Costamare Inc (CMRE) 2013 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 2013 financial results. We have with us Mister 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, April 25, 2013. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read Slide Number 2 of the presentation which contains the forward-looking statements.

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

Thank you and good morning ladies and gentlemen. During the first quarter of the year, the Company delivered positive results. In the quarters with our new building program, we took delivery of the first two 9000 TEU newbuild containership vessels. Both vessels (inaudible) charters with MSC. In addition, along with the remaining eight vessels currently on order and scheduled for delivery within the next 10 months, we continue to (inaudible) $1.3 billion of (technical difficulty) revenues throughout the duration of their charters.

Taking advantage of attractive demolition rates, we sold the 1984 build 3500 TEU containership MSC Austria for approximately $7.9 million. The sale resulted in a book gain of approximately $4 million.

On the chartering side, the Company has no ships laid up. We recently entered into an agreement to charter the 1996 build 1500 TEU containership Prosper to COSCO for a period of approximately one year at a competitive daily rate of $7350.

In a challenging market, we have minimized our rechartering 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 April 10, we declared a dividend for the first 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 (inaudible) amortization of our debt. We believe that, going forward, the containership market under pressure provides a unique opportunity to expand the (inaudible) in a lower (inaudible) environment.

And now let's move to the presentation slides. On Slide 3, we are providing a summary of our recent transactions. As already mentioned, we accepted delivery of the first two 9000 TEU newbuild containership vessels, chartered for 10 years by MSC. We expect total contracted revenues of $1.3 billion and annual incremental EBITDA of $120 million on a fully diluted basis. The Company has no laid up ships and as far as I can recall, we neither have any laid up vessels. Apart from fixing the 1996 built 1500 TEU ship to COSCO at the competitive rate, we exercised our option to extend the charter of the 1995 build Zagora with MSC for a further period of two years.

Finally, we deployed the dividend for the first quarter 2013 payable on May 8, our third consecutive quarterly dividend since the Company shares started trading on the New York Stock Exchange.

Moving on to the next slide, on this slide, you can see the first-quarter 2013 results versus the same period of 2012. During the first quarter 2013, the Company generated revenues of $91.5 million, EBITDA of $64 million and net income of $24.7 million. For the same period of 2012, the revenues amounted to $100 million and raised EBITDA income to $66.5 million and $24.5 million respectively. Consistent with our previous press releases, we feel that the EBITDA net income (inaudible) for the following items. First, we approved charter revenues (inaudible) between revenues received on a [GAAP] basis and revenues accounted for based on the straight-line amortization schedule. Secondly, the gains and losses resulting from derivatives, and thirdly the account gains and losses resulting from market disposals. Accounting for the above, the first quarter EPS amounts to $0.29, versus $0.41 for the same period of last year, and the first-quarter EBITDA to $61.2 million versus $67 million for the same period of last year. Please note, however, that the difference in EPS is also attributed to the different share count after the two follow-on offerings affected leasing in 2012. Overall, the Company generated strong results during the quarter based on [strong] fundamentals.

Moving onto the next slide, on Slide 5, we are showing the revenue contribution for our fleet. The revenues come from first-class operators. More than 90% of our contracted costs come from Maersk, MSC, Evergreen and COSCO. As you can see on the right-hand side, we currently have charters with four of the top six charters that are incorporated in the [bottom] with most of the line of companies which are in the top 20 list.

Moving onto the next slide, Slide 6 provides information on our cash flows charter coverage but also on the significant building growth of the Company. We have $2.8 billion in contracted revenues while the TEU weighted average remaining time charter duration for the fleet is 5.1 years. Now, as we move (inaudible) we'll start hitting the water that 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.

It is also reflected in the Company's cost flow per share where EBITDA (inaudible) considered a 40% discount on the rechartering of the vessels (inaudible) in 2013 and 2014. There is significant (inaudible) growth in the customer per share as seen in the bottom right chart.

Moving on to Slide 7, Slide 7 is dealing with the rechartering risk the Company would face in 2013. The long story short here, based on our (inaudible) assumptions, the Company as of today has 2013 cash EBITDA of $300 million with four ships coming out of charter during the year are rechartered at the same rate. You [can't] see the cost sensitivity for a 70% rate being equal to a 30% discount on [the] 2013 re-chartering. The cost effect is (inaudible) million which goes up to $7 million for the 60% discount. So even at this level, the cost EBITDA effect is pretty manageable. If one goes a bit further and assumes that ships coming out of deployment during the year and built prior to 1995 are sold for demolition, assuming a stock price of $400 per ton, cash proceeds of $24 million more than offset the cash (inaudible).

We feel that in order to assess the Company's real and rechartering risk, someone needs to focus on costs. So (inaudible) be servicing the company's debt obligations, the cash available for distribution is what is paying the dividend and allows for credit growth. Based on the above, we do believe that the deal we think we offer today is very attractive based on this quality and sustainability.

Moving on to the next slide. On Slide 8 we discuss our balance sheet. Our debt repayment schedule is smooth, evenly spread through the coming years. It's not backloaded and (inaudible) no financing risk. The distributable cash flow on a (inaudible) service basis is not artificially enhanced. The loan portfolio is shed at the weighted average rate of 4.1%, which is adding to the cash flow visibility.

Liquidity as of the end of the quarter stands at $231 million in cash and equivalents. At the same time, we have unencumbered vessels and a moderate (technical difficulty) leverage. We consider the (inaudible) to be in a comparative position with the comparatively strong balance sheet which will allow us to make (inaudible) acquisitions in a depressed market.

And moving on to the last slide, on Slide 9, we are just covering the market. On the supply side, nine companies monitor (inaudible) (technical difficulty). Currently the average fleet stands at 5%, having been slightly reduced over the past couple of weeks. Our (inaudible) ships have been reactivated or sold for scrap. At the same time, we have weakness relative to new orders and the orders booked today stand at a manageable 20%. The order book is very clean from 2015 onwards.

Asset values, both newbuild and secondhand vessels, remain at very low levels. Charter rates, especially for the smaller sizes up to 5000 TEU, remain depressed. We have seen however improvement on the post Panamax ships. The volatile market as such is what well-capitalized companies see as an opportunity to grow rather than as a challenge. As I already mentioned, we think that we are in the position to act and deliver superior returns despite the volatile environment.

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

(Operator Instructions). Fotis Giannakoulis, Morgan Stanley.

Yes, hi Greg. I would like to ask you about your potential acquisition targets. I remember a few months ago you acquired a vessel from a bank with 100% financing, and at same time you signed some strategic alliance with this bank to provide you with potential opportunities. Since then, we have seen your acquisition activity to be quite modest. And I want to ask if you have seen any transactions from this bank or any other lenders. And how is the behavior of the lenders right now compared to three months ago? (inaudible) the owners that they have loans they are underwater.

Yes. A couple of things. First of all, it's not that banks are the only source of potential transactions. And yes, we -- water vessels we say 100% financing, although it was a relatively small deal. But I guess two months ago, we bought a charter fleet vessel 6500 TEU at $22.5 million with equity.

So now what is the situation with lenders? This always remains a potential source of transactions. Now, I cannot possibly comment on sort of transactions that may have taken place from other companies, but I can tell you that this is a market we follow closely. And yes, we think that we will be in a position to act if something meaningful comes out of financial institutions.

But let me follow up on that. We saw Navios, they acquired some container ships. I don't want you to comment on this transaction, but this was found as something new in the market, especially about the behavior of the banks. Do you see these kind of creative structures coming to your desk right now? Is there any change compared to a few months ago?

Look, the fact that we see some movement is definitely positive. On the other hand, let me remind you that, as far as I understand, this was about a mix of vessels, not only container ships. And each [member] has its own priority, so -- or its own time frame. I repeat this is a market we are following very quite closely, but nothing I can comment on more on this transaction.

Thank you for that. Can you also give us your outlook about the supply and demand? And we have an order book which seems pretty low right now compared to historicals but at the same time demand is much lower than what historical has been. And there is still 5% idle capacity. When do you expect this idle capacity will go away, or more importantly, when do you expect that the oversupply will end and rates will be able to move higher?

First of all, regarding the supply, the (inaudible) I think it is roughly below 20%. But there is a quite heavy order book for the remaining of 2013 and for 2014. So you know, additional supplies that will be shipping in the water could be in the range of 7% or 7.5%. Someone needs to make some assumptions regarding fleet, but although we wouldn't expect a lot of vessels to slip and (inaudible) to slip in the following years, or for scrapping which is something we've seen quite excessive levels of scrap in the first quarter of the year, and we would expect this to continue.

Now, if the question is what's going on or what we see over the next couple of quarters, we see a heavy order book, and the demand is at levels which may not be enough to absorb the excess of supply. Now (inaudible) may be helping, scrapping may be helping, [slippage] I'd say could be a factor, but we wouldn't expect the market, especially for the smaller sizes, to be much more improved from where it is today. And for the smaller sizes today, the market is at depressed levels.

Now, the number of idle ships based on that 5%, normally this is something we would expect to go down for two reasons -- excessive scrapping (inaudible), large in light of the upcoming peak season, some big vessels which are now idle could be reactivated, especially a couple of our 7000 TEU ships. We expect them to find deployment from the charter base sooner rather than later. Still, even if the number of idle vessels goes down to 5% or 4.5%, we feel that the next couple of quarters we might be seeing the same market we see today, especially for the smaller vessels. The cascade effect is pushing down some particular asset classes, especially the Panamax vessels, which may be too big to sort of trade (inaudible) or maybe too small to continue trading in the (inaudible) rate, so there are some particular asset classes that might continue being under pressure.

Shall I assume that, within your acquisition targets, the Panamax class, the 4000 to 5000 TEU is excluded? And also, if you buy any vessels, are you -- will you be looking also to have a past employment?

It's all about numbers. It's all about -- it's not about sizes. But let me remind you that the Panamax is the type of vessel that we will chartering more (inaudible) that we would expect this to continue to be the case. Then, you know, (inaudible) the number up tremendously attractive. This is not something we might be considering. But it's all about numbers. We are 100% (inaudible) that we see the real impact of each transaction and we cannot exclude anything.

Now, we see that new building prices have been become quite attractive, especially for the bigger vessels. And we have also seen ships that could be bought on a charter-free basis, right, in the past, like if you buy a 6.5 (inaudible) oil ship at close to $20 million, from a historical perspective, we consider this to be a good transaction, especially if you are in a position where you can attach a charter budget to this vessel in the region of $15,000 per day or above. This gives you a lot of EBITDA (inaudible) for 15% or even higher. So although we buy the vessel charter fleet, if you buy at low levels, there's definitely a lot of upside. This is something we will definitely be looking at.

Again, we have been looking at the smaller vessels, and we have also been looking for all the donuts where, if you buy something, a ship -- let's not forget those (inaudible) life. If you buy 12 (inaudible) old vessel close to scrap prices, bear in mind that you have 10 or 15 more years to operate that assets. Again, from a pure returns perspective, we consider this to be a good transaction, so this is something we could be doing again as we did in the past.

I want to start from your last comment, at the container vessels, they have a 30-year useful life, and compare it with your debt amortization. Right now, your debt amortization is almost twice the amount of your depreciation. And if my calculations are correct, within the next five, six years, your Company will be debt free. I just want to ask what is your target capital structure, and how do you intend to address the fact that you're going to have almost no debt in five, six years?

Look. As you rightly stated, the depreciation expense more or less in our (inaudible) coming close to $80 million per year, I would say, (inaudible) figures. And if you look at our debt repayment schedule, you will see that every year we repay debt in the region of $180 million, $190 million and above. So it's like 2 or 2.5 times our depreciation expense.

And we know that someone might argue that if you say why a conservative debt repayment schedule, we like amortizing the debt. As the charter profits are being rolled over, meaning that we whenever we buy a ship with three, five, or seven year charters, the debt is being amortized more or less during the charter tenure. This is a policy we have, and this is what we think makes our dividend sustainable and both high-quality, because the Company does not have any financing risks. Someone could argue that we actively created equity for the shareholders. Out in 2018, all that ships that are in the water today or sort of 95% of the fleet will be close to debt-free, or the scrap value of those vessels, assuming $400 per ton, is going to be above any balloon payments due in 2018. So this is clearly the equity and this is also creating the opportunity to releverage the ships and use this additional cash for new acquisitions.

And my last question is probably one of my favorite questions about the dividend. And I want to ask you what it would take for you to move your dividend higher. We understand that a dividend is not going down, but what it would take to go up.

And the second part of my question is what it would make you to raise any additional equity, and if there are any thoughts for new equity (inaudible).

For the dividend, the easy answer to what would it take, it is a (inaudible) decision and you know we sent it to the board. But practically, what we expect is that the additional incremental costs that are distributed to the shareholders would be coming from new (inaudible) transactions that are delivering those returns. So, there is building growth in the Company, as we've shown. There are eight more new buildings to be delivered. And there is the firepower to enter into new transactions and we are working towards that goal. So there seems to be more cash coming from transactions and at any given point, it would feel that the market is at lower levels and that cost can be used for accretive acquisitions, we might take a different view compared to a market where we think that asset values are over and above historical levels are not justified by the earnings potential of the assets. And then we might think that the best use of our cash would be to return a substantial portion of this to the shareholders. So, it has also got to do with the timing.

But the long story short, new transactions or (inaudible) growth is something that would move the needle, and would sort of procreate the potential for additional dividend. But let's not forget that the dividend we give today is in the region of 7%. Bear in mind how sustainable that is. We'll do find it to be quite an attractive proposition.

Now, regarding any new equity offerings, we have cash on the balance sheet, $230 million as of the end of March. We have five debt-free assets. We have a low leverage and we are amortizing our debt (inaudible). So until we exhaust our cash available, I don't think it would make sense to raise any new equity. We would confuse the people first, and it wouldn't make sense and we would be diluting ourselves in a market where asset values are at their lowest.

Thank you very much, Greg.

Brandon Oglenski, Barclays.

Hi Gregory. This is Keith Mori from Barclays. Brand is unavailable right now.

Just going back to your last point, the market seems to be relatively at the bottom. What are some of the catalysts that gets you excited to start acquiring some new assets? You must be seeing some pretty attractive deals coming across your desk right now.

Look, we have been traditionally inspecting a lot of vessels over the last quarters. Definitely we didn't do as many deals as the vessels we have inspected. But you know, there may be opportunities, both in the new building sector, if someone can find the right charter because we never put another on stipulation. And also, on the, like, 12, 15-year-old vessel range where you may see older vessels, but where the returns kind of make sense.

Now, it's not that we don't like younger doughnuts, mainly three, five or seven years old, but buy something above market and charter it at above market rates for a short period, it may not be a good transaction from a risk point of view because it's ultimately a two-year period the market is not there. And you know, we would be at risk with our equity and we would be assuming a lot of residual risk. So unless the numbers work, we are not prepared to do above-market transactions for younger doughnuts.

Okay. That's helpful. And I think, just getting your view on the outlook for the containership market in general, the supply-side in particular, the order book is coming down over the next two years, call it. Do you think -- where the inflection point is? Is it maybe the end of this year? Is it maybe the end of next year? What's your kind of outlook on that?

I'm afraid I cannot provide you with the results projections. And look, in (inaudible) we're not in the business foreseeing the future. We are in the business of managing our risk, managing our downside and at the same time creating some optionality. Now, I'm not sure I can tell you where the market is going to be in three years' time. We know some facts today but it's a really volatile market and there's a lot of parameters that are coming into play.

But I can tell you that this is a market, or this is a sector that has been down for the last 4, 4.5 years. If you look historically as the cycle and the patterns, we don't expect to see a down market for eight or nine years. So, bear in mind that the order book is very different in 2015 onwards. We believe that it's not a matter of if the market will turn, but rather when. And I'm afraid I cannot say what it's going to be at the end of 2014 or 2015. But from our side, we make the best we can in order to have cash on the side, and we make sure that our debt service requirements, dividends, and operating expenses are fully covered from our contracted costs.

Okay. And then I guess one just on the specific quarter, we saw interest expense kind of sequentially rise slightly, but still significantly below, say, the early prior year. How should we maybe think about interest rate -- interest expense going forward with the new builds coming on? Should we expect sequentially for that to rise from this level, or there's a lot of hedges in place?

I think it would be more or less at the same levels. There could be some additional interest expense as we accept the (inaudible) of new buildings and we sort of go in for the delivery payment, the interest expense there should be going up. But I don't think that you're going to see a material change from the way it is today.

Okay. That's helpful. I'll pass it on. Thank you for your time.

Chris Combe, JPMorgan.

Good afternoon. I just had a follow-on on the market outlook. Maersk recently has commented that they could see a lower proportional reliance on chartered-in capacity in the future as part of their average operating fleet. So I was just wondering if you think that's purely a reflection of where we are at in the cycle. But if not, could this drive shorter-duration charters in the future for larger vessels?

Yes. Look, each carrier has its own structure and network of operations. So I think what the CEO of Maersk had mentioned is that generally he's more positive in containershiping going forward compared to what the (inaudible) were a year or two years ago.

Now, we see a line of companies seeking to chartering bigger vessels, and there's a lot -- also there's much more demand for bigger vessels as opposed to smaller assets, because it's all about economies of scale. At the same time, we've seen average time charter durations becoming longer, which is a positive sign for the whole industry, meaning that line of companies want to commit to, on average, longer periods chartering in vessels.

However, I have to repeat myself that, over the next couple of quarters, especially for smaller vessels, we don't see why would the market become much better from what it is today. Bear in mind that there is a heavy order book coming over the next quarters, and we don't expect demand to improve substantially from today's levels. And today's levels, where we are today our demanding is definitely not there in order to absorb today's supply levels.

Okay. That's clear. And with respect to the order book, can you give us a bit more detail with respect to delivery schedule by quarter this year?

Look, for the whole of 2013, and you know this is a broader consensus, the sort of incremental supply may be in the range of 7% to 7.5%. I think that, up to now, close to 300,000 TUEs more or less have been delivered, and it's an addition of $1.1 million, $1.2 billion to be delivered. Also making some basic assumptions regarding (inaudible) of sort of new building deliveries.

Now, for 2014, again the consensus is that the additional capacities within the market will be in the range of 7%, but then from 2015 onwards, based on the order book as it stands today, capacity growth is going to be less than 3%. It's going to be actually close to 2.1%. So the order book is very thin from 2014 -- from 2015 onwards.

For Costamare specifically over the next 10 months, have you published the actual quarterly, or the dates, anticipated dates, of delivery for the eight vessels?

Yes. I think this is something that we have published, and we have put out the sort of schedule of the expected deliveries. Now, the shipyards, they have a small margin and some flexibility, so whatever the delivery date is, it can be plus or minus 30 or 60 days. But this is something we have published, yes.

Okay. Very good.

In any case, we continue to use (inaudible).

And the last one, OpEx was a touch better than we expected this year. Is it unreasonable to expect below $7000 average a day for the year overall?

I think that -- look. On average, for the whole fleet, the sort of average daily OpEx is close to, I would say close to $7000 back now. In our case, we have 25 vessels lined with (inaudible). So a substantial part of our OpEx is denominated in euros. So some fluctuations in the euro-dollar exchange rate may be beneficial, or you know, they burden our operating expenses. But the number of $7000 fits in more or less in line with our (inaudible) and what we have in mind. But some fluctuations because of, you know, Greek grew (inaudible) in euros in our vessels lined with Greek flag and those are 25 vessels to date, is substantial for the (inaudible) fleet, so some fluctuation.

Thank you.

Please continue to stand by. Your conference will resume shortly. Your conference is back in progress. Mark Suarez, Euro Pacific Capital.

Good morning everyone. Just to go back on some of the demolitions you have done as of late, I know you recently sold MSC Austria for EUR7.9 million. Is the idea here to continue to replace those older ships with the low earnings potential when opportunities arise, and should we be modeling for more this year?

Look, if you can -- over the last year, I think we have been scrapping older donuts, but the six that have time charter attached. So if you take advantage of relatively high scrap prices, so if you would take about $400 per ton, and you buy a charter fleet a 15-year-old vessels which is let's say five or ten years younger than, you know, the vessels you're disposing of, without actually any incremental equity cash outflow, you are sort of renewing the fleet at minimal cost. And we think this is a good strategy. We have been doing that and we see no reason why not to continue.

Now, to the extent that the vessels are in seawater condition, and the charter feels comfortable with the Costamare management and up to now it has been the case, we don't see why not to renew the fleet at quite attractive price levels.

Got you. And just to go back on one of the comments you made in terms of the supply and demand for this year, we have seen a lot of reports that scrapping has really accelerated. I think you commented in the beginning of the conference here. We're seeing some of those numbers outpace the same numbers we saw last year. But do you see any sort of potential for fleet growth to be surprised by the market positively for affecting positively charter rates, or you will still continue to demand these two meaningful new (inaudible) before we see that happening?

Look, scrapping, even with the -- cannot -- we don't think that scrapping can go above 300,000 or 400,000 TEUs this year. I think the highest number or the highest projection I have heard is close to 400,000 TEUs max for the full year. Even taking this into account, and bear in mind that the sort of supply growth is going to be in the region of 7% or 7.5%, and if we factor in today demand levels, still for the next quarters, there could be some supply demand imbalance with the supply not being absorbed by demand levels. (inaudible)

Okay. And just lastly, on the operating expense, I think somebody commented that it's actually been outperforming vis-a-vis your budget and some of the numbers we have seen over the last four quarters. And I suspect that, you know, you've been performing that so consistently that do you foresee that to continue that trend? I just want to get a better sense of the puts and takes, because it seems to me like you seem to be performing very well in that area.

I think that, look, overall, as an operator, we are trying to minimize the operating expenses for the whole fleet. And if you look at our average daily operating expenses, taking into account the average vessel of Costamare, which is 5500 TEUs a ship, and not 200 or 3000 TEUs a ship, we have been quite competitive. But as I said, there are some euro-dollar fluctuations which may be (inaudible) but we may have to run the vessels at above market levels. But up to now, we try to perform as expected or hopefully better than that.

Got you. That's all I have for now. Thank you.

(Operator Instructions). It appears that we have no further questions at this time. Sir, please continue.

Yes, thank you very much for dialing in and for being here with us today. The Company has continued to deliver positive results in an adverse market environment. And we hope that, in the near future, we would be in a position to announce new transactions. Thank you.

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