Costamare Inc (CMRE) 2014 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 2014 Financial Results.

We have with us Mr. Gregory Zikos, Chief Financial Officer of the Company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, July 24, 2014. We would like to remind you that this conference call contains forward-looking statements. At this time, please take a moment to read Slide number 2 of the presentation, which contains the forward-looking statements.

And I will now pass the floor to the speaker today, Mr. Zikos. Mr. Zikos, the floor is yours, sir.

Thank you and good morning, ladies and gentlemen.

During the second quarter of the year, the Company continued to deliver positive results. Recently, we acquired a 2000-built 2,500 TEU container vessel for a purchase price of $9.5 million. The vessel was bought with equity and after delivery, she commenced her charter employment with Cosco. Regarding our chartering arrangements, we have no ships laid up. Our re-chartering risk is minimized. The charters for the vessels opening in 2014 account for less than 3% of our 2014 contracted revenues. Finally, on July 3, we declared a dividend on our Series B and Series C Preferred Stock. On July 8, we declared a dividend of $0.28 per share of our common stock, payable on August 6. 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 turn to the presentation slides. On Slide 3, we are providing a summary of our recent transactions mentioned earlier. During the last couple of months, we sold two vessels for demolition and expect to book a gain of close to $1 million. In addition to disposals, we purchased a 2000-built 2,500 TEU vessel, which we employed on a short-term charter. Finally, during the quarter, we declared a dividend on our common stock, the 15th consecutive dividend since our listing in terms of dividends from both classes of our preferred shares.

Moving on to the next slide, on Slide 4, we are summarizing our charter arrangements. We have no ship laid up. During the quarter, the Company fixed all of the vessels, which were opened from charter.

On Slide 5, you can see the second quarter 2014 results versus the same period of 2013. During the second quarter 2014, the Company generated revenues of $123 million, EBITDA of $79 million and net income of $24 million. For the same period of 2013, the revenues amounted to $100 million and the EBITDA and net income to $70 million and $30 million respectively.

Consistent with our previous press releases, the EBITDA and net income figures are adjusted for the following non-cash and one-time items. First, the accrued charter revenues as a resulting discrepancy between the revenues received, the revenues accounted for based on a straight-line amortization schedule. Secondly, the gains or losses resulting from derivative instruments included in one-time swap breakage costs relating to the refinancing of the latest newbuild delivered in April. And thirdly, the accounted gains and losses resulting from asset disposals.

Adjusting for the above, the first quarter EPS amounts to -- the second quarter EPS amounts to $0.48 versus $0.37 for the same period of last year and the second quarter EBITDA to $91 million versus $67.6 million for the same period of last year. Overall, the Company generated strong results during the quarter based on solid fundamentals.

On the next slide, we are showing the revenue contribution for our fleet. The revenues come from first class charters. More than 90% of our contracted cost comes from Maersk, MSC, Evergreen and Cosco. We have $2.6 billion in contracted revenues in the remaining time charter duration of about five years.

Slide 7 is dealing with the theoretical re-chartering risk that Company might face for the remainder of 2014. You can see the EBITDA sensitivity. Based on our above assumptions, the four ships coming out of charter in 2014 for the remainder of the year are re-chartered at a 70% rate, which is equal to a 30% discount on our 2014 re-chartering. The cash effect is minimal, less than 2% of the six-month EBITDA, which goes up to 3% for a 60% discount. We feel that in order to assess the Company's real re-chartering risk, someone needs to focus on cash; since cash is what is servicing the Company's debt obligations the cash available for distribution is what is paying the dividend and allows for further growth. We do believe that the dividend we offer today is very attractive, based on its quality and sustainability.

On Slide 8, we discuss our balance sheet management. Liquidity as of the end of the quarter stands at $202 million in cash and cash equivalents. We have unencumbered vessels and a moderate fleet leverage. The loan portfolio is 85% hedged at a weighted average rate of less than 4%, which adds to the visibility of our cash flow. The debt repayment schedule is smooth and evenly spread. The distributable cash flow on a post debt service basis 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 a low market.

And in the last slide, we are discussing the market. Box rates have been volatile and liner companies are dealing with management capacity issues. Charter rates, secondhand asset values and newbuilding prices remain at historically low levels. The idle fleet has been falling over the past months and now stands at a very low level of close to 1.7%. 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?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Ben Nolan, Stifel.

Yes, thanks. Nice quarter guys. My first question has to do with sort of the idle capacity in the market and you've mentioned that all of your fleets are currently in operation, which is nice and I think across the broader market, there is very low idle capacity at the moment, but yet, we've not really seen a material uplift in the rates for secondhand assets, at least not that I have seen. Do you think that it is simply a function of idle capacity falling because it is the seasonally stronger time of the year or do you think that we could be at a point here where demand is actually increasing sufficiently that idle capacity is going away and we could be very close to an inflection in rates from a supply and demand perspective?

Yes, I think that, look, idle capacity has been falling consistently since the beginning of the year like beginning of 2014, we had idle fleet in the region of 4%. It was like in April, in the region of 3.4% and now it's half, it's close to 1.7%. However, there is still structural overcapacity in the market, which is something that does not go away so easily. Although as a policy, we refrain from predicting the market, the charter rates as you rightly pointed out, they are where they are and they are at historically low levels across the board.

So the fact that the idle fleet has moved down, I don't think that it necessarily means that, we're going to be seeing charter rates uplift in the short term. Now, we may be wrong and you know this is a very volatile market, but I don't think there is a direct link resulting in a time lag between a low percentage of idle capacity and charter rates moving up substantially right after the fall in the idle vessels.

Okay, that's helpful. And then my next question -- final question is, it relates to sort of what you're seeing with respect to the liners and their appetite for the new larger vessels. There was a lot of activity last year, it seems as though that has slowed down quite a bit so far this year and furthermore, we've not really seen a lot of speculative orders. In your opinion, is it simply a function the liners not being as aggressive with respect to their inquiry for new vessels or is there perhaps maybe a little bit more discipline in the market right now? What are you feeling with respect to newbuildings from your customers?

I think, first of all, liner companies are reexamining the situation after the latest news regarding alliances and some of them I didn't go through. So on the other hand, liner companies, they have been ordering larger ships, because of economies of scale. There are less orders compared to the, I mean orders, we saw a year ago. But still because we talk about economies of scale, because we talk about a very competitive industry, I don't think that we're not going to be seeing any orders in the future. It's up to liner companies to examine where they are and where they want to go and how efficiently they can manage their capacity and how much cost savings and economies of scale they realize because of larger ships employed. But I don't think that there will be no newbuilding orders going forward.

Now, it may not be as much as we saw in the last couple of years, but still there could be some appetite. And this is where we, as a charter owner, will be hopefully playing a role and because liner companies, they want to retain flexibility, a part of their fleet needs to be able to be re-delivered back to the ship owners. And if you look at the order book today, [both our figures say], half of it is ships order directed by liner companies and half of it is ships ordered by charter owners like us and then chartered to liner companies. So still there will be some need for flexibility and for new [tonners] going forward.

Okay. I know I said that was my last question, but just sort of a follow-on to that, would you guys consider making an order without a contract already in place or has the market changed sufficiently such that the only way you would do something is if it was on the back of a contract?

Look, we have currently in our order book four ships orders at Hanjin in Philippines without a back-to-back charter coverage and the reason those ships were ordered, it is because the pricing was extremely competitive and because we believe in this size. However, leaving that particular order aside, all of the -- rest of the newbuilding business we did was covered by a charter party, which was in place when we signed the shipbuilding contract. So I cannot comment for the future, but most of our business in newbuildings are with the time charter attached to the contract.

Okay, very helpful. Thanks a lot and again, nice quarter guys.

Sure, thank you. I appreciate it.

Fotis Giannakoulis, Morgan Stanley.

Yes, good morning Greg and congratulations for the good quarter. Can you explain to us what happened when expenses were so much lower compared to your budget? I think that other times they were below what you have budgeted, but this time it seems that you have done an even better work in keeping your expenses. Is this a one-off or it's something that we should think that is going to continue in the future?

Yes, look, you're right that our expenses were -- our operating expenses were below budget this quarter and probably it will be a good idea for us to revise the budget and discuss the new budget, the revised budget with the analysts going forward, so that there will be no discrepancies.

Now, on average this quarter, our daily operating expenses for the whole fleet were in the region of $6,000 per day and bearing in mind that the average size of our fleet and our average vessel is like north of 5,500 TEUs, plus the fact that we are flying the Greek flag in substantial part of the fleet. I think those OpEx figures are quite competitive. Now, I'm not sure whether this is going to be a future story, but in any case internally we are going to be revising the budget, we are going to be looking at this again. And we will definitely let you know in due course.

Are there any benefits in any revenues that you have from your JV with V.Ships that they bring their overall OpEx number down? Has the JV efficiencies started working?

I think, look, the running expenses of the vessel, I mean for the whole fleet are below budget irrespective of those vessels are being managed by Costamare Shipping or by V.Ships. However, I think it's evident that economies of scale do provide a benefit. Together with the newbuildings, we have a fleet in the region of 70 vessels. And this is something that help us be more competitive in managing our cost base.

Thank you, Greg. I want to ask you about your new acquisition, it's a quite small one, but it would be interesting if you can give us a little bit more background. This vessel, from what I understand, was acquired 100% by Costamare, this is not one of the JV vessels. Why is that, is this outside of the scope of the JV? And did you pay this vessel in cash?

Yes, look, you're right. This ship was, I mean, it's 100% owned by Costamare Inc. It is not falling under the umbrella of the joint venture with York Capital. I think, it's a quite a small investment of less than $10 million and the ship has a relatively short charter of three to five months. So I don't think that the size is something that made it an important asset in JV terms. Bearing in mind that together with York for the newbuildings and for the rest of the secondhand ships we have commitments of or we have invested in total close to $1 billion.

However, now this ship -- it has been bought 100% with equity, with our own funds. It was chartered to Cosco for a short period at $7,000 per day. It was bought at below $10 million. We feel comfortable with this acquisition. I mean, it's not a huge CapEx commitment, quite the opposite but we feel that for the acquisition costs and for the potential of that vessel, we feel quite comfortable in that it was an acquisition that made sense.

And also I want to ask about the chartering of the four newbuildings of the JV, you have already chartered the five vessels to Evergreen. First of all, can you give us some estimate of what would be the cash flow, the free cash flow of these -- of each of these five vessels that you have already chartered and what would be the free cash flow to Costamare in particular and also how do you see the chartering of the remaining four newbuildings, how much cash flow shall we expecting for Costamare when all these nine vessels are chartered?

Okay. Look, first of all for the last four newbuildings those built at Hanjin, there is no charter in place yet. This is something that we're looking at. But those ships are going to be delivered from beginning of 2016 onwards. And bearing in mind the acquisition cost and the prospects of those vessels, today we feel quite comfortable with the chartering potential of those ships, but since there is no fixed charter yet, I'm not sure that, we will be able to provide you with a prediction regarding the cash flows.

Now, as far as the [five 14,000 TEU] ships are concerned, those have been chartered to -- [everything for five] for 10 years. Those ships, we are now in the process of closing the debt financing. So, if you bear with us for the quarter or so then hopefully we'll have the debt funding in place and we will be in a position to provide you with a levered cash flow yield for the equity holders. But leaving that aside, if you look at the EBITDA margin, we have the previous newbuildings with (inaudible) EBITDA yield, meaning that EBITDA divided by construction cost. I think that the numbers compared quite favorably.

And shall we think because apparently you are already in talks about the financing of the newbuildings that you finance the previous series of newbuildings with around 75% debt, what shall we expect now and we saw some articles on the industry newspapers talking about extremely high levels of potential credit facility that they have been offered to you, can you comment on that, shall we expect 75% or higher than that?

Yes, look, previous 10 newbuildings, five of them -- they were initially levered at 70% and five of them are at 80%. Then, we did a financing for three of those and the 70% went up substantially above 80%. So today, we haven't closed anything yet and I mean, I don't want to be premature. But I think that the 75% leverage you mentioned, bearing in mind the quality of the charter and the size of the vessels and the whole partners, I think that the 75% leverage, it is something that it is quite achievable.

And one clarification on your presentation on Slide 6, you mentioned that you have contracted revenue of approximately $2.6 billion, is that only the owned fleet or that includes the five newbuildings that are owned by the JV? And if you can give us an overview of how many of your vessels they have long term charters, let's say more than five years?

Okay. Look, this $2.6 billion, it includes our percentage of the contracted revenue of the JV vessels. So to be more specific, for instance, in the [five 1,4000 TEU] ships where we have a 40% stake, we'd take the 40% of the contracted revenues of those vessels and we add them all together. So the $2.6 billion figure it is only Costamare Inc. cash, excluding of course the portion of cash that it is allocated to York Capital.

Now, regarding the time charter coverage, on average our fleet has a time charter coverage of five years, on average. And now how many ships are above this sort of five year threshold, it's all the newbuildings. So I mean, we talk about the 10 newbuildings delivered over the last two years. It is the [five 14,000 TEU] ships already chartered. And then we have a lot of ships that are coming out of charter in the period between 2018, 2019, which are marginally within this five year period. And we talk about the [five 9,500 TEU] ships chartered to Cosco. We talk about [6,500 TEU] ships chartered to Maersk. I think [more for figures], we talk about 20 ships plus.

Thank you very much, Greg.

Keith Mori, Barclays.

Congratulation on the quarter. Just a quick question on the growth outlook for 2015. We see here a lot of new ships coming on at the JV in 2016, rates are still depressed in the market, you still have pricing in secondhand ships that are quite attractive. Should we think that the pace of secondhand ship acquisitions by you in the next 12 to 18 months could accelerate to help drive some growth for next year? Are we looking at next year as really just being a bridge to 2016 growth?

I think, look, each acquisition that we make, whether it is a secondhand ships or whether it is a newbuilding order, it needs to be justified on its own. So the numbers need to work covering our downside first and then making sure that there is some upside left for our investors. So we wouldn't be making acquisitions only in order to have accretion in our cash flow. If that means that we would be assuming a lot of residual value risk at the expiry of the charter party.

So the goal is not to grow for the sake of growing and to be [bigger], the goal is first to be safe and secondly profitable. So, if the acquisitions that they make sense for ships to be delivered between now and 2016, when the newbuildings will be seen in the water, of course we are going to do them. But enter into new transactions just to boost the growth between now and 2016, if you know, we don't feel comfortable with the prospect of those vessels going forward. I'm not sure, this is something we would be doing.

So should we think the returns between the new ships given where pricing has gone over the last 12 months, relative to maybe where the secondhand returns are, I mean, should we see the liquidity on the balance sheet of Costamare is pretty attractive, you say you're well capitalized, should we think that the capital go towards new ships or secondhand ships going forward?

I think it could be both. It could be both as long as the numbers make sense. It could be both. With the newbuildings you have, in brackets you have -- the negative is that you need to allocate capital and have a carrying cost for a couple of years until the ship is being delivered. With the secondhand ships, when you have a firm delivery, you are getting -- you are realizing some cash from day one. But again, this is something we consider. However, both types of transactions have their own merits. The newbuildings are providing long stable cash flows for the next years, which could be the backbone of the Company and make sure that dividend remains sustainable as it is now.

So I think, we could be doing both as we have been doing in the past. In January, for instance, we ordered [five 14,000 TEU] ships and since then selectively we have bought older vessels with or without charter and also with equity. So whatever makes sense that is something we're going to be looking at. But we don't have a predetermined target growth that we may need to do so many secondhand ships or so many newbuildings.

Okay. And I guess one item on, I guess, the joint venture. The earnings in the quarter came in roughly $2 million after adjusting for the swap. I mean how should we think about that line going forward, I know you have about three ships there now, it should be relatively stable, I would have expected. How should we think about that line over the next 12 months?

I think in this joint venture, we have entered into a swap auction agreement that it relates to the [five 14,000 TEU] ships. The debt is not in place yet, but in order to make sure that we're not going to be subject to substantial interest rate which we have entered into a swap auction agreement with an investment bank providing us with a ceiling regarding the seven-year swap rate, when those ships will be delivered. What you see there, you see the movement in the mark to market of that specific instrument. This is not a cash item. So it shouldn't be considered as cash coming in or if it's negative as cash going out. This [setting] will be in place until beginning of 2016. So this is the explanation of the number you're looking at.

Okay. And then I guess -- that's helpful. And the last one from me is, could you update us on, I guess the liquidity position that you feel, how much capital do you feel on the balance sheet that you can allocate to maybe secondhand ships or putting down on a new payment for a newbuild order. I mean, you have about $220 million on the balance sheet today, including restricted cash. I know you have some commitments to the joint venture. What's the number that you think is -- what's the range that you think you could spend for new acquisition?

Look, this is also a function of the debt finance that we have the ability to raise regarding new transaction. So if we talk about newbuildings, if you can raise debt in the region of let's say 70% or 80%, which is a 5 times gain. With $100 million, you can do substantial number of transactions and the same applies for secondhand ships. So this is an unknown and this is why I'm not in a position now to give you a fixed number, so that you know we can do a $1 billion transaction, $1.5 billion, $1.2 billion. But I can tell you that up to now we have never missed a transaction which we wanted to do because we didn't have the equity or because we couldn't raise the debt that's necessary in order to fund it.

So as we look up, I can tell you that a $ 1 billion transactions, this is something that's easy to do and let's not forget that we have this platform together with York and I would be tempted to go to a higher number, however we don't like overpromising. So time will tell.

Okay, thank you, guys. I'll pass it along.

Mark Suarez, Euro Pacific Capital.

Good morning guys and thanks for taking my question. Maybe just to go back on and just ask you a macro question to begin with, last quarter we have seen some good utilization from some of the vessels in the sub-2000 TEU range, especially among your vessels where demand has been relatively strong vis-a-vis panamax and such. Do you still see this as being the case and do you think this will be a good opportunity to go out there and buy assets such as these, the 1,500 TEU, 2,500 TEU range sort of in line with what you did over the past four, five months with those two recent secondhand purchases?

Look, we've seen charter rates for panamax vessels going up from $7,500 per day to up to [$9,000 and $9,500] per day. I'm not sure whether this is any longer the case. But, we've seen this increase in panamax rates and at the same time, this was coupled with less demand for geared 2,500 ships. But still if you look at the panamax vessels, which are purpose-built type of vessels for -- with their main goal to navigate through the Panama Canal, still the rates for those vessels and their prospects, I'm not sure they make them the best candidates for acquisition. Now, everything probably is a matter of numbers and what is the acquisition cost. But if you consider that panamax ships, they were yielding $20,000 or $25,000 or even $30,000 per day, some years ago and now we took about a $9,000 or $9,500 per day. And there is definitely an overcapacity in those type of vessels.

Unless the numbers work extremely well, I think this would be a relatively difficult acquisition to justify. But don't get me wrong, if the numbers worked fine, however as a type of vessel, if you look across the [book] historically, it is that specific asset that has been used more than any other containership vessel regarding asset values and charter rates.

Now regarding the smaller vessels, the 2,000 TEU to 3,000 TEUs, it's two things. First of all, the order book for those ships, it's much thinner and some could argue that then it might be a good idea that to put a newbuilding order there for that size. The other times, liner companies tend to prefer larger sizes for their own reasons and considerations. So we've seen especially the geared 2,500 TEU ships to be underperforming in the last couple of months, mainly because the charterers, they preferred the larger non-geared vessels and this is why there is up to the panamax ships and this is why the panamax rates increased a bit.

But generally speaking, still those vessels, the 2,500 TEU, they may be getting $6,000, $7,000 per day. It's far below historical charter rates. And their asset values are much below where we used to see them. For those vessels, if the numbers make sense, of course, we might buy them. But the situation today is that those ships are trading nowhere near they used to trade some years ago.

And in terms of the orders and the interest you are getting off the market, is this sort of the range you are getting closer on? In other words, how should we think about your two recent secondhand purchases, are these just one-off or should this be a new trend that we should look for going forward, the next 12 to 18 months, how should we think about that?

Yes, look, I think that that came under our radar screen and we saw them to be a good investment, but I cannot tell you now that there is a pipeline of those type of assets [as far as their potential], every quarter we may be acquiring two or three of those. Having said that, every quarter we make some acquisitions or some disposals as well, especially older vessels we scrap. So I wouldn't be surprised if we enter into some additional purchases, but we don't have, as I said earlier, we don't have that pre-determined growth rate. If something makes sense, we do it; if not, we pass on that and we look for something better. So I mean we take it as it comes. There's no magic there.

Okay and just turning on to the balance sheet for a quick second, I know given your long-term goals of growing the fleet from your own balance sheet and the JV. How should we think about the potential to maybe further monetize existing newer vessels for some of the newbuilds into either sales leasebacks? I know you did three sales leaseback recently. Is there maybe the potential to do more over the next 12 to 18 months, maybe redeploy that capital into additional secondhands, similar to the ones you did or maybe additional newbuilds with the help of the JV here?

Yes, look, yes, you're right. We refinanced at the beginning of the year three newbuildings, which had the Commercial Bank debt in place and we refinanced it with a more competitive sale leaseback type of structure from Asian financial institutions. So we have freed up some equity. This is something we may be doing in the future or we may be discussing again sale leaseback transactions for the newbuildings, which were we now have on order. This is definitely a tool that makes sense and a more levered transaction to the extent that it is solid in the cash flows book and that the debt service can be met. Then it's boosting our equity returns. It is something we did in the past and if the opportunities are there and if the circumstances allow, we will definitely review this up to the proposal.

Okay, that's what I have for now. Thanks, Greg.

(Operator Instructions) Well, it appears that we have no further questions at this time. We'll go ahead and conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Gregory Zikos for any closing remarks. Sir?

Yes, thank you very much for being here with us today. We are looking forward to speaking with you again during the next quarterly results call. Thank you. Operator, thank you.

We thank you, sir. Thank you for your time today. The conference call is now concluded. At this time, you may all disconnect your lines. Thank you and have a great day, everyone.