Costamare Inc (CMRE) 2013 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 2013 financial results. We have with us today Mr. Gregory Zikos, Chief Financial Officer of the Company.

(Operator Instructions). I must advise you that this conference is being recorded today, Thursday, July 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 statement.

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

Thank you, and good morning, ladies and gentlemen.

During the second quarter of the year, the Company delivered positive results. In accordance with our newbuilding program, we accepted delivery of the third and fourth 9,000-TEU newbuild containership vessels out of a series of ten. Both vessels commenced their targets with Evergreen. These additions to the fleet, together with the newbuildings already delivered and the remaining six vessels currently on order (inaudible) charters will continue in excess of $1.3 billion of contracted revenues throughout the duration of their charters.

Regarding new transactions, the Company and York jointly bought three secondhand ships on a charter-free basis. All three ships were subsequently chartered for periods ranging between 12 to 24 months at rates using attractive returns with significant potential upside because the acquisition cost was either close to scrap value or at historically low levels, which significantly reduces or eliminates residual value risk.

Regarding the chartering of existing vessels, the Company has no ships laid up.

We recently entered into agreements to charter the 1991- and 1992-built, 3,300 TEU containerships Princess Karmen and Marina to Seacon and Evergreen, respectively, as well as the 2001-built, 1,000 TEU containership Princess Stadt Luebeck to CMA. Despite challenging market conditions, we have minimized our re-chartering risk. The charters for the vessels opening in 2013 and 2014 account for approximately 4% of our 2013 and 2014 contracted revenues.

Finally, on July 10, 2013, we declared the 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, (inaudible) amortization of our debt.

And now let's move to the slide presentation.

On slide 3, we are providing a summary of our recent transactions. As already mentioned, we accepted delivery of another two 9,000 TEU newbuild containership vessels out of a series of ten on order, which started our long-term charters with Evergreen. We now have six remaining vessels under construction, which we expect to take delivery throughout the rest of the year, while one vessel is scheduled for delivery early next year.

The Company has no laid-up ships at the moment, and, as far as I can recall, we never had any laid-up vessels. We fixed three of our ships which were coming out of charters for short periods.

Moving on to the next slide, on slide 4, we're providing a summary of the transactions we did through our joint venture with York Capital. We purchased in total three vessels on a charter-free basis, which we subsequently chartered. In particular, we purchased a 12-year-old post-Panamax vessel at a competitive price for which we managed to secure a two-year charter with a reputable charterer at an attractive rate. Furthermore, we purchased two smaller, 1,100-1,500 TEU ships aged between 15 to 19 years old at prices close to scrap value. We subsequently arranged charters for one to two years for them at rates above breakeven levels.

All these acquisitions yield attractive returns. These acquisitions are the first we do jointly with York Capital, and our goal is to pursue opportunities of a larger scale in the near future following the same strategy which has always been return oriented.

Moving on to the next slide, on this slide, you can see the second quarter 2013 results versus the same period of 2012. During the second quarter of this year, the Company generated revenues of $100 million, EBITDA of $70.5 million, and net income of $30.6 million. For the same period of 2012, the revenues amounted to $96 million and the EBITDA and net income to $60.6 million and $21.1 million, respectively.

Consistent with our previous press releases, we feel that the EBITDA/net income figures need to be adjusted -- first, for the accrued charter revenues and the 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 gains or losses resulting from market disposals.

Adjusted for the above, the second quarter EPS amounts to $0.37 versus $0.32 for the same period of last year and the second quarter EBITDA to $67 million versus $61 million for the same period of 2012.

Overall, the Company generated strong results during the quarter based on solid fundamentals.

On the next slide, we're showing the revenue contribution of our fleet. More than 90% of (technical difficulties) 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 have cooperated in the past with most of the liner companies which are in the top-20 list.

Slide 7 provides information on cash flow, charter coverage, and the built-in growth of the Company. Today, we have $2.7 billion in contracted revenues, and the TEU-weighted average remaining time charter duration of the fleet is 4.8 years. We have eliminated the near-term re-chartering risk, and, as you can see in the bottom chart, our fleet coverage target exceeds 75% over the next three years. As the newbuildings will start hitting the water, they will generate significant revenues, adding estimated annual revenues of approximately $150 million and EBITDA of approximately $120 million upon delivery of all vessels.

Moving to the next slide, slide 8 is dealing with the theoretical re-chartering risk the Company would face in the remaining of 2013. The long story short, based on our budget, the Company has a 2013 cash EBITDA of close to $294 million. If all the four ships coming out of charter during the remainder of the year are re-chartered at the same rate, you can see the cash sensitivity. For the 70% rate, being equal to a 30% discount on our 2013 re-chartering, the cash effect is above $2 million, which goes up to just under $3 million for the 60% discount.

If we go one step further and assume that the ships coming out of employment during the year and built prior to 1995 are sold for demolition, cash proceeds of $19 million more than offset the cash shortfall.

In order to assess the Company's re-chartering risk, someone has to focus on cash, since this is what is servicing the Company's debt obligation. The customer level for distribution is what is paying the dividend and provides for further growth. We do believe that the dividend we offer today is very attractive based on its quality and sustainability.

Moving to the next slide, here we discuss our balance sheet management. The debt repayment schedule, as we've stated in the past, is smooth, evenly spread, and is not back-loaded. And so there's no refinancing risk for the shareholders. The distributable cash flow on a post-debt-service basis is not artificially high. The loan portfolio is 80% hedged at a weighted average rate just below 4%, which adds to the cash flow visibility. Liquidity as of the end of the quarter stands at $165 million. At the same time, we have unencumbered vessels and are moderate with leverage.

We consider the Company to be in a competitive position with a comparatively stronger balance sheet, which, together with our joint venture agreement with York, will allow us to make attractive acquisitions in a down market.

And moving to the last slide, on slide 10, we're discussing the market. On the supply side, the idle fleet stands at slightly above 2.5%. The order book is below the 20% mark. The current order book is (inaudible) from 2015 onwards. At the same time, scrapping continues at a rapid rate. As advised, both newbuildings and secondhand vessels remain at very low levels. Charter rates, especially for the smaller sizes up to 5,000 TEUs are at low levels, although there are some selected sectors and vessel types which have seen rate increases over the last weeks. Rates for post-Panamax vessels are generally at better levels.

The volatile market results is what well capitalized companies see as an opportunity to grow. 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). (Inaudible), Morgan Stanley.

Greg, thank you for that update. That was very interesting. And congratulations on the result.

I was just wondering if you could maybe talk a bit more about the economics of the new JV deals and how that sort of works with the profit sharing, as well, and that aspect of the new deals.

Yes. Look, first of all, those three ships we bought under this joint venture -- Costamare Inc. has a 49% equity stake, and York has a 51% equity stake. And, from an accounting perspective, we account for those assets under the equity pickup method, which means that, in our P&L, all the profit and loss of those vessels is going to be flowing to our income statement proportionately to our shareholding.

Now, if you want to talk a bit more specifically about the economics of those transactions, then I can tell you that the biggest ship we bought, the 2001-built, 5,500 TEUs, the Ensenada Express, we bought that, as we announced, for $22 million. And we chartered it for two years at a charter rate of $19,000 per day. Based on our budget, we think that we're going to have an EBITDA yield for the next two years of 19%. This is EBITDA divided by the acquisition cost. Now, as I said, we chartered this vessel at $19,000 per day. If you look at the ten-year weighted average time charter rate for those ships, this can be in the range of 30%. So we definitely believe that there is a lot of upside, while, at the same time, we enjoy very healthy returns.

Now, for the older vessels -- for the Petalidi, for instance, this is 1994-built, like 19 years old. We bought it for $2.7 million, where the scrap value today is close to $2.5 million. This vessel has like a useful life of 30 years, so it has like 10 or 11 more years to go. And we have chartered it at $6,300 per day, which is definitely above breakeven levels.

So purchasing something at scrap value and chartering it initially for a low rate because the average rate for those vessels is in the range of $10,000 per day is still yielding a decent return on our investment with a lot of upside. I mean, again, this is a no-brainer.

And a third example is pretty similar to the last one. We bought it slightly above scrap value, and we chartered that vessel at the express (inaudible) close to $8,000 per day, yielding an EBITDA yield of close to 19%.

So, although those deals have an absolute value and not of a huge amount -- but, as we mentioned, we are returns oriented. So we think that these are transactions that definitely provide upside to our shareholders.

Okay. Great. Well, thank you.

Are there any other deals you sort of have in the pipeline either for the JV or to do under Costamare without the JV loan?

The agreement we have with York Capital, with our partners, is that whatever ideas we have we share them with York, and we're going to be doing them together. Now, if for some reason one partner does not want to proceed -- if York doesn't want to proceed, then Costamare can go and do the deal on a standalone basis. But the pipeline -- you can assume that this is going to be through our joint venture with York.

Now, we look at a lot of things, both at secondhand vessels, with or without charter, and at newbuildings. I'm afraid I cannot tell you much more at this stage. But we are generally active. As Costamare, we were active. And I can tell you that having $0.5 billion of equity available to invest over a two-year investment period in a market which today is at low levels or close to depressed levels -- I think it is a no-brainer that we may be actively looking at opportunities in the near future.

Okay. Great.

And so, then, I just have another question about the smaller segment, your smaller vessel segment. So, I mean, Maersk had talked about when they -- the head of chartering talked about these falling rates from $1,200 per container to $400 on the Asia-to-Europe route and that that was sort of unexpected and that the container industry would be seeing some hardship going forward. So I was wondering if you could maybe talk a bit about how you think this per-container rate decrease will have an effect on chartering rates for the ships in general. And maybe, if you could talk a bit about that, that would be interesting.

You talk about the box rates. Right?

Yes, the box rates. Sorry. Yes. Exactly.

The box rates -- you know, we have witnessed over the last months box rates going down, especially as a [euro] trade. And I think it's logical and it is expected that liner companies will try to restore those rates with a general rate that increases, which is today now the higher those rates are, the healthier our clients are and the better this is for -- this is better for us.

So, now, there is a correlation between box rates and charter rates, but there is normally a time gap between those two rates start moving in the same direction. This is not always the case. Charter rates are -- have to do with the supply and -- demand supply of vessels and cargo demand. So I'm not sure that I can predict charter rates right now. But I think that, going forward and for the next months, we wouldn't expect charter rates to go up dramatically from what we know today.

But, as a company in container shipping, it's all about long-term time horizon. So, as a company, we are patient. We are investing today with a long-term horizon, and this is how we have been historically yielding returns. So, short-term fluctuations in the box rates or charter rates are not for companies that are long term into container shipping. And, in our case, the charter rates where they are today and, in some cases, in some asset sizes, are close to breakeven levels and they cannot go much lower, we definitely consider this as an opportunity to invest.

[Ben Nolan], Stifel.

I actually had a few questions. First, with respect to the acquisitions that you guys did with York, I was just curious how you already have perhaps funded it or intent to fund it. In other words, is there any debt that will be associated with this, or is it entirety equity acquisition?

Those ships were bought 100% with equity. However -- and we don't need to raise debt on those vessels now. We normally -- what we have been traditionally doing is that, when we charter for a longer period and at a charter rate which can service the debt, then, at this point, we would go for a leverage. And then we would seek the highest leverage available in order to boost our returns.

Now, I cannot say that those vessels may not be funded with debt over the coming months, but this is not something we, strictly speaking, need. But, at some point, we would definitely consider leveraging those assets in order to provide our shareholders with better economics.

Okay. That's helpful.

And, then, somewhat related to the acquisitions, and you mentioned it a little bit in your previous answer, but it sounds like you're probably a bit more focused on secondhand acquisitions, given the current level of prices for secondhand vessels currently. But could you maybe talk to the appetite among the liner companies for new vessel acquisitions; i.e., long-term charters on newbuildings? It seems like there maybe are a few new entrants into that market, a few state-backed institutions in Asia, or that the liners have been doing them -- doing those on their own books. I mean, is now a better time to be in the secondhand market relative to newbuildings? Are there opportunities on newbuilds?

Yes. Look, for newbuildings -- also prices for newbuildings have become very attractive lately. And it would feel that there are substantial (inaudible) there. We would be definitely looking at newbuildings, as well, especially in some asset sizes. I mean, construction costs start at historically low levels, at levels we have not witnessed before.

Now, it's true that the majority of the orders that were put over the past like year or year and a half, most of them -- they were put by liner companies themselves. But the simple reason is that there were not a lot of ship owners that had the financial strength to support those orders.

And let's not forget that the KG market, the German KG system which was supporting newbuildings -- this was based on tax breaks allowed under German law -- is no longer there. So, there are a couple of reasons.

But I can tell you that there have been deals with newbuildings where an owner puts -- the owner buys the asset and then charges it on a [back-to-back] basis to a liner company. And I can tell you that we look at both newbuildings and secondhand vessels. It just happened now that those vessels were bought like a month ago and that we announced them. Let's not forget that it generally takes a bit longer to put together a newbuilding contract and charter on a back-to-back basis. And funding for those investments, which are higher value -- it takes much longer compared to buying a secondhand ship without charter and with equity.

Sure. And so you are seeing a fair number or a good level of interest from the liners on potential newbuildings?

Yes. There are liner companies who are looking at the newbuildings market. So this part of the market is definitely there. It's not something that has disappeared; quite the opposite, I would say.

Okay. Good.

All right. And then a last question from me as it relates to some of the secondhand acquisitions that you guys are doing. We've heard that, especially recently, you have to be pretty careful about the vessels that you acquire because maintenance has been slipping in many cases on some of the older assets because cash flows are tight for owners. Have you found that to be true? Is it a little bit more challenging to source quality assets versus assets that have been run down a bit?

If you have a ship owner who does not have the funds to support the proper maintenance of the asset and there are working gaps and constraints, then, definitely, the physical condition of the vessel may not be at a standard which is acceptable. But we, like, I guess, all other ship owners in our business who are doing acquisitions, are going through inspections before buying the vessel.

But the poor maintenance of the ship does not necessarily have to do with its age. I can tell you that there are a lot of five- or ten-year-old vessels that may be much worse maintained than a 20-year-old ship which has been managed by careful owners who have the liquidity to manage that vessel.

So it is not a function always of the age of the vessel, but it is 100% correlated to the financial situation of the owner. And we have come across instances where owners were selling vessels at scrap levels or at even below scrap levels because they didn't have the liquidity to move the vessel from its latest position to the scrap yards in Asia. So there have been instances just like that.

Okay. That's all very helpful, and that does it for my questions. Thanks a lot.

(Operator Instructions). Brandon Oglenski, Barclays.

Can you just speak to the level of liquidity that you feel comfortable investing right now? At your disposal right now with the JV with York, where do you feel comfortable deploying equity, at what level?

Look, the JV as a total -- it can invest now, today, after those acquisitions, between -- to $460 million of equity, let's say. This is the dry powder of the JV. And there is a two-year investment period, which started like a couple of months ago.

Now, if the question has to do with Costamare -- what's the dry powder of Costamare? I can tell you that -- although I hate giving predictions, I can tell you that we have unencumbered vessels with a value of, I would say, $120 million or $140 million, at least. Then we have ships that -- then we have cash on balance sheet of $160 million. And we have positive cash flow from the ships in the water. And, up to now, we have never (inaudible) an investment because we couldn't find the funds to be employed. So I don't think that it is a matter of capacity. It's a matter of deals that yield the required returns.

So you feel with that level of liquidity -- what's the realistic outcome that you could lever up some of those unencumbered assets in the market today?

Those can be levered, depending on the asset, between like 50% or up to 75%.

So you feel that you're in a position to go out there and chase some pretty large deals, and you're not going to be encumbered by a lack of equity contributions then?

I'm not saying that today we have equity of $250 million, which is half of the $0.5 billion I mentioned. I tell you what's our capacity today. And let's not forget that, without raising additional equity, if that's the question and it's not our intention, I can tell you that we are in a position to find more funds in order to employ. It's not only common equity that can be raised. There are a lot of tools available apart from the cash of operation and cash on balance sheet and unlevered assets that can be used in order to raise funds.

I cannot be more specific for obvious reasons. But I can tell you that it's not a matter of capacity. It's a matter of deals being available. And let's not forget that, even if someone puts a big order, let's say, of newbuildings, those order can be levered. So let's say that we have an order of, let's say, $300 million or $400 million. Assuming 60% or 70% leverage, you talk about equity requirement of $120 million. Divide by two, it's like $60 million equity requirement. And we just talked about a $400 million transaction. So transactions like that -- it's things that we can very easily do now.

Okay. Got it.

And, I guess, on the vessel OpEx, your numbers are actually quite impressive. Is there -- ? What are you guys doing on the OpEx side that's keeping numbers relatively in line, especially with the new deliveries coming on?

Look, we have the budget. Like every other shipping company, we have a budget. And we try to stick with, and we try to do better than the budget.

Now, on average, just for the sake of clarity, our vessels are running at around $6,300 per day, on average, operating expenses. And our average size is close to 5,300 TEUs or so. So this may be a competitive type of operating expenses. But, you know, the Company has been in business for so many years, and this is (inaudible) business. So we try to make sure that we run the ships the way they should be run.

Okay. Well, thanks. That's a pretty good result there, Greg.

Mark Suarez, Euro Pacific Capital.

Just to go back on the three secondhand vessels that you acquired, what were the sources of the deal? Were they brokers, lenders, or liner companies?

No. These were deals that were -- these were assets that were bought from other ship owners. There was a Japanese ship owner and two other European ship owners. So they were not like, say, the leaseback transactions from lending companies. What we did is that we negotiated those transactions. And, at the same time, we were negotiating a time charter on a back-to-back basis. So we wanted to make sure that we're going to be getting some cash right after delivery. So, although, technically, the acquisition with the chartered parties were not on a back-to-back basis, but we had a pretty good understanding of what the charter rate would be and what the charter duration would be right upon delivery.

Got you.

And I think you touched upon some of the return benchmarks you're looking for. Now, with this new agreement with York, have your return metrics (inaudible) change, or they're pretty much in line with the sort of returns you were looking before reaching that agreement? I'm just trying to see if you guys see eye to eye when it comes to a lot of the return metrics and yields that you look for when acquiring vessels.

I think that, if you look at our five-year, historical ROE from our financial statements, you will see that this is 30% or above. And I can tell you that the good thing with our partners, with York, which are of the same mindset regarding returns and the amount of risk we are willing to accept. So we don't[ change our thresholds, or we don't change our targets. And I think we are 100% aligned with York Capital.

Okay.

And, just going back to -- I think you also talked about S&P prices being at historical lows. We've seen a lot of attractive deals, especially in the 10- to 15-year-old range. I think, last quarter, we were talking about scrap prices remaining about $400 per ton. Should we expect further demolitions for the balance of the year? I would imagine that incremental equity outflows are quite manageable at this point. Or, now, with the York agreement -- now that you have that additional capacity, that's not really a priority anymore?

Demolition -- generally speaking, for the whole industry, demolition is something that has been growing through the first six months of the year. And this is something that might continue at the same pace. There are predictions that the total scrapping for the year could top 400,000 TEUs.

Now, (inaudible) other side, as far as we are concerned, we normally tend to sell a ship for scrap after it has realized its returns, after the ship has been paid back and we have realized some good returns. And the physical condition of the ship and bearing in mind what are going to be the expected operating expenses might not justify any further investment on that asset, also taking into account the scrap prices today, which are north of $400 million -- $400 per ton.

So, on a standalone basis at Costamare, we might be selling some assets if we find a good replacement at attractive values. And this is what we did in the past, over the last year or two, numerous times. So low secondhand prices for ships 10 to 15 years old, combined with high steel prices -- I think this provides a good opportunity for someone to renew the fleet at minimum equity outflows.

So it's a real possibility to expect further vessel demolitions from your part in order to take advantage of that (inaudible)?

From our part, we don't have a lot of ships that are coming out of charter over the next five or six months and that are candidates for scrapping. Now, if there is one or two, maximum, from the whole fleet, and, still, this is something we have not decided yet -- so, out of the 46 or 49 ships in the water, if there is a candidate or if there's one or two ships to consider, this is going to be the highest number, no more than that.

Got you.

And, just turning quickly to dividends, at what point would you say the board would consider an increase in dividends? Do you guys have like a cash flow level in mind before even considering returning some of that cash to investors?

I think the dividend is something which is -- the way we are today, it's easy to raise the dividend because we are positive cash flow from operations. We repay our debt. There is some distributable cash flow, and the dividend can be raised. But, when you are in a market where you are a buyer because assets are so low leveraged historically, I think it would be contradictory to say that we are preserving cash in order to buy more assets, and, at the same time, we are increasing the dividend.

The dividend increase would normally come together with enhanced cash flows coming from investments, which we are doing today. I think this is a healthy dividend raise.

Okay. Great. That's all I have for now. Thank you, guys.

Chris Combe, JPMorgan.

I just had a follow-on question. In one of your responses to Ben, you mentioned how much easier it is to perhaps find attractive economics with secondhand, charter-free vessels, especially if you're purchasing with equity. Are there any specific vessel classes you'd avoid, regardless of the near-term economics, just because of the leanings of the liners? Perhaps they're less focused on the smaller, post-Panamaxes and maybe more reliance for smaller vessels for inter-Asia trade. Does that come into your thought process?

Yes. Look, generally speaking, for newbuildings -- let me start from there, and I will conclude with the answer. For newbuildings, up to now, we have been ordering bigger vessels because, generally speaking, liner companies -- they are asking for bigger vessels, and it's about economies of scale. And the bigger the better and the more economic it is.

Now, for secondhand vessel acquisitions, especially for ships that are like 10, 12, 15, or 17 years old, if you buy something close to scrap value or exactly at scrap value and you have a charter -- and you can arrange a charter for the next year or so, as long as the asset is in a physical condition that the ship is seaworthy, I think it's not a difficult decision to buy that vessel because you have a lot of upside locked in, and you have like 10 more years to realize this upside. So, in that instance, if the price is so low and you can find employment, whether it's like 1,700 TEU or 2,500 TEU is something that may not make a huge difference in our decision-making process.

In the past, people were avoiding the, like, gearless 2,500 TEU ships because they were not very much in demand compared to the geared ones. The last couple of weeks or last month, we've seen gearless vessels being in more demand compared to the geared ones. So the market may be changing, but, if you position yourself buying at a very low price, securing a charter, then, I guess, you don't have a lot to worry about.

Okay. That's clear.

And, as you look forward over the next two years, regardless of how much of this firepower you deploy with the JV with York, where do you see the average sort of vessel size sit as you deploy that capital? Would it be a proper mix of the two? Or is it really just more of an opportunistic approach?

I think it could be everything. It could be ships like we recently did, or it could be newbuildings. Or, assuming that the price is a justified investment, it could also be five- to ten-year-old ships with or without a charter. So I cannot be more specific, but, when you are returns oriented and not size constrained, then, I'm afraid, someone is to give a very generic answer because there is no -- we don't have any constraints, as long as the physical condition of the vessel and the returns are there.

Okay.

And a very last one on the daily OpEx, a pretty impressive performance. Is it fair to say that's a reasonable run rate, at least for the near term, going to the second half?

Look, the fact that we managed to come below budget in this quarter I don't want us to take as a precedent and assume that, every quarter, the budget is going to be -- that the ships are going to be running below budget for every quarter going forward because this means that we may have to reset the budget. This quarter, we did relatively well. I gave the number of what's our daily operating expenses, bearing in mind our average size and the fact that we fly a Greek flag on 25 of our vessels, which is an additional expense which other ship owners don't have. But I don't think it's fair to say that we're going to be performing better than budget for every single quarter going forward. I think the budget as it is is very fair, and it's still very competitive operating expenses.

Okay. That's clear. Thank you.

(Operator Instructions). And it appears we have no further questions at this time. I would like to turn the call back to Gregory for any closing remarks.

Thank you for being here with us today. We appreciate your interest in Costamare, and we remain committed to delivering superior shareholder returns. Thank you very much.

Thank you. That does conclude our conference call for today. We thank you for --