Costamare Inc (CMRE) 2014 Q1 法說會逐字稿

Welcome to the Costamare conference call on the first-quarter 2014 financial results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the Company.

At this time all participants are in 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 Wednesday April 30, 2014. 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 pass the floor to your speaker today, Mr. 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 while at the same time implementing its fleet renewal and expansion strategy.

Regarding our existing newbuilding program, we accepted delivery of all 10 newbuildings ordered during 2011. All the ships have commenced their long-term charter employment. Due to these recent developments we are pleased to announce that the Board of Directors has approved a dividend increase of $0.01 for the first quarter of the year as a result of our increasing long-term cash flows.

Recently we acquired from an insolvency administrator a 2000-built 1,645 TEU container vessel. The acquisition was funded 90% with bank debt and forms part of a broader agreement between the Company and the vessel's current lending bank. After delivery the vessel will commence its charter employment.

Regarding our chartering arrangements our re-chartering risk is minimized. The charters for the vessels opening in 2014 account for approximately 3% of our 2014 contracted revenues.

Finally, on March 31, we declared a dividend on our Series B and Series C Preferred Stock, paid on April 14. We continue to execute successfully on our growth strategy. We feel we are well positioned to continue to grow selectively and on healthy grounds.

And now let's move to the slide presentation. On slide 3 we are providing a summary of our recent transactions mentioned earlier.

Over the last couple of months we accepted delivery of another 2 9,000 TEU containership vessels which concludes the deliveries of the series of 10 vessels we ordered back in 2011. As mentioned earlier we are pleased to announce that as a result of these recent developments the Board of Directors approved a dividend increase of $0.01 and the Company today announced the first-quarter common stock dividends of $0.28. Earlier in the quarter the Company also declared a dividend on both classes of preferred shares.

Finally, we bought from an insolvency administrator a 1600 TEU vessel which is 90% funded with debt. The ship has been subsequently chartered.

Moving on to the next slide, on slide 4 we are summarizing our chartering arrangement. During the quarter the Company fixed most of the vessels which were opening for charter for short terms at market levels.

Moving on to slide 5. On this slide you can see the first-quarter 2014 results versus the same period of 2013. During the first quarter of this year the Company generated revenues of $115 million, EBITDA of $73 million and net income of $17 million.

For the same period of 2013 the revenues amounted to $92 million and the EBITDA netting up to $64 million and $24.7 million respectively. Consistently with our previous press releases we feel that the EBITDA and net income figures need to be adjusted for the following non-cash and longtime items.

First, the accrued charter revenues and the resulting discrepancy between revenues received and revenues accounted for based on a straight line amortization schedule. Secondly, the gains or losses resulting from derivative instruments including a one-time swap breakage cost relating to the refinancing of our recently delivered newbuilds. And thirdly, we account gains and losses resulting from market disposals.

Adjusting for the above the first-quarter EPS amounts to $0.35 versus $0.29 for the same period of last year and the first-quarter EBITDA $82 million versus $61 million for the same period of last year. Overall the Company delivered strong results during the quarter based on solid fundamentals.

On the next slide we are showing the revenue contribution for our fleet. Our revenues come from first-class charters.

More than 90% of our composite cost comes from Maersk, MSC, Evergreen and Cosco. We have $2.7 billion in contracted revenues the remaining time charter duration of about five years.

Moving onto slide 7. Slide 7 is dealing with a theoretical re-chartering risk the Company would face in 2014. You can see the EBITDA sensitivity.

Based on our budget assumptions the four ships coming out of charter in 2014 are re-chartered at the 70% rate, being equal to a 30% discount on our 2014 re-chartering. The cost effect is minimum, less than 30% of the nine-month EBITDA, which goes up to about 5% for a 60% discount.

We feel that in order to assess the Company's real chartering risk someone needs to focus on cash. Since this is what is servicing the Company's debt obligations and cash available for distribution is what is paying the dividend and allows for further growth. Based on the above we do believe that the dividend we offer today is very attractive based on its quality and sustainability.

Moving on to the next slide. On slide 8 we discuss our balance sheet. Liquidity as of the end of the quarter stands at $238 million in cash and equivalents.

At the same time we have unencumbered vessels and a moderate fleet leverage. Our loan portfolio is 85% shared at a weighted average rate of less than 4% which adds to the cash flow visibility.

The debt repayment schedule is smooth and evenly spread in the coming years. The distributable cash flows on a post debt service is not artificially enhanced. We consider the Company to be in a competitive position with a comparatively stronger balance sheet which together with our joint venture with York Capital will allow us to continue making attractive acquisitions in the low market.

And now moving to the last slide. On the last slide we are discussing the market.

Although box rates have been volatile the carriers' aggregated operating income has turned positive for the first time since 2010. Charter Rate and secondhand asset values remain at historically low levels. The opening of 2014 shows an increase in the volume of secondhand vessels driven by low audit prices across the board.

Competitive newbuilding prices is one of the main reasons behind the strong momentum in ordering. Finally, the end of this last season has had an impact on the idle fleet which has been falling over the last four weeks. As mentioned in the past we think we are well capitalized to act and deliver superior returns in such a volatile and low asset value environment.

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

(Operator Instructions). Ben Nolan, Stifel Nicolaus.

Yes, thank you. I actually had a few questions for you guys.

Number one, the deal that you guys did with the bank to acquire the asset in which they gave 90% financing, that seems like a pretty attractive deal, I don't know exactly what the purchase price is but I would imagine that it was pretty attractive. There haven't been an awful lot of those that we have seen in the market.

Are we just not seeing it, or is it a function of there's a lot of competition for those assets or do you think we are likely to see a lot more of that in the future? Any thoughts as it relates to that?

Regarding this bank-related transaction, I think you are right mentioning that over the last year or couple of years we haven't seen the volume of distressed transactions coming out from commercial banks people weren't expecting to see. And I think this is still the case.

Now there may have been one or two deals here and there. But definitely there are a lot of ships today where the loan outstanding is much above today's market value. And most of the ships have a short-term time charter duration, or they may be lying idle with no time charter at all.

Now, there haven't been a lot of transactions like that. One of the reasons may be that the banks may not be willing yet to take any losses, or may not be willing to participate as equity shareholders in various structured deals. Whether this is going to change or not I'm afraid this is something I'm not able to predict.

It's up to the financial institutions and it's also up to the market. So I think apparently if the market goes up then the financial institutions may not have an incentive to sell at low prices. But I'm afraid I cannot predict the future of that.

Okay. But as of now you still see deals on a one-off basis but there are things out there just not a whole lot I guess is a fair way to characterize it presently?

Yes. There are a couple of transactions but we are nowhere close to the number of deals that could have taken place had the bank decided to offload assets where the loan outstanding is much above the market value of the vessel today.

Okay, that's helpful. And then another question in going through the fleet list.

There was a footnote on the three Zim vessels and you guys had been a little underpaid in the quarter. Could you give me an update as to where that process is on those ships and how you see that playing out going forward?

I think it's probably that Zim is now in a restructuring process. We have three chips chartered to Zim, three panamax vessels, and those charters are expiring in October, around October 2015.

So first of all let me say that as far as we are concerned this is a very low exposure if you consider the contracted revenues of those vessels compared to $2.7 billion of total contracted revenues for the Company. Now, regarding the status of the restructuring, this is a work in progress.

We haven't signed anything yet. There are sort of negotiations.

I think there is a timeframe set but there are a lot of creditors involved, it is ship owners, it is banks, it is the company Zim, it is related parties, it is the Company's shareholders. So it is suppliers, [execute] and answer to creditors, bondholders.

So this is a process that goes on as we speak. I cannot tell you when this will close.

But as far as we are concerned apart from the low exposure we have we have an agreement with the Company where in exchange of a reduced rate we are going to be getting debt and equity and some charter extensions. But this has not been documented yet so I think we will not have to wait.

Okay, that's helpful. And then lastly, for me, as it relates to the state of the market, you mentioned that in the past few weeks you have seen idle fleet, or the number of assets being idled come down and utilization picking up.

I was curious if there is a particular sub segment that is seeing an especially a good improvement in utilization? Are the sub-2,000 TEUs vessels have been outperforming some of the slightly larger ones, is there any area of the market at the moment that has you especially encouraged, I guess?

We have seen, regarding the number of idle ships, we have mainly seen ships in the range of 5,000 to 7,500 TEUs where like over the last week 10 of those ships have been reactivated. So that's like 24, 25 of those ships being idle a couple of weeks ago, today we have 13 ships.

(inaudible) was the previous quarter has ended so this is something we would expect. However, leaving that aside the rate for some asset classes or across the board from a historical perspective they are at very low levels.

The panamax today is yielding loads to 7,000 per day. We have seen some increase the interest for the bigger vessels for the 8,500 TEU ships and we have some fixed those recently. So you can either those asset classes are not performing better but overall if you look at the market I would say that charter rates and asset values are at very low levels.

Okay, and in terms of -- that's somewhat universal across all asset classes, everything is pretty weak, maybe there is a small level of outperformance in some subsectors but it's not meaningful, I guess? Is that a fair way to characterize it?

Yes, for some bigger vessels we have seen improvements in the latest figures but overall it was a global containership charter rate index. I don't think that this interest would be moving substantially up from the previous quarter.

Okay. All right, that does it for me. I'll let someone else on. Thanks.

Keith Mori, Barclays.

Good morning, Greg. Just wanted to touch on the newbuild outlook. I know you have a couple that are not chartered.

Can you maybe give us an update on the progress that you have made, or you are looking at the strategy behind making for those new ships. Do you expect to maybe wait a little bit longer and hope that in lieu of asset prices may be rising?

It's actually four newbuildings which we have ordered and they have not been chartered yet. We are not in a hurry. Of course you know we are in discussions with charterers but we are not in a hurry to charter them and we think that we might have a better outcome if we are patient.

At the same time we have the cash in order to make payments as for the ship re-contract payment schedule. So this is something we take it as it goes and we are quite patient. We think that if we wait a bit longer the outcome will probably be much better.

And I guess sticking on that, I know that Costamare at the balance sheet level, the holdco doesn't really have much growth over the next year or two outside of the joint venture. Should we expect you to maybe look at potentially making some additional secondhand purchases over the next 12 to 18 months to drive some growth at the parent level here?

We look at a lot of transactions, secondhand vessels, with or without charter as well as newbuidings. Now the newbuidings of course as you said probably they're not going to be driving a lot of EBITDA growth because they have a couple of years construction period, so there is a carry cost there.

But definitely we are looking at secondhand transactions either say in a leaseback or ships which we may buy those with equity and charter them and then lever them. We are working on some deals but I'm afraid there is nothing that I can tell you today.

Okay, I'll pass it on. Thanks for the time.

Fotis Giannakoulis, Morgan Stanley.

Yes, good morning, Greg and thank you. I want to ask about the dividend increase and how big you think your dividend going forward.

Obviously, your newbuildings have already been delivered, at least the first set of newbuildings. The dividend increase was quite modest but at least it came after almost two years. What should we expect forward and what is going to be the signal to make you raise your dividend again?

Okay, the dividend increase it is in the region of 4% and you are right by saying that this comes after the 10 newbuildings we ordered back in 2011 have been all delivered. They have commenced their charter employment so the long-term cash flows allow for that.

Of course we have capacity for further dividend increases even if we don't do any meaningful transactions over the next 6 to 12 months. However, at the same time in today's environment I think it does make sense to preserve some cash for further growth.

Now, where the next dividend increase will be I am not sure that I can comment right now. We just announced this dividend increase yesterday evening.

But I can tell you, or I can repeat myself that there is only one way for the dividend to go and this is up. The founding family owns 65% of the Company so the dividend will be something we highly value. We are all on the same boat on that.

So I think let's not forget we have eight more newbuildings, nine more newbuildings, which will start become delivered from September 2016 onwards. In the meantime accretive transactions will definitely signal, give us the cash available for further dividend increases. And let's not forget that apart from the increase this is a dividend which we consider to be sustainable based on our contracted cash flows and based on our debt service which help us prudently.

The reason I'm asking you is, trying to understand how much of this dividend increase was driven by the newbuildings as they were delivered actually if I'm not mistaken, the newbuilding was delivered this quarter. And how much was driven by the rechartering agreements that you signed and the reduction of your market risk. And last how much it was related to your expectation about an improvement of your market and going forward how these three factors going to impact your decision to raise it again?

I think it was mainly driven due to the fact we have actually delivery of all the newbuildings ordered in the past. Now we normally wouldn't raise the dividend based on speculation on how the market will be doing over the next quarters or so because it is something highly uncertain and we may not be the best people to speculate.

So we base our decision based on cash. This is all that counts.

So it is due to the successful delivery of all those newbuildings. The rechartering we did and the fact that we don't have idle vessels definitely helps.

The fact that we don't have any sort of unfunded commitments which we don't think we can fund ourselves also helps. And looking the way forward accretive transactions, it is the main driver for further dividend increases.

Thank you, Greg. I want to ask you about your JV.

You have already committed some capital if I'm not mistaken around something like $46 million. How much equity do you need to contribute more and what kind of financing are we seeing newbuilding vessels that you have under your JV will be taking?

With the JV in total we have commitments for nine newbuildings. We haven't levered them yet so whatever commitment we have is going to be subject to the leverage. And we are in advanced discussions regarding the debt financing of the five prior newbuidings chartered to Evergreen.

Now, the agreement with York has been for up to $490 million of equity committed by both parties in aggregate. But this is something that is subject to change based on market conditions and when I mean subject to change I mean to increase it.

So I think that we still have a long way to go. We have more than one year of further investment period, so I don't think that the equity is the issue. Our main goal is to find deals that justify the second commitment with strong account of parties and with terms that meet our internal hurdles.

Just to be clear I'm talking about the existing vessels that you have in your order book, the $940 million, something like that, something like $900 million have already ordered. I see your balance you have committed $46 million. What is your estimate that you are going to need for this particular vessel, I'm not talking about new acquisitions?

Our remaining commitments on the Costamare side is close to $360 million.

On equity? I'm talking about the equity portion?

Equity? We haven't yet fixed the debt so I don't have a final debt sort of figure. If the debt ranges from $80 million to $90 million this is going to change our equity portion.

So out of let's say $620 million total equity commitment depending on the debt levels if we assume an 80% leverage we talk about a $65 million of equity participation. But this depends on the level that we are going to get.

Is this $65 million the remaining or in addition to what's already --?

The remaining. From that and even if it was $70 million or sort of $80 million this is a low amount of remaining equity commitment for the size of Costamare. So that's why my previous point that I think we still have a long way to go and we still have a lot of equity surplus to invest should we have attractive acquisitions.

Thank you, that was very clear. One last question about your debt capacity on the existing fleet. We see that you repaid debt something like twice your levels of your depreciation.

How do you think, first of all, your debt repayments going forward, how should we view your actual distributable cash flow? And second, how much debt can you raise on your existing assets if you want to utilize it for rate growth?

Regarding leverage, as of yearend we have furnished our lending banks with compliance certificates where the levers on the corporate level is being calculated which is in the region of let's say 55%. Now we have a fixed debt repayment schedule, which as you said, is double or more than double our depreciation expense which means that we are repaying our debt quite prudently and definitely more than the maintaining of CapEx, of definitely if you say remaining CapEx is close to the depreciation of the asset.

But now the way forward today we have four ships that are debt free. I don't have in front of me the debt offered from banks but I can tell you that $60 million or $70 million could probably be raised on those vessels.

And we could also if we wanted we could also raise the corporate levers on the 55% we have today to 60% or 65%, which is still quite an acceptable level of leverage. So in that respect I think there is still a lot of room to grow and there is still substantial capacity from underlevered assets.

Now if your question is whether we are going to be changing our debt repayment schedule I don't think this is something we have in mind. What we might be doing is to monetize some assets that are today debt free, or to monetize some assets which are underlevered. But I still don't think that we are going to be missing on any transactions because of scarcity of cash.

All right. Would it be safe to say that you do not need to raise any more common equity at this point?

Yes. I think that up to now we have proven in the last couple of times we did some fundraising had to do with preferred. I can say that we would be raising common only if we don't have any other means of financing either through our assets on the balance sheet or through other instruments.

And it should have been something which is very big, something that we know that would have accretive results and something that would merit the dilution. Otherwise I think raising common would be our last resort.

Thank you very much for your answer.

Donald McLee, Wells Fargo.

Hey, guys. You haven't announced a number of new charters for some of your smaller, older vessels and I was just interested in hearing a bit about the level of interest on those assets.

Those vessels, you talk about our slide 4 where we list all of the ships that we have been chartered. This has been chartered at today's at market level.

You can see that the 2,500 TEUs are sort of in the region of $7,500 per day. The same for the year like 2,000, or the 1,500 TEU which is again close to $7,000 per day.

These are market levers today and this is what the market is and as you can see the average duration of those charters is relatively small. As we appreciate the fact that these are charter rates at below historical levels. So in that interim we are going to be chartering for shorter periods and then when we feel that the market rate offered is attractive then in that case we would go for a longer coverage.

All right, thanks. That's all my questions.

Nish Mani, JPMorgan.

Good afternoon, guys. Greg, I was wondering if you could provide some commentary on the various sub segments you guys operate in within the container shipping space.

Historically you guys have skewed the newbuild order book and recent transactions towards larger vessels. But in light of acquiring the smaller vessel in the distressed transaction, wanted to get a sense of where you guys see future growth shaking out between -- in the secondhand space?

For the secondhand vessels when we don't have any predetermined size target, we can buy 1,500 TEU vessel charter free like we did recently, which was a distressed sale, or we could also be doing 6,500 TEU vessel under a sale and leaseback transaction with a charterer. I think we are pretty open and as long as the numbers work this is something we are going to be considering.

Now as far as newbuidings are concerned, for newbuidings the latest 5 14,000 TEU ships built in Korea, this is something that the client, our charterer asked for because apparently for their needs they wanted to have this size a vessel. So there we followed our client's request.

I think it's not secret that more than 80% of today's order book is for ships above 5,000 TEUs. A lot of companies prefer bigger vessels for economics of scale. So if that is the case I think we from our side we need to cater to the needs of our clients and hence this is why we put this order.

That makes sense. As you noted there's significantly economies of scale that's going to be realized on larger end. And to the extent that you guys have, you guys operate in the larger segment with 6,000 TEUs-plus area and the feedermax segment, in the smaller vessels, it begs the question as to how much you guys believe in the effects of cascading and whether or not the middle segment of vessels, call it 3,500 to 5,000 TEUs, if those vessels become redundant over time, do you guys see yourself growing that portion of your fleet, or is that something you would retire over time?

I think there was recently a transaction that they had to do with panamax which are not the most sought after asset size today. This is a transaction that was done where we passed on.

We might be looking at asset classes that are now not very popular today only if the numbers work. So it might make sense at some point to buy something close to scrap value so that if this asset operates for a couple of years then the equity invested will normally be paid back and you're going to bring the vessel back to scrap. So it does have to do with the numbers and how much comfortable we feel with the residual risk assumed at the expiry of the target party.

Okay, that makes sense. That's it for me. Thank you so much for your time, guys.

Mark Suarez, Euro Pacific Capital.

Hi there, good morning, Greg. Listen, just looking at scrap prices where they stand today any potential to maybe dispose some of your older vessels that expire in the near future or do you feel comfortable in just keeping, renewing these vessels on short-term contracts?

Scrapping depends on the physical condition of the vessel and on the market as well as on the steel prices. And today's steel prices are at relatively high levels hovering this close to $500 per ton.

So the decision will be taken based on those parameters. If we feel that this is an asset whose physical condition is still acceptable and can find attractive employment we would have no reason to scrap.

As a company we have been operating older vessels and it has also to do with the operational capabilities of the manager. If however we feel that the physical condition of the vessel is such so that scrap at attractive prices is justified then we would have no problem scrapping the vessel and the equity received can be used for another acquisition.

Got you. And just turning back to the vessel you recently purchased on the financially distressed source, are you seeing more of these financially distressed sources coming to you, getting to the point where a lot of these guys are getting desperate to move some of the tonnage away from their balance sheet?

Do you feel that this could be a new trend going forward if as charter rates don't really significantly improve and asset values remain historically low levels? What is your sense on that trend, that specific niche in that market?

I think that up to now we have seen a very small number of transactions like that bearing in mind how many vessels versus how many panamaxes were delivered were delivered in 2007, 2008 and 2009, and inflated prices and high leverage and only very few of those vessels have been sold today under a distressed transaction. So up to now the trend is not to see built like that.

There may have been some isolated debt transactions here and there. But I think that overall you can argue that this is the exception rather than the norm.

And to an extent this has to do with the banks appetite to dispose of those vessels and absorb or not absorb the resulting accounting loss. So I don't think -- we haven't seen a lot of transactions like that and I don't think that I'm capable of predicting the future on that.

Right. And now turning to the newbuilds. I know we have seen a lot of ordering activity especially for the large size newbuilds. I think somebody touched on that.

That is driving some of the price increases. When you talk to the shipyards, when you talk this quarter, have you seen indeed that increased competition for space within the larger vessel classes? And how do you see those newbuiding processes trending forward in the next 12 to 18 months?

I think today it's not easy to find, deliver in let's say mid-2016 for a large vessel. So there is a substantial amount of orders for those ships.

At the same time first-quarter 2014 we saw also increased ordering due to the fact that newbuiding prices have been at extremely low levels. This was the main driver between newbuiding orders even if there was no employment at the time of putting the order.

So newbuiding prices have gone up over the last months. And now whether there is competition, I don't think there is as much competition as we used to see back in 2006 or 2007. But again asset prices for newbuilds have moved up because there was some increased ordering at the beginning of the year.

Okay, great. That's all I have for now. Thanks for your time.

Gregory Lewis, Credit Suisse. Mr. Lewis, are you there, your line is live? Shawn Collins, Bank of America.

Great, hey, Greg, good afternoon, how are you? I know you've covered a lot so far, can you just comment on what you are seeing in your end customer market and to some extent comment on global trade and overall macro economic conditions to the extent that you are able to differentiate between regions, Americas, Europe and Asia?

If the question has to do with where we see global demand going I'm afraid that as a company we have the policy of not predicting about demand and supply of -- although it's not easy to predict about supply because it's something we know today for the next couple of years. Because there are so many unknown parameters the way we run the Company is that we look at our cash flows, we make a couple of transactions based on secure cash flows and we may take some residual risk based on the view we may have to the market for the next quarters but generally we tend to refrain from making market predictions.

I can tell you though that what we see today that there is definitely an imbalance between supply and demand. I think there is no question that supply today is much more so the ships today are much more than the ships needed in order to cater to the shippers' needs.

We know that there has been extensive ordering for larger ships. We see a lot of pressure and squeeze for the midsize vessels especially for the panamax vessels and we see a demand increase but not at levels that are capable for absorbing the supply.

So although, overall let's say year-to-date growth in Asia, and Europe is in the region of let's say 1.8% to 2% in demand terms, the supply of ships there, of tonnage there is much larger. If you look at the Asian, North America overall plate growth, here today this is a negative territory.

So there is no question that supply and demand are not in equilibrium but I'm afraid I cannot tell you if this is something that is going to be changing over the next quarters or years. If I may say I don't see a reason why this will be changing over the next couple of quarters unless you are telling me that you expect a hike in global GDP.

Otherwise, I think that the market, short term, the market may remain where it is today. Now from our point of view, the fact that we have a low asset value environment coupled with low charter rates, this is what we feel is the proper environment in order to expand and this is why we are now in an expansion mode.

Okay, that's very helpful. Thanks, Greg.

That's all I had. I'll turn it over, but thank you very much for the insight.

(Operator Instructions). As it appears that there are no more questions this concludes our question-and-answer session and I would like to turn the conference back over to Mr. Zikos for any closing remarks.

Yes, thank you. Thank you very much for being here with us this morning. We remain committed to delivering shareholder value.

Our goal remains to continue increasing the dividend as our cash flows increase. Thank you.

Thank you. This does conclude our conference for today. Thank you for all participating in the conference and you may now disconnect your phones.