at around $30 million or $35 million. And let me add here that we bought this vessel with especially a (inaudible) past, meaning that the next drydocking view is going to be in five years' time. So this is something that has been already factored into the acquisition cost of the vessel.

Now, generally speaking about the sort of S&P market, I think it's evident that, for 2012, most transactions that have taken place had to do with smaller vessels. It is not a very liquid market, this of $6000 sort of 6500 TEU ship. There have been made transactions, but we believe that this acquisition cost has been at the low end of the spectrum.

That make sense. In terms of the other end of kind of your acquisition strategy, kind of the new builds, we've seen 10,000 and 14,000 TEU deals getting done with the likes of Yang Ming and some other kind of mid-table container lines. Can you guys talk about where you guys stand in that process? Are you guys involved in those tenders and where you stand there?

Well, you know, first of all, we know what we have read in the newspapers, like you have. So I don't think there are any sort of official data regarding charter rates, etc. So in that respect, I wouldn't like to comment. The only thing I can say is, as far as we are concerned, you've seen the new building transactions we did in 2011, and we think that the economics there is what it is reflecting our target IRR.

Is it safe to say the economics of the deals that are kind of been talked about in the market right now are significantly lighter than what you guys are looking at when you guys signed those longer-term contracts a couple years ago?

I cannot possibly comment on that, because I don't have any hard figures which are confirmed. And it would be irresponsible for me to comment. I can only tell you what we have done in the past, and what I think is a good proxy of our target returns.

No, that's fair. One more and I'll turn it over, just a modeling question. Your old interest expense came down a bit more than expected. What's driving that? Do you have some swaps rolling over in the quarter?

I think that it could be some amortization of financing fees, which is becoming lower. And that's pretty much it. Apart from that, I don't think there is something else there.

We'll take that off-line. Thanks for the time. I appreciate it.

Fotis Giannakoulis.

Yes, hi Greg and thank you. I want to go through a little bit in more detail the acquisition, the latest acquisition. Can you tell us how did this deal come to you? Was it through brokers or through one of your lenders, or through your connections with the liner companies?

No, this was a build that was out in the open market. And we tracked it down and it didn't come through a bank or through a liner company. It was a Japanese seller who wanted to sell. And you know, we had negotiations and we finally found the price of $22 million to make sense in today's environment. At the same time, we bought the vessel on a charter-free basis, but at the same time, before committing, we had a pretty good understanding of, you know, the ship's chartering possibilities. So although we bought it charter-free, we were sort of quite sure that we would be getting a rate close to what we got. We got $14,500 per day for 12 to 15 months, which is something that it is providing us with a yield over the next 12 months. And there was a lot of upside thereafter, bearing in mind that those type of ships were out in the market for sale last year in the region of $30 million.

And what would you consider is the ten-year historical value for a vessel like that?

Well, I can tell you I have data for 65000 a year and for 55000 as you know. Regrettably, this stands in the middle, but I can tell you that a price of $30 million or $32 million is something that, from a historical perspective, it makes sense.

Okay. You mentioned that this deal was available to other potential buyers. Were there many buyers? Because the price looks extremely attractive, and I would assume that there would be a lot of interest. Is there a lot of competition out there for these type of vessels?

No, I don't think we saw a lot of competition. I mean of course there were some other potential buyers, but at the same time, we had the luxury of buying with cash, cash on hand. And now, whether we're going to be financing this acquisition or not, we don't have to. We might consider it, but the fact that we have the cash on the side and at the same time we have a pretty good understanding of the chartering of the vessel, I think it gave us an advantage.

And you mentioned the prices, the normalized price, or a year ago at least it was north of $30 million, this vessel. What was the equivalent rate at that time? And historically, how the rate for a 6000 TEU vessel has moved?

I can tell you, historically, because last year for this type of the asset, you know, it's not available to market. So I'm not sure whether the sample available is good enough. But I can tell you that this vessel in the past has been yielding $25,000 per day or $30,000 per day. This is a rate that can be expected for such an asset.

And how do see the chartering market? You mentioned that it's very thin right now. Has there been any change in the market, or it's pretty much the same, as tough as it was six months ago?

I think it still was people has described as a two-tier or even as a three-tier market. More specifically, the sub-Panamax vessels have been suffering, especially for 2500 TEU gearless vessels. We see charter rates which I'm not sure how lower they can go, they are close to breakeven. So these assets definitely cannot service any debt obligations, especially if bought at the peak of the market.

Now, ships in the region of 6500 TEUs and about, historically they have performed better. On the other hand, other than that, there are not a lot of fixtures. Also as far as there is not a lot of S&P activity in that region. But I think that, overall, the bigger the vessel, the better it has performed over the last year. So --

And can you give us a little bit of a forward look of the market? Chinese New Year is coming, theoretically this part of the year, so it would be the strongest part. Do you see the market improving in terms of chartering activity?

Look. We don't feel comfortable giving predictions about the market. And from our side, we just want to make sure that, if the market goes south, we have some cash on the side to take advantage of it. If the market goes up substantially, we may have less upside, but we still have some upside from the vessels coming out of charter during the next month. Now, theoretically, you would be expecting more activity right after February 10, which is the Chinese New Year. But overall, if you look at profit projections, the market is going to be at a status close to where it has been over the last six months.

So, it looks like an ideal environment for a buyer. Right now, you have something like $270 million of liquid cash in your balance sheet. How much of this cash do you consider is available for additional acquisition? I assume that some part of it will go to fund a new building. And also, I see six vessels that are debt free. If you were to lever these vessels up today, how much debt would you be able to raise?

Look. First of all, regarding the ships that are debt free, we don't have a formal offer from a bank today, so whatever I say is going to be just a speculation. But let me tell you that should there be builds out there, which makes sense, we feel comfortable that we will be able to arrange for the funding, both in the form of equity and in the form of debt, I will say cash on balance sheet, cash flow from operations and also from debt-free assets. At the same time, we know we have access to commercial bank debt. 37 years in shipping, Costamare has never breached any financial covenants. And we do have access to a lot forms of finance. So, I don't think that it is a matter of funding available. It as a matter of substantial deals that are really attractive, and meet our returns target.

And you talked about access to financing. Would you consider raising more equity at this point, or this is something that is not in your plans?

No. Bearing and mind that we raised equity in another night transaction in October, this is definitely something that is not on our plans today. We have cash on balance sheet, we have unlevered assets, so I think we still have a way to go before even considering such form of finance.

Thank you very much for your time.

Brandon Oglenski, Barclays.

Good afternoon everyone. This is Keith filling in for Brandon. Could we maybe talk a little bit about the demand you are seeing from the carriers regarding large vessels and small vessels? Are you getting maybe different inquiries like more or large, less for small? Is that something you're seeing, a disparity between the two?

It's a couple of things. First of all, as far as we are concerned and from our own experience, we don't have a lot of ships which have been coming out of charter recently. But I can tell you that, for the vessel we bought, for the 6000 TEU vessel, there were a couple of charterers, or probably more than two, that showed high interest for chartering this asset for periods of at least one year or even more than that. Now, leaving that aside, from what we see in the market, there is definitely not a lot of demand from liner companies for the gearless 2000 or 25000 TEU vessels which have been struggling. But for larger sizes and for vessels in good condition, post-Panamax ships, we feel that there is some demand out there.

Now, you're thinking about the demand picture maybe improving during the year. Is that something you guys have of you on when you think rates can sort of start to move higher and the demand supply picture kind of starts to become more favorable?

You're talking about charter rates, right?

Yes.

For charter rates, it's all supply and demand. There is a substantial order book scheduled for 2013. Even if you assume scrapping, if you assume some sleepers, there are a lot of TEUs that are going to be delivered during the year. If you look at the demand projections, I'm not sure how sufficiently managed it's going to be in order to drive charter rates up. So, I would prefer to refrain from making any forecasts. But I guess, if someone speaks to the demand and supply projected, and bearing in mind the order book today, you can see that I'm not sure how different this is going to be from the last six months of 2012.

That's some good market color. And I guess just more of a Company-specific question on interest expense. You said earlier that you had some lower financing commitment fees. For next year when we see the new builds coming online and potentially interest expense increasing, how should we think about that line item going forward from 4Q? Because it took a pretty big step down in 4Q.

Yes, it took something -- when the new buildings will all be delivered, partly commitment fees are going to be zero because there is going to be no commitment and from the bank. However, the actual interest expense should theoretical go up because we will have drawn more debt which is going to attract more interest expense. So, it's should normally move upward rather than downward because, on average, if you think about it, the margin is higher than the commitment fee.

Absolutely. I mean I guess when we are thinking about it, should we think about it being more in line with the last three quarters, or should 4Q kind of be the run rate to step up from?

I think it should be a bit higher than the first three quarters of the year. Now, I don't have an exact number in front of me right now, and we can hold a call in the future regarding that, but it should normally be higher than the average of the first three quarters of the year.

That's very helpful. I'll pass it along. Congratulations.

(Operator Instructions). Michael Webber, Wells Fargo.

Greg, I just want jump in and follow up on the conversation about levering up the six debt-free assets. And can you maybe is kind of pin down exactly where you think your dry powder is right now and where do you feel comfortable putting that number?

I wouldn't feel comfortable putting a number for a couple of reasons, first of all because it's -- I don't have in front of me a (technical difficulty) regarding the debt that can be raised on those six debt-free assets. And at the same time, the dry powder, also what value of assets we can buy, it also depends on the leverage we're going to be using. So, it is a combination of two things. But let me just repeat what I said, that we feel that if there is a build out there, we will make sure and we feel confident that the funds are going to be available in order to do it. Up to now, we've never lost a transaction because we couldn't raise commercial bank debt. And you see the cash on balance sheet. Even if you subtract the remaining equity capital commitments for the new buildings, you know, I think we are in a favorable position. And we can do transactions. I mean I don't think it is a matter of money. I think it is a matter of finding something that really makes sense.

Got you. And along those lines, I don't want to beat a dead horse here, but kind of specifically in terms of new business, large vessels with long-term contracts for container lines, outside of what we read about in the press recently, how many opportunities are there right now? Are we talking -- are there three potential opportunities you guys are talking to right now? Exactly within that parameter, what do are you guys seeing?

Look, regarding new buildings, there have been some transactions in the near past. There may be other opportunities but from our side, we don't focus entirely on new buildings. We are 100% returns oriented. The new buildings have the advantage of providing a stable stream of cash flow over the next 5, 10 or 12 years. However, opportunistically, the secondhand market can provide a lot of opportunities as well. So it's not only new buildings. It's also secondhand, and the secondhand can range between 10 year old ships, or 15 or 17 year old ships. In the past, I can tell you that, from our experience, 15 or 17-year-old vessels that someone can manage to buy close to scrap values, and those vessels may have 10 or 12 more years to go as useful life. These opportunities may provide the best returns. Now, I agree that as an absolute value, this investment may not be huge. However, we are not aspiring to be the biggest one but, you know, the most profitable one. So we are 100% returns oriented.

That's helpful. Thanks Greg.

There appear to be no further questions at this time. Please continue. There are no further questions.

Thank you for your interest in Costamare. We remain committed to delivering enhanced shareholder returns and we believe that, in today's environment, we are well positioned to capitalize on opportunities. Thank you.

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