Costamare Inc (CMRE) 2014 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Costamare conference call on the third-quarter 2014 financial results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the Company.

(Operator Instructions)

I must advise you this conference is being recorded today, Monday, November 3, 2014. We would like to remind you that the conference call contains forward-looking statements. Please take a moment to read slide number 2 on the presentation which contains the forward-looking statements.

And 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 third quarter of the year the Company continued to deliver positive results.

Recently we acquired together with our partners, York Capital, a 1999-built 2,500 TEU container vessel for a purchase price of $7.7 million. We paid for this both with equity and after delivery should commence a target deployment with Maersk.

During the quarter the Company sold for demolition the 1987-built 3,500 TEU containership vessel Akritas for a price of $7.3 million. The disposal resulted in an accounting gain of approximately $1.8 million.

In August we entered into a $17 million agreement in relation to the three second-hand vessels Ensenada Express, Petalidi and Padma X-press bought with equity in the past under our joint venture agreement. Regarding our chartering arrangements, we have no ships laid out and essentially no ships coming out of charter before yearend. Our re-chartering risk is minimized.

Finally on October 3 we declared a dividend on our Series B and Series C Preferred Stock. On October 7 we declared a dividend of $0.28 per share of our common stock payable on November 5.

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.

Last month we sold a vessel for demolition and booked a gain of $1.8 million. In addition we purchased together with York a 1999-built 2,500 TEU vessel, which we fixed on a short-term charter.

We also entered into a $17 million facility in relation to the three ships originally bought with equity under our joint venture agreement. Finally during the quarter we declared a dividend from our common stock, the 16th consecutive dividend since our listing in total dividends on both classes of our preferred shares.

On slide 4 we are summarizing our chartering arrangements. We have no ships laid up. During the quarter the Company fixed all of the vessels which were open for charter and essentially we have no ships opening for the remainder of the year.

Moving onto slide 5, on this slide you can see the third-quarter 2014 results during the same period of 2013. During the third quarter of the year the Company generated revenues of $125 million, EBITDA of $94 million and net income of $34 million respectively.

For the same period of 2013 the revenues amounted to $110 million and the EBITDA and net income to $69 million and $20 million respectively. Consistent with our previous press releases the EBITDA and net income figures need to be adjusted for the following loan costs and one-time items.

First, the accrued charter revenues and the resulting discrepancy between revenues received and revenues accounted for based on a straight line amortization schedule. Then the gains or losses resulting from variable instruments. Thirdly, we account against net losses resulting from asset disposals, and lastly the amortization of prepaid lease rentals which is a non-cash charge resulting from a sale and leaseback transaction for three of our vessels.

Adjusting for the above the third-quarter EPS amounts to $0.38 on an adjusted basis and the third-quarter adjusted EBITDA to $87 million. Overall the Company generated strong results during the quarter based on solid fundamentals.

On slide 6 we are showing the revenue contribution. More than 90% of the contacted cash comes from Maersk, MSC, Evergreen and Cosco. We have $2.4 billion in contracted revenues and the remaining time charter duration of about five years.

We have updated slide 7 for the next 12 months starting from the end of the third quarter of this year. The slide continues with theoretical re-chartering risk the Company would face. You can see the EBITDA sensitivity.

Based on our budget before ships coming out of charter during the next 12 months have re-chartered at the 70% rate, being equal to 30% discount. The cost effective minimum remains at 2% of the 12-month EBITDA, which goes up to about 3% for a 50% 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 helping the Company's debt obligations and cash over levels 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.

On slide 8 we discuss our balance sheet. Liquidity as of the end of the quarter stands at $199 million in cash and equivalents. We have unencumbered vessels and moderate leverage.

The loan portfolio is 85% shared at the weighted average rate of less than 4% which adds to the visibility of the cash flow. The debt repayment schedule is more than evenly spread in the coming years.

The distributable cash flow on a cost-of-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 will allow us to continue making high-priced acquisitions in a low market.

Moving to the last slide, on the last slide we are discussing the market. Box rates in the Asia and Euro trade grew as expected last week as a result of a general rate increases by liners servicing that. Rate volumes based on the latest data from CPS showed growth in most trade lanes.

The focus on brokerages and demand growth will be at levels we supply for the full year. Charter rates and second-hand asset values remain at low levels.

Panamax vessels, however, also in the past were considerably underperformed they seemed to have gained some ground over the last months. Newbuilding prices remain at low levels.

Finally, the idle fleet has been falling over the past months and now stands at the very low level of 1.1%. As mentioned in the past, we feel 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. (Operator Instructions) Ben Nolan, Stifel.

Thanks. My first question is related to the market, specifically the dynamics that maybe you are seeing from your customers as it relates to ship speed.

We have seen in the last month, we have seen a pretty material decline in oil prices and subsequently the prices of ship fuel. Has there been any move by any of your customers to increase the speeds of their ship because the relative economics from a consumption standpoint are a little bit more favorable than they had been?

Yes, look yes we definitely have witnessed a fall in fuel prices. I don't think, however, that this is something that has been already been in the market. So still sort of a charter-tied differential for intermodal ships versus older donuts.

I think it is still in place. And if the question is whether factoring in the new, also the lower fuel prices, charters may be opting for higher speeds. I'm not sure that this is still the case and we may have a long way to go.

Okay. So it is not happening on any of your vessels then?

I think, no, we haven't seen it for the time being. Although I guess in any case it will take some time but I don't think that for the time being we have seen in the latest figures signs that take into account the lower fuel prices.

Okay. That's helpful. Along with that, we have seen some what appears to be some tightening of the market certainly over the course of the summer but it has even sort of lasted out to this far and there is a pretty low level of idle capacity in the market.

We have not seen that really translate into much in the way of rate improvement. What exactly can you attribute that to?

It doesn't seem like the demand for cargoes into Europe is especially robust. I know that there's some congestion issues on the West Coast but how are you seeing the market with respect to the availability of capacity and the fact that it is tight when it should be loosening?

First of all, regarding the number of idle ships, you are right this is at a very low point. This is at in the region of 1.1%.

I think that same period last year it was about 2%. However, from this idle capacity close to 95% of those ships they are owned by non-operating owners, people like us.

And on top of that there is some structural overcapacity in the market. So although the number of cargo ships have fallen substantially still you know we have not seen a great improvement in charter rates.

No what we did witness over the last couple of months is that the panamax vessels which generally were hard to perform out from the market, they had leased charter rates of $10,000 or $11,000 per day. But this asset class again now seems to be softening a bit and we have returned back to $8,000 to $10,000 per day versus $11,000 some weeks ago. So overall the structural overcapacity that still exists in the market together with the fact that almost all of those idle ships are being owned by ship owners and not by lender companies, those factors have not led us in an improved charter rate environment.

Okay. And then my last question, and then I will turn it over, relates to the four newbuildings that you have with the joint venture. Where do you stand with respect to getting contracts on those and maybe even more broadly speaking, could you maybe address what the appetite is at the moment for -- that you are seeing from your customers for chartered and newbuilding tonnage?

It seems like there has not been as much of that going on lately. Where do you see that market and how do you think it relates to the four that you still have to contract?

Yes, regarding our new buildings, in total we have nine ships on order, five 14,000 TEUs, which have been chartered to Evergreen for 10 years and four 11,000 TEUs which are not chartered yet and I guess those are the ones you are referring to. For those ships you're not going (inaudible) since they have been contracted at prices that make sense.

And this is something we are currently working on but as I said we are not in a hurry to charter them and making sure that we will try to maximize shareholder returns. I'm not sure that I can say much more on that point apart from the fact that we feel quite comfortable with that investment.

Okay. And what about the appetite for liners for new charter then tonnage?

I think that generally speaking what we hear is that there is some appetite from lender companies to charter in vessels that are projects. So if you ask me whether this market is alive, this is definitely alive. Yes.

Okay. All right, that is it for me. I will turn it over. Thanks a lot.

Fotis Giannakoulis, Morgan Stanley.

Yes, good morning, Greg. I want to follow up on the last question and if you can tell us if there are any inquiries today about this vessels, are they still without charters?

And even if they are not at this point are you not in any discussion that you can reveal right now, what would be a reasonable rate or a reasonable EBITDA yield that we should expect for these vessels? Or at least a range of EBITDA yield?

These are ships we are discussing, we have been discussing in the market. But as I mentioned earlier, we are not in a hurry so we will take our time in order to charter them promptly. Now regarding the returns, I think that when someone looks at our previous newbuilding transactions already concluded, I think that the returns should be at around those levels in terms of EBITDA yield.

However, I cannot comment to anything and I cannot say more because this is not a deal that has been closed yet. As I said we are not in a hurry, so I'm afraid I will have to stop here on that.

I understand and appreciate it. Can you remind us what was the EBITDA yield of the previous deal?

What about the duration of the contracts that you envision for this type of vessel? We saw previously 10 years but some of your peers they have concluded 5 years. What type of duration are you looking for?

The duration is also a function of the time charter rate offered, so there could be values out there and if so from our side we can be flexible. In previous transactions, these numbers are public, we had an EBITDA yield ranging from 12% to 14%, so this is something that we did in the past.

However, as I said I cannot commit to anything now and I cannot predict either since this is still a work in progress and there may be varying -- a lot of alternatives. Also, in relation to the combination of time charter duration and the active time charter rate over to the clients.

And regarding the debt financing, what should we expect as a reasonable debt financing in terms of leverage and in terms of amortization and interest costs?

Yes, again I will have to refer in the past we have done newbuildings with leverage levels ranging between 70% up to 90%. Both post-delivery and through delivery financing.

So I think -- and the leverage, this is a function of the quality of the charterer, of the time charter duration. And mainly it is judged on a cash flow basis meaning that the cash flow from the vessel on a standalone basis need to be able to service the debt and this is what we are aiming.

So these are the leverage levels we have done in the past. And now regarding the cost of debt, again this is a variable that has to do with the leverage levels, with the duration but I cannot give you specific number. But I can tell you that generally we have been quite competitive in securing commercial bank debt both for newbuilding projects as well as for secondhand vessels.

Thank you. And these are sort of older deals you have signed these newbuildings some time ago. Going forward where do you see more opportunities arise, is it going to be on the newbuilding front or on [mid] secondhand vessels that we have seen that you have done a few of them the last couple of years?

We look at pretty much everything, as you saw like in this quarter we bought sort of 15-year-old vessels at 2,500 TEUs with equity for a purchase price of a bit less than $8 million. In the past we did what 14,000 TEU newbuildings chartered out for 10 years. So we can be pretty flexible regardless of age, size and tenure of employment and I think there will be opportunities in both secondhand in newbuildings.

Is there any area that you think that there is more dislocation in terms of pricing, or in terms of combination pack meaning a combination of acquisition price and (inaudible) rates?

I think you can find opportunities both with vessels in the water and for ships that will be under construction. As long as someone is well-capitalized and has access to debt, also has the equity in place whether this equity means cash on balance sheet or leveraging low level assets against a given balance sheet. So if someone has access to finance and a track record, I think the opportunities are going to exist in both of those areas.

And can you remind us right now how your acquisition capacity looks like, how much equity you have available between you and your JV and in theory how many assets can you buy just to have an idea of the growth potential?

We have cash on balance sheet as of the end of last quarter was close to $200 million. We are leaving aside some cash which is under our loan agreements and some working capital requirements. Most of this can be utilized and on top of that we have five ships to date which are debt free.

Under our joint venture agreement with York we have the right to invest anywhere between 25% to 49%, which allows us great flexibility. Now if you factor on top of that our access to commercial bank debt where yields can have a leverage of 50%, up to 80% or 90% I think the opportunity for container shipping is quite important.

I am not willing to give a specific number because this is subject to leverage levels and to our equity participation or to our shareholding in this single transaction, which may vary. However, I don't think the issue at Costamare is the funding or the ability of equity.

Quite the opposite. The thing is that we are trying to find transactions which are going to be yielding acceptable returns to our shareholders.

And one last question and I will hand it over. We have seen the previous months together with the volatility in the financial markets your stock price dropping similar to any other shipping stocks and sometimes because of the limited fleet load even harder.

What are your thoughts about the stock price and if there are any discussions about share buyback programs? And how do you view capital allocation between share buybacks, dividend increases and additional vessel acquisitions?

Yes, first of all regarding the stock price, you are right. I think together with the rest of the market and together with the rest of the industry the Costamare stock followed. However, in one single day we witnessed a fall -- we felt that it was over and above what someone would expect.

Bear in mind the Company's financials and nothing had changed neither financially nor operationally in the Company. However, there shouldn't be anything. The stock has recovered.

We still feel that in today's environment the dividend yield offered by the Costamare stock it is quite high and attractive bearing in mind the sustainability and quality and upside of the dividend. However, most of the losses during those days have been recovered.

Now going forward, we like dividends and think we feel were already rate sensitive twice. And I think we will be more than happy to raise it in the future after a transaction which is going to be providing us additional visible cash flow.

All in all we will have some events that would justify a dividend increase. Let's not forget that the founding family today owns close to 65% of the Company, so we have 100% aligned interest. There are no other shipping assets outside of Costamare Inc.

Now, the share buyback, it is also another tool, which is going to be helping our shareholders and compensating our shareholders in case that the stock is trading below its levels so that the EPS per share it is going to be going up. This is something we will be evaluating as well.

Now, it is difficult to have and it is in line between acquisitions and growth, share buybacks and dividend increases. However, I think that going forward regarding the share buyback and the dividend increases, this is something we are currently discussing. The acquisitions and the growth and things needless to say that in today's environment we are not sellers, we are buyers and that we will continue expanding as long as we see transactions that makes sense.

Thank you, Greg.

Mark Suarez, Euro Pacific Capital.

Good morning. Greg, over the past few quarters we have seen you guys sell older assets to then reinvest that and use that equity into newer sub-panamaxes with the JV with York. And I am wondering we should expect more of the same within the secondhand market and if so is the focus right now in the sub-panamax segment for these types of investments within the JV?

The vessels that we show we think, Akritas, it is a ship that was 1987 built. And bearing in mind where demolition prices are I think it made sense to free up some equity from that asset. And we bought for $7.7 million a ship which is like 12 years younger for a price that is $2.5 million to $3 million above scrap, which we have already fixed under a short-term charter contract.

And in the past and over the last three years we've done a lot of transactions where we have sold for demolition older assets at relatively high scrap prices and we have used that equity in order to renew the fleet. This is not something uncommon and should there be more opportunities we might continue doing that.

The thing with those deals is that by default they are operatively small amounts, so it is not a newbuilding transaction where you may be using $0.5 billion of CapEx commitment. These are transactions which could be like $5 million, $10 million, $15 million up to $20 million worth. However, those are deals that can generate very high returns and we see no reason why not to renew the fleet by taking benefit by benefiting from high scrap prices and low secondhand values.

Okay. So is my sense here, correct, that the sub-panamax segment is actually offering some very attractive opportunities and as you go into the market are seeing a lot of chartered attached transactions, or the potential for those transactions? Just wondering what percent of the market (multiple speakers)

Is not only the panamax vessels, this is like we bought it was like 2,500 TEU ship. It is sub-panamax but it could also ships like 6,500 TEUs, which could be of the same nature.

It's not that we targeted a specific asset size. I think we looked at the pure economics of the transaction.

Now going forward we are quite open to saving these bad transactions with a charter or sort of this type of acquisitions. These vessels, the (inaudible), we bought it charter free and we had to arrange the charters separately. It was not any type of structural, but we are pretty open to whatever can generate share returns.

Okay. And just turning into sort of the macro picture for a second, I know in your opening remarks you talked about charter rates.

I know that panamax rates have actually increased and then of course went back down a little due to -- and this went to $11,000 due to accelerating scrapping. Now if you look at the sub-panamax category, are you beginning to see the same trend where maybe premature scrapping is now becoming the norm vis-a-vis the historical trend?

I think for the (inaudible) small ships in the 2,000 to 3,000 TEUs, that charter rates for some asset classes there are at quite low levels. And I'm not sure how much below they can go bearing in mind that some of those ships are operating today at very close to breakeven. Some of those vessels could be either be scrapped, or they could be simply laid up into the charter rates -- going to be forcing ship owners to operate at the low.

So in that category I don't think there is much more room for lower levels. We have some ships they are trading at $5,000 to $6,000 per day and these are rates that ship owners may not be able to service promptly debt requirements from the assets.

Got you. And then just going back to your income statement here, your vessel operating expenses. I think you have done a pretty good job since the beginning of the year at controlling those costs.

I am wondering what is behind that range we have seen at around $6,000/$6,100 range. Do you think that is a good run rate as we head into 2015?

During the quarter I think we had average daily OpEx in the region of $6,000 and some dollars per day. Let's not forget that in 25 of our ships more or less we are flying the Greek flag and the Greek flag also means expenses in euros.

Now we have had some favorable FX movements over the last months and this is something that may have helped as well. However, this doesn't mean that we're going to try to make sure that our operating expenses, although we fly the Greek flag, which is more expensive than sort of some other Turkish and our shipping flags.

We try to make sure that our OpEx are quite competitive bearing in mind the size of the fleet and tonne average vessel size. Our average vessel size is about 5,000 TEUs, so $6,000 per day for an above 5,000 TEU vessel flying the Greek flag, I think in today's environment it is quite a competitive rate.

Now going forward I cannot claim that this is something, the $6,000 per day, it is a number that will be there forever. We have a budget, we have performed regular the budget. However, I think in order to be conservative and prudent I would focus on the budget rather than on the figure that has to do with the third quarter of the year.

Okay. That's helpful.

And then my last question here and I think you already mentioned this with regards to potential dividends for share buybacks. At what point do you think the Board will consider specifically raising dividends again?

Do you think it will primarily depend on the pace of acquisitions, or do you have like a cash level beyond that is required once you account for those transactions you want to accomplish over the next 12 to 18 months? I'm just trying to get a sense of what sort of benchmarks is the Board looking at before they can switch the dividend up again?

Yes, first of all this is a question that it's only the Board qualified to answer. However, if I were to ask what management would recommend I think that management would recommend that after a transaction or after the conclusion of the transaction, which is going to be resulting in substantial incremental cash flows, with a duration of some years then I think it would be proper to for instance to reward our shareholders with a third dividend to increase prices.

Okay. That's fair enough. Thanks for your time again, Greg.

Shawn Collins, Bank of America.

Great. Good afternoon. Greg, can you just talk about what percentage of the fleet is coming up for re-chartering after the next 12 months, say in year two and three and how you are thinking about this?

Yes, I will tell you on a TEU percentage by the end of 2013 -- sorry, 2015 -- the coverage is going to be 83% and by the end of 2016 it is going to be at around 70%. However, only by looking at the TEU coverage may be misleading.

So I would have to refer you to our slide 7 of the presentation. Because all we care about during I guess we're saying is going to be applying for our investors the use of cash. So although we have six operating in cash the next year their cash-generating capacity is relatively lower compared to the backbone of the fleet which is chartered for long periods.

So if you go to chart to slide 7 you will see that we have done an exercise and starting from the end of the third quarter of this year, so this is the period September 30, 2014 to September 30, 2015. Before ships come out of charter during those 12 months, I think this happens.

At let's say a 30% discount, which means that the new figure is going to be 70% of the today's figure. Then the change in the year impact, EBITDA on the percentage basis is going to be in the region of 1.6%. So one way to look at the coverage is to focus on previous offering but also you need to see what is going to be the cost effect if ships coming out of charter are going to be re-chartered at the lower rate.

Now I don't want to be misinterpreted. I am not saying that the ships coming out of charter will be chartered at lower rates because we don't know what the market will be in terms of time. All I am saying that if someone wants to discuss what is the downside for the vessels operating in 2016, one should look in slide 7 in order to assess the downside in cash EBITDA terms.

Okay, great. That's very helpful.

I appreciate that. That's insightful and instructive to look at it that way.

Second question, can you just comment on current status and dynamic that you have with your customers, the liner companies and how you feel about that? And your view on the future as to the ownership of container ships between the liners and the containership companies? And do you think that will stay consistent, or change over time, say over the next five years?

Liner companies that have been traditionally relying on ship owners like us to secure part of their tonnage. So as an example 50% of the liner fleet is owned 50% it is provided on a time charter basis by a third-party, non-operating ship owner.

And liner companies that way they are retaining operational flexibility meaning that at the expiry of the time charter they can deliver the ship to the ship owner and also some financial flexibility because those assets up to now, at least they are not recorded in their books. Now, we normally don't protect the future; however, I don't see why this is something that will be changing in the near or short term. Bearing in mind that the liner companies still they want to retain some operational flexibility and it may not be optimum to all 100% of the assets they operate.

Okay. Great. Thanks for that color, Greg.

Just one last quick question. On the new euro bank facility, the $17 million piece as part of the JV entity, can you say what the margin is for that over LIBOR? Just to get a sense on where the bank market is and I am assuming it remains open and accommodative?

Well, this is something we have not disclosed and I am afraid I cannot disclose it now. I can tell you, however, that this may not be a good proxy regarding other bank builds because here you talk about all the tonnage with a relatively short time charter coverage.

Vessels that for instance commence on bank debt that has to do with pre-delivery financing of newbuildings that are chartered out for 10 years. So you talk about a completely different type of financing structure. However, I can tell you that for those vessels and Costamare has been able to secure bank debt for ships that may be 10, 12 or 15 years old, or even older, with commercial banks.

But I'm afraid I wouldn't be able to disclose the margin at this point in time. And this is something that I'm not sure that the financing bank would be willing to disclose it either.

Okay. I understand, Greg. No worry.

Thank you for the time and for the commentary. I appreciate it.

Thank you. (Operator Instructions) All right, there are no more questions at the present time so I would like to turn the call back over to Mr. Zikos for any closing comments.

Yes, thank you for being here with us today. Going forward our goal is to continue to deliver superior shareholder returns.

Looking forward to speaking with you again at our yearend results. Thank you.

Thank you. That does conclude our conference for today.

Thank you all for participating. You may now disconnect.